<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No: 333-14463
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND HAS BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE INFORMATION HEREIN HAS BEEN COMPLETED. THE PROSPECTUS SUPPLEMENT
AND ATTACHED PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1997
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 11, 1997)
<TABLE>
<S> <C> <C>
$25,000,000
SHOLODGE, INC. LOGO
LOGO % SENIOR SUBORDINATED NOTES DUE 2007, SERIES B
</TABLE>
------------------------
ShoLodge, Inc. (the "Company") is offering $25,000,000 in aggregate
principal amount of its % Senior Subordinated Notes due 2007, Series B (the
"Series B Notes"). The Series B Notes mature on September 1, 2007. Interest on
the Series B Notes will be payable quarterly on the first day of February, May,
August and November of each year commencing November 1, 1997. The Series B 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, including $33.2 million of 9 3/4%
Senior Subordinated Notes due 2006, Series A previously issued pursuant to the
Indenture, as defined. As of July 13, 1997, after giving pro forma effect to the
sale of the Series B 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 $65.9 million. The Company had incurred
$5.0 million in additional Senior Indebtedness as of September 10, 1997. The
Company may incur additional Senior Indebtedness subject to the "Restrictions on
Additional Indebtedness" covenant in the Indenture.
Upon the occurrence of a Change in Control, as defined, of the Company, the
Company will be obligated to purchase the Series B 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 B
Notes also will be redeemable at any time on or after September 1, 2000, at the
option of the Company, in whole or in part, at declining premiums, as set forth
herein. The Company will redeem Series B 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 for all series of Notes issued under the Indenture
equal to 5% of the aggregate original principal amount of the Notes of all
series issued under the Indenture. The Company will redeem Series B 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 B Notes. See "Description of the
Notes."
The Series B 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 B
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 B
Notes; however, no assurance can be given that an active trading market for the
Series B 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 B 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>
<CAPTION>
============================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series B Note................................... 100% % %
- ----------------------------------------------------------------------------------------------------------------------------
Total............................................... $25,000,000 $ $
============================================================================================================================
</TABLE>
(1) 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."
(2) Before deducting estimated expenses of $200,000 payable by the Company.
------------------------
The Series B 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 B Notes will be available for delivery on or about September ,
1997.
------------------------
J.C. BRADFORD & CO. DAIN BOSWORTH
Incorporated
September , 1997
<PAGE> 2
[Map of continental United States with identification
of sites as described below]
The map above depicts the approximate location of the Company's corporate
headquarters, Shoney's Inns and Sumner Suites in operation, Sumner Suites under
construction and Sumner Suites under contract for purchase as of September 8,
1997.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SERIES B NOTES OFFERED HEREBY, INCLUDING STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
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.
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 16 Sumner Suites are mid-scale, all-suites hotels located in Arizona,
Florida, Georgia, Indiana, New Mexico, Ohio, Tennessee and Texas. The Shoney's
Inns lodging system consists of 88 Shoney's Inns containing approximately 9,000
rooms of which 34 Shoney's Inns containing approximately 4,000 rooms are owned
or managed by the Company. Shoney's Inns are currently located in 21 states with
a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and, to a
lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $65 and $85 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites 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. In addition, as Sumner
Suites has a limited presence in the marketplace, the Company is utilizing its
proprietary reservation system ("INNLINK") to further expand awareness of Sumner
Suites.
Shoney's Inns operate in the upper economy limited-service segment and are
designed to appeal to both business and leisure travelers, with rooms usually
priced between $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 77 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 many 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)
developing additional Sumner Suites, (ii) increasing revenue per available room
("REVPAR") while maintaining the Company's attractive suite and room price/value
relationships and controlling operating costs, 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 three Sumner Suites in
fiscal 1997 and has six Sumner Suites scheduled to open by the end of the first
fiscal quarter of 1998, one of which is currently under construction. In
addition, the Company has another three sites under contract for purchase. Based
on the Company's experience to date, the capital investment (including land,
construction period interest and pre-opening expenses) for a typical 125 suite
Sumner Suites is approximately $7.5 million (approximately $60,000 per suite).
The principal executive offices of the Company are located at 130 Maple
Drive North, Hendersonville, Tennessee 37075. The Company's telephone number is
(615) 264-8000.
S-3
<PAGE> 4
THE OFFERING
Securities Offered......... $25,000,000 principal amount of % Senior
Subordinated Notes due 2007, Series B. See
"Description of the Series B Notes."
Maturity................... September 1, 2007.
Interest Payment Date...... Quarterly, commencing November 1, 1997 and on each
February 1, May 1, August 1 and November 1
thereafter. The first interest payment will
represent interest from the date of issuance
through November 1, 1997.
Denomination............... $1,000 and any integral multiple thereof.
Redemption at Company's
Option................... Not redeemable prior to September 1, 2000. The
redemption price for the 12 months beginning
September 1, 2000 will be 104% of par plus accrued
and unpaid interest, declining 1% each year
thereafter to 100% on September 1, 2004. See
"Description of the Series B Notes -- Optional
Redemption by the Company."
Repurchase at Holder's
Option upon Change in
Control.................. The Company is required to repurchase the Series B
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 B 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 B 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 B 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 B Notes
tendered, the Company is only required to redeem,
for any 12 month period ending November 1, an
aggregate maximum for all series of Notes issued
under the Indenture 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."
S-4
<PAGE> 5
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 facility incurred (i) to fund
development and renovation of lodging facilities
and (ii) for general corporate purposes. 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 B Notes.
Trustee.................... Bankers Trust Company, New York, New York.
S-5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT RATIOS, PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
TWO FISCAL
FISCAL YEAR ENDED QUARTERS ENDED
------------------------------------------ -------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, JULY 14, JULY 13,
1994 1995(1) 1996(1) 1996(1) 1997
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total revenues......................... $60,776 $78,620 $63,483 $31,157 $41,111
Total operating expenses............... 43,239 43,137 36,314 17,991 21,923
Earnings from continuing operations
before income taxes(2).............. 12,831 28,289 15,110 7,996 9,104
Net earnings(2)........................ 7,796 16,977 9,497 5,034 6,069
Net earnings per common and common
equivalent share(2)................. 0.90 1.80 1.12 0.60 0.70
EBITDA(3).............................. 16,159 33,554 25,011 11,674 18,120
Ratio of earnings to fixed
charges(4).......................... 2.58x 4.20x 2.60x 2.93x 2.25x
OPERATING DATA:
Shoney's Inns system (end of period):
Number of units..................... 73 80 88 88 87
Number of rooms..................... 7,828 8,584 8,985 9,149 8,838
REVPAR(5)........................... $ 26.43 $ 28.17 $ 28.47 $ 28.97 $ 28.61
Company-owned Shoney's Inns (end of
period):
Number of units..................... 28 30 32 32 32
Number of rooms..................... 3,560 3,789 3,973 3,974 3,974
REVPAR(5)........................... $ 30.20 $ 30.97 $ 31.38 $ 31.71 $ 31.37
Sumner Suites (end of period):
Number of units..................... -- 3 13 8 14
Number of rooms..................... -- 299 1,528 906 1,628
REVPAR (5)(6)....................... -- -- $ 36.15 -- $ 41.56
</TABLE>
<TABLE>
<CAPTION>
JULY 13, 1997
-------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ (4,387) $ (4,387)
Total assets.............................................. 288,266 289,341
Long-term debt and capitalized leases..................... 172,960 174,035
Shareholders' equity...................................... 95,987 95,987
</TABLE>
- ---------------
(1) The financial results for the fiscal years ended December 31, 1995 and
December 29, 1996 and the two fiscal quarters ended July 14, 1996 include
$17.7 million, $775,000, and $200,000, respectively, of pre-tax profits
recognized in connection with the AmeriSuites Transaction, as defined, 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.
S-6
<PAGE> 7
(4) Earnings used in computing ratio of earnings to fixed charges consist of
earnings before minority interest in earnings of consolidated subsidiaries
and partnerships 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
2.41x for fiscal 1996 and 2.15x for the two fiscal quarters ended July 13,
1997.
(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 for the fiscal year ended December
31, 1995 or the two fiscal quarters ended July 14, 1996 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 B Notes should carefully consider,
among other things, the following risk factors before purchasing the Series B
Notes offered hereby. The information contained and incorporated by reference
herein contains 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, that involve a number of risks and
uncertainties. A number of factors, including those discussed below, could cause
results to differ materially from those anticipated by such forward-looking
statements. In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and data that may be incorrect or
imprecise. Accordingly, any forward-looking statements included or incorporated
by reference herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward-looking statements can be
identified by, among other things, the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should," "seeks," "pro forma" or
"anticipates," or the negative thereof, or other variations thereon or
comparable terminology, or by discussions of strategy, intentions, development
plans and anticipated trends in the Company's business.
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 16
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.
S-8
<PAGE> 9
Leverage. As of July 13, 1997, the Company's total long-term debt was
$173.0 million, and the Company's earnings exceeded fixed charges by $9.3
million for the two fiscal quarters then ended. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company may incur additional
Senior Indebtedness subject to the "Restrictions on Additional Indebtedness"
covenant in the Indenture. The Company has issued $33.2 million of 9 3/4% Senior
Subordinated Notes due 2006, Series A pursuant to the Indenture and may in the
future issue additional senior subordinated debt financing under the same
Indenture under which the Series B 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 B 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 B Notes at maturity or that the Company will
be able to refinance the Series B Notes or other indebtedness at maturity.
Subordination; Series B Notes Are Unsecured Obligations. The Series B
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. The Company's subsidiaries are direct or indirect obligors or
guarantors of $74.5 million of the long-term debt of the Company and its
consolidated subsidiaries outstanding at July 13, 1997. The Series B 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 B 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 B Notes then
outstanding. As of July 13, 1997, the Company had approximately $89.8 million of
outstanding Senior Indebtedness. The Company has incurred $5.0 million in
additional Senior Indebtedness as of September 10, 1997. 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 B 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, Inc. 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 a License Agreement (the "License Agreement")
with Shoney's, Inc. ("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 could have a material adverse effect upon its
operations. See "Business -- License Agreement with Shoney's." The Company
believes the performance of the Shoney's Inns and the ability of the Company to
expand the Shoney's Inns system is dependent in part on the performance of
Shoney's restaurants and the reputation of the Shoney's brand. The Company
believes that a material adverse change in the operations of Shoney's could have
a material adverse impact on the Shoney's Inns and the Company's franchise
operations. Hotel and franchising revenues for the
S-9
<PAGE> 10
Shoney's Inns and the Company's franchise operations represented approximately
80% and 64% of total hotel and franchising revenues for fiscal 1996 and for the
two fiscal quarters ended July 13, 1997, respectively.
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.
The Company believes its relationships with a majority of its 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. The Company's largest franchisee has
recently filed litigation against the Company seeking to terminate franchises
relating to four Shoney's Inns. The Company believes the claims are without
merit and intends to vigorously defend the litigation.
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 markets 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
S-10
<PAGE> 11
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 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 B Notes. The Series B 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 B Notes that
may develop, the ability of the holders to sell their Series B Notes or the
prices at which holders of the Series B Notes would be able to sell their Series
B Notes. If a market for the Series B Notes does develop, the Series B 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 B 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 B 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 B Notes. See "Underwriting."
S-11
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series B Notes offered
hereby are estimated to be approximately $23.9 million after deducting the
estimated underwriting discount and offering expenses. The Company intends to
use the net proceeds of this offering to reduce borrowings under its $75.0
million unsecured revolving credit facility with an aggregate outstanding
principal balance at July 13, 1997 of $42.3 million. This indebtedness was
originally incurred to fund hotel development, other capital improvements and
general corporate purposes. This facility currently bears interest at the
lender's prime rate plus 0.25% or two hundred basis points above the 30, 60, 90
or 180 day LIBOR rates, at the Company's option. The weighted average rate on
this facility at July 13, 1997 was 7.74%. Amounts repaid on this facility would
be available for reborrowing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Pending the above use of proceeds, the 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 13,
1997 and as adjusted to reflect the sale of $25,000,000 in aggregate principal
amount of Series B Notes offered hereby and application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JULY 13, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and capitalized leases.... $ 4,022 $ 4,022
======== ========
Revenue participation bonds due April 2001(1)............... $ 11,355 $ 11,355
Other long-term debt and capitalized leases less current
portion................................................... 74,455 50,530
9 3/4% Senior subordinated notes due 2006, Series A......... 33,150 33,150
% Senior subordinated notes due 2007, Series B......... -- 25,000
7 1/2% Convertible subordinated debentures due 2004(2) ..... 54,000 54,000
Total shareholders' equity.................................. 95,987 95,987
-------- --------
Total capitalization.............................. $268,947 $270,022
======== ========
</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 B 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 29, 1996 have been derived from the Company's audited
Consolidated Financial Statements. The financial statements for the three fiscal
years ended December 29, 1996 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 14, 1996
and July 13, 1997 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 13, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 28, 1997. The
information set forth on the following pages 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
FISCAL YEAR ENDED QUARTERS ENDED
------------------------------------------------------------------------ -------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 29, JULY 14, JULY 13,
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Revenues:
Hotel.......................... $25,598 $ 29,890 $ 36,440 $ 44,144 $ 57,528 $ 28,221 $ 39,149
Construction and development... 6,178 -- 6,213 9,214 890 514 --
Construction and development --
other........................ -- -- -- 14,827 775 200 --
Franchising.................... 1,760 2,079 2,623 2,917 4,105 2,106 1,890
Management..................... 660 979 916 438 185 116 72
Management -- previously
deferred..................... -- -- -- 2,862 -- -- --
Sales of hotels................ -- 9,080 17,366 6,174 -- -- --
Profits not recognized on
installment sales............ -- (1,295) (2,782) (1,956) -- -- --
------- -------- -------- -------- -------- -------- --------
Total revenues........... 34,196 40,733 60,776 78,620 63,483 31,157 41,111
Costs and Expenses:
Operating expenses:
Hotel........................ 15,354 17,042 20,938 25,962 31,859 15,525 20,819
Construction and
development................ 4,549 -- 5,242 10,096 1,200 691 --
Franchising.................. 1,841 2,153 2,475 2,861 3,255 1,776 1,103
Cost of hotels sold.......... -- 7,785 14,584 4,218 -- -- --
------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 21,744 26,980 43,239 43,137 36,314 17,991 21,923
------- -------- -------- -------- -------- -------- --------
Gross operating profit......... 12,452 13,753 17,537 35,483 27,169 13,166 19,188
General and administrative..... 894 1,349 1,378 1,929 2,158 1,492 1,068
------- -------- -------- -------- -------- -------- --------
Earnings before interest,
taxes, depreciation and
amortization................. 11,558 12,404 16,159 33,554 25,011 11,674 18,120
Depreciation and
amortization................. 2,944 3,290 4,083 5,638 8,249 3,820 5,909
------- -------- -------- -------- -------- -------- --------
Net operating profit..... 8,614 9,114 12,076 27,916 16,762 7,854 12,211
Other Income and Expenses:
Interest expense............... 4,939 4,642 5,525 5,856 4,219 905 5,218
Interest income................ 2,425 3,345 5,311 5,815 1,391 842 665
------- -------- -------- -------- -------- -------- --------
Net interest expense..... 2,514 1,297 214 41 2,828 63 4,553
Other income................... 911 1,012 1,263 765 1,599 434 1,660
------- -------- -------- -------- -------- -------- --------
Earnings before income taxes,
discontinued operations,
minority interests and
extraordinary items............ 7,011 8,829 13,125 28,640 15,533 8,225 9,318
Income taxes..................... 2,533 3,077 4,838 10,529 5,613 2,962 3,035
Minority interests in earnings of
consolidated subsidiaries and
partnerships................... 309 513 294 351 423 229 214
------- -------- -------- -------- -------- -------- --------
Earnings from continuing
operations before extraordinary
items.......................... 4,169 5,239 7,993 17,760 9,497 5,034 6,069
Discontinued Operations:
Income (loss) from operations
of restaurant subsidiary
disposed of, net of
applicable income taxes and
minority interests........... (9) (41) 18 (75) -- -- --
Extraordinary losses, net of
income tax benefit............. -- -- (215) (708) -- -- --
------- -------- -------- -------- -------- -------- --------
Net earnings..................... $ 4,160 $ 5,198 $ 7,796 $ 16,977 $ 9,497 $ 5,034 $ 6,069
======= ======== ======== ======== ======== ======== ========
</TABLE>
S-14
<PAGE> 15
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
TWO FISCAL
FISCAL YEAR ENDED QUARTERS ENDED
------------------------------------------------------------------------ -------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 29, JULY 14, JULY 13,
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
Net Earnings Per Common And
Common Equivalent Share:
Primary:
Earnings from continuing
operations before
extraordinary items........ $ 0.68 $ 0.67 $ 0.92 $ 2.08 $ 1.13 $ 0.60 $ 0.72
======= ======== ======== ======== ======== ======== ========
Net earnings................. $ 0.68 $ 0.66 $ 0.90 $ 1.99 $ 1.13 $ 0.60 $ 0.72
======= ======== ======== ======== ======== ======== ========
Fully diluted:
Earnings from continuing
operations before
extraordinary items........ $ 0.68 $ 0.67 $ 0.92 $ 1.87 $ 1.12 $ 0.60 $ 0.70
======= ======== ======== ======== ======== ======== ========
Net earnings................. $ 0.68 $ 0.66 $ 0.90 $ 1.80 $ 1.12 $ 0.60 $ 0.70
======= ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges(1)................. 2.14x 2.43x 2.58x 4.20x 2.60x 2.93x 2.25x
Weighted Average Common And
Common Equivalent Shares
Outstanding:
Primary...................... 6,103 7,872 8,654 8,526 8,441 8,443 8,453
======= ======== ======== ======== ======== ======== ========
Fully diluted................ 6,103 7,872 9,946 10,842 10,764 10,760 10,770
======= ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital................ $ 1,223 $ (370) $ 714 $ 4,786 $(21,745) $(35,569) $ (4,387)
Total assets................... 97,395 120,486 180,391 220,790 263,709 227,921 288,266
Long-term debt and capitalized
leases....................... 57,323 52,020 87,739 89,343 138,794 90,067 172,960
Shareholders' equity........... 29,177 54,883 65,158 82,737 89,736 87,575 95,987
</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 2.41x for fiscal 1996 and 2.15x for the two fiscal quarters ended
July 13, 1997.
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 for third parties. 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
$18.5 million was recognized through fiscal 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 and 1996.
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
FISCAL YEAR ENDED QUARTERS ENDED
------------------------------------------ -------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, JULY 14, JULY 13,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotel.................................... 60.0% 56.1% 90.6% 90.5% 95.2%
Construction and development............. 10.2 11.7 1.4 1.7 --
Construction and development -- other.... -- 18.9 1.2 0.6 --
Franchising.............................. 4.3 3.7 6.5 6.8 4.6
Management............................... 1.5 0.6 0.3 0.4 0.2
Management -- previously deferred........ -- 3.6 -- -- --
Sales of hotels.......................... 28.6 7.9 -- -- --
Profits not recognized on installment
sales................................. (4.6) (2.5) -- -- --
----- ----- ----- ----- -----
Total revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Operating expenses:
Hotel................................. 34.5% 33.0% 50.2% 49.8% 50.6%
Construction and development.......... 8.6 12.8 1.9 2.2 --
Franchising........................... 4.0 3.7 5.1 5.7 2.7
Cost of hotels sold................... 24.0 5.4 -- -- --
----- ----- ----- ----- -----
Total operating expenses......... 71.1 54.9 57.2 57.7 53.3
----- ----- ----- ----- -----
Gross operating profit........... 28.9 45.1 42.8 42.3 46.7
General and administrative............... 2.3 2.5 3.4 4.8 2.6
----- ----- ----- ----- -----
Earnings before interest, taxes,
depreciation and amortization......... 26.6 42.7 39.4 37.5 44.1
Depreciation and amortization............ 6.7 7.2 13.0 12.3 14.4
----- ----- ----- ----- -----
Net operating profit (before
interest and taxes).............. 19.9 35.5 26.4 25.2 29.7
Earnings before income taxes, discontinued
operations, minority interests and
extraordinary items...................... 21.6 36.4 24.5 26.4 22.7
Earnings from continuing operations before
extraordinary items...................... 13.2 22.6 15.0 16.2 14.8
Net earnings............................... 12.8% 21.6% 15.0% 16.2% 14.8%
</TABLE>
For the Fiscal Year-to-date Periods Ended July 13, 1997 and July 14, 1996
For the two fiscal quarters ended July 13, 1997, total revenues increased
31.9% to $41.1 million from $31.2 million for the same period in 1996.
Revenues from hotel operations in the first two quarters of 1997 increased
38.7% to $39.1 million from $28.2 million for the same period in 1996. For the
33 hotels opened for both year-to-date periods (same hotels), average daily room
rates in the first two quarters 1997 increased 3.0% to $53.88 from $52.33 in the
first two quarters of 1996 and average occupancy rates decreased to 60.4% from
62.4%, resulting in a net increase in same hotel revenues of 1.5%. The 13 hotels
opened during 1996 and the first two quarters of 1997 contributed $12.2 million
to hotel revenues in the first two quarters of 1997 compared to $1.7 million for
the same period in fiscal 1996.
S-17
<PAGE> 18
There were no revenues from regular construction and development activities
for the first two quarters of 1997 compared to $514,000 in the same period last
year. Revenues from construction and development can vary widely from quarter to
quarter depending upon the volume of outside contract work and the timing of
those projects. No outside construction projects were in progress during the
first two quarters of 1997 compared with the final portion of only one project
during the comparable period in 1996. No outside construction contracts are
currently in progress.
There were no revenues from "Construction and development -- other" in the
first two quarters of 1997 and $200,000 in the first quarter of 1996, which
represents a portion of profits not previously recognized on installment sales.
No revenues from this source are expected to be generated in the future.
Franchise revenues in the first two quarters of 1997 decreased 10.3% to
$1.9 million from $2.1 million for the comparable period last year. This
decrease was due primarily to the cancellation of reservation service contracts
by two hotel chains in the first quarter of 1997 and to a decrease of $107,000
in initial franchise fee revenues. Initial franchise fees may vary widely from
quarter to quarter.
Management contract revenues for the first two quarters of 1997 decreased
37.2% to $73,000 from $116,000 for the same period last year, due to the
cancellation of one management contract on one hotel in the third quarter of
1996.
Operating expenses from hotel operations for the first two quarters of 1997
increased 34.1% to $20.8 million in the first two quarters of 1997 from $15.5
million in the first two quarters of 1996, due to the 38.7% increase in hotel
operating revenues. Operating expenses from hotel operations, expressed as a
percentage of hotel operating revenues, decreased to 53.2% in the first two
quarters of 1997 from 55.0% in the same period of 1996, thus increasing the
gross profit margin on all hotels to 46.8% in the first two quarters of 1997
from 45.0% in the same period of 1996. The gross profit margin on same hotels
for the first two quarters of 1997 increased to 46.2% from 45.3% for the same
two quarters in 1996. The new hotels (primarily Sumner Suites) have experienced
higher profit margins than the same hotels and have generated a 48.3% profit
margin in the first two quarters of 1997.
There were no costs and expenses of construction and development in the
first two quarters of 1997 compared with $691,000 in the first two quarters of
1996. There were no outside construction contracts in the first two fiscal
quarters of 1997 compared with one during the comparable period in 1996.
Franchising operating expenses for the first two quarters of 1997 decreased
to $1.1 million from $1.8 million in the same period last year. The primary
reason for this decrease was the cancellation in the fourth quarter of 1996 of
the Company's obligation to pay a portion of franchise fees collected to
Shoney's. The reduction in this royalty fee expense was $584,000 in the first
two quarters of 1997.
General and administrative expense for the first two quarters of 1997
decreased 28.4% to $1.1 million from $1.5 million in the same period of 1996,
due primarily to reduced professional fees and increased capitalization of
general and administrative expenses.
For the first two quarters of 1997, depreciation and amortization expense
increased 54.7% to $5.9 million from $3.8 million for the same period last year.
Increased depreciation and amortization on hotels opened during 1996 and the
first two fiscal quarters of 1997 was $1.7 million, while depreciation and
amortization due to renovations and other additions to same hotels and to other
assets increased by $344,000 over the first two quarters of 1996.
For the first two quarters of 1997, interest expense increased $4.3 million
and interest income decreased $177,000, resulting in an increase in net interest
expense of $4.5 million. The increase in interest expense resulted primarily
from the additional borrowings incurred for the 12 hotels opened in 1996 and the
one hotel opened in January 1997.
Other income for the first two quarters of 1997 increased to $1.7 million
compared with $434,000 in the first two quarters of 1996, due to a gain of $1.2
million on the sale of excess land in the second quarter of 1997. Minority
interest in earnings and losses of consolidated subsidiaries and partnerships
decreased $15,000 for the
S-18
<PAGE> 19
first two quarters of 1997, compared with the same period in 1996, due to less
profitable consolidated entities which include minority ownership.
The lower effective income tax rate (33.3% for the first two quarters of
1997 versus 37.0% for the comparable period last year) is due to a reduction in
applicable state tax rates.
For the Fiscal Years Ended December 29, 1996 and December 31, 1995
For the fiscal year ended December 29, 1996, total revenues declined 19.3%
to $63.5 million from $78.6 million for the fiscal year ended December 31, 1995.
However, revenues in fiscal 1995 included $21.9 million from the AmeriSuites
Transaction, in contrast to only $775,000 from this source in fiscal 1996.
Exclusive of the AmeriSuites Transaction, total revenues increased by $6.0
million, or 10.6%, from $56.7 million in fiscal 1995 to $62.7 million in fiscal
1996.
Revenues from hotel operations in fiscal 1996 increased 30.3% to $57.5
million from $44.1 million for fiscal 1995. This increase resulted primarily
from more hotels being operated in fiscal 1996 as compared to fiscal 1995.
Sixteen hotels which opened during fiscal 1995 and fiscal 1996 contributed $14.3
million more to revenues in fiscal 1996 than in fiscal 1995. One hotel which was
sold during 1995 contributed $549,000 to hotel revenues in that year. Revenues
from the 29 same hotels declined slightly to $42.0 million in fiscal 1996 from
$42.4 million in fiscal 1995. Average daily room rates from same hotels
increased 5.1% to $50.66 in fiscal 1996 from $48.18 in fiscal 1995, and average
occupancy rates on these hotels decreased to 61.7% in fiscal 1996 from 64.5% in
fiscal 1995. For all 45 hotels owned at the end of fiscal 1996, total revenues
increased 32.0% to $57.5 million in fiscal 1996 from $43.6 million in fiscal
1995. These hotels reflected an increase of 12.8% in average daily room rates to
$54.69 in fiscal 1996 from $48.49 in fiscal 1995, and average occupancy rates on
these hotels declined to 58.9% in fiscal 1996 from 64.1% in fiscal 1995.
Revenues from regular construction and development activities for 1996 were
$889,000 in contrast to $9.2 million for the prior year. Revenues from
construction and development can vary widely from period to period depending
upon the volume of outside contract work and the timing of those projects. Three
outside construction projects were in progress during 1995 compared with only
one during 1996.
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 $775,000 recognized in 1996, when the balance of the note receivable from
Suites of America was collected.
Revenue from the sale of hotels in 1995 was $4.2 million, net of profits
not recognized on installment sales of $2.0 million, representing the sale of
one hotel in 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 fiscal 1996 increased 40.7% to $4.1 million from $2.9
million in fiscal 1995, 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 1996 there were 56
franchised Shoney's Inns in operation compared with 50 at the end of fiscal
1995. Management fee revenue in fiscal 1996 decreased 57.7% to $185,000 from
$438,000 in fiscal 1995, due to the cancellation of management contracts on 11
hotels on March 31, 1995 as a part of the AmeriSuites Transaction, and to the
cancellation of a management contract on one franchised Shoney's Inn in 1996.
Hotel operating expenses for fiscal 1996 increased by 22.7% to $31.9
million from $26.0 million in fiscal 1995. The 16 hotels opened during fiscal
1995 and fiscal 1996, which were not in operation during the full year in either
fiscal 1995 or fiscal 1996, accounted for $7.6 million of the total increase.
Additionally, operating expenses for the 29 hotels operating for all of both
years declined by $1.3 million, and operating expenses on
S-19
<PAGE> 20
the hotel sold during the first fiscal quarter of 1995 declined by $400,000.
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 on the hotels operating for all of both years
increased from 40.9% in fiscal 1995 to 43.6% in fiscal 1996.
Costs and expenses of construction and development for 1996 decreased to
$1.2 million from $10.1 million for 1995. There were three outside construction
contracts in 1995 compared to one during 1996.
Franchising operating expenses for 1996 increased 13.8% to $3.3 million
from $2.9 million for the prior year, primarily due to additional expenses
incurred by the reservation center in meeting the added demand from additional
properties served by that department. Effective October 25, 1996, the Company
was no longer required to pay a portion of its franchise fee revenues to
Shoney's in the form of royalty fees. During 1996, franchising operating
expenses included $758,000 of royalty fees to Shoney's, compared to $980,000 in
1995.
General and administrative expense increased 11.9% to $2.2 million in
fiscal 1996 from $1.9 million in fiscal 1995, due primarily to additional
staffing levels for present and future growth of the Company, and to increased
professional fees and expenses incurred.
Depreciation and amortization expense increased by 46.3% to $8.2 million in
fiscal 1996 from $5.6 million in fiscal 1995, due primarily to the 16 hotels
opened during fiscal 1995 and fiscal 1996.
For 1996, interest expense and interest income decreased $1.7 million and
$4.5 million, respectively, from 1995, resulting in an increase in net interest
expense of $2.8 million. The decrease in interest income resulted primarily from
the collection of the balance of first mortgage notes receivable of
approximately $44.0 million from Suites of America in the first quarter of 1996,
which resulted in a reduction of interest income for 1996 of $4.2 million. The
proceeds were used to reduce outstanding debt, significantly reducing interest
expense for 1996 as compared to 1995. Additional borrowings to fund new hotels
opened in 1996, however, offset a portion of this reduced interest expense.
Other income in fiscal 1996 increased to $1.6 million from $765,000 in
fiscal 1995. The $834,000 increase was due to gains on the sale of securities
available for sale and to a gain on the sale of excess land acquired for the
development of a Company owned hotel.
The loss from discontinued operations, net of applicable income taxes and
minority interest, in 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 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 1995.
For the Fiscal Years Ended December 31, 1995 and December 25, 1994
For the fiscal year ended December 31, 1995, total 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 hotels increased
5.0% to $32.8 million in fiscal 1995 from $31.2 million in fiscal 1994. Average
daily room rates from same 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.
S-20
<PAGE> 21
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 1996, when the balance of the note receivable from
Suites of America was collected. The 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
professional 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
S-21
<PAGE> 22
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 of $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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations was $4.2 million in the first two fiscal
quarters of 1997, $15.8 million in fiscal 1996, $31.6 million in fiscal 1995 and
$5.8 million in fiscal 1994. Fiscal 1995 was an unusual year due to the
AmeriSuites Transaction.
The Company currently has a $75.0 million unsecured three-year revolving
credit facility with a group of five banks, which became effective April 30,
1997. The interest rate on this credit facility through the third fiscal quarter
of 1997 is at the lenders' prime rate plus 0.25%, or two hundred basis points
over the 30, 60, 90, or 180 day LIBOR rate, at the Company's option. Thereafter,
the interest rate is based upon the ratio of senior debt to EBITDA, as defined
in the credit facility, (the "Senior Leverage Ratio") and ranges from prime rate
to prime rate plus 0.50%, or one hundred seventy five to two hundred fifty basis
points over the 30, 60, 90 or 180 day LIBOR rate, at the Company's option. The
weighted average rate on this facility at July 13, 1997 was 7.74%. The Company
pays commitment fees on the unused portion of the facility ranging from 0.20% to
0.50% based on the Senior Leverage Ratio and certain other fees under the credit
facility. The credit facility contains covenants which, inter alia, limit or
prohibit incurrences of certain additional indebtedness, liens on assets,
investments, asset sales, mergers, dividends and amendments to indebtedness
subordinated to the credit facility, including the Series B Notes. It also
contains financial covenants by the Company, including covenants with respect to
net worth, indebtedness to total capitalization, interest coverage and the
Senior Leverage Ratio. As of July 13, 1997, the Company had $42.3 million
outstanding under this credit facility. The Company expects to use the net
proceeds of the offering of the Series B Notes to reduce the outstanding balance
under this credit facility. The Company also has a $1.5 million unsecured line
of credit with another bank, bearing interest at the lender's prime rate,
maturing May 31, 1998. As of July 13, 1997, no borrowings were outstanding on
this facility.
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 $28.6
million in the first two fiscal quarters of 1997, $86.6 million in fiscal 1996
and $56.2 million in fiscal 1995.
The Company opened two Shoney's Inns and ten Sumner Suites hotels in 1996
and three Sumner Suites hotels thus far in 1997. Additionally, renovations of
several existing properties were completed in 1996 and in the first two quarters
of 1997, and several others are scheduled for completion in fiscal 1997.
Furthermore, the Company's new corporate headquarters building is substantially
complete. The Company has six Sumner Suites hotels scheduled to open by the end
of the first fiscal quarter of 1998, one of which is under construction. In
addition, the Company has another three sites under contract for purchase. The
Company expects that approximately $85.0 million in additional capital funds
will be necessary through the second quarter of 1998 to fulfill these plans.
The Company has principal payments totaling approximately $4.0 million due
under existing debt instruments through the second fiscal quarter of 1998. The
Company believes that a combination of net proceeds from this offering, net cash
provided from operations, borrowings under existing 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 for the next twelve months.
S-22
<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 16 Sumner Suites are mid-scale, all-suites hotels located in
Arizona, Florida, Georgia, Indiana, New Mexico, Ohio, Tennessee and Texas. The
Shoney's Inn lodging system consists of 88 Shoney's Inns containing
approximately 9,000 rooms of which 34 containing approximately 4,000 rooms are
owned or managed by the Company. Shoney's Inns are currently located in 21
states with a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and, to a
lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $65 and $85 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites contains from 110 to
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. In addition, as Sumner
Suites has a limited presence in the marketplace, the Company is utilizing its
proprietary reservation system, INNLINK, to further expand awareness of Sumner
Suites.
Shoney's Inns operate in the upper economy limited-service segment and are
designed to appeal to both business and leisure travelers, with rooms usually
priced between $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 77 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 many 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.
GROWTH STRATEGY
The Company's strategy is to increase cash flow and earnings by (i)
developing additional Sumner Suites, (ii) increasing REVPAR while maintaining
the Company's attractive suite and room price/value relationships and
controlling operating costs, and (iii) expanding the Shoney's Inn system through
the addition of new franchised units and selectively developing Company-owned
hotels.
Development of Additional Sumner Suites. The Company intends to continue
to develop Sumner Suites in mid-sized and larger metropolitan markets across the
United States. 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 developed and opened ten Sumner Suites in fiscal 1996. Currently, three
Sumner Suites have opened in 1997 and six additional Sumner Suites are scheduled
to be open by the end of the first fiscal quarter of 1998, one of which is
currently under construction. In addition, the Company has another three sites
under contract for purchase. See "Risk Factors -- Sumner Suites Expansion
Risks."
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
S-23
<PAGE> 24
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.
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 a net total
of six franchised units to the system in fiscal 1996. 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. See "Risk Factors -- Relationship with Shoney's, Inc." and " -- Importance
of Franchisee and Other Third Party Relationships."
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 1997, the average daily room rate for the
Sumner Suites hotels was $71.78.
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, in most cases, 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-seven 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 many 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 1997, the average daily room rate for Company-owned
Shoney's Inns was $52.11.
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. In some cases franchisees construct
smaller Shoney's Inns. Each room is professionally decorated and is generally
furnished with two double beds, a dresser, table and chairs and a color
television.
Amenities featured at most Shoney's Inns include swimming pools, meeting
rooms, facsimile machine service and continental breakfast. The Company believes
that Shoney's Inns provides its guests with quality accommodations at an
attractive price/value relationship within the upper economy segment.
S-24
<PAGE> 25
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 $58,000 to $62,000 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, capitalized interest and pre-opening expenses) for a typical 125 suite
Sumner Suites is approximately $7.5 million (approximately $60,000 per suite).
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. See "Risk
Factors -- Sumner Suites Expansion Risks."
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 and
newspaper, free room upgrades, express check-in and other privileges upon
presentation of a membership card. Approximately 9% of the rooms booked through
INNLINK for Shoney's Inns during fiscal 1997 through August 1, 1997 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
S-25
<PAGE> 26
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 Shoney's brand
name recognition 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
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
Director of Operations for Shoney's Inns and the Vice President of Operations
for Sumner Suites. Shoney's Inns and Sumner Suites are further managed by
regional managers, who directly supervise the general managers of each property.
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 each of the Company-owned
Shoney's Inns after approximately seven years of operation and expects a similar
renovation schedule for Sumner Suites. During fiscal 1996 the Company completed
the renovations of eight Company-owned Shoney's Inns and has completed or is in
the process of completing the renovations of eight additional Shoney's Inns in
fiscal 1997.
S-26
<PAGE> 27
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 requires the franchisee to
send the site general manager to a three-day management training class conducted
by the Company covering topics including human resources, sales and marketing,
yield management and cost controls. The Company also makes available some of the
most successful Company-owned Shoney's Inns as training centers. Currently the
Company does not charge for the training program but reserves the right to do so
in the future.
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.
LICENSE AGREEMENT WITH SHONEY'S
Under the License Agreement with Shoney's, the Company acts as exclusive
franchisor of Shoney's Inns and 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,
S-27
<PAGE> 28
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). 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.
Prior to 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 on October 25, 1996.
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>
REVPAR AVERAGE OCCUPANCY RATE
---------------------------------- ----------------------------------
YEAR TO YEAR TO
DATE DATE
1994 1995 1996 1997(2) 1994 1995 1996 1997(2)
------ ------ ------ ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Industry-wide................. $40.70 $42.82 $45.60 $47.78 64.7% 65.1% 65.2% 64.1%
Upper economy segment......... 27.56 29.00 30.54 30.50 61.3 61.8 61.6 59.7
Mid-scale segment............. 37.40 39.69 42.18 43.82 65.0 65.8 65.7 64.8
All Shoney's Inns............. 26.43 28.17 28.47 28.61 63.9 64.9 61.5 60.5
Company-owned Shoney's Inns... 30.20 30.97 31.38 31.37 62.1 64.3 61.1 60.2
Sumner Suites(3).............. N/A N/A 36.15 41.56 N/A N/A 48.5 57.9
<CAPTION>
AVERAGE DAILY ROOM RATE(1)
----------------------------------
YEAR TO
DATE
1994 1995 1996 1997(2)
------ ------ ------ -------
<S> <C> <C> <C> <C>
Industry-wide................. $62.86 $65.82 $69.97 $74.50
Upper economy segment......... 44.94 46.95 49.62 51.06
Mid-scale segment............. 57.50 60.32 64.16 67.63
All Shoney's Inns............. 41.33 43.28 45.86 47.30
Company-owned Shoney's Inns... 44.98 48.17 51.39 52.11
Sumner Suites(3).............. N/A N/A 74.55 71.78
</TABLE>
- ---------------
(1) Room revenues divided by the number of rented rooms.
(2) Figures for industry-wide, upper economy and mid-scale lodging chains are
based on Smith Travel Accommodation Reports. June year-to-date 1997; figures
for all Shoney's Inns and Sumner Suites are based on the Company's internal
data for the two fiscal quarters ended July 13, 1997.
(3) Information with respect to Sumner Suites is unavailable or not meaningful
prior to 1996, as two of the first three Sumner Suites hotels did not open
until late 1995.
Source: Smith Travel Accommodation Reports. December year-to-date 1996, dated
February 20, 1997, and Smith Travel Accommodation Reports. June
year-to-date 1997, dated July 31, 1997, for industry-wide, upper economy
and mid-scale lodging chains, and the Company's internal data for all
Shoney's Inns and Sumner Suites statistics.
The Company believes that the key elements underlying the improvements in
the industry's operating performance and profitability are favorable economic
conditions and continuing increases in room demand growth. The rate of room
demand growth exceeded the rate of room supply growth in each of 1994, 1995 and
1996. According to Coopers & Lybrand's "Hospitality Directions," February 1997,
room supply growth in 1997 is expected to accelerate to 2.3% per year while
lodging demand is expected to continue to grow at 2.2% per year, and occupancy
is expected to experience some declines but remain high enough to support
increases of over 5.0% per year in average daily room rate ("ADR").
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.
S-28
<PAGE> 29
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 most of its 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 has recently moved into a new headquarters building owned by
the Company that contains approximately 42,000 square feet of space including
storage and food services. Management believes that the new building contains
sufficient space to accommodate the Company's currently anticipated needs.
Approximately 41 of the 48 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. In March 1997, the
Court of Appeals reversed the trial court's ruling in favor of the plaintiff,
vacated the judgment against the Company and remanded the case to the trial
court to enter summary judgment on this claim in favor of the Company. The
plaintiff filed an application for permission to appeal to the Supreme Court of
Tennessee but the court has refused to grant such permission. The remaining
claims in the case are currently scheduled for trial in October 1997. The
Company currently does not anticipate that the pending litigation will have any
material adverse effect on the Company.
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) 56 President, Chief Executive Officer, and Director
Richard L. Johnson 56 Executive Vice President, Director
Bob Marlowe 58 Chief Accounting Officer, Secretary and
Treasurer, Director
Earl H. Sadler(1)(2)(3) 74 Director
Helen L. Moskovitz(1)(2)(3) 60 Director
James M. Grout 51 Executive Vice President
Michael A. Corbett 45 Chief Financial Officer
John C. Buttolph 68 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 has more than
25 years of experience in developing and operating lodging facilities and
restaurants. He is also a director of Community Financial Group, Inc. Mr. Moore
is chairman of the Executive Committee.
RICHARD L. JOHNSON has been Executive Vice President and a director of the
Company since 1984. 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 and serves as chairperson of the
Audit Committee.
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 B NOTES
The following description of the Series B 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 B 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 B Notes are the second 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 Second Supplemental Indenture
establishing the terms of the Series B Notes. The Indenture, as so supplemented,
is referred to herein as the "Indenture."
The Series B Notes will be limited in principal amount to $25,000,000, all
of which are being offered hereby. The Series B Notes will be issuable as fully
registered Notes in denominations of $1,000 and any integral multiple thereof.
The Series B 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 November 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 B Notes will mature on September 1, 2007, and payments of the
principal of the Series B Notes will be made at the main trust office of the
Trustee in New York, New York. The Series B 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 B Notes during
the period of 15 days immediately preceding any selection of Series B Notes for
redemption.
The Series B 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 B Notes, under the Indenture, see "Description of the Notes" in the
accompanying Prospectus.
OPTIONAL REDEMPTION BY THE COMPANY
The Series B 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 September 1, 2000 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 September 1,
<TABLE>
<S> <C>
2000................................... 104%
2001................................... 103
2002................................... 102
2003................................... 101
2004 and thereafter.................... 100
</TABLE>
S-31
<PAGE> 32
In case of the redemption of less than all of the outstanding Series B
Notes, the Series B 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 B 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 B 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 B Note which is to be redeemed in part only, the portion of the principal
amount thereof to be redeemed) of the Series B Notes selected for redemption.
CERTAIN PROVISIONS REGARDING REDEMPTION AT HOLDER'S OPTION
The Series B 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 B 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 B Notes tendered, the Company is only
required to redeem, for any 12 month period ending on December 1 of any year, an
aggregate maximum for all series of Notes issued under the Indenture 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 B Notes set forth
opposite their respective names below.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME OF UNDERWRITER SERIES B NOTES
- ------------------- --------------
<S> <C>
J.C. Bradford & Co.......................................... $
Dain Bosworth Incorporated..................................
-----------
Total............................................. $25,000,000
===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all of the Series B Notes
offered hereby, if any are purchased.
The Underwriters have advised the Company that they propose initially to
offer the Series B Notes to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and may offer Series B Notes to
certain dealers at such price less a concession of not more than % of the
principal amount of the Series B Notes. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of % of the principal amount
of the Series B 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 B 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 B Notes.
Subject to applicable limitations, the Underwriters, in connection with the
offering of the Series B Notes, may place bids for or make purchases of the
Series B Notes in the open market or otherwise, for long or short account, or
cover short positions incurred, to stabilize, maintain, or otherwise affect the
price of the Series B Notes, which might be higher than the price which might
otherwise prevail in the open market. There can be no assurance that the price
of the Series B Notes will be stabilized, or that stabilizing, if commenced,
will not be discontinued at any time. Subject to applicable limitations, the
Underwriters may also place bids or make purchases on behalf of the underwriting
syndicate to reduce a short position created in connection with the offering of
the Series B Notes.
There is no public market for the Series B Notes, and the Company does not
intend to apply for quotation of the Series B Notes on the Nasdaq National
Market or any other quotation system or listing of the Series B Notes on any
securities exchange. The Company has been advised by the Underwriters that,
following the public offering of the Series B Notes, the Underwriters presently
intend to make a market in the Series B Notes; however, the Underwriters are not
obligated to do so, and any market-making activity with respect to the Series B
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 B Notes or that an
active public market for the Series B Notes will develop. If an active market
does not develop, the market price and liquidity of the Series B 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.
S-33
<PAGE> 34
LEGAL MATTERS
Certain matters regarding the Series B Notes will be passed on for the
Company by Boult, Cummings, Conners & Berry, PLC, Nashville, Tennessee. Certain
legal matters regarding the Series B Notes will be passed on for the
Underwriters by Bass, Berry & Sims PLC, Nashville, Tennessee.
S-34
<PAGE> 35
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.
September 11, 1997
<PAGE> 36
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 29, 1996 and (ii)
Quarterly Reports on Form 10-Q for the fiscal quarters ended April 20, 1997 and
July 13, 1997 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., 130 Maple Drive North, Hendersonville, Tennessee 37075,
Attention: Michael A. Corbett, Chief Financial Officer.
2
<PAGE> 37
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 16
Sumner Suites are mid-scale, all-suites hotels located in Arizona, Florida,
Georgia, Indiana, New Mexico, Ohio, Tennessee and Texas. The Shoney's Inns
lodging system consists of 88 Shoney's Inns containing approximately 9,000
rooms, of which 34 Shoney's Inns containing approximately 4,000 rooms are owned
or managed by the Company. Shoney's Inns are currently located in 21 states with
a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and, to a
lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $65 and $85 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites 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 77 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 many 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)
developing additional Sumner Suites, (ii) increasing revenue per available room
while maintaining the Company's attractive suite and room price/value
relationships and controlling operating costs, 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 130 Maple
Drive North, Hendersonville, Tennessee 37075. The Company's telephone number is
(615) 264-8000.
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
3
<PAGE> 38
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the 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
4
<PAGE> 39
Notice relating to the same or any other Covenant Default existing or continuing
on the date of receipt of any 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.
5
<PAGE> 40
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 by such holder, in aggregate principal amount equal to the
unredeemed portion of the principal of the Notes so
6
<PAGE> 41
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
7
<PAGE> 42
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
8
<PAGE> 43
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).
9
<PAGE> 44
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
10
<PAGE> 45
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
11
<PAGE> 46
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 29, 1996, 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.
12
<PAGE> 47
[Photographs of Sumner Suites (Riverwalk) San Antonio, Texas;
Sumner Suites Lobby; Suite Interior]
[Photographs of Shoney's Inns, Birmingham, Alabama;
Shoney's Inns Lobby; Room Interior]
<PAGE> 48
======================================================
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 B 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
----
<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 B Notes..... S-31
Underwriting.......................... S-33
Legal Matters......................... S-34
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>
======================================================
======================================================
$25,000,000
SHOLODGE, INC.
[SHONEY'S INN LOGO] [SUMNER
SUITES LOGO]
% SENIOR SUBORDINATED
NOTES DUE 2007, SERIES B
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[J.C. BRADFORD & CO. LOGO]
[DAIN BOSWORTH INCORPORATED LOGO]
, 1997
======================================================
