<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------
For the Third Quarter Ended October 3, 1999 Commission File No. 0-19840
---------------------------------------------
SHOLODGE, INC.
(Exact name of registrant as specified in its charter)
---------------------------------------------
TENNESSEE 62-1015641
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
130 MAPLE DRIVE NORTH, HENDERSONVILLE, TENNESSEE 37075
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 264-8000
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
As of November 16, 1999, there were 5,466,578 shares of ShoLodge, Inc.
common stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 27,
1999 1998(1)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,180,642 $ 2,480,984
Restricted cash 1,597,629 701,484
Accounts receivable-net 4,973,288 3,251,104
Costs and estimated earnings in excess of billings on
construction contracts 5,226,238 27,799
Income taxes receivable 2,140,104 4,775,686
Prepaid expenses 881,768 519,534
Notes receivable-net 162,500 3,363,394
Other current assets 435,374 443,967
-------------------------------------
Total current assets 38,597,543 15,563,952
NOTES RECEIVABLE, NET 61,218,524 58,390,170
PROPERTY AND EQUIPMENT 145,761,389 187,360,706
Less accumulated depreciation and amortization (23,570,996) (20,335,047)
-------------------------------------
122,190,393 167,025,659
LAND UNDER DEVELOPMENT OR HELD FOR SALE 11,435,063 9,556,720
DEFERRED CHARGES,NET 8,855,509 9,201,837
DEPOSITS ON SALE/LEASEBACK 35,280,000 28,000,000
DEFERRED TAX ASSET 127,035 127,035
INTANGIBLE ASSETS 3,163,041 3,290,162
OTHER ASSETS 3,130,937 3,845,824
-------------------------------------
TOTAL ASSETS $ 283,998,045 $ 295,001,359
=====================================
</TABLE>
(1) Derived from fiscal year ended December 27, 1998 audited financial
statements.
See notes to consolidated financial statements.
<PAGE> 3
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 3, DECEMBER 27,
1999 1998(1)
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,570,073 $ 11,438,292
Taxes other than on income 1,198,351 1,636,220
Income taxes payable 0 0
Current portion of long-term debt
and capitalized lease obligations 1,441,045 21,597,951
-------------------------------------
Total current liabilities 16,209,469 34,672,463
OTHER LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, LESS CURRENT PORTION 135,368,177 128,945,784
DEFERRED GAIN ON SALE/LEASEBACK 37,178,435 30,158,244
DEFERRED CREDITS 1,425,527 2,368,523
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 1,013,168 757,311
-------------------------------------
TOTAL LIABILITIES 191,194,776 196,902,325
-------------------------------------
SHAREHOLDERS' EQUITY:
Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares outstanding) -- --
Common stock (no par value; 20,000,000 shares
authorized 5,691,378 shares issued and
outstanding as of October 3, 1999 and 7,472,310
shares issued and outstanding as of
December 27, 1998) 1,000 1,000
Additional paid-in capital 42,474,900 42,433,395
Retained earnings 65,550,258 60,973,496
Unrealized gain on securities available for sale
(net of tax) 91,535 67,704
Treasury Stock (15,314,424) (5,376,561)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 92,803,269 98,099,034
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 283,998,045 $ 295,001,359
=====================================
</TABLE>
(1) Derived from fiscal year ended December 27, 1998 audited financial
statements.
See notes to consolidated financial statements.
<PAGE> 4
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE FORTY WEEKS ENDED OCTOBER 3, 1999 AND OCTOBER 4, 1998
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4,
1999 1998 1999 1998
(As adjusted) (As adjusted)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel $ 17,051,354 $ 14,789,533 $ 51,712,387 $ 56,749,614
Franchising and management 1,893,824 881,255 3,561,087 2,441,717
Construction and development 4,494,888 0 5,198,439 0
--------------------------------------------------------------
Total revenues 23,440,066 15,670,788 60,471,913 59,191,331
COSTS AND EXPENSES:
Operating expenses:
Hotel 11,673,969 10,071,050 34,422,023 35,152,370
Franchising and management 518,924 563,710 1,683,103 1,840,414
Construction and development 3,774,840 0 4,419,688 0
--------------------------------------------------------------
Total operating expenses 15,967,733 10,634,760 40,524,814 36,992,784
General and administrative 1,079,329 1,056,207 4,542,478 4,342,610
Rent expense, net 3,936,794 2,277,540 9,506,432 7,626,940
Depreciation and amortization 1,458,094 1,496,028 5,562,389 6,157,559
--------------------------------------------------------------
Income from operations 998,116 206,253 335,800 4,071,438
OTHER INCOME AND (EXPENSES):
Interest expense (2,515,378) (2,003,335) (9,515,166) (8,061,736)
Interest income 1,628,706 1,399,025 4,726,646 3,532,139
Gain on sale of property 49,444 20,164,681 12,029,525 20,270,718
Other income (48,743) 222,138 406,252 720,176
--------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND MINORITY
INTERESTS 112,145 19,988,762 7,983,057 20,532,735
INCOME TAXES (36,000) (7,677,000) (2,315,000) (7,857,000)
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS (18,341) (385,945) (1,889,965) (459,653)
--------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM 57,804 11,925,817 3,778,092 12,216,082
EXTRAORDINARY GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT
(net of related tax effect of $490,000 in 1999 and
$600,000 in 1998, respectively 798,670 (1,066,466) 798,670 (1,066,466)
==============================================================
NET EARNINGS $ 856,474 $ 10,859,351 $ 4,576,762 $ 11,149,616
==============================================================
EARNINGS PER COMMON SHARE
Basic:
Earnings per share from continuing operations $ 0.01 $ 1.44 $ 0.55 $ 1.48
Extraordinary gain (loss), net of tax effect $ 0.14 $ (0.12) $ 0.12 $ (0.13)
Net earnings $ 0.15 $ 1.32 $ 0.67 $ 1.35
==============================================================
Diluted:
Earnings per share from continuing operations $ 0.01 $ 1.15 $ 0.54 $ 1.29
Extraordinary gain (loss), net of tax effect $ 0.13 $ (0.10) $ 0.11 $ (0.10)
Net earnings $ 0.14 $ 1.05 $ 0.65 $ 1.19
==============================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 5,842,152 8,255,810 6,828,121 8,255,810
Diluted 6,067,252 10,870,565 7,054,246 11,006,802
--------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEKS ENDED OCTOBER 3, 1999 AND OCTOBER 4, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS ENDED
OCTOBER 3, OCTOBER 4,
1999 1998
(AS ADJUSTED)
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 4,572,762 $ 12,216,082
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
EXTRAORDINARY GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT 1,288,670 (1,666,466)
DEPRECIATION AND AMORTIZATION 5,562,389 6,157,559
ACCRETION OF DISCOUNT ON SECURITIES
HELD TO MATURITY 0 (442,427)
RECOGNITION OF PREVIOUSLY DEFERRED PROFIT (16,009,957) (173,748)
GAIN ON CASUALTY LOSS (93,071) 0
GAIN ON SALE OF PROPERTY AND OTHER ASSETS (112,253) (20,270,718)
DEFERRED INCOME TAX PROVISION 0 1,456,638
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 1,889,965 459,653
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RESTRICTED CASH (896,145) 292,559
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE AND COSTS AND
ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONSTRUCTION
CONTRACTS (6,920,623) 4,972,747
DECREASE IN INCOME TAXES RECEIVABLE 2,635,582 0
(INCREASE) IN PREPAID EXPENSES (362,234) (47,074)
(INCREASE) DECREASE IN OTHER ASSETS (286,627) 82,630
INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 2,131,781 4,110,047
(DECREASE) INCREASE IN INCOME AND OTHER TAXES (1,805,835) 649,633
------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (8,405,596) 7,797,115
CASH FLOWS FROM INVESTING ACTIVITIES:
PAYMENTS RECEIVED ON NOTES RECEIVABLE 12,292,668 176,936
CAPITAL EXPENDITURES (17,663,069) (63,759,958)
PROCEEDS FROM SALE OF PROPERTY AND OTHER ASSETS 65,312,470 23,350,948
DEPOSITS ON SALE/LEASEBACK OF HOTELS (7,280,000) 0
------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 52,662,069 (40,232,074)
CASH FLOWS FROM FINANCING ACTIVITIES:
DECREASE IN DEFERRED CHARGES 74,057 1,273,488
PROCEEDS FROM LONG-TERM DEBT 23,399,754 0
PAYMENTS ON LONG-TERM DEBT (36,952,036) (15,663,838)
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (182,232) (496,923)
DISTRIBUTIONS TO MINORITY INTERESTS 0 (1,809,580)
EXERCISE OF STOCK OPTIONS 41,505 0
PURCHASE OF TREASURY STOCK (9,937,863) 0
------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (23,556,815) (16,696,853)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,699,658 (49,131,812)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,480,984 58,103,004
------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 23,180,642 $ 8,971,192
====================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In Management's opinion, the information and amounts furnished in this
report reflect all adjustments which are necessary for the fair
presentation of the financial position and results of operations for
the periods presented. All adjustments are of a normal and recurring
nature. The condensed consolidated balance sheet at December 27, 1998
has been derived from the audited consolidated financial statements at
that date. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended
December 27, 1998.
The fiscal year consists of a 52/53 week year ending the last Sunday of
the year. The four quarters have 16, 12, 12, and 12 weeks in first,
second, third and fourth quarters, respectively, in each fiscal year.
When the 53rd week occurs in a fiscal year, it is added to the fourth
fiscal quarter, making it 13 weeks in length.
The Company has historically reported lower earnings in the first and
fourth quarters of the year due to the seasonality of the Company's
business. The results of operations for the quarters and year-to-date
periods ended October 3, 1999 and October 4, 1998 are not necessarily
indicative of the operating results for the entire year.
<PAGE> 7
B. EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted
average number of common shares outstanding. The following table
reconciles earnings and weighted average shares used in the earnings
per share calculations for the fiscal quarters and fiscal year-to-date
periods ended October 3, 1999, and October 4, 1998:
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic:
Earnings Before Extraordinary
Items $ 57,804 $ 11,925,817 $3,778,092 $ 12,216,082
Extraordinary Gain (Loss) 798,670 (1,066,466) 798,670 (1,066,466)
---------- ------------ ---------- ------------
Net Earnings Applicable To
Common Stock $ 856,474 $ 10,859,351 $4,576,762 $ 11,149,616
========== ============ ========== ============
Shares:
Weighted Average Common
Shares Outstanding 5,842,152 8,255,810 6,828,121 8,255,810
========== ============ ========== ============
Basic Earnings Per Share:
Before Extraordinary Items $ 0.01 $ 1.44 $ 0.55 $ 1.48
Extraordinary Gain (Loss) 0.14 (0.12) 0.12 (0.13)
---------- ------------ ---------- ------------
Net Earnings $ 0.15 $ 1.32 $ 0.67 $ 1.35
========== ============ ========== ============
Diluted:
Earnings Before Extraordinary
Items
(Basic) $ 57,804 $ 11,925,817 $3,778,092 $ 12,216,082
Extraordinary Gain (Loss) 798,670 (1,066,466) 798,670 (1,066,466)
Dilutive Effect Of 7.5%
Convertible Debentures -- 598,154 -- 1,993,846
---------- ------------ ---------- ------------
Numerator For Diluted
Earnings Per Share $ 856,474 $ 11,457,505 $4,576,762 $ 13,143,462
========== ============ ========== ============
Shares:
Weighted Average Common
Shares Outstanding 5,842,152 8,255,810 6,828,121 8,255,810
Effect of Dilutive
Securities (Options) 225,100 298,153 226,125 434,390
Effect Of Dilutive
Securities (7.5%
Convertible Debentures) -- 2,316,602 -- 2,316,602
---------- ------------ ---------- ------------
Weighted Average Common And
Common Equivalent Shares
Outstanding 6,067,252 10,870,565 7,054,246 11,006,802
========== ============ ========== ============
Diluted Earnings Per Share:
Before Extraordinary Items $ 0.01 $ 1.15 $ 0.54 $ 1.29
Extraordinary Gain (Loss) 0.13 (0.10) 0.11 (0.10)
---------- ------------ ---------- ------------
Net Earnings $ 0.14 $ 1.05 $ 0.65 $ 1.19
========== ============ ========== ============
</TABLE>
<PAGE> 8
C. OPERATING SEGMENT INFORMATION
The Company's significant operating segments are hotel operations,
franchising and management, and construction and development. In 1999,
the Company is reporting a new segment due to its renewed construction
and development activity for third parties. None of the Company's
segments conduct foreign operations. Operating profit includes the
operating revenues and expenses directly identifiable with the
operating segment. Identifiable assets are those used directly in the
operations of each segment. A summary of the Company's operations by
segment follows (in thousands of dollars):
<TABLE>
<CAPTION>
12 Weeks Ended 40 Weeks Ended
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
(As adjusted) (As adjusted)
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues from external customers $ 17,051 $ 14,789 $ 51,712 $ 56,750
Franchising and management 6,243 16,835 20,611 54,937
Construction and development 4,495 0 5,198 0
Elimination of intersegment revenue franchising
and management (4,349) (15,953) (17,049) (52,496)
--------- --------- -------- --------
Total revenues $ 23,440 $ 15,671 $ 60,472 $ 59,191
========= ========= ======== ========
Operating profit (loss):
Hotel $ 170 $ 1,097 $ 2,942 $ 8,200
Franchising and management 108 (891) (3,385) (4,129)
Construction and development 720 0 779 0
--------- --------- -------- --------
Total operating profit (loss) $ 998 $ 206 $ 336 $ 4,071
========= ========= ======== ========
Capital expenditures:
Hotel $ 3,866 $ 17,472 $ 16,104 $ 60,483
Franchising and management 541 2,753 1,559 3,277
Construction and development 0 0 0 0
--------- --------- -------- --------
Total capital expenditures $ 4,407 $ 20,225 $ 17,663 $ 63,760
========= ========= ======== ========
Depreciation and amortization:
Hotel $ 1,190 $ 1,250 $ 4,643 $ 5,312
Franchising and management 268 246 919 846
Construction and development 0 0 0 0
--------- --------- -------- --------
Total depreciation and amortization $ 1,458 $ 1,496 $ 5,562 $ 6,158
========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of As of
October 3, December 27,
1999 1998
Total assets:
<S> <C> <C>
Hotel $218,369 $245,893
Franchising and management 60,403 49,080
Construction and development 5,226 28
-------- --------
Total assets $283,998 $295,001
======== ========
</TABLE>
<PAGE> 9
D. ADJUSTED PRIOR YEAR'S EARNINGS
As reported in the Company's Form 10-K for the fiscal year ended
December 27, 1998, the following is a summary of the unaudited
financial information for the third fiscal quarter and year-to-date
period ended October 4, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Third Quarter Year-to-date
------------- ------------
As Originally As As Originally As
Reported Adjusted Reported Adjusted
-----------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenue $15,671 $15,671 $59,191 $59,191
Gross Operating Profit 5,036 5,036 22,199 22,199
Net Income (a) 11,629 10,859 12,310 11,150
Net Income Per Share - Basic 1.41 1.32 1.49 1.35
Net Income Per Share - Diluted 1.12 1.05 1.30 1.19
</TABLE>
(a) Decrease in net income relates to interest expense
and general and administrative expense, most of which
had previously been capitalized as hotel properties
under development, and additional franchise taxes
(classified as general and administrative expense)
and interest due to the IRS (classified as income tax
expense) related to installment sales of 16 hotels.
E. CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
In the opinion of management, any ultimate liability with respect to
these actions will not materially affect the consolidated financial
position or results of operations of the Company. The following is a
summary of legal action pending against the Company and action recently
concluded.
In 1997, Tri-State Inns, Inc. and Motels of America, Inc. filed a suit
against ShoLodge Franchise Systems, Inc., a subsidiary of the Company,
seeking to be discharged, relieved and excused of any future
performance under the License Agreement relating to 14 Shoney's Inns,
or in the alternative, compensatory damages, based on theories of
alleged breach of contractual obligations and implied warranties of
good faith and fair dealing, alleged fraudulent inducement based on
alleged misrepresentations and alleged failure to make material
disclosures of fact, alleged promissory estoppel and alleged breach of
fiduciary duty. In addition, the plaintiffs originally sought a
declaratory judgment concerning the provision of the License Agreement
which specifies the damages due upon termination of the License
Agreement. On March 18, 1998, the plaintiffs filed a motion for summary
judgment seeking to invalidate the non-competition and stipulated
damages provisions set forth in the License Agreements. On August 6,
1998, the court denied the plaintiff's motion. The Company also had
filed counter claims against the plaintiffs. The case was dismissed on
July 16, 1999, in accordance with a settlement agreement entered into
by the parties, pursuant to which the parties exchanged mutual releases
and Tri-State and its affiliates agreed to pay the Company a total of
$1,175,000 in cash ($575,000 at the settlement date and $200,000 each
year for the next three years). The case is now concluded. The total of
$1,175,000 was recognized as franchising revenues in the third quarter
ended October 3, 1999.
<PAGE> 10
In 1998, two purported class action lawsuits were filed against the
Company and certain officers of the Company, by plaintiffs who claim to
be shareholders and debt security holders of the Company, respectively,
both alleging that the Company violated certain anti-fraud provisions
of the Tennessee Securities Act of 1980, as amended, by issuing
allegedly false and misleading statements and financial information to
the investing public. The complaints seek an unspecified amount of
damages and unspecified injunctive relief. The Company filed motions to
dismiss both suits on the basis that the plaintiff's allegations failed
to state a cause of action under the applicable state statute. The
trial court denied both motions. The court's denial of the Company's
motions on these suits are currently before the Court of Appeals. One
case was argued before the Court of Appeals on May 7, 1999, but the
court has not rendered an opinion. Both cases have been set for trial
on April 24, 2000. The Company believes both suits are without merit
and will defend itself vigorously. Neither management nor legal counsel
can predict the outcome at this time.
In 1998, a former chief financial officer of the Company, filed a
lawsuit against the Company and its chief executive officer alleging
that his employment by the Company was wrongfully terminated, claiming
breach of contract, fraud, retaliatory discharge and related claims.
The plaintiff seeks $3 million in compensatory damages and punitive and
treble damages. On December 31, 1998 the Company filed a motion to
dismiss this lawsuit on the basis that the plaintiff has intentionally
destroyed relevant evidence during the pendency of the case. The court
granted this motion on January 28, 1999 and dismissed the case with
prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or
Amend the Judgment dismissing the case. The court denied the motion on
April 23, 1999. The plaintiff has filed an appeal. The Company believes
the suit is without merit and will defend itself vigorously. Neither
management nor legal counsel can predict the outcome at this time.
F. LONG-TERM DEBT
The Company's $25.2 million revolving credit facility with a group of
five banks matured on June 30, 1999. It was repaid in full on June 29,
1999, from a portion of the $65.0 million gross proceeds from a
sale-leaseback transaction involving six of the Company's Sumner Suites
hotels. The Company has established a new three year credit facility
with a new bank group effective August 27, 1999. The new credit
facility is for an initial amount of $30 million (a $10 million term
loan and a $20 million revolving line of credit), secured by a pledge
of certain promissory notes payable to the Company received in
connection with the sale of 16 of the Company's lodging facilities in
the third quarter of 1998. The borrowing base is the lower of (a) 85%
of the outstanding principal amount of the pledged notes, (b) 65% of
the appraised market value of the underlying real property collateral
securing the pledged notes, or (c) $30 million. The interest rate is at
the lender's base rate plus 50 basis points and the Company is to pay
commitment fees on the unused portion of the facility at .50% per
annum. The Company incurred certain fees and expenses in association
with closing and administering the credit facility. The credit facility
also contains covenants which, inter alia, limit or prohibit the
incurring of certain additional indebtedness in excess of a specified
debt to total capital ratio, prohibit additional liens on the
collateral, restrict mergers and the payment of dividends and restrict
the Company's ability to place liens on unencumbered assets. The credit
facility contains financial covenants as to the Company's minimum net
worth. As of October 3,
<PAGE> 11
1999, the Company had $10 million in borrowings outstanding under this
credit facility, consisting of the three year term loan.
In the second quarter of 1999 the Company announced its plan to use up
to $12.0 million of its Company funds to repurchase a portion of its
$54.0 million outstanding convertible subordinated debentures, and
repurchased $668,000 of this debt for $411,000 in the third fiscal
quarter of 1999. Since the end of the third quarter (through November
3) an additional $3.0 million of this debt has been purchased at a cost
of $1.8 million. In the third quarter of 1999 the Company announced its
plan to use up to $15 million of its Company funds to repurchase a
portion of its outstanding $67.7 million senior subordinated notes. As
of the end of the third fiscal quarter the Company has repurchased $3.6
million of these debt securities at a cost of $2.5 million. Since the
end of the third quarter (through November 3), an additional $1.7
million of these debt securities has been repurchased at a cost of $1.2
million.
G. STOCKHOLDERS' EQUITY
In the first three quarters of 1999, the Company repurchased 1.8
million shares of its common stock for $9.9 million pursuant to a plan
to repurchase up to $12.5 million of the Company's outstanding common
stock. In July of 1999 the Company increased the authorized amount to
repurchase an additional $7.5 million of common stock pursuant to the
plan, increasing the total amount authorized to $20.0 million. In 1998,
784,000 shares were repurchased for $5.4 million. Since the end of the
third quarter 1999 (through November 3), the Company has repurchased an
additional 205,000 shares for $1.2 million.
H. COMMITMENTS
The Company sold and leased back 14 Sumner Suites hotels in November,
1997. The 1997 lease agreement was amended in June 1999 to add six
Sumner Suites hotels to the lease effective June 29, 1999. The
amendment added $7.3 million per year to the base rent. The base rent
on these six hotels for the third quarter of 1999 was $1.7 million, and
for the third quarter 1999 year-to-date period was $1.9 million.
<PAGE> 12
ShoLodge, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
The following discussion should be read in conjunction with the
Company's condensed consolidated financial statements and notes thereto
appearing elsewhere in this quarterly report.
The Company develops, owns and operates all-suites hotels under the
Sumner Suites brand name and is an operator and the exclusive franchisor of
Shoney's Inns. The Company's 26 Sumner Suites hotels (3,163 suites) operated as
of October 3, 1999 are mid-scale, all-suites hotels located in Arizona,
Colorado, Florida, Georgia, Indiana, Kansas, New Mexico, North Carolina, Ohio,
Tennessee, Texas and Virginia. As of October 3, 1999, the Company owns and
operates 6 of these and now operates the other 20 as a result of two
sale-leaseback transactions in 1997 and 1999. As of October 3, 1999, the
Shoney's Inn lodging system consists of 74 Shoney's Inns containing
approximately 7,200 rooms of which 17 containing approximately 1,900 rooms are
owned or managed by the Company. Shoney's Inns are currently located in 21
states with a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and,
to a lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $75 and $100 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites contains from 110 to
135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room,
and offers a deluxe continental breakfast.
The Sumner Suites concept was launched in 1995 with three hotels. From
1990 until 1995, the Company developed and managed 12 mid-scale, all-suites
hotels under another brand name before selling its interests in those hotels in
March 1995. The Company believes that its experience in developing, constructing
and managing mid-scale, all-suites hotels has enabled it to expand effectively
its development and ownership of the Sumner Suites system. In addition, as
Sumner Suites has a limited presence in the marketplace, the Company is
utilizing its proprietary reservation system, INNLINK, to further expand
awareness of Sumner Suites.
Shoney's Inns operate in the upper economy limited-service segment and
are designed to appeal to both business and leisure travelers, with rooms
usually priced between $40 and $65 per night. The typical Shoney's Inn includes
60 to 120 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not
offer full food service, most offer continental breakfast and most of the
Shoney's Inns are located adjacent to or in close proximity to Shoney's
restaurants. Management believes that its strategy of
<PAGE> 13
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.
RESULTS OF OPERATIONS
For the Fiscal Quarters and Fiscal Year-to-date Periods Ended October 3, 1999
and October 4, 1998
Total operating revenues for the third fiscal quarter ended October 3,
1999, were $23.4 million, or 49.6% more than the total operating revenues of
$15.7 million reported for the third quarter of 1998. For the fiscal
year-to-date period ended October 3, 1999, total operating revenues were $60.5
million, or 2.2% more than the total operating revenues of $59.2 million for the
comparable period in 1998.
Revenues from hotel operations in the third fiscal quarter of 1999
increased by $2.3 million, or 15.3% from the $14.8 million for the same period
in 1998. For the 33 same hotels opened for all of both quarterly periods, an
increase of 2.6% in average daily room rates, from $65.11 in third quarter 1998
to $66.79 in third quarter 1999, partially offset by a decrease in average
occupancy rates on these hotels from 59.3% to 58.9% this year, resulted in an
increase in same hotel revenues of 1.7% from $12.9 million in third quarter 1998
to $13.1 million in third quarter 1999. The eight hotels opened since the end of
second quarter 1998 contributed $4.0 million to hotel operating revenues in
third quarter this year versus $292,000 in third quarter last year. Sixteen
hotels were sold in third quarter 1998; these hotels contributed $1.6 million to
hotel operating revenues in third quarter 1998 versus none in third quarter
1999.
Revenues from hotel operations in the first three quarters of 1999
decreased by $5.0 million, or 8.9%, from the $56.7 million for the same period
in 1998. For the 32 same hotels opened for all of both year-to-date periods, an
increase of 2.3% in average daily room rates, from $64.94 in the first three
quarters of 1998 to $66.46 in the first three quarters of 1999, partially offset
by a decrease in average occupancy rates on these hotels from 59.2% to 56.8%
this year, resulted in an increase in same hotel revenues of 0.2% from $40.3
million in the first three quarters of 1998 to $40.4 million in the first three
quarters of 1999. The nine hotels opened since the end of 1997 contributed $11.3
million to hotel operating revenues in the first three quarters of this year
versus $1.0 million in the first three quarters of last year. The sixteen hotels
sold in third quarter 1998 contributed $15.4 million to hotel operating revenues
in the first three quarters of 1998 versus none in 1999.
The Company owns and operates two hotel brands - Sumner Suites hotels
and Shoney's Inns. The 26 Sumner Suites hotels' RevPAR (revenue per available
room) increased by 11.5%, from $43.05 in the third quarter of 1998 to $48.02 in
the third
<PAGE> 14
quarter of 1999. The 18 Sumner Suites same hotels' RevPAR increased by 7.2%,
from $46.17 in third quarter 1998 to $49.48 in third quarter this year. All
future Company-owned hotels currently planned will be of the Sumner Suites
brand. RevPAR for all Company-owned Shoney's Inns decreased from $31.66 in third
quarter 1998 (including the 16 hotels sold in third quarter 1998) to $26.95 in
third quarter 1999. The 15 Shoney's Inns same-hotels, which are also the only
ones currently owned by the Company, reflected a decrease in RevPAR from $29.35
in third quarter 1998 to $26.95 in third quarter 1999, due primarily to
increased competition from new hotels.
All Sumner Suites hotels' RevPAR decreased from $44.74 in the first
three quarters of 1998 to $44.68 in the first three quarters of 1999, due to the
nine hotels opened since January of 1998 which had not reached stabilization.
However, the 17 Sumner Suites same-hotels' RevPAR increased by 4.3%, from $46.46
in the first three quarters of 1998 to $48.45 in the first three quarters of
1999. For the first three quarters of this year, RevPAR for all Company-owned
Shoney's Inns decreased from $30.97 for the first three quarters of 1998 to
$25.46 for the same period this year. The 15 same-hotel Shoney's Inns reflected
a decrease for this same period from $27.88 in 1998 to $25.46 in 1999, due
primarily to increased competition from new hotels.
Franchising and management revenues increased by $1.0 million, or
114.9%, in the third quarter 1999 from third quarter 1998. Franchise fees
increased by $1.1 million from third quarter last year, while royalty and
reservation fees decreased by $27,000, from $712,000 in third quarter 1998 to
$685,000 in third quarter 1999. In the third quarter of 1999, a settlement
agreement entered into between the Company and an ex-franchisee whereby the
ex-franchisee agreed to pay the Company $575,000 in cash and $200,000 each year
for the next three years, resulted in the recognition of $1.2 million in
franchising revenues in this quarter and is included in the $1.1 million
increase in franchise fees; other franchise fees decreased by $82,000. For the
first three quarters of 1999, franchising and management revenues increased by
$1.1 million, or 45.8%, from the same period last year. Franchise fees increased
by $861,000 from the first three quarters of last year (including the $1.2
million settlement discussed above), but royalty and reservation revenues
increased by $332,000, from $1.9 million in the first three quarters of 1998 to
$2.2 million in the first three quarters of 1999. These increases in 1999 over
1998 are due primarily to the franchise revenues earned on the 16 Shoney's Inns
sold to a new franchisee in early third quarter 1998. Franchise fee revenue
(initial fees and termination fees) can vary materially from quarter to quarter
depending on the level of the Company's new franchise sales activities and
terminations of franchises.
Revenues from construction and development activities were $4.5 million
in third quarter 1999 and $5.2 million in the first three quarters of 1999,
versus none year-to-date in the comparable periods of 1998. The 1999 revenues
earned to date are on three hotel construction contracts being performed for
third parties.
Operating expenses from hotel operations for the third quarter of 1999
increased by $1.6 million, or 15.9%, from $10.1 million in third quarter 1998,
due partially to the
<PAGE> 15
$2.3 million increase in hotel operating revenues. The sale of the 16 Shoney's
Inns in third quarter 1998 accounted for a decrease of $1.2 million in hotel
operating expenses from third quarter 1998 to third quarter 1999. The nine
Sumner Suites hotels opened in 1998 and first quarter 1999 caused hotel
operating expenses to increase by $2.0 million over third quarter last year.
Hotel operating expenses on the 32 hotels opened prior to 1998 increased by
$839,000, or 11.0%, in third quarter 1999 over third quarter 1998. The operating
expenses as a percentage of operating revenues for this activity increased from
68.1% in third quarter 1998 to 68.5% in third quarter 1999; however, operating
expenses as a percentage of operating revenues on the 32 hotels opened prior to
1998 increased from 61.2% in third quarter 1998 to 67.8% in third quarter 1999,
due primarily to an 8.9% decrease in hotel revenues from the 15 Shoney's Inns
still owned. The nine hotels which opened in 1998 and first quarter 1999
impacted hotel operating expenses significantly due to the related pre-opening
and startup expenses incurred during their first year or two after opening,
before the hotels reach stabilization.
Operating expenses from hotel operations for the first three quarters
of 1999 decreased by $730,000, or 2.1%, from $35.2 million in the first three
quarters of 1998, due partially to the $5.0 million decrease in hotel operating
revenues. The sale of the 16 Shoney's Inns in third quarter 1998 accounted for a
decrease of $8.7 million in hotel operating expenses from the first three
quarters of 1998 to the first three quarters of 1999. The nine Sumner Suites
hotels opened in 1998 and first quarter of 1999 caused hotel operating expenses
to increase by $6.8 million over the first three quarters of last year. Hotel
operating expenses on the 32 same-hotels increased by $1.2 million, or 4.8%, in
the first three quarters 1999 over the first three quarters of 1998. The
operating expenses as a percentage of operating revenues for this activity
increased from 61.9% in the first three quarters of 1998 to 66.6% in the first
three quarters of 1999; however, operating expenses as a percentage of operating
revenues on the 32 same-hotels only increased from 61.0% in the first three
quarters of 1998 to 63.8% in the first three quarters of 1999. Increases in
hotel operating expenses on same-hotels were primarily in the areas of payroll
related costs, repairs and maintenance, security, and property taxes.
Franchising and management operating expenses decreased by $45,000, or
7.9%, from third quarter 1998 to third quarter 1999, and by $157,000, or 8.5%,
from the first three quarters of 1998 to the first three quarters of 1999. The
decreases were primarily in the central reservation center operating costs.
Construction and development costs in third quarter 1999 were $3.8 million, and
for the first three quarters of 1999 were $4.4 million, versus none in the first
three quarters of 1998. The 1999 costs were incurred in earning the revenues
from the three third party construction contracts, two of which are still in
progress at October 3, 1999.
General and administrative expenses increased by $23,000, or 2.2%, in
the third quarter of 1999 from the third quarter of 1998. For the first three
quarters of 1999 general and administrative expenses increased by $200,000, or
4.6%, from the comparable period last year. Excluding year-to-date charge-offs
of pre-development costs for sites no longer deemed probable of development in
the amounts of $620,000 in 1999 and $180,000 in
<PAGE> 16
1998, general and administrative expenses for this period declined by $240,000,
or 5.8%, from the same period last year.
Rent expense increased by $1.7 million, or 72.9%, in third quarter 1999
from third quarter 1998. For the first three quarters of 1999, rent expense
increased by $1.9 million, or 24.6%, from the same period last year. The
increases were due to the increase in base rent due to additional hotels sold
and leased back in 1999 as compared to 1998. The 1997 lease agreement was
amended in June 1999 to add six Sumner Suites hotels to the lease effective June
29, 1999. The base rent on these six hotels for the third quarter of 1999 was
$1.7 million, and for the third quarter 1999 year-to-date period was $1.9
million.
Depreciation and amortization expense decreased by $38,000, or 2.5%,
from third quarter 1998 to third quarter 1999. The sale of the 16 Shoney's Inns
in third quarter 1998 reduced depreciation expense in third quarter 1999 by
$170,000 from third quarter 1998. However, depreciation and amortization expense
increased in third quarter 1999 over third quarter 1998 by $132,000, due to the
nine additional hotels opened in 1998 and first quarter 1999, net of the effect
of the cessation of depreciation in June 1999 on the six hotels sold and leased
back. Depreciation and amortization expense decreased by $595,000, or 9.7%, from
the first three quarters of 1998 to the first three quarters of 1999. The sale
of the 16 Shoney's Inns in third quarter 1998 reduced depreciation expense in
the first three quarters of 1999 by $2.1 million from the first three quarters
of 1998. However, depreciation and amortization expense increased in the first
three quarters of 1999 over the first three quarters of 1998 by $1.5 million due
to the nine additional hotels opened in 1998 and first quarter 1999, net of the
effect of the cessation of depreciation in June 1999 on the six hotels sold and
leased back.
Interest expense increased by $512,000, while interest income increased
by $230,000 from third quarter 1998, for a net increase of $282,000 in net
interest expense. The increase in interest expense for the first three quarters
of 1999 was $1.5 million over the first three quarters of 1998, while interest
income during that period increased by $1.2 million, for an increase in net
interest expense of $259,000. The increase in interest expense resulted from
additional borrowings incurred in 1998 and first three quarters of 1999 for
capital expenditures for new hotels, partially offset by interest expense
reductions from the extinguishment of debt in third quarter 1998 associated with
the hotels sold. The 1999 increase in interest income was due primarily to
interest earned on mortgage notes receivable from the sale of the hotels in
third quarter 1998, which exceeded interest earned in the first three quarters
of 1998 from cash temporarily invested from the proceeds of the sale-leaseback
transaction which occurred in the fourth quarter of 1997.
The gain recognized on sale of property in third quarter 1999 was
$49,000 compared with $20.2 million in third quarter 1998. The gain on sale of
property in third quarter 1999 was from the sale of land held for sale. The gain
on sale of property in third quarter 1998 represented a portion of the gain on
the sale of 16 Shoney's Inns effective
<PAGE> 17
August 1, 1998. A portion of the gain on the sale of four of these 16 hotels was
deferred and recognized on the installment method through the second quarter of
1999. The gain recognized on sale of property in the first three quarters of
1999 was $12.0 million compared with $20.3 million for the same period in 1998.
Of the $12.0 million in first three quarters of 1999, $11.9 million relates to
the recognition of previously deferred gain related to four of the 16 hotels
sold in third quarter 1998, which was being recognized on the installment
method. The balance of the gain on sale of property in the first three quarters
of both 1999 and 1998 was from the sale of land held for sale.
Other income decreased by $271,000 from third quarter 1998 to third
quarter 1999, and by $314,000 from the first three quarters of 1998 to the first
three quarters of 1999. Other income can vary widely from quarter to quarter due
to the nature of this income and its varied sources. Minority interests in
earnings of consolidated subsidiaries and partnerships decreased by $368,000
from third quarter 1998 to third quarter 1999, and increased by $1.4 million
from the first three quarters of 1998 to the first three quarters of 1999. The
1999 year-to-date net increase of $1.4 million consisted of a $1.8 million
year-to-date increase due to the 40% minority interest in $4.6 million of the
gain on sale of property recognized in first quarter 1999 discussed above,
partially offset by a $399,000 decrease due to other operating activities in
which minority ownership was involved.
The extraordinary gain from early extinguishment of debt in the third
quarter of 1999 was the result of the repurchase of $4.3 million of the
Company's previously issued subordinated debt at a discount from face value, net
of the write-off of related unamortized deferred financing costs. The
extraordinary loss from early extinguishment of debt in the third quarter of
1998 was a result of debt paid off in conjunction with the sale of 16 Shoney's
Inns in August of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows used in operating activities were $ 8.4
million in first three quarters of 1999, compared with $7.8 million provided by
operating activities in the first three quarters of 1998. Accounts receivable
increased by $6.9 million in the first three quarters of 1999, compared with a
decrease of $5.0 million in the first three quarters of 1998, due primarily to
the opening of three new hotels in first quarter 1999 and to substantially
larger construction contracts receivable, including unbilled amounts due from
third parties for construction activities on their behalf, in the first three
quarters of 1999. The increase in accounts payable in the first three quarters
of 1999 was $2.1 million, compared with an increase of $4.1 million in the first
three quarters of 1998; however, the decrease in income and other taxes payable
in the first three quarters of 1999 was $1.8 million, compared with an increase
of $650,000 in the first three quarters of 1998. Income taxes receivable also
decreased by $2.6 million in the first three quarters of 1999.
<PAGE> 18
The Company's cash flows provided by investing activities were $52.7
million in the first three quarters of 1999, compared with cash flows used in
investing activities of $40.2 million for the comparable period in 1998. The
Company collected $12.3 million from notes receivable in the first three
quarters of 1999, of which $12.2 million related to two hotel properties sold in
1997 and 1998; only $177,000 was received in the first three quarters of 1998
from the collection of notes receivable. The Company requires capital
principally for the construction and acquisition of new lodging facilities and
the purchase of equipment and leasehold improvements. Capital expenditures for
such purposes were $17.7 million in the first three quarters of 1999 and $63.8
million in the first three quarters of 1998. The Company sold and leased back
six hotels in June of 1999, for which the gross proceeds were $65.0 million and
proceeds net of the required $7.3 million security deposit were $57.7 million.
Proceeds from the sale of other property were $312,000 in the first three
quarters of 1999, compared with $23.4 million in the comparable period in 1998,
which included approximately $22.5 million from the sale of 16 hotels in third
quarter of 1998.
Net cash used in financing activities was $23.6 million in the first
three quarters of 1999 compared with net cash used in financing activities of
$16.7 million in the first three quarters of 1998. Repayments, net of
borrowings, on the bank revolving credit facility which matured on June 30,
1999, were $20.3 million in the first three quarters of 1999 versus no activity
in the first three quarters of 1998. The facility was repaid in full on June 29,
1999. Payments on long-term debt, other than on the bank revolving credit
facility, were $16.7 million in the first three quarters of 1999 compared with
$15.7 million in the first three quarters of 1998. Additionally, $4.6 million
was borrowed in the first three quarters of 1999 to finance the purchase of
hotel furniture, fixtures, and equipment (of which $2.3 million was repaid in
connection with the sale-leaseback transaction); no furniture, fixtures, and
equipment financing occurred in the first three quarters of 1998. In the first
three quarters of 1999, the Company repurchased 1.8 million shares of its common
stock for $9.9 million pursuant to a plan to repurchase up to $12.5 million of
the Company's outstanding common stock. In July of 1999 the Company increased
the authorized amount to repurchase an additional $7.5 million of common stock
pursuant to the plan, increasing the total amount authorized to $20.0 million.
In 1998, 784,000 shares were repurchased for $5.4 million. Since the end of the
third quarter 1999 (through November 3), the Company has repurchased an
additional 205,000 shares for $1.2 million. In the second quarter of 1999 the
Company announced its plan to use up to $12.0 million of its Company funds to
repurchase a portion of its $54.0 million outstanding convertible subordinated
debentures, and repurchased $668,000 of this debt for $411,000 in the third
fiscal quarter of 1999. Since the end of the third quarter (through November 3)
an additional $3.0 million of this debt has been purchased at a cost of $1.8
million. In the third quarter of 1999 the Company announced its plan to use up
to $15 million of its Company funds to repurchase a portion of its outstanding
$67.7 million senior subordinated notes. As of the end of the third fiscal
quarter the Company has repurchased $3.6 million of these debt securities at a
cost of $2.5 million. Since the end of the third quarter (through November 3),
an additional $1.7 million of these debt securities has been repurchased at a
cost of $1.2 million.
<PAGE> 19
The Company's $25.2 million revolving credit facility with a group of
five banks matured on June 30, 1999. It was repaid in full on June 29, 1999,
from a portion of the $65.0 million gross proceeds from a sale-leaseback
transaction involving six of the Company's Sumner Suites hotels. The Company has
established a new three year credit facility with a new bank group effective
August 27, 1999. The new credit facility is for an initial amount of $30 million
(a $10 million term loan and a $20 million revolving line of credit), secured by
a pledge of certain promissory notes payable to the Company received in
connection with the sale of 16 of the Company's lodging facilities in the third
quarter of 1998. The borrowing base is the lower of (a) 85% of the outstanding
principal amount of the pledged notes, (b) 65% of the appraised market value of
the underlying real property collateral securing the pledged notes, or (c) $30
million. The interest rate is at the lender's base rate plus 50 basis points and
the Company is to pay commitment fees on the unused portion of the facility at
.50% per annum. The Company incurred certain fees and expenses in association
with closing and administering the credit facility. The credit facility also
contains covenants which, inter alia, limit or prohibit the incurring of certain
additional indebtedness in excess of a specified debt to total capital ratio,
prohibit additional liens on the collateral, restrict mergers and the payment of
dividends and restrict the Company's ability to place liens on unencumbered
assets. The credit facility contains financial covenants as to the Company's
minimum net worth. As of October 3, 1999, the Company had $10 million in
borrowings outstanding under this credit facility, consisting of the three year
term loan.
The Company also maintains a $1 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
2000. As of October 3, 1999, the Company had no borrowings outstanding under
this credit facility.
The Company opened six new Sumner Suites hotels in 1998 (including four
in the first three quarters of 1998) and three in first quarter 1999. As of the
end of the third fiscal quarter of 1999, one Sumner Suites hotel was under
construction in Orlando, Florida, which opened in the fourth quarter of 1999.
Additionally, the Company has acquired four sites for future development and
estimates that approximately $28.0 million in capital funds will be required to
complete their development, none of which are expected to be complete by the end
of 1999. In 1998 the Company decided to slow its aggressive development schedule
of new Sumner Suites hotels in the near term. This decision was based on current
market conditions, rooms supply in certain areas, and capital availability.
Under the terms of the trust indenture governing the senior
subordinated notes issued in 1996 and 1997, the Company is obligated to redeem
at par up to 5% annually of the notes issued under the indenture beginning in
1999. Approximately $3.0 million of these notes are expected to be redeemed
under this provision on December 1, 1999.
<PAGE> 20
The Company is investigating various alternatives to maximize
shareholder value. These alternatives could include, without limitation, a
continuation of the development and operation of Sumner Suites hotels and the
franchising and operation of Shoney's Inns, a sale of the remaining Shoney's
Inns, the sale-leaseback of some or all of the Company's Sumner Suites hotels,
negotiating new credit arrangements, developing hotels for other owners, the
repurchase of additional shares of the Company's common stock or outstanding
debt securities, or any combination of these or other strategies. The Company
believes that a combination of existing cash, net proceeds from possible future
sale-leaseback transactions, the collection of notes receivable, net cash
provided by operations, borrowings under existing and new revolving credit
facilities or mortgage debt, and available furniture, fixture and equipment
financing packages will be sufficient to fund its scheduled hotel development,
stock repurchase plan, debt repayments and operations for the next twelve
months.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing a
possible disruption of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Based on recent assessments, the Company determined that it would be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 Issue can be mitigated.
However, if such modifications or replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has divided the Year 2000 Issue into what it considers
being critical and non-critical issues. The Company believes that in its line of
business the critical issues involve the ability to process hotel sales
transactions beginning with hotel reservations through settlement and
collection. Additionally, critical importance has been placed on the Company's
ability to process and maintain accurate accounting, financial and corporate
records.
The systems that the Company has identified as being critical are the
core business software applications including, but not limited to, the
following: the IBM AS400 operating system, the accounting and financial
reporting system, the front desk
<PAGE> 21
and credit card payment system, the room door key system, the central
reservations system, and the cash management software. In addition, the computer
systems maintained by the Company's banks and the telecommunications systems
maintained by the Company's telecommunications vendor have been identified as
critical systems.
The Company has also identified non-critical issues relating to
peripheral business software including, but not limited to: stand alone personal
computers, in-house development applications, Windows NT and the 98 operating
system, spreadsheet software, word processing software, network server back-up
software, development tools software and computer systems maintained by other
third party vendors.
The Company has recently completed its process of making the required
modifications to its existing software systems and scheduling the required
replacements of software and hardware. The Company utilized both internal and
external resources to program, replace, implement and test these changes. The
Company's cost of the Year 2000 project did not exceed $100,000; however, the
Company's internal staff has spent substantial time on the issue. These costs
have been expensed as incurred.
The Company's contingency plans in place consist of (1) backing up
electronic data each night and storing the backup off site, (2) storing a backup
server off site, and (3) an agreement with a vendor to replace the IBM AS400
system within 24 hours if needed. Management believes that its level of
preparedness has minimized its risk of systems failures related to the Year 2000
issue.
FORWARD-LOOKING STATEMENT DISCLAIMER
The statements appearing in this report which are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements, including delays in concluding or the inability to
conclude transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks.
MARKET RISK
There have been no material changes in the Company's exposure to market
risk in the first three fiscal quarters ended October 3, 1999.
<PAGE> 22
PART II - OTHER INFORMATION
Item 1. Paul Senior v. ShoLodge, Inc., Leon Moore and Bob Marlowe, Case No.
98C-136, Chancery Court for Sumner County, Tennessee at Gallatin, filed
April 29, 1998 (the "Senior Case"). This case names the Company and two
of its officers, Leon Moore and Bob Marlowe, as defendants in a class
action lawsuit by plaintiffs who claim to be shareholders of the
Company. The case originally named Michael A. Corbett, former chief
financial officer of the Company, as a defendant, but the plaintiffs
subsequently deleted Mr. Corbett as a named defendant. The Senior Case
alleges that the Company violated certain anti-fraud provisions of the
Tennessee Securities Act of 1980, as amended, by issuing allegedly
false and misleading statements and financial information to the
investing public during the first three quarters of 1997. The Company
moved to dismiss the complaint on the basis that the plaintiff's
allegations failed to state a cause of action under the Tennessee
Securities Act of 1980. The court denied the motion but granted the
Company's request that the Tennessee Court of Appeals review the
court's decision on an interlocutory basis. The court's denial of the
Company's motion is now before the Court of Appeals. On January 29,
1999, the Company filed its appellate brief. The case was argued before
the Court of Appeals on May 7, 1999, but the court has not rendered an
opinion as of the date of this filing. The case has now been scheduled
for trial on April 24, 2000.
Stanley Gale v. ShoLodge, Inc., Leon Moore and Bob Marlowe, Case No.
98C-208, Chancery Court for Sumner County, Tennessee at Gallatin, filed
July 2, 1998. This case names the Company and two of its officers, Leon
Moore and Bob Marlowe, as defendants in a purported class action
lawsuit by plaintiffs who claim to be holders of the Company's debt
securities. The case alleges that the Company violated certain
anti-fraud provisions of the Tennessee Securities Act of 1980, as
amended, based on essentially the same factual allegations as the
Senior Case. The complaint seeks an unspecified amount of damages and
unspecified injunctive relief. The Company filed a motion to dismiss
the case for failure to state a cause of action under the applicable
state statute. The trial court denied the motion. The case has now been
scheduled for trial on April 24, 2000.
Michael A. Corbett v. ShoLodge, Inc. and Leon Moore, Case No. 98C-184,
Chancery Court for Sumner County, Tennessee at Gallatin, filed June 12,
1998. This case was filed by Michael A. Corbett, the former chief
financial officer of the Company, and alleges that his employment by
the Company was wrongfully terminated. The plaintiff alleges breach of
contract, fraud, retaliatory discharge and related claims. The
plaintiff seeks $3 million in compensatory damages and punitive and
treble damages. On December 31, 1998 the Company filed a motion to
dismiss this lawsuit on the basis that the plaintiff has intentionally
destroyed relevant evidence during the pendency of the case. The court
granted this motion on January 28, 1999 and dismissed the case with
prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or
Amend the Judgment dismissing the case. The court denied the motion on
April 23, 1999. The plaintiff has filed an appeal.
Tri-State Inns, Inc. and Motels of America, Inc. v. ShoLodge Franchise
Systems, Inc., Superior Court of Liberty County, Georgia, Civil Action
File No. 97-V-00591. In this action, Tri-State Inns, Inc., the
franchisee of the Shoney's Inn located in Hinesville, Georgia,
originally sought to be discharged, relieved and excused of any future
performance under the License Agreement relating to such Shoney's Inn,
and Motels of America, Inc. sought to be discharged, relieved and
excused of any further performance under a Guaranty Agreement whereby
the obligations of Tri-State Inns, Inc. under such License Agreement
were guaranteed by Motels of America, Inc., or in the alternative
compensatory damages, based on theories of alleged breach of
contractual obligations and implied warranties of good faith and fair
dealing, alleged fraudulent inducement based on alleged
misrepresentation and alleged failure to make material disclosures of
fact, alleged promissory estoppel and alleged breach of fiduciary duty.
In addition, the plaintiffs originally sought a declaratory judgment
concerning the provision of the License Agreement which specifies the
damages due upon termination of the License Agreement. This action was
removed to the U.S. District Court for the Southern District of
Georgia, Case No. CV-497-129. Subsequent to removal, the action was
thereafter transferred to the U.S. District Court for the Middle
District of Tennessee as Civil Action No. 3-98-0028. On December 19,
1997, the plaintiffs filed a Second Amended Complaint in which they
sought to be relieved of obligations not simply as to the Hinesville
Shoney's Inn but also with regard to 13 other license agreements
between plaintiffs and the Company. In the alternative, the plaintiffs
sought an undisclosed amount in compensatory
<PAGE> 23
damages. On March 18, 1998, the plaintiffs filed a motion for summary
judgment seeking to invalidate the non-competition and stipulated
damages provisions set forth in the License Agreements. On August 6,
1998, the court denied the plaintiffs' motion. On July 16, 1999, the
plaintiffs' claims were dismissed with prejudice in accordance with a
settlement agreement entered into by the parties, pursuant to which the
parties exchanged mutual releases and Tri-State and its affiliates
agreed to pay the Company $575,000 in cash, and $200,000 each year for
the next three years. The case is now concluded.
No material developments occurred during the first three fiscal
quarters ended October 3, 1999, with respect to any other pending
litigation.
Item 4. Submission of Matters to a vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
6 (a) Exhibits -
10.1 Loan and Security Agreement by and among The Hotel
Group, Inc., as Borrower, ShoLodge, Inc., as
Holdings, and The Financials Institutions that are
Signatories hereto, the Lenders, and Foothill Capital
Corporation, as Agent, dated as of August 27, 1999,
incorporated by reference from the Registrant's
Report on Form 8-K dated September 15, 1999, filed
with the Commission
27 Financial Data Schedule for Quarter Ended October 3,
1999
27.1 Financial Data Schedule (Restated) for Quarter Ended
October 4, 1998
6 (b) Reports on Form 8-K
A Form 8-K dated September 15, 1999, relating to the closing
on a three-year credit facility with Foothill Capital Corporation on
September 15, 1999.
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ShoLodge, Inc.
Date: November 16, 1999 S/ Leon Moore
-------------------------------------------
Leon Moore
President, Chief Executive Officer,
Principal Executive Officer, Director
Date: November 16, 1999 S/ Bob Marlowe
-------------------------------------------
Bob Marlowe
Secretary, Treasurer, Chief Accounting
Officer, Principal Accounting Officer,
Chief Financial Officer, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
FINANCIAL STATEMENTS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 3, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> OCT-03-1999
<CASH> 23,180,642
<SECURITIES> 0
<RECEIVABLES> 10,534,090
<ALLOWANCES> 334,564
<INVENTORY> 0
<CURRENT-ASSETS> 38,597,543
<PP&E> 145,761,389
<DEPRECIATION> 23,570,996
<TOTAL-ASSETS> 283,998,045
<CURRENT-LIABILITIES> 16,209,469
<BONDS> 135,368,177
0
0
<COMMON> 1,000
<OTHER-SE> 92,802,269
<TOTAL-LIABILITY-AND-EQUITY> 283,998,045
<SALES> 51,712,387
<TOTAL-REVENUES> 60,471,913
<CGS> 0
<TOTAL-COSTS> 60,136,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,515,166
<INCOME-PRETAX> 6,093,092
<INCOME-TAX> 2,315,000
<INCOME-CONTINUING> 3,778,092
<DISCONTINUED> 0
<EXTRAORDINARY> 798,670
<CHANGES> 0
<NET-INCOME> 4,576,762
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
FINANCIAL STATEMENTS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 4, 1998 (AS
ADJUSTED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> OCT-04-1998
<CASH> 9,681,134
<SECURITIES> 221,615
<RECEIVABLES> 3,864,615
<ALLOWANCES> 281,785
<INVENTORY> 0
<CURRENT-ASSETS> 17,896,613
<PP&E> 177,348,232
<DEPRECIATION> 20,027,075
<TOTAL-ASSETS> 289,896,624
<CURRENT-LIABILITIES> 18,682,658
<BONDS> 129,435,493
0
0
<COMMON> 1,000
<OTHER-SE> 106,473,090
<TOTAL-LIABILITY-AND-EQUITY> 289,896,624
<SALES> 56,749,614
<TOTAL-REVENUES> 59,191,331
<CGS> 0
<TOTAL-COSTS> 55,119,893
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,061,736
<INCOME-PRETAX> 20,073,082
<INCOME-TAX> 7,857,000
<INCOME-CONTINUING> 12,216,082
<DISCONTINUED> 0
<EXTRAORDINARY> (1,066,466)
<CHANGES> 0
<NET-INCOME> 12,216,082
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.19
</TABLE>
