<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 Second Quarter Ended July 11, 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 August 23, 1999, there were 5,796,378 shares of ShoLodge, Inc.
common stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 11, DECEMBER 27,
1999 1998(1)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 29,004,558 $ 2,480,984
Restricted cash 1,174,075 701,484
Accounts receivable, net 3,893,906 3,251,104
Construction contracts 731,351 27,799
Income taxes receivable 4,775,686 4,775,686
Prepaid expenses 1,128,080 519,534
Notes receivable, net 162,500 3,363,394
Other current assets 429,041 443,967
------------- ------------
Total current assets 41,299,197 15,563,952
NOTES RECEIVABLE, NET 61,243,524 58,390,170
PROPERTY AND EQUIPMENT 142,284,710 187,360,706
Less accumulated depreciation and amortization (22,795,266) (20,335,047)
------------- ------------
119,489,444 167,025,659
LAND UNDER DEVELOPMENT OR HELD FOR SALE 11,351,926 9,556,720
DEFERRED CHARGES,NET 8,651,256 9,201,837
DEPOSITS ON SALE/LEASEBACK TRANSACTIONS 35,280,000 28,000,000
DEFERRED TAX ASSET 127,035 127,035
INTANGIBLE ASSETS 3,200,966 3,290,162
OTHER ASSETS 2,114,727 3,845,824
------------- ------------
TOTAL ASSETS $ 282,758,075 $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>
JULY 11, DECEMBER 27,
1999 1998(1)
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 11,508,300 $ 11,438,292
Taxes other than on income 2,073,180 1,636,220
Income taxes payable 679,792 0
Current portion of long-term debt
and capitalized lease obligations 1,552,581 21,597,951
------------- ------------
Total current liabilities 15,813,853 34,672,463
OTHER LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, LESS CURRENT PORTION 130,117,557 128,945,784
DEFERRED GAIN ON SALE/LEASEBACK TRANSACTIONS 38,351,664 30,158,244
DEFERRED CREDITS 1,690,432 2,368,523
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 994,827 757,311
------------- ------------
TOTAL LIABILITIES 186,968,333 196,902,325
------------- ------------
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, 6,371,378 shares issued and outstanding
as of July 11, 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 64,693,784 60,973,496
Unrealized gain on securities available for sale (net of tax) 92,938 67,704
Less treasury stock, at cost, 1,896,000 shares in 1999 and
784,000 shares in 1998 (11,472,880) (5,376,561)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 95,789,742 98,099,034
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 282,758,075 $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 TWENTY-EIGHT WEEKS ENDED JULY 11,1999 AND JULY 12, 1998
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
JULY 11, JULY 12, JULY 11, JULY 12,
1999 1998 1999 1998
(As adjusted) (As adjusted)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel $ 16,402,332 $ 19,344,570 $ 34,661,033 $ 41,960,081
Franchising and management 744,841 562,117 1,667,263 1,560,462
Construction and development 412,286 0 703,551 0
------------ ------------ ------------ ------------
Total revenues 17,559,459 19,906,687 37,031,847 43,520,543
COSTS AND EXPENSES:
Operating expenses:
Hotel 10,704,002 11,574,319 22,748,054 25,081,320
Franchising and management 527,021 528,448 1,164,179 1,276,704
Construction and development 398,910 0 644,848 0
------------ ------------ ------------ ------------
Total operating expenses 11,629,933 12,102,767 24,557,081 26,358,024
General and administrative 1,748,620 1,716,625 3,463,149 3,286,403
Rent expense, net 2,556,106 2,281,620 5,569,638 5,349,400
Depreciation and amortization 1,640,265 2,089,053 4,104,295 4,661,531
------------ ------------ ------------ ------------
(Loss) Income from operations (15,465) 1,716,622 (662,316) 3,865,185
OTHER INCOME AND (EXPENSES):
Interest expense (3,325,135) (2,550,630) (6,999,788) (6,058,401)
Interest income 1,217,580 786,843 3,097,940 2,133,114
Gain on sale of property 7,370,825 56,171 11,980,081 106,037
Other income 134,629 304,009 454,995 498,038
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY
INTERESTS 5,382,434 313,015 7,870,912 543,973
INCOME TAXES (2,049,000) (99,000) (2,279,000) (180,000)
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS 10,878 (54,487) (1,871,624) (73,708)
------------ ------------ ------------ ------------
NET EARNINGS $ 3,344,312 $ 159,528 $ 3,720,288 $ 290,265
============ ============ ============ ============
EARNINGS PER COMMON SHARE
Basic:
Net earnings $ 0.47 $ 0.02 $ 0.51 $ 0.04
============ ============ ============ ============
Diluted:
Net earnings $ 0.41 $ 0.02 $ 0.50 $ 0.03
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 7,178,978 8,255,810 7,250,680 8,255,810
Diluted 9,685,234 8,268,921 7,477,153 8,323,251
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT WEEKS ENDED JULY 11, 1999 AND JULY 12, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
28 WEEKS ENDED
JULY 11, JULY 12,
1999 1998
(AS ADJUSTED)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 3,720,288 $ 290,265
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 4,104,295 4,661,531
ACCRETION OF DISCOUNT ON SECURITIES
HELD TO MATURITY 0 (403,329)
RECOGNITION OF PREVIOUSLY DEFERRED PROFIT (14,571,823) (1,972,554)
GAIN ON CASUALTY LOSS (93,071) 0
GAIN ON SALE OF PROPERTY AND OTHER ASSETS (62,809) (108,357)
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 1,871,624 73,708
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) IN RESTRICTED CASH (472,591) (397,108)
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE (1,346,354) 1,195,371
(INCREASE) IN PREPAID EXPENSES (608,546) (156,449)
DECREASE (INCREASE) IN OTHER ASSETS 433,571 (13,666)
INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 70,008 2,342,260
INCREASE IN INCOME AND OTHER TAXES 1,116,753 (13,316)
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,838,655) 5,498,356
CASH FLOWS FROM INVESTING ACTIVITIES:
PAYMENTS RECEIVED ON NOTES RECEIVABLE 12,267,668 98,474
CAPITAL EXPENDITURES (13,256,028) (43,534,709)
PROCEEDS FROM SALE OF PROPERTY AND OTHER ASSETS 65,198,026 1,059,205
DEPOSITS ON SALE/LEASEBACK OF HOTELS (7,280,000) 0
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 56,929,666 (42,377,030)
CASH FLOWS FROM FINANCING ACTIVITIES:
DECREASE IN DEFERRED CHARGES 360,974 256,964
PROCEEDS FROM LONG-TERM DEBT 13,399,754 0
PAYMENTS ON LONG-TERM DEBT (32,169,672) (1,032,884)
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (103,679) (353,620)
DISTRIBUTIONS TO MINORITY INTERESTS 0 (109,580)
EXERCISE OF STOCK OPTIONS 41,505 0
PURCHASE OF TREASURY STOCK (6,096,319) 0
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (24,567,437) (1,239,120)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,523,574 (38,117,794)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,480,984 58,103,004
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 29,004,558 $ 19,985,210
============ ============
</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 July 11, 1999 and July 12, 1998 are not necessarily
indicative of the operating results for the entire year.
B. COMPREHENSIVE INCOME
On December 29, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". Comprehensive income includes net income and other
comprehensive income which is defined as non-owner transactions in
equity. The following table sets forth (in thousands) the amounts of
other comprehensive income included in equity for the two quarters
ended July 11, 1999 and July 12, 1998.
<TABLE>
<CAPTION>
7/11/99 7/12/98
------- -------
<S> <C> <C>
Net unrealized gain on securities available
for sale for the two quarters $25 $4
</TABLE>
<PAGE> 7
C. EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted
average number of common shares outstanding. The following table
reconciles earnings and weighted average shares used in the earnings
per share calculations for the fiscal quarters and fiscal year-to-date
periods ended July 11, 1999, and July 12, 1998:
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
July 11, July 12, July 11, July 12,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC:
NET INCOME APPLICABLE TO
COMMON STOCK $3,344,312 $ 159,528 $3,720,288 $ 290,265
========== ========== ========== ==========
SHARES:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,178,978 8,255,810 7,250,680 8,255,810
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.47 $ 0.02 $ 0.51 $ 0.04
========== ========== ========== ==========
DILUTED:
NET INCOME APPLICABLE TO
COMMON STOCK (BASIC) $3,344,312 $ 159,528 $3,720,288 $ 290,265
DILUTIVE EFFECT OF 7.5%
CONVERTIBLE DEBENTURES 579,462 -- -- --
---------- ---------- ---------- ----------
NUMERATOR FOR DILUTED
EARNINGS PER SHARE $3,923,774 $ 159,528 $3,720,288 $ 290,265
========== ========== ========== ==========
SHARES:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,178,978 8,255,810 7,250,680 8,255,810
EFFECT OF DILUTIVE
SECURITIES (OPTIONS) 189,654 13,111 226,473 67,441
EFFECT OF DILUTIVE
SECURITIES (7.5%
CONVERTIBLE DEBENTURES) 2,316,602 -- -- --
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,685,234 8,268,921 7,477,153 8,323,251
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.41 $ 0.02 $ 0.50 $ 0.03
========== ========== ========== ==========
</TABLE>
<PAGE> 8
D. OPERATING SEGMENT INFORMATION
The Company's significant operating segments are hotel operations,
franchising and other. The hotel operating segment has exceeded 90% of
total revenues for each of the last three fiscal years. 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 28 Weeks Ended
------------------- --------------------
July 11, July 12, July 11, July 12,
1999 1998 1999 1998
(As adjusted) (As adjusted)
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues from external customers $ 16,402 $ 19,344 $ 34,661 $ 41,960
Franchising and other 6,084 18,412 15,071 38,103
Elimination of intersegment revenue
franchising and other (4,927) (17,849) (12,700) (36,542)
-------- -------- --------- ---------
Total revenues $ 17,559 $ 19,907 $ 37,032 $ 43,521
======== ======== ========= =========
Operating profit (loss):
Hotel $ 1,730 $ 3,576 $ 2,772 $ 7,102
Franchising and other (1,745) (1,859) (3,434) (3,237)
-------- -------- --------- ---------
Total operating profit (loss) $ (15) $ 1,717 $ (662) $ 3,865
======== ======== ========= =========
Capital expenditures:
Hotel $ 4,662 $ 18,786 $ 12,238 $ 40,301
Franchising and other 682 1,521 1,018 3,234
-------- -------- --------- ---------
Total capital expenditures $ 5,344 $ 20,307 $ 13,256 $ 43,535
======== ======== ========= =========
Depreciation and amortization:
Hotel $ 1,379 $ 1,812 $ 3,453 $ 4,062
Franchising and other 261 277 651 600
-------- -------- --------- ---------
Total depreciation and amortization $ 1,640 $ 2,089 $ 4,104 $ 4,662
======== ======== ========= =========
As of As of
July 11, December 27,
1999 1998
Total assets:
Hotel $ 220,508 $ 245,893
Franchising and other 62,250 49,108
--------- ---------
Total assets $ 282,758 $ 295,001
========= =========
</TABLE>
<PAGE> 9
E. 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 second fiscal quarter and year-to-date
period ended July 12, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Second Quarter Year-to-date
------------------------ -------------------------
As Originally As As Originally As
Reported Adjusted Reported Adjusted
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenue $19,907 $19,907 $43,521 $43,521
Gross Operating Profit 7,804 7,804 17,163 17,163
Net Income (a) 290 159 681 290
Net Income Per Share .04 .02 .08 .03
</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.
F. 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.
<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.
<PAGE> 11
ShoLodge, Inc. and Subsidiaries Management's
Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
The following discussion should be read in conjunction with the
Company's condensed consolidated financial statements and notes thereto
appearing elsewhere in this quarterly report.
The Company develops, owns and operates all-suites hotels under the
Sumner Suites brand name and is an operator and the exclusive franchisor of
Shoney's Inns. The Company's 26 Sumner Suites hotels (3,163 suites) operated as
of July 11, 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 July 11, 1999, the Shoney's Inn lodging system
consists of 73 Shoney's Inns containing approximately 7,000 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.
<PAGE> 12
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 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 July 11, 1999 and
July 12, 1998
Total operating revenues for the second fiscal quarter ended July 11,
1999, were $17.6 million, or 11.8% less than the total operating revenues of
$19.9 million reported for the second quarter of 1998. For the fiscal
year-to-date period ended July 11, 1999, total operating revenues were $37.0
million, or 33.3% less than the total operating revenues of $43.5 million for
the comparable period in 1998.
Revenues from hotel operations in the second fiscal quarter of 1999
decreased by $2.9 million, or 15.2% from the $19.3 million for the same period
in 1998. For the 33 same hotels opened for all of both quarterly periods, an
increase of 2.5% in average daily room rates, from $65.12 in second quarter 1998
to $66.73 in second quarter 1999, partially offset by a decrease in average
occupancy rates on these hotels from 59.3% to 58.4% this year, resulted in an
increase in same hotel revenues of 1.7% from $12.8 million in second quarter
1998 to $13.0 million in second quarter 1999. The eight hotels opened since the
end of first quarter 1998 contributed $3.4 million to hotel operating revenues
in second quarter this year versus none in second quarter last year. Sixteen
hotels were sold in third quarter 1998; these hotels contributed $6.6 million to
hotel operating revenues in second quarter 1998 versus none in second quarter
this year.
<PAGE> 13
Revenues from hotel operations in the first two quarters of 1999
decreased by $7.3 million, or 40.0%, from the $42.0 million for the same period
in 1998. For the 32 same hotels opened for all of both year-to-date periods, an
increase of 2.4% in average daily room rates, from $65.07 in the first two
quarters of 1998 to $66.60 in the first two quarters of 1999, partially offset
by a decrease in average occupancy rates on these hotels from 57.6% to 56.0%
this year, resulted in an increase in same hotel revenues of 0.2% from $27.9
million in the first two quarters of 1998 to $28.0 million in the first two
quarters of 1999. The nine hotels opened since the end of 1997 contributed $6.7
million to hotel operating revenues in the first two quarters of this year
versus $297,000 in the first two quarters of last year. The sixteen hotels sold
in third quarter 1998 contributed $13.7 million to hotel operating revenues in
the first two quarters of 1998 versus none this year.
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 0.3%, from $45.13 in the second quarter of 1998 to $45.27 in
the second quarter of 1999. However, the 18 Sumner Suites same hotels' RevPAR
increased by 7.8%, from $45.13 in second quarter 1998 to $48.64 in second
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 $34.43 in second quarter 1998 (including the 16 hotels sold in third
quarter 1998) to $27.09 in second 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 $30.61 in second quarter 1998 to $27.09 in
second quarter 1999, due primarily to increased competition from new hotels.
All Sumner Suites hotels' RevPAR decreased from $45.56 in 1998 to
$43.18 in 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 3.9%, from $46.36 in the first two quarters of 1998 to $48.16 in
the first two quarters of 1999. For the first two quarters of this year, RevPAR
for all Company-owned Shoney's Inns decreased from $30.80 for the first two
quarters of 1998 to $24.83 for the same period this year. The 15 same-hotel
Shoney's Inns reflected a decrease for this same period from $27.25 in 1998 to
$24.83 in 1999, due primarily to increased competition from new hotels.
Franchising and management revenues increased by $183,000, or 32.5%, in
the second quarter 1999 from second quarter 1998. Initial franchise fees
decreased by $12,000 from second quarter last year, but royalty and reservation
fees increased by $198,000, from $427,000 in second quarter 1998 to $625,000 in
second quarter 1999. For the first two quarters of 1999, franchising and
management revenues increased by $107,000, or 11.6%, from the same period last
year. Initial franchise fees decreased by $232,000 from the first two quarters
of last year, but royalty and reservation revenues increased by $349,000, from
$1.2 million in the first two quarters of 1998 to $1.5 million in the first two
quarters of 1999. These increases in 1999 over 1998 are due primarily to
<PAGE> 14
the franchise revenues earned on the 16 Shoney's Inns sold to a new franchisee
in third quarter 1998. Initial franchise fee revenue can vary materially from
quarter to quarter depending on the level of the Company's new franchise sales
activities.
Revenues from construction and development activities were $412,000 in
second quarter 1999 and $704,000 in the first two 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 second quarter of 1999
decreased by $870,000, or 7.5%, from $11.6 million in second quarter 1998, due
partially to the $2.9 million decrease in hotel operating revenues. The sale of
the 16 Shoney's Inns in third quarter 1998 accounted for a decrease of $3.2
million in hotel operating expenses from second quarter 1998 to second quarter
1999. The nine Sumner Suites hotels opened in 1998 and first quarter 1999 caused
hotel operating expenses to increase by $2.2 million over second quarter last
year. Hotel operating expenses on the 32 hotels opened prior to 1998 increased
by $56,000, or 0.7%, in second quarter 1999 over second quarter 1998. The
operating expenses as a percentage of operating revenues for this activity
increased from 59.8% in second quarter 1998 to 65.3% in second quarter 1999;
however, operating expenses as a percentage of operating revenues on the 32
hotels opened prior to 1998 only increased from 63.1% in second quarter 1998 to
63.6% in second quarter 1999. 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.
<PAGE> 15
Operating expenses from hotel operations for the first two quarters of
1999 decreased by $2.3 million, or 19.4%, from $25.1 million in the first two
quarters of 1998, due partially to the $7.3 million decrease in hotel operating
revenues. The sale of the 16 Shoney's Inns in third quarter 1998 accounted for a
decrease of $7.4 million in hotel operating expenses from the first two quarters
of 1998 to the first two quarters of 1999. The nine Sumner Suites hotels opened
in 1998 and first quarter of 1999 caused hotel operating expenses to increase by
$4.8 million over the first two quarters of last year. Hotel operating expenses
on the 32 same-hotels increased by $337,000, or 2.0%, in the first two quarters
1999 over the first two quarters of 1998. The operating expenses as a percentage
of operating revenues for this activity increased from 59.8% in the first two
quarters of 1998 to 65.6% in the first two quarters of 1999; however, operating
expenses as a percentage of operating revenues on the 32 same-hotels only
increased from 60.9% in the first two quarters of 1998 to 62.0% in the first two
quarters of 1999. Increases in hotel operating expenses on same-hotels were
primarily in the areas of payroll related costs, repairs and maintenance, credit
card discounts, contract labor, and guest services and supplies.
Franchising and management operating expenses decreased by $1,000, or
0.3%, from second quarter 1998 to second quarter 1999, and by $113,000, or
17.7%, from the first two quarters of 1998 to the first two quarters of 1999.
The decreases were primarily in the central reservation center operating costs.
Construction and development expenses in second quarter 1999 were $399,000, and
for the first two quarters of 1999 were $645,000, versus none in the first two
quarters of 1998. The 1999 expenses were incurred in earning the revenues from
the three third party construction contracts, two of which are still in
progress.
General and administrative expenses increased by $32,000, or 1.9%, in
the second quarter of 1999 from the second quarter of 1998. These expenses
include $489,000 and $167,000, in second quarter 1999 and second quarter 1998,
respectively, of capitalized costs related to certain future development sites,
which are no longer considered probable of development. Excluding the effect of
these write-offs of sites no longer deemed probable, general and administrative
expense for the second quarter of 1999 declined by $289,000, or 18.7%, from
second quarter 1998. For the first two quarters of 1999 general and
administrative expenses increased by $177,000, or 10.3%, from the comparable
period last year. Excluding year-to-date charge-offs of sites no longer deemed
probable in the amounts of $616,000 in 1999 and $167,000 in 1998, general and
administrative expenses for this period declined by $272,000, or 8.7%, from the
same period last year.
<PAGE> 16
Rent expense increased by $274,000, or 12.0%, in second quarter 1999
from second quarter 1998. For the first two quarters of 1999, rent expense
increased by $220,000, or 7.3%, from the same period last year. The increases
were due primarily 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 13 days to the end of the
second quarter was $260,000.
Depreciation and amortization expense decreased by $449,000, or 21.5%,
from second quarter 1998 to second quarter 1999. The sale of the 16 Shoney's
Inns in third quarter 1998 reduced depreciation expense in second quarter 1999
by $857,000 from second quarter 1998. However, depreciation and amortization
expense increased in second quarter 1999 over second quarter 1998 by $408,000,
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 $557,000, or
22.6%, from the first two quarters of 1998 to the first two quarters of 1999.
The sale of the 16 Shoney's Inns in third quarter 1998 reduced depreciation
expense in the first two quarters of 1999 by $1.9 million from the first two
quarters of 1998. However, depreciation and amortization expense increased in
the first two quarters of 1999 over the first two quarters of 1998 by $1.4
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 $775,000, while interest income increased
by $431,000 from second quarter 1998, for a net increase of $344,000 in net
interest expense. The increase in interest expense for the first two quarters of
1999 was $941,000 over the first two quarters of 1998, while interest income
during that period increased by $965,000, for a decrease in net interest expense
of $24,000. The increase in interest expense resulted from additional borrowings
incurred in 1998 and first two 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 two quarters of 1998 from cash temporarily invested
from the proceeds of the sale-leaseback transaction which occurred in the fourth
quarter of 1997.
<PAGE> 17
The gain recognized on sale of property in second quarter 1999 was $7.4
million compared with only $56,000 in second quarter 1998. Included in the
second quarter 1999 gain was $7.3 million of the from the recognition of the
balance of the gain previously deferred from the sale of three of the 16 hotels
sold in third quarter 1998, which was being recognized on the installment
method. The buyer refinanced the assumed debt, pledged new collateral, and the
trustee released the first mortgage to the Company. There is no deferred gain to
be recognized after second quarter 1999. The balance of the gain on sale of
property in second quarter 1999 and the $56,000 gain in second quarter 1998,
were both from the sale of land held for sale. The gain recognized on sale of
property in the first two quarters of 1999 was $12.0 million compared with
$106,000 for the same period in 1998. Of the $12.0 million in first two 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 two quarters of both 1999 and 1998 was from the sale of
land held for sale.
Other income decreased by $169,000 from second quarter 1998 to second
quarter 1999, and by $43,000 from the first two quarters of 1998 to the first
two 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 $65,000 from
second quarter 1998 to second quarter 1999, and increased by $1.8 million from
the first two quarters of 1998 to the first two quarters of 1999. The $1.8
million year-to-date increase was due to the 40% minority interest in $4.6
million of the gain on sale of property recognized in first quarter 1999,
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows used in operating activities were $ 5.8 million in
first two quarters of 1999, compared with $5.5 million provided by operating
activities in the first two quarters of 1998. Accounts receivable increased by
$1.3 million in the first two quarters of 1999, compared with a decrease of $1.2
million in the first two quarters of 1998, due primarily to the opening of three
new hotels in first quarter 1999 and to substantially larger construction
contracts receivable in the first quarter of 1999. The increase in accounts
payable in the first two quarters of 1999 was only $70,000, compared with an
increase of $2.3 million in the first two quarters of 1998; however, the
increase in income and other taxes payable in the first two quarters of 1999 was
$1.1 million, compared with a decrease of $13,000 in the first two quarters of
1998.
<PAGE> 18
The Company's cash flows provided by investing activities were $56.9
million in the first two quarters of 1999, compared with cash flows used in
investing activities of $42.4 million for the comparable period in 1998. The
Company collected $12.2 million from notes receivable in the first two quarters
of 1999, which related to two hotel properties sold in 1997 and 1998; only
$98,000 was received in the first two 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 $13.3
million in the first two quarters of 1999 and $43.5 million in the first two
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 $198,000 in the first two quarters of 1999, compared with
$1.1 million in the comparable period in 1998.
Net cash used in financing activities was $24.6 million in the first
two quarters of 1999 compared with net cash used in financing activities of $1.2
million in the first two 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 two quarters of 1999 versus no activity in the first two
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 $3.1
million in the first two quarters of 1999 compared with $1.0 million in the
first two quarters of 1998. Additionally, $4.6 million was borrowed in the first
two 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 two quarters of 1998. In the first two quarters of 1999,
the Company repurchased 1.1 million shares of its common stock for $6.1 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 second quarter
1999, the Company has repurchased an additional 575,000 shares for $3.2 million.
In the second quarter of 1999 the Company announced its plan to repurchase up to
$12.0 million of its $54.0 million outstanding convertible subordinated
debentures, but has not repurchased any of this debt to date.
<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
executed a nonbinding letter of intent with a new bank group for the
establishment of a new three year revolving credit facility. The specific terms
and conditions of this new credit facility are currently being negotiated and
are expected to be finalized in the third quarter. As presently being
negotiated, the new credit facility is expected to be for an initial amount of
$30 million, 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 expected to be
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 expected to
be at the lender's base rate plus 50 basis points and the Company is expected to
be required to pay commitment fees on the unused portion of the facility at .50%
per annum. The Company will incur certain fees and expenses in association with
closing and administering the credit facility. The credit facility is expected
to contain 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 is expected to contain financial
covenants as to the Company's minimum net worth.
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 July 11, 1999, the Company had no borrowings outstanding under this
credit facility.
The Company opened six new Sumner Suites hotels in 1998 (including one
in the first two quarters of 1998) and three in first quarter 1999. As of the
end of the second fiscal quarter of 1999, one Sumner Suites hotel was under
construction in Orlando, Florida, which is expected to open in the third quarter
of 1999. The Company estimates that approximately $3.0 million in capital funds
will be necessary to complete the construction of the hotel under construction.
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.
On September 23, 1998 and amended on July 15, 1999, the Company's Board
of Directors authorized the use of up to $20.0 million for the repurchase of
shares of the Company's common stock. The purchases, including block purchases,
are to be made from time to time in the open market at prevailing market prices,
or in privately
<PAGE> 20
negotiated transactions at the Company's discretion. No time limit has been
placed on the duration of the stock repurchase plan, and the Company may
discontinue the plan at any time. From September 1998 through the end of the
second fiscal quarter of 1999, 1.9 million shares had been repurchased at a cost
of $11.5 million.
The Company is investigating various alternatives to maximize
shareholder value. These alternatives could include, without limitation, a
continuation of the development and operation of Sumner Suites and the
franchising and operation of Shoney's Inns, a sale of the remaining Shoney's
Inns, 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 if will 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.
<PAGE> 21
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 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 is currently in the process of making the required
modifications to its existing software systems and scheduling the required
replacements of software and hardware. The Company will utilize both internal
and external resources to program, replace, implement and test these changes.
The Company has not determined the total cost of the Year 2000 project; however,
these costs are not expected to exceed $100,000 nor have a material effect on
its financial statements. The Company has spent less than $75,000 on external
costs on the Year 2000 project through the end of the second fiscal quarter of
1999; however, the Company's internal staff has spent substantial time on the
issue. These costs have been expensed as incurred. The Company plans to complete
the Year 2000 project not later than September, 1999 and is currently on
schedule to meet this target.
The Company believes it has an effective program in place to resolve
the Year 2000 Issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 project. In the event that the
Company does not timely complete the project, the Company could be unable to
take reservations, invoice customers or collect payments. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect the Company's operations. The amount of potential
liability or lost revenue cannot be reasonably estimated at this time.
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 leaves little risk of systems failures on January 1, 2000.
<PAGE> 22
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 two fiscal quarters ended July 11, 1999.
<PAGE> 23
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> 24
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 two fiscal
quarters ended July 11, 1999, with respect to any other
pending litigation.
Item 4. Submission of Matters to a vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
28, 1999, 7,262,910 shares were outstanding and eligible to
vote. The shareholders considered and voted to reelect the
following directors:
<TABLE>
<CAPTION>
Vote Cast
---------
Name of Nomine For Withheld
-------------- --- --------
<S> <C> <C>
Helen L. Moskovitz 6,082,486 974,824
Richard L. Johnson 6,082,486 974,824
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
6 (a) Exhibits -
10.1 Purchase and Sale Agreement by and between ShoLodge,
Inc. and certain of its Affiliates, as Sellers, and
HPT Suite Properties Trust, as Purchaser, dated June
29, 1999, incorporated by reference to the
Registrant's Report on Form 8-K filed with the
Commission on July 14, 1999
10.2 Agreement to Lease between HPT Suite Properties Trust
and Suite Tenant, Inc., dated June 29, 1999,
incorporated by reference to the Registrant's Report
on Form 8-K filed with the Commission on July 14,
1999
10.3 Second Amendment to Lease Agreement and First
Amendment to Incidental Documents entered into
between Hospitality Properties Trust, ShoLodge, Inc.,
and Suite Tenant, Inc., dated June 29, 1999,
incorporated by reference to the Registrant's Report
on Form 8-K filed with the Commission on July 14,
1999
27 Financial Data Schedule for Quarter Ended July 11,
1999
27.1 Financial Data Schedule (Restated) for Quarter Ended
July 12, 1998
6 (b) Reports on Form 8-K
A Form 8-K was filed on July 14, 1999, relating to
the completion of a sale-leaseback transaction involving six
Sumner Suites hotels on June 29, 1999.
<PAGE> 25
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: August 23, 1999 S/ Leon Moore
-------------------------------------
Leon Moore
President, Chief Executive Officer,
Principal Executive Officer, Director
Date: August 23, 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 2 FISCAL QUARTERS ENDED JULY 11, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> JUL-11-1999
<CASH> 29,004,558
<SECURITIES> 0
<RECEIVABLES> 5,198,970
<ALLOWANCES> 573,713
<INVENTORY> 0
<CURRENT-ASSETS> 41,299,197
<PP&E> 142,284,710
<DEPRECIATION> 22,795,266
<TOTAL-ASSETS> 282,758,075
<CURRENT-LIABILITIES> 15,813,853
<BONDS> 130,117,557
0
0
<COMMON> 1,000
<OTHER-SE> 95,788,742
<TOTAL-LIABILITY-AND-EQUITY> 282,758,075
<SALES> 34,661,033
<TOTAL-REVENUES> 37,031,847
<CGS> 0
<TOTAL-COSTS> 37,694,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,999,788
<INCOME-PRETAX> 5,999,288
<INCOME-TAX> 2,279,000
<INCOME-CONTINUING> 3,720,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,720,288
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
FINANCIAL STATEMENTS FOR THE 2 FISCAL QUARTERS ENDED JULY 12, 1998 (AS ADJUSTED)
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUL-12-1998
<CASH> 21,384,819
<SECURITIES> 9,621,679
<RECEIVABLES> 3,859,629
<ALLOWANCES> 216,785
<INVENTORY> 0
<CURRENT-ASSETS> 30,399,834
<PP&E> 238,242,672
<DEPRECIATION> 42,321,921
<TOTAL-ASSETS> 299,108,056
<CURRENT-LIABILITIES> 17,425,086
<BONDS> 153,192,096
0
0
<COMMON> 1,000
<OTHER-SE> 95,645,579
<TOTAL-LIABILITY-AND-EQUITY> 299,108,056
<SALES> 41,960,081
<TOTAL-REVENUES> 43,520,543
<CGS> 0
<TOTAL-COSTS> 39,655,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,058,401
<INCOME-PRETAX> 470,265
<INCOME-TAX> 180,000
<INCOME-CONTINUING> 290,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290,265
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.03
</TABLE>
