<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 9, 2000 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, 2000, there were 5,663,668 shares of ShoLodge, Inc.
common stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 9, DECEMBER 26,
2000 1999(1)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,216,667 $ 3,386,937
Restricted cash 14,141,815 1,605,513
Accounts receivable-trade, net 5,019,173 4,853,252
Construction contracts receivable 428,795 7,674,104
Costs and estimated earnings in excess of billings on construction contracts 9,550,010 3,588,071
Income taxes receivable 974,218 3,335,543
Prepaid expenses 455,359 573,064
Notes receivable-net 842,498 468,762
Other current assets 158,667 441,023
------------------------------------
Total current assets 49,787,202 25,926,269
NOTES RECEIVABLE, NET 63,288,526 60,887,262
PROPERTY AND EQUIPMENT 108,615,249 148,698,134
Less accumulated depreciation and amortization (22,044,915) (23,821,643)
------------------------------------
86,570,334 124,876,491
LAND UNDER DEVELOPMENT OR HELD FOR SALE 9,210,892 9,186,608
DEFERRED CHARGES,NET 7,597,334 8,407,623
DEPOSITS ON SALE/LEASEBACK 0 35,280,000
INTANGIBLE ASSETS 3,028,940 3,122,173
OTHER ASSETS 2,198,881 2,627,487
------------------------------------
TOTAL ASSETS $ 221,682,109 $ 270,313,913
====================================
</TABLE>
(1) Derived from fiscal year ended December 26, 1999 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 3
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
JULY 9, DECEMBER 26,
2000 1999(1)
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,913,734 $ 9,594,955
Taxes other than on income 834,651 1,448,602
Current portion of long-term debt
and capitalized lease obligations 562,320 2,227,929
------------------------------------
Total current liabilities 15,310,705 13,271,486
OTHER LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, LESS CURRENT PORTION 105,437,727 125,550,557
DEFERRED INCOME TAXES 2,089,297 2,089,297
DEFERRED GAIN ON SALE/LEASEBACK 4,129,962 36,307,820
DEFERRED CREDITS 2,675,639 1,283,605
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 757,853 932,809
------------------------------------
TOTAL LIABILITIES 130,401,183 179,435,574
------------------------------------
SHAREHOLDERS' EQUITY:
Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares outstanding) 0 0
Common stock (no par value; 20,000,000 shares
authorized 5,701,978 shares issued and outstanding
as of July 9, 2000 and 5,372,578 shares issued
and outstanding as of December 26, 1999) 1,000 1,000
Additional paid-in capital 43,840,879 42,484,275
Retained earnings 66,116,698 65,512,322
Unrealized gain on securities available for sale (net of tax) 71,912 80,321
Treasury stock (17,548,915) (17,199,579)
Less notes receivable from officer, net of discount of $331,000 (1,200,648) 0
------------------------------------
TOTAL SHAREHOLDERS' EQUITY 91,280,926 90,878,339
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 221,682,109 $ 270,313,913
====================================
</TABLE>
(1) Derived from fiscal year ended December 26, 1999 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 9, 2000 AND JULY 11, 1999
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
JULY 9, JULY 11, JULY 9, JULY 11,
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel $ 17,603,898 $ 16,402,332 $ 39,805,704 $ 34,661,033
Franchising and management 935,003 744,841 1,832,314 1,667,263
Construction and development 2,930,034 412,286 7,062,805 703,551
---------------------------------------------------------------
Total revenues 21,468,935 17,559,459 48,700,823 37,031,847
COSTS AND EXPENSES:
Operating expenses:
Hotel 13,099,115 10,704,002 28,786,421 22,748,054
Franchising and management 565,928 527,021 1,384,111 1,164,179
Construction and development 3,155,874 398,910 7,178,996 644,848
---------------------------------------------------------------
Total operating expenses 16,820,917 11,629,933 37,349,528 24,557,081
General and administrative 1,399,930 1,748,620 2,802,193 3,463,149
Rent expense, net 4,672,679 2,556,106 10,038,424 5,569,638
Depreciation and amortization 1,310,440 1,640,265 3,417,215 4,104,295
---------------------------------------------------------------
Loss from operations (2,735,031) (15,465) (4,906,537) (662,316)
OTHER INCOME AND (EXPENSES):
Interest expense (2,517,466) (3,325,135) (6,136,051) (6,999,788)
Interest income 1,471,683 1,217,580 3,343,671 3,097,940
Gain on sale of property and leasehold interests 4,381,795 7,370,825 4,680,819 11,980,081
Other income 124,438 134,629 282,131 454,995
---------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY GAIN 725,419 5,382,434 (2,735,967) 7,870,912
INCOME TAX (BENEFIT) EXPENSE 367,000 2,049,000 (830,000) 2,279,000
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS (7,949) 10,878 (26,878) (1,871,624)
---------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM 350,470 3,344,312 (1,932,845) 3,720,288
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
(net of related tax effect of $1,401,000 and $1,555,000
respectively) 2,286,214 0 2,537,221 0
---------------------------------------------------------------
NET EARNINGS $ 2,636,684 $ 3,344,312 $ 604,376 $ 3,720,288
===============================================================
EARNINGS PER COMMON SHARE
Basic:
Earnings per share from continuing operations $ 0.07 $ 0.47 $ (0.36) $ 0.51
Extraordinary gain, net of tax effect $ 0.43 $ 0.00 $ 0.47 $ 0.00
Net earnings $ 0.50 $ 0.47 $ 0.11 $ 0.51
===============================================================
Diluted:
Earnings per share from continuing operations $ 0.07 $ 0.41 $ (0.36) $ 0.50
Extraordinary gain, net of tax effect $ 0.43 $ 0.00 $ 0.47 $ 0.00
Net earnings $ 0.50 $ 0.41 $ 0.11 $ 0.50
===============================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 5,318,268 7,178,978 5,325,393 7,250,680
Diluted 5,321,614 9,685,234 5,375,852 7,477,153
---------------------------------------------------------------
</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 9, 2000 AND JULY 11, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
28 WEEKS ENDED
JULY 9, JULY 11,
2000 1999
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEMS ($ 1,932,845) $ 3,720,288
ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 3,417,215 4,104,295
AMORTIZATION OF DEFERRED CHARGES RECORDED
AS INTEREST EXPENSE 408,185 778,356
RECOGNITION OF PREVIOUSLY DEFERRED GAINS (2,526,455) (2,747,622)
GAIN ON SALE OF PROPERTY AND LEASEHOLD INTERESTS (4,680,819) (11,980,081)
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 26,878 1,871,624
COMPENSATION EXPENSE 151,955 0
CHANGES IN ASSETS AND LIABILITIES:
INCREASE IN TRADE RECEIVABLES (165,921) (1,346,354)
DECREASE IN CONSTRUCTION CONTRACT RECEIVABLES 7,245,309 0
INCREASE IN ESTIMATED EARNINGS IN EXCESS OF BILLING
ON CONSTRUCTION CONTRACTS (5,961,939) 0
INCREASE IN INCOME AND OTHER TAXES RECEIVABLE 197,530 1,116,753
DECREASE (INCREASE) IN PREPAID EXPENSES 117,705 (608,546)
DECREASE IN OTHER ASSETS 257,717 433,571
INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 975,423 70,008
--------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,470,062) (4,587,708)
CASH FLOWS FROM INVESTING ACTIVITIES:
INCREASE IN RESTRICTED CASH (12,536,302) (472,591)
PAYMENTS RECEIVED ON NOTES RECEIVABLE 75,000 12,267,668
CAPITAL EXPENDITURES (2,016,390) (13,256,028)
PROCEEDS FROM SALE OF PROPERTY AND LEASEHOLD INTERESTS 38,560,676 65,198,026
PROCEEDS FROM SALE OF LEASEHOLD INTERESTS, NET OF EXPENSES 13,832,482 0
INCREASE OF DEPOSITS ON SALE/LEASEBACK OF HOTELS (4,295,000) (7,280,000)
--------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 33,620,466 56,457,075
CASH FLOWS FROM FINANCING ACTIVITIES:
PAYMENTS FOR DEFERRED LOAN COSTS (159,008) (417,382)
PROCEEDS FROM LONG-TERM DEBT 12,800,500 13,399,754
PAYMENTS ON LONG-TERM DEBT (28,225,407) (32,169,672)
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (189,590) (103,679)
DISTRIBUTIONS TO MINORITY INTERESTS (201,834) 0
EXERCISE OF STOCK OPTIONS 4,001 41,505
PURCHASE OF TREASURY STOCK (349,336) (6,096,319)
--------------------------------
NET CASH USED IN FINANCING ACTIVITIES (16,320,674) (25,345,793)
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,829,730 26,523,574
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,386,937 2,480,984
--------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,216,667 $ 29,004,558
================================
</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 26, 1999
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 26, 1999.
The fiscal year consists of a 52/53 week year ending the last Sunday of
the year. The Company's fiscal quarters have 16, 12, 12, and 12 weeks
in 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 9, 2000 and July 11, 1999 are not necessarily
indicative of the operating results for the entire year.
B. 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 9, 2000 and
July 11, 1999.
<TABLE>
<CAPTION>
7/09/00 7/11/99
------- -------
<S> <C> <C>
Net unrealized (loss) gain on securities
available for sale for the two quarters ($8) $25
</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 9, 2000, and July 11, 1999:
<TABLE>
<CAPTION>
12 WEEKS ENDED 28 WEEKS ENDED
-------------- --------------
July 9, July 11, July 9, July 11,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
BASIC:
EARNINGS BEFORE
EXTRAORDINARY ITEMS $ 350,470 $3,344,312 ($1,932,845) $3,720,288
EXTRAORDINARY GAIN 2,286,214 -- 2,537,221 --
---------- ---------- ----------- ----------
NET EARNINGS APPLICABLE TO
COMMON STOCK $2,636,684 $3,344,312 $ 604,376 $3,720,288
========== ========== =========== ==========
SHARES:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,318,268 7,178,978 5,325,393 7,250,680
========== ========== =========== ==========
BASIC EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEMS $ 0.07 $ 0.47 $ (0.36) $ 0.51
EXTRAORDINARY GAIN 0.43 -- 0.47 --
---------- ---------- ----------- ----------
NET EARNINGS $ 0.50 $ 0.47 $ 0.11 $ 0.51
========== ========== =========== ==========
DILUTED:
EARNINGS BEFORE
EXTRAORDINARY ITEMS $ 350,470 $3,344,312 $(1,932,845) $3,720,288
EXTRAORDINARY GAIN 2,286,214 -- 2,537,221 --
---------- ---------- ----------- ----------
NET EARNINGS APPLICABLE TO
COMMON STOCK 2,636,684 3,344,312 604,376 3,720,288
DILUTIVE EFFECT OF 7.5%
CONVERTIBLE DEBENTURES -- 579,462 -- --
---------- ---------- ----------- ----------
NUMERATOR FOR DILUTED
EARNINGS PER SHARE $2,636,684 $3,923,774 $ 604,376 $3,720,288
========== ========== =========== ==========
SHARES:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,318,268 7,178,978 5,325,393 7,250,680
EFFECT OF DILUTIVE
SECURITIES (OPTIONS) 3,346 189,654 50,459 226,473
EFFECT OF DILUTIVE SECURITIES
(7.5% CONVERTIBLE DEBENTURES) -- 2,316,602 -- --
---------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,321,614 9,685,234 5,375,852 7,477,153
========== ========== =========== ==========
DILUTED EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEMS $ 0.07 $ 0.41 $ (0.36) $ 0.50
EXTRAORDINARY GAIN 0.43 -- 0.47 --
---------- ---------- ----------- ----------
NET EARNINGS $ 0.50 $ 0.41 $ 0.11 $ 0.50
========== ========== =========== ==========
</TABLE>
<PAGE> 8
D. OPERATING SEGMENT INFORMATION
The Company's significant operating segments are hotel operations,
franchising and management, and construction and development. None of
the Company's segments conduct foreign operations. Operating profit
includes the operating revenues and expenses directly identifiable with
the operating segment. Identifiable assets are those used directly in
the operations of each segment. A summary of the Company's operations
by segment follows (in thousands of dollars):
<TABLE>
<CAPTION>
12 Weeks Ended 28 Weeks Ended
July 9, July 11, July 9, July 11,
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues from external customers $ 17,604 $ 16,401 $ 39,806 $ 34,661
Franchising and management 2,123 1,841 4,505 4,044
Construction and development 3,225 4,244 8,696 11,027
Elimination of intersegment revenue franchising,
management, construction and development (1,483) (4,927) (4,306) (12,700)
--------- --------- -------- --------
Total revenues $ 21,469 $ 17,559 $ 48,701 $ 37,032
========= ========= ======== ========
Operating profit (loss):
Hotel $ (1,434) $ 1,713 $ (2,100) $ 2,755
Franchising and management (1,124) (1,707) (2,770) (3,366)
Construction and development (177) (21) (37) (51)
--------- --------- -------- --------
Total operating profit (loss) $ (2,735) $ (15) $ (4,907) $ (662)
========= ========= ======== ========
Capital expenditures:
Hotel $ 551 $ 4,662 $ 1,842 $ 12,238
Franchising and management 25 682 173 998
Construction and development 1 -- 1 20
--------- --------- -------- --------
Total capital expenditures $ 577 $ 5,344 $ 2,016 $ 13,256
========= ========= ======== ========
Depreciation and amortization:
Hotel $ 1,030 $ 1,384 $ 2,766 $ 3,459
Franchising and management 274 247 637 625
Construction and development 6 9 14 20
--------- --------- -------- --------
Total depreciation and amortization $ 1,310 $ 1,640 $ 3,417 $ 4,104
========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of As of
July 9, December 26,
2000 1999
-------- --------
<S> <C> <C>
Total assets:
Hotel $145,931 $200,773
Franchising and management 65,316 57,986
Construction and development 10,435 11,555
-------- --------
Total assets $223,275 $270,314
======== ========
</TABLE>
<PAGE> 9
E. RELATED PARTY TRANSACTION
On July 5, 2000, the Board of Directors accelerated the vesting in
options to purchase 40,000 shares of common stock. Immediately
thereafter, the president and chief executive officer of the Company
exercised vested employee stock options for 408,333 shares of the
Company's common stock, at the exercise price of $3.75 per share. He
executed non-interest bearing, unsecured, full-recourse promissory
notes totaling $1.5 million with maturity dates coinciding with the
expiration dates of each option grant, ranging from February 11, 2002,
to May 30, 2007. The closing market price of the Company's common stock
on July 5, 2000, was $3.31 per share. The Company has recorded the
notes receivable of $1.5 million, net of unearned discount of $331,000,
assuming a market interest rate of 8.50%. Compensation expense has been
recorded in the amount of $152,000 (the fair value of shares received
less the present value of the notes receivable using an 8.50% discount
rate). The fair value of shares issued of $1.4 million has been
recorded as paid-in capital and the notes receivable are recorded as a
deduction from shareholders' equity.
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 certain legal action against the Company which was recently
concluded.
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 sought $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 filed an appeal with the Tennessee Court
of Appeals. On May 12, 2000, the Court of Appeals ordered the plaintiff
to file a bond for costs on appeal or else show cause why his appeal
should not be dismissed for failure to comply with Tenn. R. App. P. 6.
The plaintiff failed to respond, so on June 1, 2000, the Court ordered
the appeal dismissed. This case is now concluded.
G. SALE/LEASEBACK TRANSACTION
In May 2000, the Company entered into a sale and leaseback agreement
for four of its Sumner Suites hotels. The assets of the hotels were
sold to Hospitality Properties Trust ("HPT"), a real estate investment
trust, and the hotels continued to be operated by the Company until the
sale of leasehold interests on July 9, 2000 as described in Note H
below. The Company initially deferred the gain of $3.7 million and was
recognizing it on the straight-line method over the initial lease term,
as a reduction of rent expense. As a part of the lease, the Company was
required to pay an additional security deposit of $4.3 million, which
was also assigned as a part of the sale of leasehold interests on July
9, 2000.
<PAGE> 10
H. SALE OF LEASEHOLD INTERESTS
On July 9, 2000, the Company completed a transaction with Prime
Hospitality Corp. ("Prime") in which it sold to Prime all of its
leasehold interest in 24 Sumner Suites hotels, for a total of $15.6
million. The Company received $100,000 in cash, $13.9 million in the
form of an escrow fund and retired its debt securities held by Prime
with a face value of $2.6 million and a fair value of $1.6 million. As
a part of the transaction, the Company assigned its interest to Prime
in two deposits related to the lease, the $14.0 million guaranty
deposit and $25.6 million in lease security deposits and the related
supplies inventory at each hotel.
The Company also agreed to construct two hotels on sites presently
owned by the Company. These projects will be funded by the $13.9
million escrow money from the sale and any excess escrow funds will
then be released to the Company. The Company also gave HPT, the owner
of the 24 Sumner Suites whose leasehold rights were assigned to Prime,
the right to exchange one or both of two specific hotels included in
the leasehold group for these two new properties, upon completion of
their construction, without payment or receipt of any additional
consideration. If the Company does not consent to the property
exchange, then HPT can require the Company to purchase the two
properties.
The Company further agreed to lease to Prime three other Sumner Suites
hotels, which the Company owns. The 11-year lease provides for initial
minimum annual rental payments of $2.9 million, increasing to $3.1
million if the lease is extended, and also provides for percentage
rents based on hotel sales, as defined. Prime will convert all 27
existing Sumner Suites to the AmeriSuites brand. The Company agreed to
not operate any other all-suites hotels in competition with Prime
within a defined geographic radius of each of the hotels being sold.
This restriction will not prevent the Company from developing hotels
for others in the restricted area or operating or franchising any
Shoney's Inn brand hotel in the restricted area.
The Company recognized a gain of $3.6 million, continued to defer gains
of $4.1 million from the sale/leaseback on two of the hotels, and
recognized extraordinary gains related to the early extinguishment of
the debt securities received from Prime of $855,000, all before income
tax. The Company will recognize the deferred gains from the
sale/leaseback when HPT exercises the exchange option or requires the
Company to purchase the two properties, or these rights expire.
In addition, the Company agreed to construct one 124-room AmeriSuites
hotel for Prime on a site presently owned by Prime at a construction
and development price of $76,500 per room, less Prime's cost of the
land. The Company also agreed to provide reservation services to Prime
for all of its existing hotels, for a fee based on a percentage of room
revenue.
<PAGE> 11
I. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
(in thousands of dollars):
<TABLE>
<CAPTION>
28 Weeks Ended
--------------
July 9, July 11,
2000 1999
<S> <C> <C>
Investing:
Proceeds from sale of property
arising from note receivable $2,850 $0
Proceeds from sale of leasehold
interests arising from repurchase
of long-term debt at a discount $1,618 $0
Financing:
Exercise of stock options financed
by notes receivable $1,531 $0
</TABLE>
<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, through July 9, 2000, operated
all-suites hotels under the Sumner Suites brand name, and is an operator and the
exclusive franchisor of Shoney's Inns. The Company's 27 Sumner Suites hotels
owned and operated through July 9, 2000 are mid-scale, all-suites hotels located
in Arizona, Colorado, Florida, Georgia, Indiana, Kansas, New Mexico, North
Carolina, Ohio, Tennessee, Texas and Virginia. See "Prime Transaction" below for
a discussion of the transaction which transferred the operations of all of the
27 Sumner Suites hotels to Prime Hospitality Corp. ("Prime") effective with the
close of business on July 9, 2000. As of July 9, 2000, the Shoney's Inn lodging
system consists of 76 Shoney's Inns containing 7,344 rooms of which 16
containing 1,822 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 were 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
offered mid-scale accommodations at rates between $75 and $100 per night and
were 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. Subsequent to the end of the
second quarter of this year, the Company will no longer operate these hotels,
which are to be re-flagged as AmeriSuites by Prime within the next few months.
There are no plans to develop and operate Sumner Suites hotels in the near term.
The Company is, however, developing this type of hotel for third parties,
including new AmeriSuites hotels for Prime.
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 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.
<PAGE> 13
The Company's operations have been supplemented by contract revenues
from construction and development of hotels for third parties. Revenues from
these activities have varied widely from period to period, depending upon
whether the Company's construction and development activities were primarily
focused on its own facilities or on outside projects. Construction revenues are
recognized on the percentage of completion basis.
SALE OF LEASEHOLD INTERESTS
On July 9, 2000, the Company completed a transaction with Prime
Hospitality Corp. ("Prime") in which it sold to Prime all of its leasehold
interest in 24 Sumner Suites hotels, for a total of $15.6 million. The Company
received $100,000 in cash, $13.9 million in the form of an escrow fund and
retired its debt securities held by Prime with a face value of $2.6 million and
a fair value of $1.6 million. As a part of the transaction, the Company assigned
its interest to Prime in two deposits related to the lease, the $14.0 million
guaranty deposit and $25.6 million in lease security deposits and the related
supplies inventory at each hotel.
The Company also agreed to construct two hotels on sites presently
owned by the Company. These projects will be funded by the $13.9 million escrow
money from the sale and any excess escrow funds will then be released to the
Company. The Company also gave HPT, the owner of the 24 Sumner Suites whose
leasehold rights were assigned to Prime, the right to exchange one or both of
two specific hotels included in the leasehold group for these two new
properties, upon completion of their construction, without payment or receipt of
any additional consideration. If the Company does not consent to the property
exchange, then HPT can require the Company to purchase the two properties.
The Company further agreed to lease to Prime three other Sumner Suites
hotels, which the Company owns. The 11-year lease provides for initial minimum
annual rental payments of $2.9 million, increasing to $3.1 million if the lease
is extended, and also provides for percentage rents based on hotel sales, as
defined. Prime will convert all 27 existing Sumner Suites to the AmeriSuites
brand. The Company agreed to not operate any other all-suites hotels in
competition with Prime within a defined geographic radius of each of the hotels
being sold. This restriction will not prevent the Company from developing hotels
for others in the restricted area or operating or franchising any Shoney's Inn
brand hotel in the restricted area.
The Company recognized a gain of $3.6 million, continued to defer gains
of $4.1 million from the sale/leaseback on two of the hotels, and recognized
extraordinary gains related to the early extinguishment of the debt securities
received from Prime of $855,000, all before income tax. The Company will
recognize the deferred gains from the sale/leaseback when HPT exercises the
exchange option or requires the Company to purchase the two properties, or these
rights expire.
<PAGE> 14
In addition, the Company agreed to construct one 124-room AmeriSuites
hotel for Prime on a site presently owned by Prime at a construction and
development price of $76,500 per room, less Prime's cost of the land. The
Company also agreed to provide reservation services to Prime for all of its
existing hotels, for a fee based on a percentage of room revenue.
RESULTS OF OPERATIONS
For the Fiscal Quarters and Fiscal Year-to-date Periods Ended July 9, 2000 and
July 11, 1999
Total operating revenues for the quarter ended July 9, 2000, were $21.5
million, or 22.3% more than the total operating revenues of $17.6 million
reported for the second quarter of 1999. For the fiscal year-to-date period
ended July 9, 2000, total operating revenues were $48.7 million, or 31.5% more
than the total operating revenues of $37.0 million for the comparable period in
1999.
Revenues from hotel operations in the second fiscal quarter of 2000
increased by $1.2 million, or 7.3%, from the $16.4 million reported for the same
period last year. For the 40 same hotels opened for all of both quarterly
periods, an increase of 0.1% in average daily room rates, from $69.77 in second
quarter 1999 to $69.86 in second quarter 2000, and an increase in average
occupancy rates on these hotels from 55.9% to 59.1% this year, resulted in an
increase in same hotel revenues of 5.2% from $16.1 million in second quarter
1999 to $17.0 million in second quarter 2000. The one additional hotel opened in
the fourth quarter of 1999 contributed $476,000 to hotel operating revenues in
second quarter this year. One hotel which was sold in June 2000 contributed
$161,000 to hotel revenues in second quarter this year, compared with $278,000
in second quarter 1999.
Revenues from hotel operations in the first two fiscal quarters of 2000
increased by $5.1 million, or 14.8%, from the $34.7 million reported for the
same period last year. For the 37 same hotels opened for all of both
year-to-date periods, a decrease of 0.2% in average daily room rates, from
$68.81 in 1999 to $68.66 in 2000, and an increase in average occupancy rates on
these hotels from 53.7% to 56.7% this year, resulted in an increase in same
hotel revenues of 5.0% from $32.6 million in 1999 to $34.2 million in 2000. The
four hotels opened since the end of 1998 contributed $5.2 million to hotel
operating revenues in the first two quarters of this year, compared with $1.6
million for the same period last year. The hotel which was sold in June 2000
contributed $379,000 to hotel revenues in the first two quarters of this year,
compared with $482,000 for the same period in 1999.
<PAGE> 15
Through July 9, 2000, the Company owned and operated two hotel brands -
Shoney's Inns and Sumner Suites hotels. RevPAR (revenue per available room) for
the 15 Company-owned Shoney's Inns decreased from $27.09 in second quarter 1999
to $25.88 in second quarter 2000. The 27 Sumner Suites hotels' RevPAR increased
by 8.4%, from $45.25 in second quarter 1999 to $49.03 in second quarter 2000.
The 26 Sumner Suites same-hotels' RevPAR increased by 8.8%, from $45.25 in
second quarter 1999 to $49.25 in second quarter this year. For the first two
quarters of this year, the RevPAR for all 15 Company-owned Shoney's Inns
decreased from $24.83 in 1999 to $23.76 this year; the 14 same hotel Shoney's
Inns' RevPAR during this same period decreased from $25.02 in 1999 to $23.99
this year. For the first two quarters of this year, the RevPAR for all 27 Sumner
Suites hotels increased from $43.17 in 1999 to $47.76 this year; the 23 same
hotel Sumner Suites hotels' RevPar during this same period increased from $43.98
in 1999 to $47.73 this year.
Franchising and management revenues increased by $190,000, or 25.5%, in
second quarter 2000 from second quarter 1999. Initial franchise and franchise
termination fees increased by $253,000 from second quarter of last year, which
was offset by a $63,000 decrease in royalty and reservation fees, due primarily
to lower revenues upon which such fees are based. Initial franchise fee revenue
and termination fees vary from quarter to quarter depending on the level of
franchise sales activities and the number of franchises terminated. Franchising
and management revenues increased by $165,000, or 9.9%, in the first two
quarters of this year from the same period last year. Initial franchise and
franchise termination fees increased by $341,000 from the first two quarters of
last year, which was offset by a $176,000 decrease in royalty and reservation
fees, due primarily to lower revenues upon which such fees are based, but also
due to a $40,000 decrease in reservation fees due to the cancellation of
reservation services by one hotel chain in March of 1999. Three new franchised
hotels opened near the end of the second quarter 2000, and as of July 9, 2000,
there was one franchised Shoney's Inn under construction, which is expected to
open in early 2001.
Revenues from construction and development activities were $2.9
million in second quarter 2000 on four third party construction contracts in
progress versus $412,000 in second quarter 1999 on three third party
construction contracts in progress. For the first two quarters of this year,
revenues from construction and development activities were $7.1 million on seven
third party construction contracts in progress versus $704,000 in the first two
quarters of 1999 on three third party construction contracts in progress. As of
July 9, 2000, there were two third party construction contracts in progress.
Operating expenses from hotel operations for the second quarter of 2000
increased by $2.4 million, or 22.4%, from $10.7 million in second quarter 1999,
due partially to the $1.2 million increase in hotel operating revenues. The four
Sumner Suites hotels opened in 1999 and first quarter 2000 caused hotel
operating expenses to increase by $1.0 million over second quarter last year.
Hotel operating expenses on the 37 same-hotels increased by 14.7%, or $1.4
million, in second quarter 2000 over second quarter 1999. The
<PAGE> 16
operating expenses as a percentage of operating revenues for this activity
increased from 65.3% in second quarter 1999 to 74.4% in second quarter 2000;
operating expenses as a percentage of operating revenues on the 37 same-hotels
increased from 65.4% in second quarter 1999 to 73.4% in second quarter 2000.
Increases in hotel operating expenses on same-hotels were primarily in the areas
of payroll related costs, repairs and maintenance, uncollectible accounts
receivable, operating supplies, and security. Payroll related costs increased
significantly in second quarter of this year due to the Prime transaction (see
above discussion). Since the announcement of the prospective transaction in
first quarter, it was necessary to maintain the hotel staffing positions at the
27 Sumner Suites hotels to the date operations of these hotels were assumed by
Prime (July 9, 2000). These costs included bonuses to stay until the transaction
was consummated, payment of accrued vacation for those employees transferred to
Prime or who resigned or were terminated, termination pay, regular second
quarter bonuses to be paid, and payroll taxes and travel expenses associated
with these costs.
Operating expenses from hotel operations for the first two quarters of
2000 increased by $6.0 million, or 26.5%, from $22.7 million in the first two
quarters of 1999, due partially to the $5.1 million increase in hotel operating
revenues. The four Sumner Suites hotels opened in 1999 and first quarter 2000
caused hotel operating expenses to increase by $2.3 million over the first two
quarters of 1999. Hotel operating expenses on the 37 same-hotels increased by
18.0%, or $3.8 million, in the first two quarters of this year over the
comparable period last year. The operating expenses as a percentage of operating
revenues for this activity increased from 65.6% in the first two quarters of
1999 to 72.3% in the first two quarters of 2000; operating expenses as a
percentage of operating revenues on the 37 same-hotels increased from 64.0% in
the first two quarters of 1999 to 71.9% in the first two quarters of 2000.
Increases in hotel operating expenses on same-hotels were primarily in the areas
of payroll related costs, repairs and maintenance, uncollectible accounts
receivable, operating supplies, and security. Payroll related costs increased
significantly in second quarter of this year due to the impacts of the Prime
transaction described above. Since the announcement of the proposed transaction
in first quarter, it was necessary to maintain the hotel staffing positions at
the 27 Sumner Suites hotels to the date operations of these hotels were assumed
by Prime (July 9, 2000). These costs included bonuses to stay until the
transaction was consummated, termination pay, and payroll taxes and travel
expenses associated with these costs.
Franchising and management operating expenses increased by $39,000, or
7.4%, from second quarter 1999 to second quarter 2000, and by $220,000, or 18.9%
from the first two quarters of 1999 to the first two quarters of this year. The
increases were primarily in the areas of (1) reservation center equipment
expenses and payroll and related benefits and (2) franchise administrative
expenses; particularly, advertising, postage and freight, dues and
subscriptions, and hotel inspection expenses. Construction and development costs
in second quarter of this year were $3.2 million on the four third party
construction contracts in progress versus $399,000 in first quarter 1999 on the
three third party construction contract in progress at that time.
<PAGE> 17
Construction and development costs in the first two quarters of this
year were $7.2 million on the five third party construction contracts in
progress versus $645,000 in the first two quarters of 1999 on the three third
party construction contract in progress at that time. The Company reflected a
loss from the construction and development activities due to fewer contracts
than the existing overhead costs. General and administrative expenses in the
second quarter of this year decreased by $349,000, or 19.9%, from second quarter
1999, and in the first two quarters of this year they decreased by $661,000, or
19.1%. These decreases were due primarily to decreased professional fees, travel
expenses and telephone expenses.
Rent expense increased by $2.1 million in second quarter this year from
last year's second quarter, which represents the base rent paid in the second
quarter of this year on the six Sumner Suites hotels sold and leased back on
June 29, 1999, and the four Sumner Suites hotels sold and leased back on May 11,
2000. For the first two quarters of this year, rent expense increased by $4.5
million from the comparable period last year, of which $4.4 million represents
the increase in base rent paid on the ten Sumner Suites hotels sold and leased
back in June of 1999 and May of 2000. The balance of the increase is due to
increases in percentage rent paid on the hotels sold and leased back and to a
reduction in deferred gain accretion which reduces rent expense on those hotels.
Depreciation and amortization expense decreased by $330,000, or 20.1%,
from second quarter 1999, and for the first two quarters, decreased by $687,000,
or 16.7% from the same period last year. The sale-leaseback of 6 Sumner Suites
hotels in June, 1999, and 4 Sumner Suites hotels in May, 2000, reduced
depreciation expense in both the second quarter of this year and the first two
quarters of this year from the comparable periods in 1999. Interest expense in
the second quarter of this year decreased by $808,000, or 24.3%, from second
quarter last year, while interest income increased by $254,000, or 20.9%, from
second quarter 1999, for a net decrease of $1.1 million in net interest expense.
Interest expense in the first two quarters of this year decreased by $864,000,
or 12.3%, from the first two quarters last year, while interest income increased
by $246,000, or 7.9%, from the first two quarters of 1999, for a net decrease of
$1.1 million in year-to-date net interest expense. These reductions in net
interest expense were due to a paydown of $7.5 million of the Company's
outstanding debt using a portion of the $38.4 million gross proceeds of the sale
lease-back of four hotels on May 11 of this year and to the interest income
earned from the temporary investment of the remaining proceeds from that
transaction in interest bearing instruments.
The gain recognized on sale of property and leasehold interests in
second quarter 2000 totaled $4.4 million, and includes a gain of $3.6 million
recognized on the sale of the Company's leasehold interest in 24 Sumner Suites
hotels which had been previously sold and leased back, at which time the gain
had been deferred and was being amortized over the lease term. Additionally, a
Shoney's Inn was sold in second quarter at a gain of $755,000. The gain on sale
of property in second quarter 1999 totaling $7.4 million relates to four of the
16 hotels sold in third quarter 1998, the recognition of which was
<PAGE> 18
originally deferred and recognized on the installment method. The gain on sale
of property and leasehold interests in the first two quarters of this year was
$4.7 million, consisting of the two transactions in the second quarter and
$299,000 recognized in first quarter from a recognition of deferred gains
related to the sale of two Shoney's Inns in 1998. The gain on sale of property
in the first two quarters of 1999 was $12.0 million, of which $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.
Other income decreased by $10,000 from second quarter 1999 to second
quarter 2000, and by $173,000 from the first two quarters of 1999 to the first
two quarters of 2000. 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 from $1.9
million in the first two quarters of 1999 to $27,000 in the first two quarters
of 2000, due primarily to the 40% minority interest in $4.6 million of the gain
on sale of property recognized in first quarter 1999, described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows used in operating activities were $2.5 million
in the first two quarters of 2000, compared with $4.6 million used in operating
activities in the first two quarters of 1999.
The Company's cash flows provided by investing activities were $33.6
million in the first two quarters of 2000, compared with $56.5 million for the
comparable period in 1999. 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 $2.0 million in the first two quarters of 2000 and $13.3 million in the
first two quarters of 1999. Proceeds from the sale of property and leasehold
interests were $38.6 million in the first two quarters of 2000 versus $65.2
million for the comparable period in 1999. In the second quarter of 2000, the
Company sold and leased back four hotels and sold a fourth hotel for a
combination of cash and a note; in the second quarter of 1999, the Company sold
and leased back six hotels.
Net cash used in financing activities was $16.3 million in the first
two quarters of 2000 compared with $25.3 million in the first two quarters of
1999. Repayments, net of borrowings, on long-term debt and capitalized lease
obligations were $15.6 million in the first two quarters of 2000 versus $18.9
million in the first two quarters of 1999. The repayments in the first two
quarters of 2000 include $15.5 million of long-term debt repurchased in the open
market. In the first two quarters of 2000, the Company repurchased 80,000 shares
of its common stock for $349,000; in the first two quarters of 1999, the Company
repurchased 1,112,000 shares of its common stock for $6.1 million pursuant to a
plan to repurchase up to $20.0 million of the Company's outstanding common
stock.
<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
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 $30.0
million (a $10.0 million term loan and a $20.0 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) $30.0 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 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 July 9, 2000, the Company had $10.0 million in
borrowings outstanding under this credit facility, consisting of the three-year
term loan of $10.0 million; the remaining availability under this credit
facility as of July 9, 2000, was $16.8 million ($3.2 million was used in second
quarter 2000 to secure the Company's guaranty of a subsidiary's letter of
credit).
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,
2001. As of July 9, 2000, the Company had no borrowings outstanding under this
credit facility.
The Company opened four new Sumner Suites hotels in 1999 (including
three in the first two quarters of 1999) and none in the first two quarters of
2000. As of the end of the second fiscal quarter of 2000, two hotels were under
construction which are expected to open in second quarter 2001. The Company
estimates that approximately $13.0 million in capital funds will be necessary to
complete the construction of the two hotels under construction. These two hotels
may be exchanged upon completion for two of the 24 Sumner Suites hotels that are
included in the leasehold interests sold to Prime (See above discussion of Sale
of Leasehold Interests). The Company has escrowed $13.9 million to finish these
two hotels. The Company has decided to cease its development of new Sumner
Suites hotels in the near term. This decision was based on current market
conditions, rooms supply in certain areas, capital availability, and the Sale of
Leasehold Interests discussed above.
The Company's Board of Directors has previously 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 negotiated
transactions at the
<PAGE> 20
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. As of the
end of the second fiscal quarter of 2000, approximately 3.0 million shares had
been repurchased at a cost of $17.5 million.
On May 11, 2000, the Company sold and leased back four Sumner Suites
hotels, adding these four hotels to the existing lease of 20 other hotels. Net
proceeds from this transaction were $33.7 million, of which $7.5 million was
used to reduce long-term indebtedness of the Company. The balance of $26.2
million was temporarily invested in money market funds until needed. This
transaction represented the first closing transaction as a part of the series of
contemplated transactions pursuant to an agreement entered into with Prime on
March 16, 2000 (reference "Pending Prime Transaction" discussion in Item 7 of
the Company's 1999 Form 10-K and footnote H of the Notes to Condensed
Consolidated Financial Statements included in Item 1 of this Form 10-Q). The
assumption by Prime of the Company's leasehold interest in the 24 Sumner Suites
hotels leased from HPT Suite Properties Trust and the Company's lease of three
Sumner Suites hotels to Prime occurred on July 9, 2000.
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, 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 cash on hand, 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.
MARKET RISK
There have been no material changes in the Company's exposure to market
risk in the second fiscal quarter ended July 9, 2000.
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.
<PAGE> 21
PART II - OTHER INFORMATION
Item 1. ShoLodge Franchise Systems, Inc. v. Ambe Hotels & Investments, et al,
Chancery Court for Davidson County, Tennessee, Case No. 00-1865-II. On
June 14, 2000, the Company filed an action against Ambe Hotels &
Investments and other parties arising out of Ambe's failure to pay
royalty and other fees to the Company pursuant to the License Agreement
concerning the Shoney's Inn in Orlando, Florida. On July 7, 2000, the
Company reached a settlement with the defendants pursuant to which the
defendants agreed to pay the Company $175,000 in past due royalty fees
and in termination fees. The defendants had paid $10,000 of the
settlement amount by July 9, 2000, and the balance of $165,000 was
received on August 22, 2000. The action will be dismissed with
prejudice with the receipt of this final payment.
ShoLodge Franchise Systems, Inc. v. Skyland Inn, LLC, et al, Chancery
Court for Davidson County, Tennessee, Case No. 00-1637-II. On May 25,
2000, the Company filed a declaratory judgment action against Skyland
Inn, LLC, the franchisee of the Shoney's Inn in Asheville, North
Carolina, and other parties. On or about July 20, 2000, the Company
reached a settlement with the defendants pursuant to which Skyland Inn,
LLC agreed to pay the Company $20,000 and agreed to execute a
Promissory Note in the amount of $180,000 in favor of the Company in
satisfaction of Skyland's obligations under the terms of the License
Agreement. The Company has received a payment of $20,000 in cash and
has received an executed Promissory Note in the amount of $180,000. The
action will be dismissed with prejudice in the immediate future.
Michael A. Corbett v. ShoLodge, Inc. and Leon Moore, Chancery Court for
Sumner County, Tennessee, No. 98C-184. In this action, filed on June
12, 1998, Michael A. Corbett, the former Chief Financial Officer of
ShoLodge, claims that he was wrongfully terminated by the Company and
has asserted claims against the Company and its chief executive
officer, Leon Moore, for breach of contract, fraud, retaliatory
discharge and related claims. The plaintiff sought $3,000,000 in
compensatory damages and sought punitive and treble damages in
addition. The defendants filed an answer to the complaint on July 9,
1998. On December 31, 1998, the Company filed a motion to dismiss this
lawsuit on the basis that Mr. Corbett had intentionally destroyed
relevant evidence during the pendency of the case. The Court heard oral
argument on the motion on January 28, 1999, and granted the motion at
the conclusion of the hearing and dismissed the case with prejudice. On
March 8, 1999, Mr. Corbett filed a Motion to Alter or Amend the
Judgment dismissing the case, which the Court denied. The plaintiff
appealed the dismissal of the case to the Tennessee Court of Appeals.
On May 12, 2000, the Tennessee Court of Appeals ordered the plaintiff
to file a bond for costs on appeal or else show cause why his appeal
should not be dismissed for failure to comply with Tenn. R. App. P. 6.
The plaintiff failed to respond; therefore, the Court ordered the
appeal dismissed on June 1, 2000. This case is now concluded.
No material developments occurred during the second quarter ended July
9, 2000 with respect to any other pending litigation. Reference is made
to Form 10-Q for first fiscal quarter ended April 16, 2000.
Item 4. Submission of Matters to a vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 26, 2000,
5,307,578 shares were outstanding and eligible to vote. The
shareholders considered and voted to reelect the following director:
<TABLE>
<CAPTION>
Name of Nominee Vote Cast
--------------- ---------
For Withheld
--- --------
<S> <C> <C>
Leon Moore 5,113,621 31,285
</TABLE>
<PAGE> 22
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 May
11, 2000. Incorporated by reference to the Company's
Report on Form 8-K, filed with the Commission on May
26, 2000.
10.2 Agreement to Lease between HPT Suite Properties
Trust and Suite Tenant, Inc. dated May 11, 2000.
Incorporated by reference to the Company's Report on
Form 8-K, filed with the Commission on May 26, 2000.
10.3 Fourth Amendment to Lease Agreement and Amendment to
Incidental Documents entered into between Hospitality
Properties Trust, HPT Suite Properties Trust,
ShoLodge, Inc. and Suite Tenant, Inc., dated May 11,
2000. Incorporated by reference to the Company's
Report on Form 8-K, filed with the Commission on May
26, 2000.
10.4 Sale and Purchase Agreement by and between ShoLodge,
Inc. and Prime Hospitality Corp., dated as of March
16, 2000. Incorporated by reference to the Company's
Annual Report on Form 10-K, filed with the Commission
on March 27, 2000.
10.5 First Amendment to Sale and Purchase Agreement by and
between ShoLodge, Inc. and Prime Hospitality Corp.,
dated as of July 9, 2000. Incorporated by reference
to the Company's Report on Form 8-K, filed with the
Commission on July 24, 2000.
10.6 Lease Agreement by and between Southeast Texas Inns,
Inc., as landlord, and May-Ridge, L.P., as tenant,
dated as of July 9, 2000. Incorporated by reference
to the Company's Report on Form 8-K, filed with the
Commission on July 24, 2000.
10.7 Contractor and Development Agreement by and between
Prime Hospitality Corp., as owner, Moore &
Associates, Inc., as contractor, and ShoLodge, Inc.,
as guarantor, dated as of July 9, 2000. Incorporated
by reference to the Company's Report on Form 8-K,
filed with the Commission on July 24, 2000.
10.8 Interim Agreement for Reservation Services by and
between ShoLodge, Inc. and Prime Hospitality Corp.,
dated as of July 9, 2000. Incorporated by reference
to the Company's Report on Form 8-K, filed with the
Commission on July 24, 2000.
10.9 Agreement for Reservation Services by and between
ShoLodge, Inc. and Prime Hospitality Corp., dated as
of July 9, 2000. Incorporated by reference to the
Company's Report on Form 8-K, filed with the
Commission on July 24, 2000.
27 Financial Data Schedule for Quarter Ended July 9,
2000
6(b) Reports on Form 8-K
A Form 8-K was filed on May 26, 2000, relating to the
completion of a sale-leaseback transaction involving
four Sumner Suites hotels on May 11, 2000.
<PAGE> 23
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 24, 2000 S/ Leon Moore
--------------------------------------------
Leon Moore
President, Chief Executive Officer,
Principal Executive Officer, Director
Date: August 24, 2000 S/ Bob Marlowe
--------------------------------------------
Bob Marlowe
Secretary, Treasurer, Chief Accounting
Officer, Principal Accounting Officer,
Chief Financial Officer, Director
