<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------
For the Third Quarter Ended October 1, 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 November 13, 2000, there were 5,645,908 shares of ShoLodge, Inc.
common stock outstanding.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 26,
2000 1999(1)
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,877,242 $ 3,386,937
Restricted cash 14,399,632 1,605,513
Accounts receivable-trade, net 3,452,081 4,853,252
Construction contracts receivable 204,271 7,674,104
Costs and estimated earnings in excess of billings on construction contracts 3,682,319 3,588,071
Income taxes receivable 63,095 3,335,543
Prepaid expenses 440,120 573,064
Notes receivable-net 937,142 468,762
Other current assets 158,667 441,023
-------------------------------------
Total current assets 33,214,569 25,926,269
NOTES RECEIVABLE, NET 63,037,477 60,887,262
PROPERTY AND EQUIPMENT 109,962,342 148,698,134
Less accumulated depreciation and amortization (22,535,967) (23,821,643)
-------------------------------------
87,426,375 124,876,491
LAND UNDER DEVELOPMENT OR HELD FOR SALE 9,229,759 9,186,608
DEFERRED CHARGES, NET 7,239,416 8,407,623
DEPOSITS ON SALE/LEASEBACK 0 35,280,000
INTANGIBLE ASSETS 2,988,966 3,122,173
OTHER ASSETS 4,258,048 2,627,487
-------------------------------------
TOTAL ASSETS $207,394,610 $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>
OCTOBER 1, DECEMBER 26,
2000 1999(1)
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,141,857 $ 9,594,955
Taxes other than on income 556,381 1,448,602
Current portion of long-term debt
and capitalized lease obligations 490,015 2,227,929
-------------------------------------
Total current liabilities 14,188,253 13,271,486
OTHER LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, LESS CURRENT PORTION 91,708,001 125,550,557
DEFERRED INCOME TAXES 2,089,297 2,089,297
DEFERRED GAIN ON SALE/LEASEBACK 4,129,962 36,307,820
DEFERRED CREDITS 2,395,963 1,283,605
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 712,470 932,809
-------------------------------------
TOTAL LIABILITIES 115,223,946 179,435,574
-------------------------------------
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 5,658,268 shares issued and outstanding
as of October 1, 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 67,233,161 65,512,322
Unrealized gain on securities available for sale (net of tax) 57,442 80,321
Treasury stock (17,737,619) (17,199,579)
Less notes receivable from officer, net of discount of $307,050 (1,224,199) 0
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 92,170,664 90,878,339
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $207,394,610 $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 FORTY WEEKS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Hotel $3,510,542 $17,051,354 $43,316,246 $51,712,387
Franchising and management 1,057,179 1,893,824 2,889,493 3,561,087
Construction and development 2,073,101 4,494,888 9,135,906 5,198,439
----------------------------------------------------------
Total revenues 6,640,822 23,440,066 55,341,645 60,471,913
COSTS AND EXPENSES:
Operating expenses:
Hotel 2,936,441 11,673,969 31,722,862 34,422,023
Franchising and management 532,301 518,924 1,916,412 1,683,103
Construction and development 2,216,199 3,774,840 9,395,195 4,419,688
----------------------------------------------------------
Total operating expenses 5,684,941 15,967,733 43,034,469 40,524,814
General and administrative 1,080,329 1,079,329 3,882,522 4,542,478
Rent expense, net 153,420 3,936,794 10,191,844 9,506,432
Depreciation and amortization 1,137,630 1,458,094 4,554,845 5,562,389
----------------------------------------------------------
(Loss) earnings from operations (1,415,498) 998,116 (6,322,035) 335,800
OTHER INCOME AND (EXPENSES):
Interest expense (2,175,730) (2,515,378) (8,311,781) (9,515,166)
Interest income 1,594,386 1,628,706 4,938,057 4,726,646
Gain on sale of property and leasehold interests 1,658 49,444 4,682,477 12,029,525
Other income 867,579 (48,743) 1,149,710 406,252
----------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY GAIN (1,127,605) 112,145 (3,863,572) 7,983,057
INCOME TAX (BENEFIT) EXPENSE (339,000) 36,000 (1,169,000) 2,315,000
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS (14,616) (18,341) (41,494) (1,889,965)
----------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (803,221) 57,804 (2,736,066) 3,778,092
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
(net of related tax effect of $2,732,000 in 2000 and
$490,000 in 1999 respectively) 1,919,684 798,670 4,456,905 798,670
----------------------------------------------------------
NET EARNINGS $1,116,463 $ 856,474 $ 1,720,839 $ 4,576,762
==========================================================
EARNINGS PER COMMON SHARE
Basic:
(Loss) earnings per share from continuing operations ($0.14) $0.01 ($0.50) $0.55
Extraordinary gain, net of tax effect $0.34 $0.14 $0.82 $0.12
Net earnings $0.20 $0.15 $0.32 $0.67
==========================================================
Diluted:
(Loss) earnings per share from continuing operations ($0.14) $0.01 ($0.50) $0.54
Extraordinary gain, net of tax effect $0.34 $0.13 $0.81 $0.11
Net earnings $0.20 $0.14 $0.31 $0.65
==========================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 5,667,906 5,842,152 5,428,147 6,828,121
Diluted 5,723,408 6,067,252 5,492,949 7,054,246
----------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FORTY WEEKS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS ENDED
OCTOBER 1, OCTOBER 3,
2000 1999
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEMS $(2,736,066) $ 3,778,092
ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 4,554,845 5,562,389
AMORTIZATION OF DEFERRED CHARGES RECORDED
AS INTEREST EXPENSE 566,720 923,884
RECOGNITION OF PREVIOUSLY DEFERRED GAINS (2,806,131) (4,185,756)
GAIN ON SALE OF PROPERTY AND LEASEHOLD INTERESTS (4,682,477) (12,029,525)
INCREASE IN MINORITY INTEREST IN EQUITY
OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 41,494 1,889,965
COMPENSATION EXPENSE 151,955 -
CHANGES IN ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN TRADE RECEIVABLES 1,401,171 (1,722,184)
DECREASE IN CONSTRUCTION CONTRACT RECEIVABLES 7,469,833 -
INCREASE IN ESTIMATED EARNINGS IN EXCESS OF BILLING
ON CONSTRUCTION CONTRACTS (94,248) (5,198,439)
(INCREASE) DECREASE IN INCOME AND OTHER TAXES RECEIVABLE (338,473) 1,319,747
DECREASE (INCREASE) IN PREPAID EXPENSES 132,944 (362,234)
INCREASE IN OTHER ASSETS (2,008,698) (290,627)
INCREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES 203,546 2,131,781
-----------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,856,415 (8,182,907)
CASH FLOWS FROM INVESTING ACTIVITIES:
INCREASE IN RESTRICTED CASH (12,794,119) (896,145)
PAYMENTS RECEIVED ON NOTES RECEIVABLE 231,409 12,292,668
CAPITAL EXPENDITURES (3,750,707) (17,663,069)
PROCEEDS FROM SALE OF PROPERTY AND LEASEHOLD INTERESTS 38,560,676 65,312,470
PROCEEDS FROM SALE OF LEASEHOLD INTERESTS, NET OF EXPENSES 13,832,482 -
INCREASE OF DEPOSITS ON SALE/LEASEBACK OF HOTELS (4,295,000) (7,280,000)
-----------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 31,784,741 51,765,924
CASH FLOWS FROM FINANCING ACTIVITIES:
PAYMENTS FOR DEFERRED LOAN COSTS (355,506) (690,220)
PROCEEDS FROM LONG-TERM DEBT 12,800,500 23,399,754
PAYMENTS ON LONG-TERM DEBT (38,610,382) (35,514,303)
PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (189,590) (182,232)
DISTRIBUTIONS TO MINORITY INTERESTS (261,834) -
EXERCISE OF STOCK OPTIONS 4,001 41,505
PURCHASE OF TREASURY STOCK (538,040) (9,937,863)
-----------------------------------
NET CASH USED IN FINANCING ACTIVITIES (27,150,851) (22,883,359)
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,490,305 20,699,658
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,386,937 2,480,984
-----------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $9,877,242 $23,180,642
===================================
</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 October 1, 2000 and October 3, 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 three quarters ended October 1, 2000 and October
3, 1999.
<TABLE>
<CAPTION>
10/1/00 10/3/99
------- -------
<S> <C> <C>
Net unrealized (loss) gain on securities
available for sale for the three quarters $(23) $24
</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
October 1, 2000, and October 3, 1999:
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
---------------------------- ----------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
BASIC:
EARNINGS (LOSS) BEFORE
EXTRAORDINARY ITEMS $ (803,221) $ 57,804 $(2,736,066) $3,778,092
EXTRAORDINARY GAIN 1,919,684 798,670 4,456,905 798,670
----------- ---------- ----------- ----------
NET EARNINGS APPLICABLE TO
COMMON STOCK $ 1,116,463 $ 856,474 $ 1,720,839 $4,576,762
=========== ========== =========== ==========
SHARES:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,667,906 5,842,152 5,428,147 6,828,121
=========== ========== =========== ==========
BASIC EARNINGS (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEMS $ (0.14) $ 0.01 $ (0.50) $ 0.55
EXTRAORDINARY GAIN 0.34 0.14 0.82 0.12
----------- ---------- ----------- ----------
NET EARNINGS $ 0.20 $ 0.15 $ 0.32 $ 0.67
=========== ========== =========== ==========
DILUTED:
EARNINGS (LOSS) BEFORE
EXTRAORDINARY ITEMS $ (803,221) $ 57,804 ($2,736,066) $3,778,092
EXTRAORDINARY GAIN 1,919,684 798,670 4,456,905 798,670
----------- ---------- ----------- ----------
NET EARNINGS APPLICABLE TO
COMMON STOCK 1,116,463 856,474 1,720,839 4,576,762
DILUTIVE EFFECT OF 7.5%
CONVERTIBLE DEBENTURES -- -- -- --
----------- ---------- ----------- ----------
NUMERATOR FOR DILUTED
EARNINGS PER SHARE $ 1,116,463 $ 856,474 $ 1,720,839 $4,576,762
=========== ========== =========== ==========
SHARES:
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,667,906 5,842,152 5,428,147 6,828,121
EFFECT OF DILUTIVE
SECURITIES (OPTIONS) 55,502 225,100 64,802 226,125
EFFECT OF DILUTIVE SECURITIES
(7.5% CONVERTIBLE DEBENTURES) -- -- -- --
----------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,723,408 6,067,252 5,492,949 7,054,246
=========== ========== =========== ==========
DILUTED EARNINGS (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEMS $ (0.14) $ 0.01 $ (0.50) $ 0.54
EXTRAORDINARY GAIN 0.34 0.13 0.81 0.11
----------- ---------- ----------- ----------
NET EARNINGS $ 0.20 $ 0.14 $ 0.31 $ 0.65
=========== ========== =========== ==========
</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 40 Weeks Ended
-------------- --------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues from external customers $ 3,511 $ 17,051 $ 43,316 $ 51,712
Franchising and management 1,434 3,037 5,939 7,082
Construction and development 2,534 7,700 11,230 18,727
Elimination of intersegment revenue franchising,
management, construction and development (838) (4,348) (5,143) (17,049)
------- -------- -------- --------
Total revenues $ 6,641 $ 23,440 $ 55,342 $ 60,472
======= ======== ======== ========
Operating profit (loss):
Hotel ($ 532) $ 100 $ (2,632) $ 2,855
Franchising and management (811) 175 (3,581) (3,192)
Construction and development (72) 723 (109) 673
------- -------- -------- --------
Total operating profit (loss) ($1,415) $ 998 $ (6,322) $ 336
======= ======== ======== ========
Capital expenditures:
Hotel $ 421 $ 4,177 $ 2,264 $ 16,416
Franchising and management 1,269 230 1,442 1,227
Construction and development 44 -- 45 20
------- -------- -------- --------
Total capital expenditures $ 1,734 $ 4,407 $ 3,751 $ 17,663
======= ======== ======== ========
Depreciation and amortization:
Hotel $ 888 $ 1,184 $ 3,654 $ 4,643
Franchising and management 242 265 879 890
Construction and development 8 9 22 29
------- -------- -------- --------
Total depreciation and amortization $ 1,138 $ 1,458 $ 4,555 $ 5,562
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of As of
October 1, December 26,
2000 1999
<S> <C> <C>
Total assets:
Hotel $143,932 $200,624
Franchising and management 59,131 57,986
Construction and development 4,332 11,704
-------- --------
Total assets $207,395 $270,314
======== ========
</TABLE>
<PAGE> 9
E. RELATED PARTY TRANSACTION
On July 5, 2000, the Board of Directors accelerated the vesting of certain
options held by the Company's president and chief executive officer 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%. During the
Company's second quarter of fiscal year 2000, compensation expense was
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 pending against the Company.
On August 30, 2000, the Company filed a lawsuit to recover outstanding and
past due royalty and other fees from a franchisee, Crossville Motel
Associates, Inc., and its principal, Stephen Roberson. On October 17, 2000,
these defendants filed a counterclaim against ShoLodge seeking damages in
the amount of $1,000,000 for alleged misrepresentations, breach of
contract, and violation of Tennessee Consumer Protection Act. The
defendants also seek to have any damages awarded trebled under the
Tennessee Consumer Protection Act. ShoLodge has not yet filed an answer to
the counterclaim, but it intends to deny the material allegations in the
counterclaim and defend the claims vigorously. A trial date has not yet
been scheduled.
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 arising from the
sale-leaseback 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.
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
<PAGE> 10
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 construction projects are presently in process and are
expected to be completed in the third quarter of 2001. 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 has converted all 27 of the Sumner Suites
hotels 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 previous sale/leaseback transactions on two of the hotels
subject to possible exchange, 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. This
construction is presently in progress and is expected to be completed in
the third quarter of 2001. 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. Reservation service fees are now included in
franchising and management revenues. The reservation system technology is
currently being enhanced in order to accommodate Prime's requirements, and
is expected to be ready to add these additional services in early 2001.
<PAGE> 11
I. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES (in thousands of dollars):
<TABLE>
<CAPTION>
40 Weeks Ended
--------------
Oct. 1, Oct. 3,
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>
J. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board (FASB) Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, becomes effective
January 1, 2001, but is expected to have no effect on the Company, since
no activities of this nature are currently applicable to the Company.
<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 "Sale of Leasehold Interests"
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 October 1, 2000, the
Shoney's Inn lodging system consisted of 74 Shoney's Inns containing 6,991 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 no longer operates these hotels, which
Prime has re-flagged as AmeriSuites. 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.
Also, the Company retains ownership of the Sumner Suites registered trademark
and may continue to develop hotels under this name in the longer term.
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
<PAGE> 13
chains by offering guest services approximating those of full-service facilities
without the additional capital expenditures, operating costs or higher room
rates.
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 construction projects are presently in process and
are expected to be completed in the third quarter of 2001. 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 has converted 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 previous sale/leaseback transactions on two of the hotels
subject to possible exchange, and recognized extraordinary gains related to the
early extinguishment of the
<PAGE> 14
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. This
construction is presently in progress and is expected to be completed in the
third quarter of 2001. 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 October 1, 2000
and October 3, 1999
Total operating revenues for the quarter ended October 1, 2000, were
$6.6 million, or 71.7% less than the total operating revenues of $23.4 million
reported for the third quarter of 1999. For the fiscal year-to-date period ended
October 1, 2000, total operating revenues were $55.3 million, or 8.5% less than
the total operating revenues of $60.5 million for the comparable period in 1999.
Revenues from hotel operations in the third fiscal quarter of 2000
decreased by $13.5 million, or 79.4%, from the $17.1 million reported for the
same period last year. For the 14 same hotels opened for all of both quarterly
periods, a decrease of 0.7% in average daily room rates, from $51.10 in third
quarter 1999 to $50.72 in third quarter 2000, and a decrease in average
occupancy rates on these hotels from 52.1% to 50.0% this year, resulted in a
decrease in same hotel revenues of 4.2% from $3.7 million in third quarter 1999
to $3.5 million in third quarter 2000. One Shoney's Inn which was sold in June
2000 contributed $297,000 to hotel revenues in third quarter last year. The 26
Sumner Suites hotels which were open at the end of the third quarter of 1999
contributed $13.1 million to hotel revenues in third quarter last year. These 26
hotels were included in the 27 hotels which were operated through the end of the
second quarter of this year, but not in the third quarter (see discussion of
Sale of Leasehold Interests above).
Revenues from hotel operations in the first three fiscal quarters of
2000 decreased by $8.4 million, or 16.2%, from the $51.7 million reported for
the same period last year. For the 14 same hotels opened for all of both
year-to-date periods, a decrease of 0.1% in average daily room rates, from
$50.64 in 1999 to $50.57 in 2000, and a decrease in average occupancy rates on
these hotels from 50.3% to 48.2% this year, resulted in a decrease in same hotel
revenues of 3.9% from $11.7 million in 1999 to $11.2 million in 2000. The
Shoney's Inn which was sold in June 2000 contributed $379,000 to hotel revenues
in the first three quarters of this year, compared with $779,000 in the first
three quarters of 1999. The 27 Sumner Suites hotels which were operated only
through the end
<PAGE> 15
of the second quarter of this year contributed $31.7 million to hotel revenues
in the first three quarters of this year, compared with $39.3 million in the
first three quarters of last year.
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 $26.95 in third quarter 1999
to $25.37 in third quarter 2000. RevPAR for the 14 same hotel Shoney's Inns
which the Company continues to own and operate decreased from $26.61 in the
third quarter of 1999 to $25.37 in the third quarter of this year. The 27 Sumner
Suites hotels were not operated in the third quarter of this year; these hotels'
RevPAR was $48.02 in third quarter 1999. For the first three quarters of this
year, the RevPAR for all 15 Company-owned Shoney's Inns decreased from $25.46 in
1999 to $24.22 this year; the 14 same hotel Shoney's Inns' RevPAR during this
same period decreased from $25.49 in 1999 to $24.40 this year. For the first
three quarters of this year, the RevPAR for the 27 Sumner Suites hotels
increased from $44.68 in 1999 to $47.76 this year.
Franchising and management revenues decreased by $837,000, or 44.2%, in
third quarter 2000 from third quarter 1999. Initial franchise and franchise
termination fees decreased by $934,000 from $1.2 million in third quarter of
last year to $241,000 in third quarter this year; last year's $1.2 million was
the result of the settlement of litigation with one Shoney's Inns franchisee.
Royalty and reservation fees increased by $91,000, including an increase of
$197,000 in reservation fees earned on the Sumner Suites (now AmeriSuites)
hotels which were operated by Prime in the third quarter of this year, versus
being operated by the Company prior to July 10, 2000. However, royalty and
reservation revenues on other chains decreased due 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
decreased by $672,000, or 18.9%, in the first three quarters of this year from
the same period last year. Initial franchise and franchise termination fees
decreased by $606,000 from the first three quarters of last year, and royalty,
reservation and management fees decreased by $66,000, due primarily to lower
revenues upon which such fees are based. Three new franchised hotels opened in
July of this year, and as of October 1, 2000, there was one franchised Shoney's
Inn under construction, which is expected to open in early 2001. In addition,
one franchised Shoney's Inn was converted from another brand on October 12,
2000, subsequent to the end of the Company's third fiscal quarter. Six
franchised Shoney's Inns terminated their license agreements in the first three
quarters of this year.
Revenues from construction and development activities were $2.1
million in third quarter 2000 on five third party construction contracts in
progress versus $4.5 million in third quarter 1999 on three third party
construction contracts in progress. For the first three quarters of this year,
revenues from construction and development activities were $9.1 million on ten
third party construction contracts in progress versus $5.2 million in
<PAGE> 16
the first three quarters of 1999 on three third party construction contracts in
progress. As of October 1, 2000, there were five third party construction
contracts in progress.
Operating expenses from hotel operations for the third quarter of 2000
decreased by $8.7 million, or 74.8%, from $11.7 million in third quarter 1999,
due primarily to the $13.5 million decrease in hotel operating revenues. The 27
Sumner Suites hotels which were operated only through the end of the second
quarter of this year incurred operating expenses of $8.7 million in the third
quarter of 1999 as compared with only $271,000 in the third quarter of this
year. Additionally, operating expenses of the Shoney's Inn sold in June of this
year were $193,000 last year. Hotel operating expenses on the 14 same-hotels
decreased by 3.8%, or $106,000, in third quarter 2000 from third quarter 1999.
The operating expenses as a percentage of operating revenues for this activity
increased from 68.5% in third quarter 1999 to 83.6% in third quarter 2000;
operating expenses as a percentage of operating revenues on the 14 same-hotels
which the Company continues to operate increased from 75.7% in third quarter
1999 to 76.0% in third quarter 2000. Increases in hotel operating expenses on
same-hotels were primarily in the areas of payroll related costs, utilities,
operating supplies, and real estate taxes; however, most of these increases were
offset with decreases in other operating expenses, including advertising,
repairs and maintenance, and insurance expense.
Operating expenses from hotel operations for the first three quarters
of 2000 decreased by $2.7 million, or 7.8%, from $34.4 million in the first
three quarters of 1999, due partially to the $8.4 million decrease in hotel
operating revenues. The 27 Sumner Suites hotels which were operated only through
the end of the second quarter of this year incurred operating expenses of $25.6
million in the first three quarters of 1999 as compared with $22.7 million in
the first three quarters of this year. Additionally, operating expenses of the
Shoney's Inn sold in June of this year were $518,000 in the first three quarters
of last year as compared with $343,000 this year to the date of sale. Hotel
operating expenses on the 14 same-hotels which the Company continues to operate
increased by 3.8%, or $316,000, in the first three quarters of this year over
the comparable period last year. The operating expenses as a percentage of
operating revenues for this activity increased from 66.6% in the first three
quarters of 1999 to 73.2% in the first three quarters of 2000; operating
expenses as a percentage of operating revenues on the 14 same-hotels increased
from 71.5% in the first three quarters of 1999 to 77.3% in the first three
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, complimentary food and
beverage, and security.
Franchising and management operating expenses increased by $13,000, or
2.6%, from third quarter 1999 to third quarter 2000, and by $233,000, or 13.9%
from the first three quarters of 1999 to the first three 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, dues and subscriptions, and hotel
inspection expenses. Construction and development costs in third
<PAGE> 17
quarter of this year were $2.2 million on the five third party construction
contracts in progress versus $3.8 million in third quarter 1999 on the three
third party construction contract in progress at that time. Construction and
development costs in the first three quarters of this year were $9.4 million on
the ten third party construction contracts in progress versus $4.4 million in
the first three quarters of 1999 on the three third party construction contract
in progress at that time. General and administrative expenses in the third
quarter of this year increased by $1,000, or 0.1%, from third quarter 1999,
while in the first three quarters of this year they decreased by $660,000, or
14.5%. These year-to-date decreases were due primarily to decreased professional
fees, travel expenses and telephone expenses.
Rent expense decreased by $3.8 million in third quarter this year from
last year's third quarter, due entirely to the elimination (beginning in the
third quarter of this year) of rent expense related to the Sumner Suites hotels
sold and leased back prior to the end of the second fiscal quarter of this year,
at which time the leasehold interests were sold. For the first three quarters of
this year, rent expense increased by $685,000 from the comparable period last
year. Rent expense for the Sumner Suites hotels sold and leased back increased
by $730,000 through the date of the sale of the leasehold interests on July 9,
2000, over the first three quarters of 1999. Additionally, the ground lease on
the Shoney's Inn sold in June of this year was assumed by the buyer, reducing
the Company's rent expense in the first three quarters of 2000 from the
comparable period in 1999.
Depreciation and amortization expense decreased by $320,000, or 22.0%,
from third quarter 1999, and for the first three quarters, decreased by $1.0
million, or 18.1% 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 third quarter of this year and the first three
quarters of this year from the comparable periods in 1999. Interest expense in
the third quarter of this year decreased by $340,000, or 13.5%, from third
quarter last year, while interest income decreased by $34,000, or 2.1%, from
third quarter 1999, for a decrease of $305,000 in net interest expense. Interest
expense in the first three quarters of this year decreased by $1.2 million, or
12.6%, from the first three quarters of last year, while interest income
increased by $211,000, or 4.5%, from the first three quarters of 1999, for a net
decrease of $1.4 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 Company has also continued to
repurchase its public debt in the open market and in privately negotiated
transactions, reducing its interest expense (see Liquidity and Capital Resources
discussion below).
The gain on sale of property and leasehold interests in the first three
quarters of this year was $4.7 million, including 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
<PAGE> 18
and leased back, at which time the gain had been deferred and was being
amortized over the lease term. Additionally, a hotel was sold in second quarter
at a gain of $755,000 and $299,000 was 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 three 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 increased by $916,000 from third quarter 1999 to third
quarter 2000, and by $743,000 from the first three quarters of 1999 to the first
three quarters of 2000. Most of the increases in both third quarter and the
three quarters was due to increased rental income due to the lease of three
hotels to Prime effective July 9, 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 three quarters of 1999 to $41,000 in
the first three 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 provided by operating activities were $1.9
million in the first three quarters of 2000, compared with $8.2 million used in
operating activities in the first three quarters of 1999.
The Company's cash flows provided by investing activities were $31.8
million in the first three quarters of 2000, compared with $51.8 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 $3.8 million in the first three quarters of 2000 and $17.7 million in the
first three quarters of 1999. Proceeds from the sale of property and leasehold
interests were $38.6 million in the first three quarters of 2000 versus $65.3
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 $27.2 million in the first
three quarters of 2000 compared with $22.9 million in the first three quarters
of 1999. Repayments, net of borrowings, on long-term debt and capitalized lease
obligations were $26.0 million in the first three quarters of 2000 versus $12.3
million in the first three quarters of 1999. The repayments in the first three
quarters of 2000 include $28.9 million of long-term debt repurchased in the open
market or in privately negotiated transactions. In the first three quarters of
2000, the Company repurchased 124,000 shares of its common stock for $538,000;
in the first three quarters of 1999, the Company repurchased 1,792,000 shares
<PAGE> 19
of its common stock for $9.9 million pursuant to a plan to repurchase up to
$20.0 million of the Company's outstanding common stock.
The Company established a three-year credit facility with a bank group
effective August 27, 1999. The 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 October 1, 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 October 1, 2000, was $11.9 million. $3.1 million is currently
used 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 October 1, 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 three quarters of 1999) and none in the first three quarters
of 2000. As of the end of the third 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. There are no plans to develop or operate
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 Company's discretion. No time limit has been placed on the
duration of the stock
<PAGE> 20
repurchase plan, and the Company may discontinue the plan at any time. As of the
end of the third fiscal quarter of 2000, approximately 3.0 million shares had
been repurchased at a cost of $17.7 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, 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 third fiscal quarter ended October 1, 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 has now been dismissed
with prejudice.
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 has now been dismissed with prejudice.
ShoLodge Franchise Systems, Inc. v. Crossville Motel Associates, Inc.,
et al., Case No. 00-2717-II, Chancery Court for Davidson County,
Tennessee. ShoLodge filed this action on August 30, 2000, to recover
outstanding and past due royalty and other fees from a franchisee,
Crossville Motel Associates, Inc., and its principal, Stephen
Roberson. On October 17, 2000, these defendants filed a counterclaim
against ShoLodge seeking damages in the amount of $1,000,000 for
alleged misrepresentations, breach of contract, and violation of
Tennessee Consumer Protection Act. The defendants also seek to have
any damages awarded trebled under the Tennessee Consumer Protection
Act. ShoLodge has not yet filed an answer to the counterclaim, but it
intends to deny the material allegations in the counterclaim and
defend the claims vigorously. A trial date has not yet been scheduled.
ShoLodge Franchise Systems, Inc. v. Franklin Hospitality, Ltd., et
al., U.S. District Court for the Middle District of Tennessee, Case
No. 3-99-0787. On October 2, 2000, the parties reached a settlement in
the case, pursuant to which the defendants agreed to pay ShoLodge
$100,000. The parties are currently in the process of documenting the
settlement, and if the settlement is consummated, the litigation will
be dismissed with prejudice.
Paul Senior, on behalf of himself and all others similarly situated,
v. ShoLodge, Inc., Leon Moore, Michael A. Corbett and Bob Marlowe,
Chancery Court for Sumner County, Tennessee, No. 98C-136. The parties
reached a settlement of this litigation and the Gale litigation
(discussed in the following paragraph) on December 15, 1999. Pursuant
to the terms of the settlement, the Company agreed to pay $100,000 and
agreed to redeem up to $675,000 of its debt securities at seventy-five
percent (75%) of par value or the purchase price of the security,
whichever is less. The Company's insurance carrier also agreed to
contribute $1,250,000 toward the settlement. On August 16, 2000, the
trial court approved the settlement and issued an Order dismissing
this action with prejudice.
Stanley Gale, on behalf of himself and all others similarly situated,
v. ShoLodge, Inc., Leon Moore and Bob Marlowe, Chancery Court for
Sumner County, Tennessee, No. 98C-208. As discussed under the Senior
action in the preceding paragraph, the
<PAGE> 22
parties have reached a settlement of this case, and the Court has now
dismissed this action with prejudice.
No material developments occurred during the third quarter ended
October 1, 2000 with respect to any other pending litigation.
Reference is made to Forms 10-Q for first fiscal quarter ended April
16, 2000, and second fiscal quarter ended July 9, 2000.
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits -
10.1 Amended and Restated License Agreement entered into
September 27, 2000, by and between Shoney's, Inc.,
ShoLodge Franchise Systems, Inc. and the Registrant.
27 Financial Data Schedule for Quarter Ended October
1, 2000
6(b) Reports on Form 8-K
A Form 8-K was filed on July 24, 2000, relating to the
completion of a transaction on July 9, 2000, with Prime
Hospitality Corp. involving all of the Company's Sumner
Suites hotels.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ShoLodge, Inc.
Date: November 14, 2000 S/ Leon Moore
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Leon Moore
President, Chief Executive Officer,
Principal Executive Officer, Director
Date: November 14, 2000 S/ Bob Marlowe
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Bob Marlowe
Secretary, Treasurer, Chief
Accounting Officer, Principal
Accounting Officer, Chief Financial
Officer, Director
