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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1999 COMMISSION FILE NUMBER 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant on March 17, 2000, was approximately $10,400,000. The market value
calculation was determined using the last sale price of registrant's common
stock on March 17, 2000, as reported on The Nasdaq Stock Market, and assumes
that all shares beneficially held by executive officers and directors of the
registrant are shares owned by "affiliates," a status which each of the officers
and directors individually disclaims.
Shares of common stock, no par value, outstanding on March 17, 2000, were
5,307,578.
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DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FROM WHICH PORTIONS ARE
PART OF FORM 10-K INCORPORATED BY REFERENCE
- ------------------------------------------------------
Part III Proxy Statement for registrant's annual meeting
of shareholders to be held during the second
quarter of fiscal 2000.
Part IV Registration Statement on Form S-1, Commission
File No. 33-44504.
Part IV Registration Statement on Form S-3, Commission
File No. 33-77910.
Part IV Registration Statement on Form S-8, filed with
the Commission on June 24, 1997
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company currently develops, owns and operates all-suites hotels
under the Sumner Suites brand name and is an operator and the exclusive
franchisor of Shoney's Inns. The Company's 27 Sumner Suites are mid-scale,
all-suites hotels located in Arizona, Colorado, Florida, Georgia, Indiana,
Kansas, Missouri, New Mexico, North Carolina, Ohio, Tennessee, Texas and
Virginia. The Shoney's Inn lodging system consists of 76 Shoney's Inns
containing approximately 7,300 rooms of which 17 containing approximately 1,900
rooms are owned or managed by the Company. Shoney's Inns are currently located
in 21 states with a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and,
to a lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $75 and $100 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites contains from 110 to
135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room,
and offers a deluxe continental breakfast.
From 1990 until 1995, the Company developed and managed 12 mid-scale,
all-suites hotels under the AmeriSuites brand name before selling its interests
in those hotels in March 1995. The Sumner Suites concept was launched in 1995
with three hotels. In March 2000 the Company entered into an agreement to sell
all of its interests in its Sumner Suites hotels, as described under "Pending
Prime Transaction."
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.
The Company was incorporated under the laws of the State of Tennessee in
1976.
GROWTH STRATEGY
The Company's strategy is to increase cash flow and earnings by(i)
increasing REVPAR in Company-owned inns while maintaining the Company's
attractive room price/value relationships and controlling operating costs,(ii)
expanding the Shoney's Inn system through the addition of new franchised units
and (iii) utilizing the Company's experience in developing all-suite hotels to
construct and develop hotels for others.
Internal Growth. The Company seeks to increase cash flow and earnings
from its existing hotels through increases in REVPAR while controlling operating
costs. The Company seeks to increase REVPAR by increasing average daily room
rates and supporting or increasing occupancy rates through targeted marketing
and advertising strategies, employing promotional activities in local markets
and capitalizing on the Company's proprietary central reservation system. In
addition, the Company is committed to sustaining the quality of its properties
through an ongoing renovation and maintenance program in order to increase
REVPAR. The Company seeks to minimize costs throughout its operations primarily
through the use of an in-house development and construction team and increased
economies of scale in purchasing.
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Expansion of Shoney's Inn System. In the recent past the Company has
focused on expanding the Shoney's Inn system principally through the addition of
new franchises. Six franchised Shoney's Inns were opened in fiscal 1999, three
hotels left the Shoney's Inn system and currently three franchised Shoney's Inns
are under construction. As of 1999 fiscal year-end, there were 76 Shoney's Inns
(of which 15 are Company owned) with a total of 7,307 rooms. The Company targets
existing Shoney's Inn franchises, other hotel brand developers and contacts
within the industry as potential franchisees for additional Shoney's Inns.
Development of Additional All-Suite Hotels. The Company has slowed its
aggressive schedule of developing inns for its own account in the recent past.
Currently, no Sumner Suites are under construction, and the Company has entered
into an agreement to sell its Sumner Suite hotels and two development sites that
it owns to Prime Hospitality Corp. and to develop AmeriSuites hotels on the two
sites for Prime. See "Pending Prime Transaction" below. The Company is
developing and constructing all-suite hotels for third parties and expects to
continue to do so in the immediate future.
In addition to the strategies described above, the Company may from time
to time investigate various alternatives to maximize shareholder value. These
alternatives could include, without limitation, a continuation of the
development and operation of Sumner Suites, the continued franchising and
operation of Shoney's Inns, a sale of the remaining Shoney's Inns, negotiating
new credit arrangements, an increase in 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.
PENDING PRIME TRANSACTION
On March 16, 2000 the Company entered into a Sale and Purchase Agreement
with Prime Hospitality Corp. ("Prime") that contemplates a series of
transactions in which the Company will (i) sell to Prime all of the Company's
interest in 20 Sumner Suites hotels currently leased from HPT Suite Properties
Trust and operated by the Company, (ii) sell to HPT Suite Properties Trust,
which would then lease to Prime, all of the Company's interest in four Sumner
Suites hotels currently owned and operated by ShoLodge, (iii) lease directly to
Prime the remaining three Sumner Suites hotels currently owned and operated by
the Company on terms similar to the existing lease agreement between the Company
and HPT Suite Properties Trust and (iv) sell to Prime two undeveloped hotel
sites. In addition, the agreement contemplates that Prime will engage the
Company to construct an AmeriSuites hotel on each of the two undeveloped sites
being purchased from the Company and to provide other services to Prime.
The Company expects to receive at closing approximately $54 million in
cash and securities consisting of outstanding debt instruments of the Company
currently held by Prime or an affiliate, future minimum annual rental payments
of approximately $3 million, and additional future annual revenues for services
to be provided to Prime amounting to approximately $4 million per year. As a
condition to the transfer of the assets to Prime, the Company will receive a
release of its $14 million in cash currently securing its lease guaranty with
HPT Suite Properties Trust; this is included in the $54 million to be received
at closing.
The Company will grant Prime the right to continue operating the hotels
as "Sumner Suites" for up to nine months after closing. As part of the
transaction the Company will agree not to operate another all-suites hotel in
competition with Prime within a defined geographic radius of each of the hotels
being sold. The radius is the same that currently exists with respect to the
Sumner Suites currently leased from HPT Suite Properties Trust and three miles
for each of the hotels in Texas. This restriction will not prevent the Company
from developing hotels for others in the restricted area or operating or
franchising any "Shoney's" brand inn in the restricted area.
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The closing of the pending transaction is subject to a number of
conditions including Prime's satisfaction with its due diligence review of the
hotels and the approval of HPT Suites Properties Trust. It is possible that the
parties will not be able to successfully complete the transaction or that the
terms of the final transaction will vary, perhaps materially, from those
described herein.
SUMNER SUITES CONCEPT
Sumner Suites are all-suites hotels positioned in the mid-scale segment
to appeal primarily to business travelers and, to a lesser extent, leisure
travelers. The Sumner Suites hotels are generally located in mid-sized to larger
metropolitan markets near business and leisure travel destinations such as
business parks, office buildings, local attractions and restaurants. The current
daily room rates typically range from $75 to $100; however, room rates vary
depending upon a number of factors, including location and competition. For
fiscal 1999, the average daily room rate for the Sumner Suites hotels was
$77.54.
The Sumner Suites prototype hotel is a five story, interior corridor,
stucco building containing 110 to 135 rooms. The bedroom in each suite is
furnished with either a king size bed or two double beds, a night stand, vanity,
and closet area, and the sitting area contains a sleeper sofa, a desk, chairs
and reading lamps. A kitchenette area includes a sink, refrigerator, microwave
oven and cabinets that contain kitchen and cooking utensils. Additional room
amenities include new 26 inch remote control color televisions with premium
channel selections, in room coffee makers and dual line telephones for computer
connections.
The lobby area of each Sumner Suites hotel features marble floors and
seating areas with numerous couches, tables and chairs allowing for informal
meeting and lounge space. Adjacent to the seating area is a combination buffet
and beverage service area. Each Sumner Suites is equipped with large meeting
rooms that can be sectioned to meet individual guests' or groups' needs. An
exercise facility and swimming pool are additional features. Guests at the
Sumner Suites are offered a wide range of amenities and services, such as deluxe
continental breakfast, fitness center, free unlimited local telephone calls, on
premises coin operated laundry, same-day laundry and dry cleaning, fax services,
24-hour front desk message service and free parking. Typically, the Sumner
Suites are located near free standing, full service restaurants. The Company
believes that Sumner Suites provides its guests with quality accommodations at
an attractive price/value relationship within the all-suites segment.
SHONEY'S INNS CONCEPT
Shoney's Inns are limited-service hotels positioned in the upper economy
segment to appeal to both business and leisure travelers and are located in 21
states in markets ranging from small towns to larger metropolitan areas.
Shoney's Inns are generally located in proximity to interstate highways, major
streets and highways providing convenient access to business establishments.
Most of the Shoney's Inns are located adjacent or in close proximity to a
Shoney's restaurant. Management believes that its strategy of locating its
Shoney's Inns in close proximity to free-standing Shoney's restaurants gives it
a competitive advantage over many other limited-service lodging chains. Daily
room rates at Shoney's Inns range from $40 to $65 and vary depending upon a
number of factors, including location, competition and type of room. For fiscal
1999, the average daily room rate for Company-owned Shoney's Inns was $50.13.
Historically, the typical Shoney's Inn has been a two story, exterior
corridor, brick veneer building with plate glass fronts, containing 100 to 125
rooms. New prototypes for Shoney's Inns include a four story, interior corridor,
brick or stucco building containing 100 to 120 rooms as well as smaller
prototype buildings containing 80 rooms. In some cases franchisees construct
smaller Shoney's Inns. Each room is
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professionally decorated and is generally furnished with two double beds, a
dresser, table and chairs and a color television.
Amenities featured at most Shoney's Inns include swimming pools, meeting
rooms, facsimile machine service and continental breakfast. The Company believes
that Shoney's Inns provides its guests with quality accommodations at an
attractive price/value relationship within the upper economy segment.
HOTEL CONSTRUCTION AND DEVELOPMENT
The Company's construction subsidiary has a full time staff who manage,
supervise, control and perform the construction of the hotels being developed by
the Company. Subcontractors are employed by the Company for most of the major
construction components of a new hotel, including plumbing, electrical, and
mechanical subcontracts. The Company intends to continue to build hotels both
for its own account and for others. When building hotels for its own account,
the Company believes that its in-house capabilities provide advantages in
controlling costs, quality, and development schedule as compared to using
independent contractors. The Company believes that its construction experience
and its relationship with many subcontractors will facilitate the effective
development of additional hotels.
The Company devotes significant resources to the identification and
evaluation of potential sites for hotels. In the past, the Company has generally
targeted mid-sized to larger metropolitan markets for locating Sumner Suites
hotels. The Company has typically targeted markets with populations of 500,000
or more that have high levels of business development and multiple sources of
room demand. The site selection process focuses on the competitive environment,
including room and occupancy rates and proximity to business parks, office
buildings, and other demand generators. The Company's franchisees focus on sites
for their Shoney's Inns in proximity to interstate highway access roads and
major streets and highways providing convenient access to local business
establishments and tourist attractions.
Management believes that the development cost of a new Sumner Suites
hotel is approximately $65,000 to $70,000 per suite, depending on the location
of the hotel, size of the hotel (number of suites), cost of land, local zoning
and permitting costs, construction period and local building costs which are
affected by the cost of building materials and construction labor. Based on the
Company's experience to date, the capital investment (including land and
construction period interest) for a typical 135 suite Sumner Suites is
approximately $9.0 million (approximately $66,000 per suite).
The construction phase of a hotel generally requires six months after
the site and all approvals and permits have been obtained. The Company's
experience in selection and acquisition of sites has varied and generally
averages six months. The approval and permitting phase can occur simultaneously
with site acquisition and generally requires three months. The entire
development process generally ranges from 10 to 12 months but may take longer.
SALES AND MARKETING
The Company directs marketing efforts on behalf of its Company-owned
inns primarily to business travelers, whom management believes have represented
the largest segment of its customers in recent years.
Sumner Suites. Marketing of the Sumner Suites brand has primarily
targeted the business traveler through a variety of efforts. Initially,
pre-opening sales calls are made by the general manager and director of sales of
each property in the local market area during the 90 days prior to opening. In
addition, advertisements are placed in the Hotel Travel Index, a comprehensive
listing of hotels worldwide used by travel agents for booking clients into
destination cities. Advertising is also placed in local
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business publications, direct mail to targeted business travel and a
comprehensive on-line directory on the worldwide web at www.sumnersuites.com.
The Sumner Suites toll-free reservation number, 1-800-74-SUITE, is promoted to
travel agents through advertising and direct mailings. The Company believes that
approximately 31% of all Sumner Suites room sales are booked through the
Company's reservation center.
Shoney's Inns. All Shoney's Inns participate in the "Sho Business"
frequent traveler program, entitling members to receive the lowest available
corporate rate, complimentary coffee and newspaper, free room upgrades, express
check-in and other privileges upon presentation of a membership card.
Approximately 13% of the rooms booked through INNLINK for Shoney's Inns during
fiscal 1999 have been reserved by guests who are members of the Sho Business
program. Historically, the Company has also marketed its hotels directly to
businesses whose employees travel in the southeastern United States.
Additionally, the Company attempts to take advantage of the Shoney's
brand name recognition in the over-50 age group and in the package tour market
through advertisement in publications targeting such readers and by encouraging
franchisee participation in promotional discounts for frequent customers over-50
and for tour operators. The Company's program for the over-50 age group is tied
to AARP membership and entitles its members to receive special room rate
discounts, complimentary coffee and newspaper and other benefits. The Shoney's
Inn system also advertises in Shoney's restaurants, and individual Shoney's Inns
are encouraged to participate in joint mailings and other promotions with local
Shoney's restaurants.
The Company annually publishes a Shoney's Inn system directory showing,
for each Inn, its address and telephone number, location as indicated on a
locator map, a brief description of the facilities, the services and amenities
provided and other relevant information. These directories are distributed in
each Shoney's Inn and state travel centers and are provided directly to travel
agents, sponsors of group tours, corporate travel departments and other selected
potential customers. The Company also provides a comprehensive on-line directory
on the worldwide web at www.shoneysinns.com.
Many properties have a full-time director of sales whose
responsibilities include local marketing and direct and group sales. At the
corporate level, a Director of Marketing oversees national marketing plans and
provides marketing support for each corporate and franchised property. The
Director of Marketing also oversees management of the Shoney's Inn national
advertising fund, into which all Shoney's Inns pay 1% of revenue to support
national marketing efforts such as the annual system directory and national
advertising (e.g. USA Today, Reader's Digest, Compass Travel Directory inserts).
Travel Agents. The Company has a policy of paying travel agents a
commission, standard in the hotel industry, on all revenue booked by them. The
Company, with respect to all Sumner Suites and both owned and franchised
Shoney's Inns, has joined the TACS-Lite Program administered by Citibank.
TACS-Lite (Travel Agent Commission Settlement) is a program where each hotel
property reports to the Company each week by fax (or by electronic transmission
if capable) all of its room sales generated through travel agents. The Company
in turn forwards this information to Citibank which automatically generates
checks each month to travel agents across the country for the total commissions
earned. The Company believes that travel agents are more likely to book guests
into a Shoney's Inn or Sumner Suites knowing that their commissions will be paid
by Citibank without the travel agent having to go to the trouble and expense of
billing each separate location.
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LODGING OPERATIONS
Hotel Management. Overall hotel operations are the responsibility of the
Vice President and Director of Hotel Operations. Shoney's Inns and Sumner Suites
are further managed by regional managers, who directly supervise the general
manager of each property. The general manager of each Shoney's Inns or Sumner
Suites is fully responsible for day-to-day operations and is compensated by
salary and bonus systems which reward revenue and operating margin performance.
Each general manager, in conjunction with senior management, develops the
property's operating budget and is held accountable for meeting the goals and
objectives of the hotel.
Reservation System. The Company's proprietary central reservation
system, INNLINK, provides important support for the room reservation process for
both Sumner Suites and Shoney's Inns and is marketed to other chains as well.
Other chains that contract with the Company for the service include Country
Hearth Inns, Key West Inns and Wilson Inns & Hotels. INNLINK operates 24 hours a
day, 7 days a week. The INNLINK system may be accessed by individual travelers
as well as by travel agents, tour and group booking agents at 1-800-222-2222 for
Shoney's Inns and 1-800-74-SUITE for Sumner Suites. Electronically, INNLINK is
accessed through numerous global distribution systems (e.g., SABRE Travel
Information Network, Galileo International, Amadeus and WorldSpan). The
reservation system includes specially designed hotel reservation software, with
adequate capacity, and state of the art hardware and telecommunications devices.
The Company believes that approximately 31% and 13% of room sales for Sumner
Suites and Shoney's Inns, respectively, are made through INNLINK.
Quality Control. To ensure quality and consistency, the Company
regularly inspects each of its company owned and/or operated hotels and each
Shoney's Inn in the Shoney's Inn system for compliance with facility and service
standards. Generally, in addition to its ongoing refurbishment activities, the
Company fully renovates each of the Company-owned Shoney's Inns after
approximately seven years of operation and expects a similar renovation schedule
for Sumner Suites.
Training. The Company utilizes the services of an "opening team" to
assist with hiring and training new staff and opening new Company-owned hotels.
The opening team trains local hotel personnel in front desk operations,
operational policies, hotel accounting and cash handling procedures,
record-keeping, housekeeping and laundry, maintenance and repair, marketing,
personnel management, purchasing, quality assurance and sales. Sales training
includes a team of direct sales personnel that assists the local staff in the
actual pre-selling of rooms. An opening team generally remains on site for one
to four weeks depending on the prior experience of the local general manager.
FRANCHISE OPERATIONS
Franchise Sales. The Company markets the Shoney's Inn franchise
principally to existing Shoney's Inn franchisees, other hotel brand developers
and other prospects known through management's contacts in the lodging industry.
The Company employs two full-time licensed franchise salesmen. The Company also
markets franchises through advertisements in trade publications and
participation in trade shows and franchising conventions.
Management believes that the Company attracts potential new franchisees
by offering a comparable level of franchisee support services at a lower price
than its competitors. Management periodically monitors the initial fee, royalty
fee, advertising fee, reservation fee and other charges imposed by other
franchisors with whom the Company competes and believes that the fees charged by
the Company are competitive and, in most cases, lower than such other
franchisors.
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Fees. Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, a potential franchisee pays a $2,500 application fee.
Upon approval of the application, the Company and the franchisee enter into a
20-year license agreement, and the franchisee generally pays a license fee equal
to the greater of $250 per room or $15,000. The application fee is applied
against the license fee.
Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, the franchisee pays monthly royalties of 3.5% of the
licensed hotel's gross sales during the term of the license agreement.
Additionally, a marketing cooperative fee of 1% of gross sales and a fee for
participation in the Shoney's Inn central reservation system of 1% of gross
sales are charged.
Franchisee Services. Management believes that the support the Company
offers to franchisees is a significant factor in determining its success as a
franchisor and that the Company's successful record as a Shoney's Inn builder,
owner and operator evidences valuable experience and abilities which can enhance
the franchisee support function. As franchisor, the Company draws on its own
operational experience to assist franchisees.
Once a Shoney's Inn is constructed, the Company requires the franchisee
to send the site general manager to a management training class conducted by the
Company covering topics including human resources, sales and marketing, yield
management and cost controls. Currently the Company does not charge for the
training program but reserves the right to do so in the future.
The Company inspects every Shoney's Inn at least three times a year, at
least two of which are unannounced, through its Quality Standards and Compliance
program, using trained field representatives. The Company encourages franchisees
to renovate each of the Shoney's Inns after approximately seven years of
operations, in the same manner that the Company renovates its own hotels.
The Company offers to provide management services to Shoney's Inn
franchisees pursuant to contractual arrangements. The Company's fee for these
services is a percentage of the managed hotel's gross revenues. Currently, the
Company manages two hotels under contract arrangement.
LICENSE AGREEMENT WITH SHONEY'S
Under the License Agreement with Shoney's, Inc., the Company acts as
exclusive franchisor of Shoney's Inns and has certain rights to use and to
license the use of the service marks "Shoney's Inn" and "Shoney's Inn & Suites"
in connection with lodging operations. Under the License Agreement, Shoney's
retains certain rights, including the right to approve the styles, shapes,
colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks
are displayed, the nature and extent of on-site food and beverage service and
the terms of franchise agreements (other than the maximum fees and other
financial terms). Further, Shoney's retains the right to terminate the License
Agreement under limited circumstances, including the bankruptcy of the Company,
the failure to comply with the terms of the License Agreement and the failure to
desist from conduct likely to impair Shoney's goodwill and reputation.
Prior to October 25, 1996, the License Agreement entitled Shoney's to
receive a portion of the franchise fees collected by the Company equal, in
substantially all cases, to 1.5% of 52 Shoney's Inns' gross revenues through
October 1999 and 0.5% of the remaining and all future Shoney's Inns' gross
revenues for the first ten years of their operation. Shoney's right to receive
such fees was terminated on October 25, 1996.
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LODGING INDUSTRY
Smith Travel Research divides lodging chains into various segments based
on price. Shoney's Inns are included in the economy segment. Sumner Suites are
included in the mid-scale (without food and beverage) segment, although because
the average daily room rate at Sumner Suites exceeds $75.00, the Sumner Suites
could be included in the upscale segment.
The following tables illustrate certain comparative information
regarding REVPAR and its components for the years indicated:
<TABLE>
<CAPTION>
AVERAGE AVERAGE DAILY
REVPAR OCCUPANCY RATE ROOM RATE (1)
------ -------------- -------------
1997 1998 1999 1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Industry-wide $48.68 $50.32 $51.42 64.6% 64.0% 63.3% $75.30 $78.62 $81.27
Economy segment 25.17 31.25 28.77 58.1 58.6 58.1 51.34 53.33 49.52
Mid-scale (w/o food and
beverage) segment 39.77 41.09 41.81 67.5 66.6 65.1 58.94 61.69 64.22
Upscale segment 63.97 61.65 66.38 71.9 67.4 69.6 88.94 91.47 95.37
All Shoney's Inns 28.00 27.96 27.23 59.2 57.3 54.1 47.30 48.80 50.36
Company-owned Shoney's
Inns 30.83 29.98 24.24 59.2 57.7 48.3 52.07 51.95 50.13
All Sumner Suites 41.66 42.89 43.63 57.9 55.4 56.3 71.94 77.43 77.54
</TABLE>
(1) Room revenues divided by the number of rented rooms.
Source: Smith Travel Research, Standard Historical Trend Report for years
ended 1997, 1998 and 1999, for industry wide, economy, mid-scale
(w/o food and beverage) and upscale lodging chains, and the
Company's internal data for all Shoney's Inns and Sumner Suites
statistics.
COMPETITION
The lodging industry is highly competitive. In franchising the Shoney's
Inn system and managing its own lodging facilities, the Company encounters
competition from numerous lodging companies, many of which have greater industry
experience, name recognition, and financial and marketing resources than the
Company. While the actual competition for individual lodging facilities varies
by location, the primary competition for Shoney's Inns includes lodging chains
such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns
and Travelodges. The Company's Sumner Suites hotels experience competition from
chains such as Embassy Suites, Hampton Inns, Residence Inn, Courtyard by
Marriott, Quality Suites, AmeriSuites, Comfort Suites, and Springhill Suites.
Each of the Company's hotels is located in a developed area that includes
competing lodging facilities, and the Company expects that most of its future
hotels which it constructs will be located in similar areas. Management believes
that the principal competitive factors in its lodging operations are room rates,
quality of accommodations, name recognition, supply and availability of
alternative lodging facilities, service levels, reputation, reservation systems
and convenience of location. In its franchising operations, the principal
competitive factors are fee structure and support services. Management further
believes that the Company is presently competitive in all these respects.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws,
regulations and administrative practices affecting its business. The Company's
lodging operations must comply with provisions relating to health, sanitation
and safety standards, equal
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employment, minimum wages, building codes and zoning ordinances, and licenses to
operate lodging facilities. The sale of franchises is regulated by various state
laws as well as by the Federal Trade Commission ("FTC") Rules on Franchising.
The FTC requires that franchisors make extensive disclosure to prospective
franchisees but does not require registration. A number of states require
registration or disclosure in connection with franchise offers and sales. In
addition, several states have "franchise relationship laws" that limit the
ability of franchisors to terminate franchise agreements or to withhold consent
to the renewal or transfer of these agreements.
Federal and state environmental regulations are not expected to have a
material effect on the Company's operations, but more stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could delay construction of lodging facilities and add to
their cost. A significant portion of the Company's personnel are paid at rates
related to federal minimum wages and, accordingly, increases in the minimum wage
could adversely affect the Company's operating results.
The Americans with Disabilities Act (the "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. The ADA
became effective as to public accommodations in January 1992 and as to
employment in July 1992. The Company currently designs its lodging facilities to
be accessible to the disabled and believes that it is in substantial compliance
with all current applicable regulations relating to accommodations for the
disabled. The Company intends to comply with future regulations relating to
accommodating the needs of the disabled, and the Company does not currently
anticipate that such compliance will require the Company to expend substantial
funds.
SERVICE MARKS
The Company has the right to use the "Shoney's Inn" and "Shoney's Inn &
Suites" service marks in its lodging operations under its License Agreement with
Shoney's (See "License Agreement with Shoney's" above). The "Shoney's Inn" and
"Shoney's Inn & Suites" marks may not be used in certain limited areas in
southern and western Virginia and in northeastern Tennessee; however, the
Company does not believe that these limitations are material to its present
business or its expansion strategy. The Company believes that its ability to use
the Shoney's marks is material to its business. The Company has registered the
service mark "INNLINK," which it uses in connection with its reservation system,
with the United States Patent and Trademark Office. The Company has registered
the service mark "Sumner Suites" with the United States Patent and Trademark
Office.
INSURANCE
The Company maintains general liability insurance and property insurance
for all its locations and operations, as well as specialized coverage, including
guest property and liquor liability insurance, in connection with its lodging
business. Generally, the costs of insurance coverage and the availability of
liability insurance coverage have varied widely in recent years. While the
Company believes that its present insurance coverage is adequate for its current
operations, there can be no assurance that the coverage is sufficient for all
future claims or will continue to be available in adequate amounts or at a
reasonable cost.
EMPLOYEES
As of December 26, 1999 the Company had approximately 1,500 employees,
including approximately 115 in the Company's corporate headquarters. The
company's employees are not represented by a labor union. The Company considers
its relationships with employees to be good.
- 9 -
<PAGE> 12
ITEM 2. PROPERTIES.
The Company's corporate headquarters, owned by the Company, is located in
Hendersonville, Tennessee and contains approximately 42,000 square feet of space
including storage and food services. Management believes that its corporate
headquarters building contains sufficient space to accommodate the Company's
currently anticipated needs.
Thirteen of the fifteen Company-owned Shoney's Inns and nine of the 24
Company-owned or operated Sumner Suites are located on sites owned by the
Company either directly or through subsidiaries. The remaining hotels are
located on sites that are leased pursuant to long-term ground leases or through
sale-leaseback arrangements with a real estate investment trust involving both
the land and improvements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to litigation from time to time in the ordinary
course of its business. The Company is not aware of any material legal action
pending or threatened against it, except for the following:
Tri-State Inns, Inc. and Motels of America, Inc. v. ShoLodge Franchise
Systems, Inc., Superior Court of Liberty County, Georgia, Civil Action File No.
97-V-00591. In this action, Tri-State Inns, Inc., the franchisee of the Shoney's
Inn located in Hinesville, Georgia, seeks to be discharged, relieved and excused
of any future performance under the License Agreement relating to such Shoney's
Inn, and Motels of America, Inc. seeks to be discharged, relieved and excused of
any further performance under a Guaranty Agreement whereby the obligations of
Tri-State Inns, Inc. under such License Agreement were guaranteed by Motels of
America, Inc., or in the alternative compensatory damages, based on theories of
alleged breach of contractual obligations and implied warranties of good faith
and fair dealing, alleged fraudulent inducement based on alleged
misrepresentations and alleged failure to make material disclosures of fact,
alleged promissory estoppel and alleged breach of fiduciary duty. In addition,
the plaintiffs seek a declaratory judgment concerning the provision of the
License Agreement which specifies the damages due to the Company upon
termination of the License Agreement. The Company removed this action to the
U.S. District Court for the Southern District of Georgia, and the case has since
been transferred to the U.S. District Court for the Middle District of Tennessee
and redocketed as Case No. 3-98-0028. Subsequent to the removal, the plaintiffs
amended their complaint to assert the same allegations with regard to
plaintiffs' thirteen (13) other license agreements with the Company. On March
18, 1998, the plaintiffs filed a motion for summary judgment seeking to
invalidate the non-competition and stipulated damages provisions set forth in
the license agreements. On August 6, 1998, the court denied the plaintiffs'
motion. The case was set for trial on September 7, 1999. Prior to trial,
however, the parties reached a settlement of all claims pursuant to which the
plaintiffs agreed to pay the Company a total of $1,175,000 in exchange for the
parties' execution of mutual releases and a dismissal of all claims raised in
the action. The case has now been 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. In this action, filed on April 29,
1998, the plaintiff, Paul Senior, a shareholder of the Company, claims that the
Company and three of its senior officers, Leon Moore, Michael A. Corbett and Bob
Marlowe, violated the Tennessee Securities Act of 1980 by intentionally or
recklessly disseminating materially false and misleading information concerning
the financial condition of the Company during the first three quarters of 1997.
The action seeks to certify as a class of plaintiffs all persons who purchased
any stock in the Company from May 2, 1997 through March 9, 1998. The Complaint
seeks an unspecified amount of damages and unspecified injunctive relief. On
June 30, 1998, the Court granted the Company's motion to stay this action
pending
- 10 -
<PAGE> 13
the resolution of a similar federal court action, which has since been
dismissed, on the basis that both actions sought the same relief on behalf of
the same class of plaintiffs. The plaintiff has now voluntarily dismissed the
claims asserted against Michael A. Corbett. The Company filed a motion to
dismiss the complaint, which was denied, but the Court granted the Company leave
to pursue an interlocutory appeal of the Court's denial of the Company's motion
to dismiss. The Company filed an Application for Permission to Appeal with the
Court of Appeals on October 12, 1998, which the Court of Appeals granted. On
January 29, 1999, the Company filed its appellate brief. Oral argument before
the Court of Appeals occurred on May 7, 1999, but the Court of Appeals has yet
to issue a ruling. The case is currently scheduled to be tried on April 24,
2000. The parties have, however, reached a settlement of this action (and the
Gale action discussed below) which, if approved by the Court, would result in
the dismissal of both the Senior and Gale actions with prejudice. Pursuant to
the terms of the settlement, the Company will pay $100,000 and will agree 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 has also agreed to contribute $1,250,000 toward the
settlement. It is expected that the Court will consider the fairness of the
settlement in May 2000. The settlement, if approved, will have no material
adverse impact on the Company.
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. In this action, filed on July 2, 1998, Stanley Gale, who
claims to have purchased certain senior subordinated notes issued by the Company
in September 1997, claims that the Company and two of its senior officers, Leon
Moore and Bob Marlowe, violated the Tennessee Securities Act of 1980 by
intentionally or recklessly disseminating materially false and misleading
information concerning the financial condition of the Company during the first
three quarters of 1997. The action seeks to certify as a class of plaintiffs all
persons who purchased the Company's debt securities from May 7, 1997 to March 8,
1998. The Complaint seeks an unspecified amount of damages and unspecified
injunctive relief. The Company moved to dismiss this action for failure to state
a claim, which motion was heard by the Court on September 11, 1998. The Court
denied the motion to dismiss, and the case has now been set for trial on April
24, 2000. As discussed supra in the Senior action, the parties have reached a
settlement of this case which, if approved by the Court, would result in the
dismissal of this action with prejudice. It is expected that the Court will
consider the fairness of the settlement in May 2000. The settlement, if
approved, will have no material adverse impact on the Company.
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 seeks $3,000,000
in compensatory damages and seeks 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 has appealed
the dismissal of the case to the Tennessee Court of Appeals. No date for
argument has been set in the Court of Appeals.
ShoLodge Franchise Systems, Inc. v. The William & Roxann Davis Company,
L.L.C., et al., U.S. District Court for the Middle District of Tennessee, Case
No. 3-99-0967. On October 12, 1999, the Company filed an action against The
William & Roxann Davis Company, L.L.C. and other parties arising out of a breach
of the License Agreement
- 11 -
<PAGE> 14
concerning the Shoney's Inn in Texarkana, Arkansas. On January 11, 2000, the
defendants filed a counterclaim against the Company claiming that the Company
should be precluded from enforcing the License Agreement because of certain
alleged misrepresentations made prior to the execution of the License Agreement,
because of certain alleged breaches of the License Agreement by the Company, and
because of the Company's alleged violation of the Arkansas Franchise Practices
Act. The Court held an initial case management conference in the case on January
19, 2000. The case has not yet been set for trial.
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
July 8, 1999, the Company instituted a lawsuit against Franklin Hospitality,
Ltd. and others in the Chancery Court for Davidson County, Tennessee, arising
out of the breach of the License Agreement for the Shoney's Inn Hotel in
Franklin, Tennessee. On August 16, 1999, the defendants removed the case to the
U.S. District Court for the Middle District of Tennessee and, on August 18,
1999, filed a counterclaim against the Company. The defendants claim that the
Company provided only partial and stale franchise offering disclosures to the
defendants prior to execution of the License Agreement and thereby violated 16
C.F.R. ss. 436.1. The defendants further claim that the Company misled them by
misrepresenting contributions received from the Company's reservation system.
The defendants still further claim that the Company breached the License
Agreement in a number of respects. The Company intends to defend the case
vigorously and has moved to have the counterclaim asserted against it dismissed
on a number of grounds, but as yet the Court has not yet ruled on the motion.
The case has not yet been scheduled for trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1999.
- 12 -
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market and is
quoted on The Nasdaq Stock Market ("NASDAQ") under the symbol "LODG." The prices
set forth below reflect the high and low sales prices for the Company's Common
Stock as reported by NASDAQ for the periods indicated.
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter $16 1/2 $7 7/8
Second Quarter 10 3/8 7 5/8
Third Quarter 10 3/8 3 3/8
Fourth Quarter 7 1/2 3 3/8
FISCAL 1999 HIGH LOW
----------- ---- ---
First Quarter 7 1/2 3 1/2
Second Quarter 5 13/16 4 5/16
Third Quarter 6 1/2 5 1/4
Fourth Quarter 6 3 7/8
FISCAL 2000 HIGH LOW
----------- ---- ---
First Quarter (through March 17, 2000) 5 1/16 3 15/32
</TABLE>
On March 17, 2000, the last reported sale price for the Company's Common
Stock as reported by NASDAQ was $3.75 per share. As of March 17, 2000, there
were approximately 54 holders of record of the Company's Common Stock and
approximately 1,100 beneficial owners.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings to finance future
development of its business, and does not therefore anticipate paying any cash
dividends in the foreseeable future. The Company's primary revolving credit
agreements prohibit the payment of dividends without the lender's consent.
The Company declared a five-to-four stock split of its Common Stock to be
effected as a 25% stock dividend which was payable on May 14, 1993 to those
shareholders of record on April 30, 1993. The Company declared a four-to-three
stock split of its Common Stock to be effected as a 33 1/3% stock dividend
payable on March 28, 1994 to the shareholders of record on March 14, 1994.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth on the following page as of and for
each of the five fiscal years in the period ended December 26, 1999 have been
derived from the Company's audited Consolidated Financial Statements. The
Consolidated Financial Statements for each of the three fiscal years and the
periods ended December 26, 1999, which have been audited by independent
auditors, are included elsewhere in this Report. The information set forth on
the following page should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Report.
- 13 -
<PAGE> 16
SHOLODGE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
DEC. 31, DEC. 29, DEC. 28, DEC. 27, DEC. 26,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
HOTEL $ 44,144 $ 57,528 $ 71,945 $ 69,240 $ 66,188
CONSTRUCTION AND DEVELOPMENT 24,041 1,665 0 81 11,234
FRANCHISING AND MANAGEMENT 6,217 4,290 3,164 3,119 4,152
SALE OF HOTELS 6,174 0 0 0 0
PROFITS NOT RECOGNIZED ON INSTALLMENT SALES (1,956) 0 0 0 0
--------- --------- --------- --------- ---------
TOTAL OPERATING REVENUES 78,620 63,483 75,109 72,440 81,574
COSTS AND EXPENSES:
OPERATING EXPENSES:
HOTEL 25,178 30,998 42,988 44,934 46,282
CONSTRUCTION AND DEVELOPMENT 10,096 1,200 0 71 9,826
FRANCHISING AND MANAGEMENT 2,861 3,255 2,301 2,393 2,420
COST OF HOTELS SOLD 4,218 0 0 0 0
--------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 42,353 35,453 45,289 47,398 58,528
--------- --------- --------- --------- ---------
GENERAL AND ADMINISTRATIVE 1,929 2,158 3,953 6,358 6,342
RENT EXPENSE 784 861 1,991 9,838 13,530
DEPRECIATION AND AMORTIZATION 5,272 7,863 10,376 8,012 7,101
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS 28,282 17,148 13,500 834 (3,927)
OTHER INCOME (EXPENSES):
INTEREST EXPENSE (6,222) (4,605) (11,298) (10,415) (12,136)
INTEREST INCOME 5,815 1,391 1,762 4,949 6,182
GAIN ON SALE OF PROPERTY 212 340 3,819 20,632 15,002
OTHER INCOME 553 1,219 837 441 843
--------- --------- --------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY
ITEMS, AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY 28,640 15,493 8,620 16,441 5,964
INCOME TAXES (10,529) (5,598) (2,259) (6,581) (1,909)
MINORITY INTEREST IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES & PARTNERSHIPS (351) (423) (173) (647) (1,910)
--------- --------- --------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING POLICY 17,760 9,472 6,188 9,213 2,145
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS OF RESTAURANT
SUBSIDIARY DISPOSED OF, NET OF APPLICABLE
INCOME TAXES & MINORITY INTEREST (75) 0 0 0 0
GAIN ON DISPOSAL OF DISCONTINUED BUSINESS
SEGMENT, NET OF INCOME TAX EFFECT 25 526 0 0
EXTRAORDINARY LOSSES, NET OF INCOME TAX
BENEFIT (708) 0 (186) (1,067) 2,394
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
POLICY, NET OF INCOME TAX EFFECT 0 0 (1,164) 0 0
--------- --------- --------- --------- ---------
NET EARNINGS $ 16,977 $ 9,497 $ 5,364 $ 8,146 $ 4,539
========= ========= ========= ========= =========
EARNINGS PER COMMON SHARE
BASIC:
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING POLICY $ 2.16 $ 1.15 $ 0.75 $ 1.12 $ 0.33
========= ========= ========= ========= =========
NET EARNINGS $ 2.06 $ 1.15 $ 0.65 $ 0.99 $ 0.70
========= ========= ========= ========= =========
</TABLE>
- 14 -
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C> <C>
DILUTED:
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING POLICY $ 1.87 $ 1.12 $ 0.74 $ 1.07 $ 0.32
========= ========= ========= ========= =========
NET EARNINGS $ 1.80 $ 1.12 $ 0.64 $ 0.95 $ 0.67
========= ========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 8,227 8,232 8,245 8,191 6,518
========= ========= ========= ========= =========
DILUTED 10,842 10,757 8,415 8,611 6,745
========= ========= ========= ========= =========
BALANCE SHEET DATA:
WORKING CAPITAL $ 4,786 $ (21,745) $ 54,120 $ (19,109) $ 12,655
TOTAL ASSETS 220,790 263,709 299,877 295,001 270,314
LONG-TERM DEBT AND CAPITALIZED LEASES 89,343 138,794 154,638 128,946 125,551
SHAREHOLDERS' EQUITY 82,737 89,736 95,352 98,099 90,879
</TABLE>
- 15 -
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The Company derives revenue primarily from hotel room sales at its Sumner
Suites and Company-owned Shoney's Inn hotels. The Company also receives
management fees for services it performs for two franchised Shoney's Inns. The
Company derives additional revenue from franchise fees it receives as the
exclusive franchisor of Shoney's Inns.
The Company's hotel operations have been supplemented by contract revenues
from construction and development of 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.
During first quarter of fiscal 1996, the Company sold its 60% ownership in
five restaurants to the 40% owner for a note receivable. The income or loss from
restaurant operations for each of the reported periods is reported as
discontinued operations net of applicable income taxes and minority interest.
The Company initially deferred recognition of the gain from the sale of this
segment until further principal payments on the note were received. In fiscal
1996 $40,000 of this gain was recognized and in fiscal 1997, the remaining
$813,000 was recognized as gain on disposal of discontinued business segment.
The Company's hotel operations have historically been seasonal in nature,
reflecting higher occupancy rates during spring and summer months, which may be
expected to cause fluctuations in the Company's quarterly revenues and earnings
from hotel operations. The Company's fiscal year ends on the last Sunday of the
calendar year.
The Company elected to make a change in accounting for pre-opening costs
effective with the beginning of its 1997 fiscal year to reflect the preferable
method of expensing pre-opening costs as incurred, rather than capitalizing
those expenditures and amortizing them over a three-year period.
PENDING PRIME TRANSACTION
On March 16, 2000 the Company entered into a Sale and Purchase Agreement
with Prime Hospitality Corp. ("Prime") that contemplates a series of
transactions in which the Company will (i) sell to Prime all of the Company's
interest in 20 Sumner Suites hotels currently leased from HPT Suite Properties
Trust and operated by the Company, (ii) sell to HPT Suite Properties Trust which
will lease to Prime all of the Company's interest in four Sumner Suites hotels
currently owned and operated by ShoLodge, (iii) lease to Prime the remaining
three Sumner Suites hotels currently owned and operated by the Company on terms
similar to the existing lease agreement between the Company and HPT Suite
Properties Trust and (iv) sell to Prime two undeveloped hotel sites. In
addition, the agreement contemplates that Prime will engage the Company to
construct an AmeriSuites hotel on each of the two undeveloped sites being
purchased from the Company and to provide other future services to Prime.
The Company expects to receive at closing approximately $54 million in
cash and securities consisting of outstanding debt instruments of the Company
currently held by Prime or an affiliate, future minimum annual rental payments
of approximately $3 million, and future additional annual revenues for services
to be provided to Prime in the future amounting to approximately $4 million per
year. As a condition to the transfer of the assets to Prime, the Company will
receive a release of its $14 million
- 16 -
<PAGE> 19
in cash currently securing its lease guaranty with HPT Suite Properties Trust
(this is included in the $54 million cash at closing).
If the Prime transaction closes as currently negotiated, the Company's
hotel operations will be significantly reduced and the Company's development and
construction activities will increase. The cash proceeds of the transaction will
be used primarily to reduce indebtedness and to fund the Company's working
capital needs.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items of revenue and expense to the total revenues of
the Company.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
DEC. 28, DEC. 27, DEC. 26,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Hotel 95.8% 95.6% 81.1%
Construction and development 0.0% 0.1% 13.8%
Franchising and management 4.2% 4.3% 5.1%
Total operating revenues 100.0% 100.0% 100.0%
Costs and Expenses:
Operating expenses:
Hotel 57.2% 62.0% 56.7%
Construction and development 0.0% 0.1% 12.0%
Franchising and management 3.1% 3.3% 3.0%
----- ----- -----
Total operating expenses 60.3% 65.4% 71.7%
----- ----- -----
General and administrative 5.3% 8.8% 7.8%
Rent expense 2.7% 13.6% 16.6%
Depreciation and amortization 13.8% 11.1% 8.7%
----- ----- -----
Income from operations 18.0% 1.2% (4.8)%
Other Income (expenses):
Interest expense (15.0)% (14.4)% (14.9)%
Interest income 2.3% 6.8% 7.6%
Gain on sale of property 5.1% 28.5% 18.4%
Other income 1.1% 0.6% 1.0%
----- ----- -----
Earnings from Continuing Operations Before
Income Taxes, Minority Interest, Extraordinary
Items and Cumulative Effect of Change in
Accounting Policy 11.5% 22.7% 7.3%
Income Taxes (3.0)% (9.1)% (2.3)%
Minority Interest in Earnings of Consolidated
Subsidiaries and Partnerships (0.2)% (0.9)% (2.3)%
----- ----- -----
Earnings from Continuing Operations Before
Extraordinary Items and Cumulative Effect of
Change in Accounting Policy 8.2% 12.7% 2.6%
Discontinued Operations:
Gain on disposal of discontinued business
segment, net of income tax effect 0.7% 0.0% 0.0%
Extraordinary Losses, net of income tax benefit (0.2)% (1.5)% 2.9%
Cumulative Effect of Change in Accounting
Policy, net of income tax effect (1.5)% 0.0% 0.0%
----- ----- -----
Net earnings 7.1% 11.2% 5.6%
===== ===== =====
</TABLE>
- 17 -
<PAGE> 20
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
For the fiscal year ended December 26, 1999, total operating revenues
increased 12.6% to $81.6 million from $72.4 million for the fiscal year ended
December 27, 1998.
Revenues from hotel operations in fiscal 1999 decreased by 4.4% to $66.2
million from $69.2 million for fiscal year 1998. For the 32 hotels opened for
all of both years (same hotels), average daily room rates in 1999 increased 2.0%
to $66.17 from $64.88 in 1998, while average occupancy rates decreased from
56.8% in 1998 to 55.1% in 1999, resulting in a total decrease in same hotel
revenues per available room (RevPAR) of 1.1%, from $36.87 in 1998 to $36.47 in
1999. The remaining (non-same) hotels contributed $15.4 million to hotel
revenues in 1999 compared with $18.0 million in 1998. The $15.4 million revenues
from non-same hotels in 1999 was from ten (10) new hotels opened in 1998 and
1999. The $18.0 million revenues from non-same hotels in 1998 consisted of $2.6
million from six new hotels opened in 1998 and $15.4 million from 16 hotels
which were sold in third quarter 1998.
The Company owns and operates two hotel brands - Sumner Suites and
Shoney's Inns. The 27 Sumner Suites hotels' RevPAR increased by 1.7% in 1999
over 1998, from $42.89 to $43.63. The 17 Sumner Suites same hotels' RevPAR
increased by 3.4%, from $45.54 in 1998 to $47.10 in 1999. All future
Company-owned hotels currently planned will be of the all-suites type. RevPAR
for all Company-owned Shoney's Inns declined by 19.1% in 1999 from 1998, from
$29.98 to $24.24. For this same period, RevPAR for the 15 Shoney's Inns which
the Company currently owns, declined by 9.9% in 1999 from 1998, from $26.90 to
$24.24. The decreases in the Shoney's Inns RevPAR were due primarily to
increased competition from new hotels.
Franchising and management revenues in fiscal 1999 increased by 33.1% from
1998, to $4.2 million in 1999 from $3.1 million in 1998. A settlement agreement
entered into between the Company and an ex-franchisee whereby the ex-franchisee
agreed to pay the Company $575,000 in cash and $200,000 each year for the next
three years, resulted in the recognition of $1.2 million in franchising revenues
in 1999. Exclusive of this non-recurring franchise revenue, the remaining
franchising and management revenues declined by $143,000 from 1998 to 1999. This
decrease was due primarily to the cancellation of reservation services by one
hotel chain in the first half of 1999. At the end of fiscal 1999 there were 61
franchised Shoney's Inns in operation compared with 59 at the end of fiscal
1998. As of December 26, 1999, there were three franchised Shoney's Inns under
construction scheduled to open in year 2000.
Revenues from construction and development activities in 1999 were $11.2
million compared to only $81,000 in fiscal 1998. The 1999 revenues earned were
from three hotel construction contracts being performed for third parties, one
of which was still in progress at year-end. Revenues from construction and
development can vary widely from period to period depending upon the volume of
outside contract work and the timing of those projects.
Hotel operating expenses for fiscal 1999 increased by 3.0% to $46.3
million from $44.9 million in 1998. The sale of the 16 Shoney's Inns in third
quarter 1998 accounted for a decrease of $8.6 million in hotel operating
expenses from 1998 to 1999. The ten Sumner Suites hotels opened in 1998 and 1999
caused hotel operating expenses to increase by $8.6 million over 1998. Hotel
operating expenses on the 32 same-hotels increased by $1.4 million, or 4.3%, in
1999 over 1998. The operating expenses as a percentage of operating revenues for
this activity increased from 64.9% in 1998 to 69.9% in 1999. Operating expenses
as a percentage of operating revenues on the 32 same hotels increased from 63.7%
to 67.1% from 1998 to 1999. Increases in hotel operating expenses on same hotels
were primarily in the areas of payroll related costs, repairs and maintenance,
regional general and administrative expenses, and security costs. Repairs and
maintenance costs include the provisions to reserves for repairs and
replacements on the leased properties, including the six added in June 1999.
Regional
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administrative expenses increased as a result of increasing the number and
quality of regional operations managers and their support staff in order to
achieve more efficiency and consistency in hotel operations.
Franchising and management operating expenses increased by $27,000, or
1.1%, from 1998 to 1999. Construction and development costs in 1999 were $9.8
million compared to only $71,000 in 1998. The costs incurred in 1999 were
directly related to the revenues earned from the three third party construction
contracts, one of which was still in progress at year end 1999.
General and administrative expenses declined by $15,000, or 0.2%, from
1998 to 1999. Excluding charge-offs of pre-development costs for sites no longer
deemed probable of development in the amounts of $623,000 in 1999 and $578,000
in 1998, general and administrative expenses declined by $60,000, or 1.0%, from
1998 to 1999.
Rent expense increased by $3.7 million, or 37.5%, in 1999 from 1998. The
increase was due to the increase in base rent due to additional hotels being
sold and leased back in 1999 over 1998. The 1997 lease agreement was amended in
June 1999 to add six Sumner Suites hotels to the lease effective June 29, 1999.
The base rent on these six hotels from June 29, 1999, through December 26, 1999,
was $3.6 million. Rent expense related to the 15 Company-owned Shoney's Inns
decreased by $134,000, from $845,000 in 1998, to $711,000 in 1999, due primarily
to the sale of the 16 Shoney's Inns in third quarter 1998, where the buyer
assumed the lease obligations on those Inns acquired.
Depreciation and amortization expenses decreased by $912,000 or 11.4%,
from 1998 to 1999. The sale of the 16 Shoney's Inns in third quarter 1998
reduced depreciation in 1999 by $2.1 million from 1998. However, depreciation
and amortization expense increased in 1999 over 1998 by $1.1 million due to the
ten additional hotels opened in 1998 and 1999, net of the effect of the
cessation of depreciation in June 1999 on the six hotels sold and leased back.
Interest expense increased by $1.7 million, while interest income
increased by $1.2 million from 1998 to 1999, for an increase of $489,000 in net
interest expense. The increase in interest expense resulted from additional
borrowings incurred in 1998 and 1999 for capital expenditures for ten new
hotels, partially offset by interest expense reductions from the extinguishments
of debt in third quarter 1998 associated with the hotels sold, and the
extinguishments of debt in the second half of 1999 from the repurchase of $15.7
million of the Company's outstanding subordinated debt. The increase in interest
income in 1999 over 1998 was due primarily to interest earned for a full year on
mortgage notes receivable from the sale of the 16 hotels in third quarter 1998,
which exceeded interest earned in 1998 from cash temporarily invested from the
proceeds of the sale-leaseback transaction which occurred in the fourth quarter
of 1997.
The gain recognized on the sale of property in 1999 was $15.0 million
compared with $20.6 million in 1998. $11.9 million of the $15.0 million
recognized in 1999 was due to the recognition of previously deferred gains
related to four of the 16 hotels sold in 1998, which was being recognized on the
installment method of accounting. The other $3.1 million was from the sale in
1999 of land held for resale. The $20.6 million recognized in 1998 represented
$20.4 million from the sale of the 16 hotels and $194,000 from the sale of land
held for resale.
Other income increased by $402,000, or 91.0%, in 1999 from 1998. Other
income can vary widely from period to period due to the nature of this income
and its varied sources. Minority interests in earnings of consolidated
subsidiaries and partnerships increased by $1.3 million from 1998 to 1999. The
1999 minority interests included $1.8 million which represented the 40% minority
interest in $4.6 million of the gain on sale of property recognized in 1999
discussed above. This was partially offset by a
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decrease in minority interests due to other operating activities in which
minority ownership was involved.
The extraordinary gain from early extinguishments of debt in 1999 was the
result of the repurchase of $12.6 million of the Company's previously issued
subordinated debt at a discount from face value, net of the write-off of related
unamortized deferred financing costs. The extraordinary loss from early
extinguishments of debt in 1998 was a result of debt paid off in conjunction
with the sale of 16 Shoney's Inns in 1998.
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
For the fiscal year ended December 27, 1998, total operating revenues
decreased 3.6% to $72.4 million from $75.1 million for the fiscal year ended
December 28, 1997.
Revenues from hotel operations in fiscal 1998 decreased by 3.8% to $69.2
million from $71.9 million for fiscal year 1997. For the 28 hotels opened for
all of both years (same hotels), average daily room rates in 1998 increased 3.7%
to $63.01 from $60.74 in 1997, while average occupancy rates increased to 57.3%
from 56.5%, resulting in a total increase in same hotel revenues per available
room (RevPAR) of 5.1%, from $34.34 in 1997 to $36.10 in 1998. The remaining
(non-same) hotels contributed $25.5 million to hotel revenues in 1998 compared
with $29.9 million in 1997. The $25.5 million revenues from non-same hotels in
1998 consisted of $10.1 million from new hotels and $15.4 million from 17 hotels
which were sold (one in fourth quarter 1997 and 16 in third quarter 1998). The
$29.9 million revenues from non-same hotels in 1997 consisted of $1.9 million
from new hotels and $28.0 million from the 17 hotels sold in 1997 and 1998.
The Company owns and operates two hotel brands - Shoney's Inns and Sumner
Suites hotels. RevPAR for all Company-owned Shoney's Inns declined by 2.8% in
1998 from 1997, from $30.83 to $29.98; however, for this same period, RevPAR for
the 15 Shoney's Inns which the Company currently owns, declined only slightly,
from $26.94 in 1997 to $26.90 in 1998.
The 23 Sumner Suites hotels' RevPAR increased in 1998 by 3.1% from 1997,
from $41.66 to $42.96. The 13 Sumner Suites same hotels' RevPAR increased by
8.9% from $42.78 in 1997 to $46.60 in 1998. Effective August 1, 1998, the
company sold 16 of its Company-owned Shoney's Inns, and will consider additional
opportunities to sell its remaining 15 Company-owned Shoney's Inns.
Franchising and management revenues in fiscal 1998 declined by 1.4% from
1997 to $3.1 million in 1998 compared with $3.2 million in 1997. A decrease in
monthly franchising fees resulted primarily from (1) the loss of 14 Shoney's
Inns from the chain in the first half of 1998, and (2) the cancellation of
reservation services by two hotel chains in the first half of 1997. These
decreases were offset by (1) the addition of new franchisees, primarily the 16
acquired from the Company in the third quarter of 1998, and (2) franchise
termination fees of $257,000 earned in 1998 from the termination of four
franchises compared with no such fees in 1997. Initial franchise fees and
franchise termination fees may vary widely from year to year. At the end of
fiscal 1998 there were 59 franchised Shoney's Inns in operation. Management fee
revenue in fiscal 1998 decreased by 1.5%, from $139,000 in 1997 to $137,000 in
1998, on the two Company-managed Shoney's Inns.
Revenues from construction and development activities during 1998 were
only $81,000 compared with none in 1997. Revenues from construction and
development can vary widely from period to period depending upon the volume of
outside contract work and the timing of those projects.
Hotel operating expenses for fiscal 1998 increased by 4.6% to $44.9
million from $43.0 million in 1997. Operating expenses of all Company-owned
Shoney's Inns declined
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<PAGE> 23
by $6.0 million; however, revenues from these hotels declined by $12.9 million.
Both declines were due to the sale of the hotels discussed earlier. The gross
operating profit margin on all 32 Shoney's Inns declined from 40.5% in 1997 to
35.3% in 1998. Operating expenses on the 15 Shoney's Inns not sold increased by
1.6% in 1998 over 1997 even though revenues from these hotels declined by 1.5%
from 1997 to 1998. The gross operating profit margin on these Shoney's Inns
currently owned declined from 34.3% in 1997 to 32.2% in 1998. Operating expenses
of the 13 same-hotel Sumner Suites increased by $1.5 million due primarily to
the $1.9 million increase in hotel revenues. The gross profit margin on these
same-hotels declined slightly, from 42.2% in 1997 to 40.9% in 1998. All 23
Sumner Suites hotels reflected an increase in hotel operating expenses of $8.0
million from $16.1 million in 1997 to $24.0 million in 1998, due primarily to
the $10.2 million increase in hotel revenues. The gross profit margin on all
Sumner Suites hotels declined from 39.8% in 1997 to 34.9% in 1998. Hotel
operating expenses and gross profit margins for the Sumner Suites hotels
reflects the pre-opening costs for new hotels. In 1998, six new hotels were
opened and three additional hotels were nearing completion by year-end. Only
four new hotels were opened in 1997. The increased number of new hotels in 1998
as compared with 1997 caused pre-opening expenses to be higher in 1998 than in
1997. Other hotel operating expenses which increased as percentages of hotel
revenues in 1998 over 1997 were payroll related costs, replacement reserve
provisions, real estate taxes, repairs and maintenance, complimentary food and
beverage cost, and travel agent commissions.
Franchising and management operating expenses in 1998 increased by 4.0% to
$2.4 million from $2.3 million in 1997. The increase was due primarily to
increases in travel expenses, inspections cost and training expenses.
Construction and development costs on outside contracts was $71,000 in
1998 versus none in 1997. These costs were incurred in connection with the
$81,000 earned in construction and development revenues in 1998.
General and administrative expense increased 60.9% to $6.4 million in 1998
from $4.0 million in 1997. The increase was due primarily to increased
professional fees, increased land acquisition costs as a result of implementing
Emerging Issues Task Force ("EITF") No. 97-11, increased corporate franchise
taxes, and increased expenses related to the occupancy of the new corporate
headquarters building.
Rent expense increased by $7.8 million, from $2.0 million in 1997 to $9.8
million in 1998. This increase was due to the sale-leaseback of 14 hotels in
November 1997, for which rent expense in 1998 was $9.0 million compared with
$1.1 million in 1997. This increase was partially offset by reduction in rent
expense due to the sale of certain Shoney's Inns in 1998 which were on leased
land.
Depreciation and amortization expense decreased by 22.8% to $8.0 million
in 1998 from $10.4 million in 1997. The sale-leaseback of 14 hotels in late 1997
caused depreciation expense to be eliminated on those hotels for 1998;
depreciation expense on those 14 hotels in 1997 was $2.8 million. The sale of
one hotel in December 1997 and 16 hotels in August 1998 reduced depreciation
expense as well; depreciation expense on those 17 hotels declined by $1.3
million, from $3.4 million in 1997 to $2.1 million in 1998. These reductions
were partially offset, however, with increases totaling $1.7 million in
depreciation and amortization on additions to depreciable and amortizable assets
beginning with first quarter 1997. Ten new hotel openings and several
renovations of existing hotels occurred during 1997 and 1998.
In 1998, interest expense decreased by $833,000 while interest income
increased by $3.2 million, for a total decrease in net interest expense of $4.1
million as compared with 1997. This reduction in net interest expense from 1997
to 1998 was primarily the result of (1) the sale-leaseback of 14 hotels in late
1997, the proceeds of which were used to reduce indebtedness and to invest in
interest earning funds until needed for capital expenditures for new hotels, (2)
the sale of 17 hotels in December
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<PAGE> 24
1997 and August 1998, the proceeds of which were used to reduce indebtedness and
to invest in interest-earning funds until needed, and (3) interest earned on the
seller-financed promissory notes resulting from the sales transactions.
The gain on sale of property in 1998 primarily represents a portion of the
gain on the sale of 16 hotels in third quarter 1998 for $90.0 million,
consisting of $22.5 million in cash with the balance of $67.5 million in the
form of interest-bearing promissory notes. Profit was recognized on 12 of the
sales under the full accrual method of accounting. Profit recognition on the
other 4 hotels sold is being accounted for under the installment method. Of the
approximately $12.0 million profit on these 4 hotels, $77,000 was recognized in
1998, with the balance to be recognized in future quarters on the installment
method of accounting. $194,000 of the 1998 gain on sale of property was from the
sale of properties other than the 16 hotels. The $3.8 million gain on sale of
property in 1997 consisted of $2.2 million from the sale of one hotel and $1.6
million from the sale of land held for resale.
Other income declined by 47.3% in 1998 from 1997, from $838,000 to
$441,000. This decline was due primarily to the sale of hotels in 1998 which
generated rental income. Minority interests in earnings and losses of
subsidiaries and partnerships increased by $475,000 in 1998 from 1997, due
primarily to minority ownership interest in the gain on sale of property in
third quarter 1998.
Income tax expense as a percentage of pre-tax earnings from continuing
operations before extraordinary items in 1998 was 41.7% compared with 26.7% in
1997. The unusually high effective rate in 1998 was due primarily to interest
due to the Internal Revenue Service resulting from the deferral of federally
taxable income due to the installment sales accounting resulting from the sale
of 16 hotels in 1998. The unusually low effective income tax rate in 1997 was
due primarily to refunds of prior years' state taxes.
The gain on disposal of a discontinued business segment in 1997 was the
result of the recognition of previously deferred profit from the sale of the
Company's 60% interest in a restaurant subsidiary to the then 40% owner.
The extraordinary loss from early extinguishments of debt in 1998 was a
result of debt paid off in conjunction with the sale of 16 hotels previously
discussed. In 1997, the loss was a result of debt paid off in connection with
the sale-leaseback transaction with a real estate investment trust. The
cumulative effect of a change in accounting principle in 1997 represents the
write-off of the unamortized balance of previously capitalized pre-opening costs
as of the beginning of the 1997 fiscal year. Beginning with 1997, these costs
are expenses as incurred.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows used in operating activities were $20.8 million
in 1999, compared with $2.7 million in 1998 and $4.0 million in 1997. Earnings
from continuing operations before extraordinary items and cumulative effect of
change in accounting policy were $2.1 million in 1999, $9.2 million in 1998, and
$6.2 million in 1997. Depreciation and amortization was $7.1 million, $8.0
million, and $11.0 million in 1999, 1998, and 1997, respectively, the declines
each year being the result of the sale of properties in 1997, 1998, and 1999, in
excess of new properties being opened during these years. The Company recognized
$15.0 million and $20.6 million from gains on sale of property during 1999 and
1998, respectively, of which $11.9 million and $20.4 million during 1999 and
1998, respectively, was from the sale of 16 lodging facilities in 1998, a
portion of which was deferred to 1999 under the installment method of
accounting. The $3.8 million gain on sale of property in 1997 represented $2.2
million from the sale of one lodging facility and $1.6 million from the sale of
land held for resale. The $1.9 million cash provided by minority interests in
earnings of consolidated subsidiaries and partnerships in 1999 included $1.8
million from one
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<PAGE> 25
partnership which sold one of the 16 lodging facilities in 1998 upon which the
deferred gain was recognized in 1999 in the amount of $4.6 million. The
construction contracts receivable and estimated earnings in excess of billings
on construction contracts of $11.2 million in 1999, is due to two construction
contracts for third parties, which are not billable until the projects are
completed. A reduction of income taxes receivable of $1.4 million and $1.4
million in 1999 and 1998, respectively, provided cash flow in those years versus
using cash in 1997. Decreases in income and other taxes payable, however, used
cash of $1.7 million, $493,000, and $350,000, in 1999, 1998, and 1997,
respectively. Decreases in accounts payable and accrued expenses used $1.8
million cash in 1999, compared with increases which provided cash in 1998 of
$519,000, and decreases in 1997 which used $1.1 million. An increase in accounts
receivable in 1999 used $1.6 million cash, compared with only $250,000 and
$272,000 in 1998 and 1997, respectively.
The Company's cash flows provided by investing activities were $55.9
million in 1999 and $58.1 million in 1997, whereas cash flows used by investing
activities were $63.2 million in 1998. The Company collected $12.3 million from
notes receivable in 1999, of which $12.2 million related to two hotel properties
sold in 1997 and 1998. Proceeds from the sale of property and other assets were
$70.9 million, $9.1 million, and $142.0 million in 1999, 1998, and 1997,
respectively. These amounts in 1999 and 1997 include the net proceeds from the
sale/leaseback of 14 hotels in 1997 and six hotels in 1999. The initial
sale/leaseback transaction in 1997 provided net proceeds of approximately $137.0
million, with $28.0 million being held by the acquirer of the properties as
security and guaranty deposits. In 1999, the original lease was amended to
include an additional six hotels sold for $65.0 million and leased back.
Additional security deposits of $7.3 million are being held by the acquirer of
the properties on this second transaction. An additional $4.9 million in 1997
was provided from the sale of one other hotel and land held for resale. In 1998,
the Company sold 16 hotels providing cash of $8.1 million. Various other
properties were sold, providing an additional $1.0 million cash in 1998. In
addition to the sale/leaseback transaction in 1999, several other parcels of
land held for resale were sold for cash. The Company has required 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 $20.1 million, $72.5 million, and $55.9 million in 1999,
1998, and 1997, respectively.
Net cash used in financing activities was $34.2 million in 1999, compared
with $9.8 million and $284,000 in 1998 and 1997, respectively. In September of
1997 the Company issued $35.0 million of 9.55% Senior Subordinated Notes, due
2007, Series B under the Company's $125 million shelf registration. Net proceeds
from this issue was used to reduce the outstanding balances under the Company's
revolving credit facilities. A portion of the net proceeds from the
sale/leaseback of 14 hotels in 1997 was also used to pay off the balance of the
revolving credit facilities, a bank line of credit loan, and approximately $10.5
million of furniture, fixture and equipment loans. Proceeds from the financing
of new furniture, fixtures and equipment were approximately $4.0 million in
1997. In 1998, the Company sold 16 hotels, using a portion of the net proceeds
to reduce indebtedness. The transaction also resulted in the write-off of
deferred financing charges related to the debt paid off early, and distributions
of $2.0 million to minority owners of two of the hotels sold. In 1998, the
Company repurchased 784,000 shares of its common stock for $5.4 million, and in
1999, the Company repurchased 2.1 million shares of its common stock for $11.8
million pursuant to a plan to repurchase up to $20.0 million of the Company's
outstanding common stock. In the second quarter of 1999 the Company announced
its plan to use up to $12.0 million of its Company funds to repurchase a portion
of its $54.0 million outstanding convertible subordinated debentures, and
repurchased $4.0 million of this debt for $2.5 million in 1999. In the third
quarter of 1999 the Company announced its plan to use up to $15 million of its
Company funds to repurchase a portion of its outstanding $67.7 million senior
subordinated notes. As of the end of 1999, the Company had repurchased $8.6
million of these debt securities at a cost of $5.8
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<PAGE> 26
million. An additional $1.3 million of these debt securities has been
repurchased since 1999 year-end at a cost of $839,000.
The Company's $25.2 million revolving credit facility with a group of five
banks matured on June 30, 1999. It was repaid in full on June 29, 1999, from a
portion of the $65.0 million gross proceeds from a sale/leaseback transaction
involving six of the Company's Sumner Suites hotels. The Company has established
a new three-year credit facility with a new bank group effective August 27,
1999. The new credit facility is for an initial amount of $30.0 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 Company incurred certain fees and expenses in association
with closing and administering the credit facility. The credit facility also
contains covenants which 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 December 26, 1999, the Company had $12.0 million in
borrowings outstanding under this credit facility, including the three-year term
loan of $10.0 million.
The Company also maintains a $1.0 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
2000. As of December 26, 1999, the Company had no borrowings outstanding under
this credit facility.
The Company opened six new Sumner Suites hotels in 1998 and four in 1999.
As of the end of 1999, no Sumner Suites hotels were under construction. The
Company has acquired four sites for future development, two of which will be
sold to Prime as part of the pending transaction and the other two will likely
be sold by the Company. In 1998 the Company decided to slow its aggressive
development schedule of new Sumner Suites hotels. This decision was based on
current market conditions, rooms supply in certain areas, and capital
availability.
Under the terms of the trust indenture governing the senior subordinated
notes issued in 1996 and 1997, the Company is obligated to redeem at par up to
5% annually of the notes issued under the indenture beginning in 1999.
Approximately $3.0 million of these notes were redeemed under this provision on
December 1, 1999.
In addition to the strategies described above, the Company may from time
to time investigate various alternatives to maximize shareholder value. These
alternatives could include, without limitation, a continuation of the
development and operation of Sumner Suites, the continued franchising and
operation of Shoney's Inns, a sale of the remaining Shoney's Inns, negotiating
new credit arrangements, an increase in developing hotels for other owners, the
repurchase of additional shares of the Company's common stock or outstanding
debt securities, or any combination of these or other strategies. The Company
believes that a combination of existing cash, 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. If the pending Prime Transaction is completed, the Company will
have additional cash resources that will likely be used to repay indebtedness
and provide further working capital.
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<PAGE> 27
YEAR 2000 ISSUE
The Company completed all Year 2000 readiness work and experienced no
significant problems.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has not entered into any transactions using derivative
financial instruments and believes that its exposure to market risk associated
with other financial instruments is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements required by Item 8 are filed at the end of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 24, 1998, the firm of Deloitte & Touche LLP verbally notified
the Company that they were resigning as auditors of the Company and confirmed
such resignation in writing by letter dated November 30, 1998. A copy of that
letter was attached as Exhibit 7.1 to the Company's Form 8-K filed with the
Securities and Exchange Commission on December 2, 1998.
The reports of Deloitte & Touche LLP on the Company's financial statements
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.
Disagreements:
In connection with the audits of the Company's financial statements for
the fiscal years ended December 28, 1997 and December 29, 1996, and during the
subsequent unaudited interim periods since 1997 Deloitte & Touche LLP cited
three disagreements on matters of accounting principles or practices which if
not resolved to the satisfaction of Deloitte & Touche LLP would have caused
Deloitte & Touche LLP to make reference to the matter in their report. The
disagreements as communicated to the Company's Audit Committee related to the
1997 (i) accounting for profits on certain real estate transactions, (ii)
capitalization of general and administrative costs, and (iii) recording
intercompany revenues for rooms rented to construction workers. The matter of
accounting for profits on certain real estate transactions involved the question
of the timing of earnings recognition and also the allocation of cost basis
among various outparcels of land sold to third parties. The matter of
capitalization
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<PAGE> 28
of general and administrative costs concerned the method of allocating certain
indirect costs, such as salaries and related employee benefits, utilities,
telephone expense, printing and supplies, and other overhead expenses, to
internal development costs to be capitalized. The matter of recording
intercompany revenues for rooms rented to construction workers resulted from the
Company's recording room revenues at the hotel properties earned from the
construction company subsidiary of the Company during renovation or construction
of Company-owned hotels. Management recorded adjustments relating to each of
these transactions and also restated its financial statements for each of the
quarters in fiscal 1997, as described in three Form 10-Q/A's filed on March 30,
1998 with the Securities and Exchange Commission; Deloitte & Touche LLP
indicated that the disagreements were satisfactorily resolved. The Company's
Audit Committee discussed each of these disagreements with Deloitte & Touche
LLP. The Company authorized Deloitte & Touche LLP to respond fully to any
successor independent auditing firm regarding each disagreement. Deloitte &
Touche LLP cited no disagreements in this two year period regarding financial
statement disclosure or auditing scope and procedures which if not resolved to
the satisfaction of Deloitte & Touche LLP would have caused Deloitte & Touche
LLP to make reference to the matter in their report. There were no disagreements
on any types of matters described in Regulation S-K Item 304 in 1996 or in the
subsequent unaudited interim periods since 1997.
Reportable Conditions
In addition, in connection with the 1997 audit there were six "reportable
conditions" as that term is described in Item 304(a)(1)(v)(A) of Regulation S-K;
that is, Deloitte & Touche LLP advised the Company that the internal controls
necessary for the development of reliable financial statements were inadequate.
The 1997 reportable conditions related to the following matters: accounting
structure and internal controls (which matter is considered by Deloitte & Touche
LLP to be a material weakness), accounting for certain real estate transactions,
capitalization of indirect costs associated with internal development and
construction, construction company accounting, capitalization of interest on
land under development, and accounts receivable allowance analysis. There were
four "reportable conditions" in connection with the 1996 audit; also of the type
described in Item 304(a)(1)(v)(A) of Regulation S-K. They related to the
accounting for capitalization of indirect costs associated with internal
development and construction, capitalization of construction period interest,
capitalization of pre-opening costs and accounting structure and the reporting
process. The Company's present accounting systems and internal controls appeared
to Deloitte & Touche LLP to be inadequate to ensure that transactions are
recorded and reported in conformity with generally accepted accounting
principles.
The Company's Audit Committee discussed each of these "reportable
conditions" with Deloitte & Touche LLP.
The Company authorized Deloitte & Touche LLP to respond fully to any
successor independent auditing firm regarding each reportable condition.
The Company requested Deloitte & Touche LLP to furnish a letter addressed
to the Commission stating whether it agreed with the above statements. The
letter from the former accountant dated December 2, 1998 was filed as Exhibit
7.2 to the Company's Report on Form 8-K filed with the Commission on December 2,
1998. A subsequent letter from the former accountant dated December 18, 1998 and
received by the Company on December 22, 1998 was filed as Exhibit 7.2 to the
Company's Report on Form 8-K/A filed with the Commission on December 23, 1998.
Engagement of New Auditors
On December 7, 1998 the Board of Directors and the Audit Committee of the
Company approved the engagement of Ernst & Young LLP as its independent auditors
for the fiscal year ending December 27, 1998.
- 26 -
<PAGE> 29
The Company did not consult with Ernst & Young LLP during the fiscal year
ended December 29, 1996, the fiscal year ended December 28, 1997 or during the
subsequent interim periods since 1997 with respect to the application of
accounting principles, the type of audit opinion that might be rendered on the
Company's financial statements or any matter that was the subject of a
disagreement or reportable event with the Company's former auditors.
The Company requested Deloitte & Touche LLP to furnish a letter stating
whether it agreed with the above statements. A copy of that letter, dated
December 8, 1998 was filed as Exhibit 7.1 to the Company's Report on Form 8-K
filed with the Commission on December 8, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors and officers of the Company under
the heading "Election of Director" and the information concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934 under the heading
"Delinquent Filings of Ownership Reports" to be contained in the Company's Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" and the
information under the heading "Performance Graph" to be contained in the
Company's Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain
Beneficial Owners and Management" to be contained in the Company's Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions" to be contained
in the Company's Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference.
- 27 -
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
(a) 1. Financial Statements:
The following Financial Statements are included herein:
Independent Auditors' Report:
Report of Ernst & Young LLP F-1
Report of Deloitte & Touche LLP F-2
Consolidated Balance Sheets at December 27, 1998 and
December 26, 1999 F-3 - F-4
Consolidated Statements of Earnings for each of the
three years in the period ended December 26, 1999 F-5 - F-6
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended
December 26, 1999 F-7 - F-8
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 26, 1999 F-9 - F-10
Notes to consolidated financial statements F-11 - F-38
2. Financial Statement Schedules:
Independent Auditors' Report:
Report of Ernst & Young LLP S-1
Report of Deloitte & Touche LLP S-2
Schedule II - Valuation and Qualifying Accounts S-3
All other schedules required by Regulation S-X are omitted as the
required information is inapplicable or the information requested
thereby is set forth in the financial statements or the notes
thereto.
3. Exhibits:
The exhibits required by Item 601 of Regulation S-K and paragraph
(c) of this Item 14 are listed below. Management contracts and
compensatory plans and arrangements required to be filed as exhibits
to this form are:
10(14) -- 1991 Stock Option Plan
10(15) -- First Amendment to 1991 Stock Option Plan
10(16) -- Second Amendment to 1991 Stock Option Plan
10(17) -- Key Employee Supplemental Income Plan
</TABLE>
- 28 -
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------
<S> <C>
3(1) -- Amended and Restated Charter. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No.
33-44504, filed with the Commission on December 12, 1991
3(2) -- Articles of Amendment to Charter creating Series A
Subordinated Preferred Stock. Incorporated by reference to the
Company's Registration Statement on Form 8-A filed with the
Commission on July 3, 1997
3(3) -- Articles of Amendment to Amended and Restated Charter dated
September 8, 1997. Incorporated by reference to the Company's
Annual Report on Form 10-K, filed with the Commission on April
13, 1998
3(4) -- Amended and Restated Bylaws. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No.
33-44504, filed with the Commission on December 12, 1991
3(5) -- Amendment to the Amended and Restated Bylaws adopted on July
31, 1996. Incorporated by reference to the Company's Annual
Report on Form 10-K, filed with the Commission on April 13, 1998
4(1) -- Amended and Restated Charter. Section 6 of the Amended and Restated
Charter is included in Exhibit 3(1)
4(2) -- Indenture dated as of June 6, 1994, by and between the
Registrant and Third National Bank in Nashville, Tennessee,
Trustee, relating to $54,000,000 in 7 1/2 Convertible
Subordinated Debentures due 2004. Incorporated by reference to
the Company's Registration Statement on Form S-3, Commission File
No. 33-77910, filed with the Commission on April 19, 1994
4(3) -- Indenture dated as of November 15, 1996, by and between the
Registrant and Bankers Trust Company, Trustee, relating to Senior
Subordinated Notes. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q, filed with the Commission on
November 20, 1996
4(4) -- First Supplemental Indenture dated as of November 15, 1996 by
and between the Registrant and Bankers Trust Company, Trustee,
relating to 9 3/4% Senior Subordinated Notes due 2006, Series A.
Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on November 20, 1996
4(5) -- Second Supplemental Indenture dated as of September 25, 1997
by and between the Registrant and Bankers Trust Company, Trustee,
relating to 9.55% Senior Subordinated Notes due 2007, Series B.
Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on September 30, 1997
The Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, any and all instruments defining the rights
of holders of long-term debt of the Registrant and its subsidiaries,
the total amount of which does not exceed 10% of the total assets of
the Registrant and its subsidiaries on a consolidated basis.
</TABLE>
- 29 -
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -----------------------------------
<S> <C>
10(1) -- Amended and Restated Partnership Agreement of Demonbreun Hotel
Associates, Ltd., dated October 22, 1991. Incorporated by reference to
the Company's Registration statement on Form S-1, Commission File No.
33-44504, filed with the Commission on December 12, 1991
10(2) -- Agreement of Limited Partnership of Shoney's Inn North, Ltd., dated
December 31, 1987. Incorporated by reference to the Company's
Registration statement on Form S-1, Commission File No. 33-44504, filed
with the Commission on December 12, 1991
10(3) -- Partnership Agreement of Shoney's Inn of Atlanta, N.E., dated December
26, 1988. Incorporated by reference to the Company's Registration
statement on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991
10(4) -- Partnership Agreement of Shoney's Inn of Stockbridge, dated December
26, 1988. Incorporated by reference to the Company's Registration
statement on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991
10(5) -- Joint Venture Agreement of Atlanta Shoney's Inns Joint Venture, dated
May 4, 1988. Incorporated by reference to the Company's Registration
statement on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991
10(6) -- Amended and Restated Limited Partnership Agreement of Shoney's Inns of
Gulfport, Ltd., dated January 1, 1987. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No.
33-44504, filed with the Commission on December 12, 1991
10(7) -- Second Amended and Restated Limited Partnership Agreement of
Shoney's Inn of Bossier City, Ltd., dated January 1, 1987.
Incorporated by reference to the Company's Registration statement
on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991
10(8) -- Second Amended and Restated Limited Partnership Agreement of Shoney's
Inn of New Orleans, Ltd., dated January 1, 1987. Incorporated by
reference to the Company's Registration statement on Form S-1,
Commission File No. 33-44504, filed with the Commission on December 12,
1991
10(9) -- 1991 Stock Option Plan. Incorporated by reference to the Company's
Registration statement on Form S-8, filed with the Commission on June
24, 1997
10(10) -- First Amendment to 1991 Stock Option Plan. Incorporated by reference to
the Company's Registration statement on Form S-8, filed with the
Commission on June 24, 1997
10(11) -- Second Amendment to 1991 Stock Option Plan. Incorporated by reference
to the Company's Registration statement on Form S-8, filed with the
Commission on June 24, 1997
10(12) -- Key Employee Supplemental Income Plan. Incorporated by
reference to the Company's Registration statement on Form S-1,
Commission File No. 33-44504, filed with the Commission on
December 12, 1991
</TABLE>
- 30 -
<PAGE> 33
<TABLE>
<S> <C>
10(13) -- License Agreement, dated October 25, 1991, by and among the Registrant,
Shoney's Investments, Inc. and ShoLodge Franchise Systems, Inc.
Incorporated by reference to the Company's Registration statement on
Form S-1, Commission File No. 33-44504, filed with the Commission on
December 12, 1991
10(14) -- Amendment No. 1 to License Agreement, dated September 16, 1992 by and
among Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and
the Registrant. Incorporated by reference to the Company's Annual
Report on Form 10-K, filed with the Commission on March 29, 1993
10(15) -- Amendment No. 2 to License Agreement, dated March 18, 1994 by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registrant. Incorporated by reference to the Company's Annual Report on
Form 10-K, filed with the Commission on March 28, 1994
10(16) -- Amendment No. 3 to License Agreement, dated March 13, 1995 by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registrant. Incorporated by reference to the Company's Annual Report on
Form 10-K, filed with the Commission on April 11, 1995
10(17) -- Amendment No. 4 to License Agreement, dated June 26, 1996, by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and
Registrant. Incorporated by reference to the Company's Quarterly Report
on Form 10-Q, filed with the Commission on August 28, 1996
10(18) -- Amendment No. 5 to License Agreement, dated October 25, 1996, by and
among Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and
Registrant. Incorporated by reference to the Company's Quarterly Report
on Form 10-Q, filed with the Commission on November 20, 1996
10(19) -- Agreement dated March 15, 1994 between ShoLodge Franchise Systems, Inc.
and Shoney's of Knoxville, Inc. Incorporated by reference to the
Company's Annual Report on Form 10-K, filed with the Commission on
March 28, 1994
10(20) -- Credit Agreement dated as of April 30, 1997 by and among the Registrant
and certain Subsidiaries of the Registrant, as Borrowers, and the
Lenders referred to therein, First Union National Bank of Tennessee, as
Administrative Agent, and NationsBank of Tennessee, as Co-Agent.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q, filed with the Commission on August 27, 1997
10(21) -- Joinder Agreement Number 1 to the Credit Agreement, dated as of June
11, 1997. Incorporated by reference to the Company's Quarterly Report
on Form 10-Q, filed with the Commission on August 27, 1997
10(22) -- First Amendment to Credit Agreement, dated as of January 16, 1998, by
and among the Registrant and certain subsidiaries of the Registrant, as
Borrower, the Lenders referred to therein, First Union National Bank of
Tennessee, as Administrative Agent, and NationsBank of Tennessee, as
Co-Agent. Incorporated by reference to the Company's Annual Report on
Form 10-K, filed with the Commission on April 13, 1998
10(23) -- Second Amendment and Waiver Agreement to Credit Agreement dated as of
October 21, 1998, by and among the Registrant and certain subsidiaries,
as Borrower, the Lenders referred to therein, First Union National Bank
</TABLE>
- 31 -
<PAGE> 34
<TABLE>
<S> <C>
of Tennessee, as Administrative Agent, and NationsBank of Tennessee, as
Co-Agent. Incorporated by reference to the Company's Quarterly Report
on Form 10-Q, filed with the Commission on November 19, 1998
10(23) -- Pledge and Security Agreement dated as of October 21, 1998, by the
Registrant and certain subsidiaries, as Pledgors, and First Union
National Bank as Administrative Agent. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q, filed with the Commission
on November 18, 1998
10(24) -- Letter Agreement dated April 9, 1999 between First Union
National Bank (f/k/a First Union National Bank of Tennessee) as
Administrative Agent, the Registrant, et al. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on June 2, 1999.
10(25) -- Rights Agreement between the Registrant and SunTrust, Atlanta, as
Rights Agent, dated as of June 27, 1997. Incorporated by reference to
the Company's Registration Statement on Form 8-A filed with the
Commission on July 3, 1997
10(26) -- Purchase and Sale Agreement by and between the Registrant and certain
of its Affiliates, as Sellers, and Hospitality Properties Trust, as
Purchaser, dated October 24, 1997. Incorporated by reference to the
Company's Current Report on Form 8-K, filed with the Commission on
November 13, 1997
10(27) -- Agreement to Lease between Hospitality Properties Trust and the
Registrant dated October 24, 1997. Incorporated by reference to the
Company's Current Report on Form 8-K, filed with the Commission on
November 13, 1997
10(28) -- Form of Lease Agreement to be entered into between certain Affiliates
of the Registrant, as Tenant, and Hospitality Properties Trust, as
Landlord. Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on November 13, 1997
10(29) -- Form of Security Agreement to be entered into between certain
Affiliates of the Registrant, as Tenant, and Hospitality Properties
Trust, as Secured Party. Incorporated by reference to the Company's
Current Report on Form 8-K, filed with the Commission on November 13,
1997
10(30) -- Form of Assignment and Security Agreement to be entered into between
certain Affiliates of the Registrant, as Assignor, and Hospitality
Properties Trust, as Assignee. Incorporated by reference to the
Company's Current Report on Form 8-K, filed with the Commission on
November 13, 1997
10(31) -- Form of Stock Pledge Agreement to be entered into between the
Registrant, as Pledgor, and Hospitality Properties Trust, as Secured
Party. Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on November 13, 1997
10(32) -- Form of Limited Guaranty Agreement to be entered into by the
Registrant, as Guarantor, for the benefit of Hospitality Properties
Trust. Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on November 13, 1997
</TABLE>
- 32 -
<PAGE> 35
<TABLE>
<S> <C>
10(33) -- Letter between Hospitality Properties Trust and the Registrant dated
November 19, 1997. Incorporated by reference to the Company's Current
Report on Form 8-K, filed with the Commission on December 3, 1997
10(34) -- Motel Purchase Agreement made as of July 22, 1998. Incorporated by
reference to the Company's Current Report on Form 8-K, filed with the
Commission on September 18, 1998
10(35) -- First Amendment to Motel Purchase Agreement made as of July 22, 1998.
Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on September 18, 1998
10(36) -- Purchase and Sale Agreement by and between the Registrant and
certain of its Affiliates, as Sellers, and HPT Suite Properties
Trust, as Purchaser, dated June 29, 1999. Incorporated by
reference to the Company's Current Report on Form 8-K, filed with
the Commission on July 14, 1999.
10(37) -- Agreement to Lease between HPT Suite Properties Trust and
Suite Tenant, Inc., dated June 29, 1999. Incorporated by
reference to the Registrant's Current Report on Form 8-K, filed
with the Commission on July 14, 1999.
10(38) -- Second Amendment to Lease Agreement and First Amendment to
Incidental Documents entered into between Hospitality Properties
Trust, the Registrant and Suite Tenant, Inc., dated June 29,
1999. Incorporated by reference to the Registrant's Current
Report on Form 8-K, filed with the Commission on July 14, 1999.
10(39) -- Loan and Security Agreement ben and among The Hotel Group, Inc.,
as Borrower, the Registrant, as Holdings, and the financial
institutions that are signatories thereto, the Lenders, and
Foothill Capital Corporation, as Agent, dated as of August 27,
1999. Incorporated by reference to the Company's Current Report
on Form 8-K dated September 15, 1999, filed with the Commission
on September 28, 1999.
10(40) -- Sale and Purchase Agreement between the Registrant and Prime
Hospitality Corp., dated as of March 16, 2000.*
21 -- Subsidiaries of the Registrant*
23(1) -- Consent of Ernst & Young LLP*
23(2) -- Consent of Deloitte & Touche LLP*
27 -- Financial Data Schedule*
</TABLE>
* Filed herewith
(b) No reports on Form 8-K were filed during the fourth quarter ended
December 26, 1999.
(c) Exhibits required by Item 601 of Regulation S-K are listed above.
(d) All financial statement schedules required by Regulation S-X are filed
following the Financial Statements listed above.
- 33 -
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 2000 /s/ Leon Moore
-----------------------
Leon Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------
<S> <C> <C>
/s/ Leon Moore President, Chief Executive March 27, 2000
- ---------------------- Officer, Principal Executive
Leon Moore Officer, Director
/s/ Bob Marlowe Secretary, Treasurer, Chief March 27, 2000
- ---------------------- Financial Officer, Chief
Bob Marlowe Accounting Officer, Principal
Accounting Officer, Director
/s/ Richard L. Johnson Executive Vice President, March 27, 2000
- ---------------------- Director
Richard L. Johnson
/s/ Earl H. Sadler Director March 27, 2000
- ----------------------
Earl H. Sadler
/s/ Helen L. Moskovitz Director March 27, 2000
- ----------------------
Helen L. Moskovitz
</TABLE>
- 34 -
<PAGE> 37
Report of Independent Auditors
Shareholders and Board of Directors
ShoLodge, Inc.
We have audited the accompanying consolidated balance sheets of ShoLodge, Inc.
and subsidiaries as of December 26, 1999 and December 27, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of ShoLodge, Inc and subsidiaries at December 26, 1999 and
December 27, 1998, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Atlanta, Georgia
March 17, 2000
F-1
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShoLodge, Inc.
Hendersonville, Tennessee
We have audited the consolidated statements of earnings, shareholders' equity
and cash flows of ShoLodge, Inc. and subsidiaries (the "Company") for the year
ended December 28, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the operations of ShoLodge, Inc. and
subsidiaries and their cash flows for the year ended December 28, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements the Company
changed its method of accounting for pre-opening costs for the year ended
December 28, 1997.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
April 1, 1998
F-2
<PAGE> 39
ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1999 1998
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,386,937 $ 2,480,984
Restricted cash 1,605,513 701,484
Accounts receivable -
Trade, net of allowance for doubtful accounts
of $459,869 and $642,780 for 1999 and
1998, respectively 4,853,252 3,251,104
Construction contracts 7,674,104 --
Costs and estimated earnings in excess of
billings on construction contracts 3,588,071 27,799
Income taxes receivable 3,335,543 4,775,686
Prepaid expenses 573,064 519,534
Notes receivable, net 468,762 3,363,394
Other current assets 441,023 443,967
--------------------------------
Total current assets 25,926,269 15,563,952
Notes receivable, net 60,887,262 58,390,170
Property and equipment 148,698,134 187,360,706
Less accumulated depreciation and amortization (23,821,643) (20,335,047)
--------------------------------
124,876,491 167,025,659
Land under development or held for sale 9,186,608 9,556,720
Deferred charges, net 8,407,623 9,201,837
Deposits on sale/leaseback 35,280,000 28,000,000
Deferred tax asset -- 127,035
Intangible assets 3,122,173 3,290,162
Other assets 2,627,487 3,845,824
--------------------------------
$ 270,313,913 $ 295,001,359
================================
</TABLE>
F-3
<PAGE> 40
Sholodge, Inc and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1999 1998
------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 9,594,955 $ 11,438,292
Taxes payable other than on income 1,448,602 1,636,220
Current portion of long-term debt and
capitalized lease obligations 2,227,929 21,597,951
----------------------------------
Total current liabilities 13,271,486 34,672,463
Long-term debt and capitalized lease obligations,
less current portion 125,550,557 128,945,784
Deferred income taxes 2,089,297 --
Deferred gain on sale/leaseback 36,307,820 30,158,244
Deferred credits 1,283,605 2,368,523
Minority interests in equity of consolidated
subsidiaries and partnerships 932,809 757,311
----------------------------------
Total liabilities 179,435,574 196,902,325
Shareholders' equity:
Preferred stock (no par value; 1,000,000 shares
authorized; no shares issued) -- --
Series A redeemable nonparticipating stock (no
par value; 1,000 shares authorized; no
shares issued) -- --
Common stock (no par value; 20,000,000 shares
authorized, 5,372,578 and 7,472,310 shares
issued and outstanding as of December 26, 1999
and December 27, 1998, respectively) 1,000 1,000
Additional paid-in capital 42,484,275 42,433,395
Retained earnings 65,512,322 60,973,496
Unrealized gain on securities available-for-sale,
net of income taxes 80,321 67,704
Less treasury stock, at cost, 2,897,300 and
784,000 shares in 1999 and 1998, respectively (17,199,579) (5,376,561)
----------------------------------
Total shareholders' equity 90,878,339 98,099,034
----------------------------------
$ 270,313,913 $ 295,001,359
==================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Hotel $ 66,187,974 $ 69,240,264 $ 71,944,716
Franchising and management 4,151,550 3,118,789 3,163,938
Construction and development 11,234,378 81,077 --
---------------------------------------------------
Total revenues 81,573,902 72,440,130 75,108,654
Cost and expenses:
Operating expenses:
Hotel 46,281,773 44,933,620 42,987,647
Franchising and management 2,419,700 2,392,978 2,301,401
Construction and development 9,825,958 71,351 --
---------------------------------------------------
Total operating expenses 58,527,431 47,397,949 45,289,048
General and administrative 6,342,439 6,357,877 3,952,603
Rent expense, net 13,530,020 9,838,105 1,991,400
Depreciation and amortization 7,100,525 8,012,436 10,376,484
---------------------------------------------------
Income (loss) from operations (3,926,513) 833,763 13,499,119
Other income (expenses):
Interest expense (12,136,415) (10,414,876) (11,298,126)
Interest income 6,182,084 4,949,404 1,762,450
Gain on sale of property 15,001,716 20,631,641 3,818,692
Other income 843,047 441,292 837,611
---------------------------------------------------
Earnings from continuing operations before
income taxes, minority interests, extraordinary
items, and cumulative effect of change in
accounting policy 5,963,919 16,441,224 8,619,746
Income taxes (1,909,000) (6,581,000) (2,259,000)
Minority interests in earnings of consolidated
subsidiaries and partnerships (1,909,605) (647,407) (172,710)
---------------------------------------------------
Earnings from continuing operations before
extraordinary items and cumulative
effect of change in accounting policy 2,145,314 9,212,817 6,188,036
Discontinued operations:
Gain on disposal of discontinued business
segment, net of income tax provision of
$287,000 for 1997 -- -- 526,000
</TABLE>
F-5
<PAGE> 42
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings (continued)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Extraordinary gain (loss) on early extinguishment
of debt, net of income tax effect of
$(1,467,000), $600,000 and $101,000 for 1999,
1998 and 1997, respectively 2,393,512 (1,066,466) (186,124)
Cumulative effect of change in accounting policy,
net of income tax benefit of $691,000 in 1997 -- -- (1,164,114)
-----------------------------------------------------
Net earnings $ 4,538,826 $ 8,146,351 $ 5,363,798
=====================================================
Net earnings per common share:
Basic:
Continuing operations before extraordinary
items and cumulative effect $ 0.33 $ 1.12 $ 0.75
Discontinued operations -- -- 0.06
Extraordinary gain (loss) 0.37 (0.13) (0.02)
Cumulative effect of change in accounting
policy -- -- (0.14)
-----------------------------------------------------
Net earnings $ 0.70 $ 0.99 $ 0.65
=====================================================
Diluted:
Continuing operations before extraordinary items
and cumulative effect $ 0.32 $ 1.07 $ 0.74
Discontinued operations -- -- 0.06
Extraordinary gain (loss) 0.35 (0.12) (0.02)
Cumulative effect of change in accounting policy -- -- (0.14)
-----------------------------------------------------
Net earnings $ 0.67 $ 0.95 $ 0.64
=====================================================
Weighted average common shares outstanding:
Basic 6,517,717 8,190,593 8,244,572
=====================================================
Diluted 6,744,835 8,611,401 8,414,955
=====================================================
Pro forma amounts assuming the change in
accounting policy is applied retroactively:
Earnings from continuing operations before
extraordinary item $ 6,188,036
Earnings per share:
Basic 0.75
Diluted 0.74
Net earnings 6,527,912
Net earnings per share:
Basic 0.79
Diluted 0.78
</TABLE>
See accompanying notes.
F-6
<PAGE> 43
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 26, 1999, December 27, 1998 and December 28, 1997
<TABLE>
<CAPTION>
SERIES A REDEEMABLE
NONPARTICIPATING STOCK COMMON STOCK ADDITIONAL
------------------------------------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 29, 1996 -- $ -- 8,233,318 $1,000 $42,212,042
Exercise of stock options, net -- -- 22,492 -- 219,478
Net earnings -- -- -- -- --
Change in unrealized gain on
securities available-for-sale,
net of income taxes -- -- -- -- --
---------------------------------------------------------------------
Balance, December 28, 1997 -- -- 8,255,810 1,000 42,431,520
Exercise of stock options, net -- -- 500 -- 1,875
Net earnings -- -- -- -- --
Change in unrealized gain on
securities available-for-sale,
net of income taxes -- -- -- -- --
Repurchased -- -- (784,000) -- --
---------------------------------------------------------------------
Balance, December 27, 1998 -- -- 7,472,310 1,000 42,433,395
Exercise of stock options, net -- -- 13,568 -- 50,880
Net earnings -- -- -- -- --
Change in unrealized gain on
securities available-for-sale,
net of income taxes -- -- -- -- --
Repurchased -- -- (2,113,300) -- --
---------------------------------------------------------------------
Balance, December 26, 1999 -- $ -- 5,372,578 $1,000 $42,484,275
=====================================================================
</TABLE>
F-7
<PAGE> 44
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (continued)
Years ended December 26, 1999, December 27, 1998 and December 28, 1997
<TABLE>
<CAPTION>
UNREALIZED GAIN
ON SECURITIES COST OF
AVAILABLE-FOR- COMMON
RETAINED SALE, NET OF SHARES
EARNINGS INCOME TAXES REPURCHASED TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 29, 1996 $47,463,347 $ 59,739 $ -- $ 89,736,128
Exercise of stock options, net -- -- -- 219,478
Net earnings 5,363,798 -- -- 5,363,798
Change in unrealized gain on
securities available-for-sale,
net of income taxes -- 32,568 -- 32,568
-------------------------------------------------------------------
Balance, December 28, 1997 52,827,145 92,307 -- 95,351,972
Exercise of stock options, net -- -- -- 1,875
Net earnings 8,146,351 -- -- 8,146,351
Change in unrealized gain on
securities available-for-sale,
net of income taxes -- (24,603) -- (24,603)
Repurchased -- (5,376,561) (5,376,561)
-------------------------------------------------------------------
Balance, December 27, 1998 60,973,496 67,704 (5,376,561) 98,099,034
Exercise of stock options, net -- -- -- 50,880
Net earnings 4,538,826 -- -- 4,538,826
Change in unrealized gain on
securities available-for-sale,
net of income taxes -- 12,617 -- 12,617
Repurchased -- -- (11,823,018) (11,823,018)
-------------------------------------------------------------------
Balance, December 26, 1999 $65,512,322 $ 80,321 $(17,199,579) $ 90,878,339
===================================================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 45
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings from continuing operations before
extraordinary items and cumulative effect of
change in accounting policy $ 2,145,314 $ 9,212,817 $ 6,188,036
Adjustments to reconcile earnings from continuing
operations before extraordinary items and
cumulative effect of change in accounting
policy to net cash (used in) provided by
operating activities:
Gain from discontinued operations -- -- 813,000
Extraordinary gain (loss) on early
extinguishment of debt 3,860,512 (1,666,466) (287,124)
Depreciation and amortization 7,100,525 8,012,436 11,034,031
Accretion of discount on securities held to
maturity -- (442,427) (691,175)
Recognition of previously deferred profit (5,140,869) (1,850,364) (1,194,555)
Gain on sale of property and other assets (15,001,716) (20,631,641) (3,818,692)
Deferred income tax provision 2,216,333 4,289,965 (8,831,039)
Minority interests in earnings of consolidated
subsidiaries and partnerships 1,909,605 647,407 172,710
Changes in assets and liabilities:
Increase in restricted cash (904,029) (205,484) (496,000)
Increase in trade receivables (1,602,148) (250,480) (272,466)
Increase in construction contract receivables (7,674,104) -- --
Increase in cost and estimated earnings in
excess of billings on construction
contracts (3,560,272) -- --
Decrease (increase) in income taxes
receivable 1,440,143 1,356,468 (6,132,154)
(Increase) decrease in prepaid expenses (53,530) 13,164 (60,875)
(Increase) decrease in other assets (1,996,952) (1,220,791) 1,066,360
(Decrease) increase in accounts payable and
accrued expenses (1,843,337) 518,580 (1,126,003)
Decrease in income and other taxes payable (1,662,354) (492,538) (349,950)
----------------------------------------------------
Net cash used in operating activities (20,766,879) (2,709,354) (3,985,896)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments from notes receivable 12,317,668 174,424 --
Capital expenditures (20,101,074) (72,473,490) (55,907,485)
Proceeds from sale of property and other assets 70,915,913 9,089,264 141,959,540
Deposits on sale/leaseback of hotels (7,280,000) -- (28,000,000)
----------------------------------------------------
Net cash provided by (used in) investing activities 55,852,507 (63,209,802) 58,052,055
</TABLE>
F-9
<PAGE> 46
ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in deferred loan financing
charges 457,712 1,236,761 (2,353,085)
Proceeds from long-term debt 26,149,754 25,300,000 124,207,614
Payments on long-term debt (48,681,641) (8,758,117) (120,946,562)
Payments on capitalized lease obligations (233,362) (603,743) (642,719)
Distributions to minority interests (100,000) (2,009,580) (201,148)
Exercise of stock options 50,880 1,875 219,478
Purchase of treasury stock (11,823,018) (5,376,561) --
----------------------------------------------------
Net cash (used in) provided by financing activities (34,179,675) 9,790,635 283,578
Net increase (decrease) in cash and cash equivalents 905,953 (56,128,521) 54,349,737
Cash and cash equivalents at beginning of year 2,480,984 58,609,505 4,259,768
----------------------------------------------------
Cash and cash equivalents at end of year $ 3,386,937 $ 2,480,984 $ 58,609,505
====================================================
</TABLE>
See accompanying notes.
F-10
<PAGE> 47
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 26, 1999, December 27, 1998 and December 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The business activities of ShoLodge, Inc. and subsidiaries (the "Company") are
composed primarily of owning, franchising, operating and constructing lodging
facilities. Presently there are two brands, Sumner Suites and Shoney's Inns. As
of December 26, 1999, the Company derives its hotel revenues from both brands
from 22 owned properties and 20 leased properties located in 13 states across
the United States. Of these 42 properties, 13 are located in Texas and 7 are
located in Georgia. No other state has more than three properties. A summary of
the significant accounting policies used in the preparation of the accompanying
consolidated financial statements follows.
The Consolidated Financial Statements include the accounts of the Company and
its majority-owned and controlled subsidiaries and partnerships. All significant
intercompany items and transactions have been eliminated. The Company is the
managing general partner in the partnership entities.
The Fiscal Year of the Company consists of 52/53 weeks ending the last Sunday of
the calendar year.
Accounting Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents include highly liquid investments with original
maturities of three months or less.
F-11
<PAGE> 48
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted Cash represents $200,000 at one of the Company's major banks and the
balance is the cash funded in a reserve account as provided for in the lease
agreement on the sale/leaseback transaction (see Note 12) to cover the cost of
replacement, renewals, certain repairs and maintenance, major repairs,
alteration improvements, and renewals or replacements to the hotels' buildings,
furnishings, fixtures and equipment. The Company is required to add to the
account each year by a percentage of total annual hotel sales as defined in the
lease agreement. The applicable percentage was 3% in 1998, 4% in 1999 (3% for
four of the properties) and 5% will be each year thereafter during the term of
the lease (4% for four of the properties for 2000). The disbursements from this
fund are restricted to the above-listed uses as defined in the lease agreement.
Accounts Receivable from Construction Contracts include billed amounts earned on
construction contracts open at the date of the balance sheet. Revenues and costs
in 1999 include approximately $515,000 related to unexecuted change orders.
Costs and estimated earnings in excess of billings on construction contracts
were not billable to customers at the date of the balance sheet. As of December
26, 1999, construction amounts receivable were primarily from two contracts with
the same third party customer ($10,978,000 of the total of $11,262,000).
Property and Equipment is recorded at cost. Depreciation is computed primarily
on the straight-line method over the estimated useful lives of the related
assets, generally forty years for buildings and improvements and seven years for
furniture, fixtures and equipment. Equipment under capitalized leases is
amortized over the shorter of the estimated useful lives of the related assets
or the lease term using the straight-line method. Significant improvements are
capitalized while maintenance and repairs are expensed as incurred. The Company
capitalizes direct and indirect costs of construction and interest during the
construction period. Interest costs capitalized during the years ended December
28, 1997, December 27, 1998 and December 26, 1999 were approximately $3,485,000,
$3,219,000, and $2,004,000, respectively. Preopening costs are expensed as
incurred effective at the beginning of fiscal year 1997 (See Note 2).
F-12
<PAGE> 49
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Land Under Development or Held For Sale consists of land adjacent to
Company-owned hotels. The Company actively develops these sites to enhance the
profitability of the hotels.
Deferred Charges include loan costs incurred in obtaining financing and are
amortized using the interest method over the respective terms of the related
debt. In addition, deferred charges include costs incurred in amending the
Company's franchise license agreement, which is being amortized on the
straight-line method over twenty years. Accumulated amortization totaled
$3,541,811 and $3,967,041 as of December 27, 1998 and December 26, 1999,
respectively.
Investments. The Company's investment securities have been classified as either
available-for-sale or held to maturity. The available-for-sale securities are
carried at fair value with unrealized holding gains and losses, net of tax
effects, reported as a separate component of shareholders' equity. The
held-to-maturity securities are carried at amortized cost.
Intangible Assets include excess of cost over fair value of net assets acquired
(goodwill) in the amount of $2,837,019 at December 27, 1998 and $2,687,045 at
December 26, 1999, respectively, which is amortized on the straight-line method
over a period of twenty-five years. The amounts reported are net of accumulated
amortization of $912,306 and $1,062,279, as of 1998 and 1999, respectively. In
addition, costs of trademark are included in the amount of $453,143 and $435,128
as of 1998 and 1999, respectively, and are amortized on the straight-line method
over a period of twenty years. This amount is net of accumulated amortization of
$33,620 and $56,812 as of 1998 and 1999, respectively.
Other Assets include the long-term portion of notes receivables, cash surrender
value of life insurance, non-current portion of direct financing leases,
securities available for sale, and base linens stock. Base linens stock is
amortized to fifty percent of its initial cost on a straight-line basis over a
thirty-six month period.
F-13
<PAGE> 50
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Asset Impairment. The Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows related to those assets are less than their carrying
amounts. The Company records impairment losses on long-lived assets under
development or held for sale when indications of impairment are present and the
estimated fair value less costs to sell is less than their carrying amount.
Advertising. The Company charges the costs of advertising to expense as
incurred. Advertising expense was approximately $2,988,000, $2,311,000 and
$1,920,000 for the years ended December 28, 1997, December 27, 1998 and December
26, 1999, respectively.
Income Taxes. The Company uses the liability method to account for income taxes.
Revenues from hotel operations are recognized as services are rendered.
Construction and development revenues from fixed-price and modified fixed-price
construction contracts, are recognized based on the percentage of completion
method, measured by the percentage of cost incurred to total estimated cost for
each contract. This method is used because management considers it to be the
best available measure of progress on these contracts. Franchising and
management revenues are recognized as earned. Profit from the sale of land and
hotel properties is recognized at the time the sale is consummated, the minimum
down payment is received, and there is no significant continuing involvement.
Earnings Per Common Share for all periods has been computed in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share. Basic earnings per share is computed by dividing earnings by the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share is computed by dividing earnings by weighted average number of
common shares outstanding during the year plus incremental shares that would
have been outstanding upon the assumed exercise of dilutive options and the
assumed conversion of dilutive debentures. See Note 6 for a reconciliation of
basic and diluted earnings per share.
F-14
<PAGE> 51
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation. The Company uses the intrinsic value method for
valuing its awards of stock options and recording the related compensation
expense, if any. See Note 8 for pro forma disclosures using the fair value
method as described in SFAS No. 123, Accounting for Stock-Based Compensation.
Concentrations of Credit Risk. Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments and trade receivables. The Company places its cash investments with
high credit quality financial institutions who are members of the FDIC thus
reducing any potential risk. Concentrations of credit risk with respect to trade
receivables are limited due to the Company's large number of customers and their
dispersion across many geographic areas. Notes receivable are from a group of
affiliated companies which acquired and operate the 16 hotels described in Note
13.
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 the amounts of other comprehensive income included in
equity for the years ended December 26, 1999, December 27, 1998 and December 28,
1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net unrealized gain (loss) on securities
available for sale $13,000 $(25,000) $33,000
</TABLE>
Reclassifications. Certain reclassifications have been made in the 1997 and 1998
consolidated financial statements to conform to the classifications used in
1999.
F-15
<PAGE> 52
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING CHANGE
In the fourth quarter of fiscal 1997, the Company changed its method of
accounting for pre-opening costs, effective December 30, 1996, whereby
pre-opening costs are expensed as incurred rather than the previous method of
capitalizing such costs and amortizing them over a three-year period. The
Company believes the new method is preferable in the circumstances and conforms
to the predominant practice in the industry.
The cumulative effect of the change for periods prior to fiscal 1997, net of
income tax effect, is a reduction in net earnings of $1,164,114 or $0.14 per
share and was recognized in the first quarter of 1997.
On December 29, 1997, the Company adopted the practice of capitalizing only
directly identifiable internal costs of identifying and acquiring commercial
properties to be developed in accordance with Emerging Issues Task Force
("EITF") Issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions." The implementation of this EITF resulted in increased
operating costs of approximately $1,353,000 and $835,000 in 1998 and 1999,
respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1999 1998
---------------------------------
<S> <C> <C>
Land and improvements $ 25,799,108 $ 36,842,353
Buildings and improvements 91,250,926 100,989,405
Furniture, fixtures and equipment 29,209,987 29,686,485
Equipment under capitalized leases 1,596,278 2,103,182
Construction in progress 841,835 17,739,281
--------------------------------
148,698,134 187,360,706
Less accumulated depreciation and amortization (23,821,643) (20,335,047)
--------------------------------
$ 124,876,491 $ 167,025,659
================================
</TABLE>
F-16
<PAGE> 53
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt and capitalized lease obligations consist of:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Industrial revenue bonds, due in varying
amounts through 2017 $ 3,055,000 $ 3,120,000
7.50% Convertible subordinated debentures 50,004,000 54,000,000
9.75% Series A senior subordinated notes 28,909,000 33,021,000
9.55% Series B senior subordinated notes 27,112,000 34,995,000
Bank credit facility 12,000,000 20,300,000
Notes payable - bank and other, bearing interest
at 7.50% to 8.94%, due in varying amounts
through 2003 6,505,571 4,497,859
Notes payable - due in varying amounts
through 2000 3,324 41,745
Capitalized lease obligations 189,591 568,131
--------------------------------
127,778,486 150,543,735
Less current portion (2,227,929) (21,597,951)
--------------------------------
$ 125,550,557 $ 128,945,784
================================
</TABLE>
The Industrial Revenue Bonds ("IRBs") and substantially all notes payable are
collateralized by property and equipment with a net book value of approximately
$12 million at December 26, 1999. Additionally, the IRBs, are collateralized by
irrevocable letters of credit and are guaranteed by the Company. The interest
rate on the IRBs is a variable rate reset weekly by the remarketing agent (5.01%
at December 26, 1999).
F-17
<PAGE> 54
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
The Company's 7.50% convertible subordinated debentures mature in May 2004 with
interest payable in semi-annual installments. The debentures are convertible at
any time before maturity, unless previously redeemed, into common stock of the
Company at a conversion price of $23.31 per share, subject to adjustment. The
debentures are unsecured and subordinated in right of payment to the prior
payment in full of all existing and future senior indebtedness, as defined in
the debentures. The Company, at its option, can redeem the bonds beginning in
May 1997 at 105.25% of par, declining .75% each year thereafter to par in May
2004.
During November 1996, the Company issued $33,150,000 of 9.75% senior
subordinated notes, Series A, under an aggregate $125,000,000 senior
subordinated indenture agreement. The notes mature in November 2006, with
interest payable quarterly. The notes are unsecured and subordinated in right of
payment to the prior payment in full of all existing and future senior
indebtedness of the Company. Additionally, in September 1997, the Company issued
$35,000,000 of 9.55% senior subordinated notes, Series B, also under the
aggregate $125,000,000 senior subordinated indenture agreement. The notes mature
in September 2007, with interest payable quarterly. The notes are unsecured and
subordinated in right of payment in full of all other senior indebtedness of the
Company and will be senior in right of payment to, or pari passu with all other
subordinated indebtedness of the Company, including the Series A notes.
In 1998 and 1997, the Company had an unsecured, three-year revolving credit
facility with a group of five banks. The credit facility matured June 30, 1999,
and the outstanding balance of $25.2 million was repaid in full on June 29,
1999. The interest rate on this credit facility was at the lender's base rate,
or one hundred seventy-five basis points over the 30, 60, 90 or 180 day LIBOR
rate, at the Company's option.
The Company entered into a new three year credit facility with a new bank group
effective August 27, 1999. The new credit facility is for an initial amount of
$30 million (a $10 million term loan and a $20 million revolving line of
credit), secured by a pledge of certain promissory notes payable to the Company
received in connection with the sale
F-18
<PAGE> 55
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
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 marked value of the underlying real
property collateral securing the pledged notes, or (c) $30 million. The interest
rate is at the lender's base rate (8.50% at December 26, 1999) 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
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
December 26, 1999, the Company had $12 million in borrowings outstanding under
this credit facility, including $10 million under the three year term loan.
The Company also maintains a $1 million unsecured line of credit with another
bank, bearing interest at the lender's prime rate, maturing May 31, 2000. As of
December 26, 1999, the Company had no borrowings outstanding under this credit
facility.
In November 1997, the Company repaid approximately $10,500,000 of equipment
loans with the proceeds of the sale/leaseback transaction (Note 12). This early
retirement of loans resulted in an extraordinary pretax charge of approximately
$287,000 for the year ended December 28, 1997.
In September 1998 the Company repaid approximately $14,111,000 of debt with the
proceeds of the sale of 16 hotels (Note 13). This early retirement of debt
resulted in an extraordinary pretax charge of approximately $1,666,000 for the
year ended December 27, 1998.
F-19
<PAGE> 56
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
From October 1, 1999, through December 26, 1999, the Company repurchased
$12,598,000 of the Company's previously issued subordinated debt at a discount
from face value resulting in an extraordinary pretax gain of approximately
$3,861,000, net of the write-off of related unamortized deferred financing costs
for the year ended December 26, 1999.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 2,038,338
2001 1,173,814
2002 12,718,896
2003 2,501,592
2004 50,515,255
Thereafter 58,641,000
=============
$ 127,588,895
=============
</TABLE>
See Note 5 for capitalized lease obligation maturities.
5. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain property and equipment under
noncancelable operating and capitalized lease agreements. Total rental expense
under operating leases for the years ended December 28, 1997, December 27, 1998
and December 26, 1999 was approximately $2,711,000, $15,056,000 and $18,476,000,
respectively.
F-20
<PAGE> 57
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rental payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
------------------------------
<S> <C> <C>
2000 $ 21,778,543 $ 206,120
2001 21,725,000 --
2002 21,725,000 --
2003 21,726,100 --
2004 21,729,400 --
Thereafter 141,158,729 --
-----------------------------
$249,842,772
=============
Less amount representing interest at 9.5% (16,529)
Less current portion (189,591)
----------
$ --
==========
</TABLE>
The Company is self-insured for workers' compensation benefits up to $500,000
annually in aggregate and $250,000 per occurrence and has recorded a reserve for
all outstanding claims at December 26, 1999. While the Company's ultimate
liability may exceed or be less than the amount accrued, the Company believes
that it is unlikely that it would experience losses that would be materially in
excess of such estimated amounts. In addition to the reserves recorded, the
Company had outstanding letters of credit in the amount of $667,000, $667,000
and $45,000, as of December 28, 1997, December 27, 1998, and December 26, 1999,
respectively, to satisfy workers compensation self-insurance security deposit
requirements.
F-21
<PAGE> 58
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is or has been a party to legal proceedings incidental to its
business. In the opinion of management, any ultimate liability with respect to
these actions will not materially affect the consolidated financial position or
results of operations of the Company. The following is a summary of legal action
pending against the Company and action recently concluded.
In 1997, Tri-State Inns, Inc. and Motels of America, Inc. filed a suit against
ShoLodge Franchise Systems, Inc., a subsidiary of the Company, seeking to be
discharged, relieved and excused of any future performance under the License
Agreement relating to 14 Shoney's Inns, or in the alternative, compensatory
damages, based on theories of alleged breach of contractual obligations and
implied warranties of good faith and fair dealing, alleged fraudulent inducement
based on alleged misrepresentations and alleged failure to make material
disclosures of fact, alleged promissory estoppel and alleged breach of fiduciary
duty. In addition, the plaintiffs originally sought a declaratory judgment
concerning the provision of the License Agreement which specifies the damages
due upon termination of the License Agreement. On March 18, 1998, the plaintiffs
filed a motion for summary judgment seeking to invalidate the non-competition
and stipulated damages provisions set forth in the License Agreements. On August
6, 1998, the court denied the plaintiff's motion. The Company also had filed
counter claims against the plaintiffs. The case was dismissed on July 16, 1999,
in accordance with a settlement agreement entered into by the parties, pursuant
to which the parties exchanged mutual releases and Tri-State and its affiliates
agreed to pay the Company a total of $1,175,000 in cash ($575,000 at the
settlement date and $200,000 each year for the next three years). The case is
now concluded. The total of $1,175,000 was recognized as franchising revenues in
1999.
In 1998, two purported class action lawsuits were filed against the Company and
certain officers of the Company, by plaintiffs who claim to be shareholders and
debt security holders of the Company, respectively, both alleging that the
Company violated certain anti-fraud provisions of the Tennessee Securities Act
of 1980, as amended, by issuing allegedly false and misleading statements and
financial information to the investing public. The complaints sought an
unspecified amount of damages and unspecified injunctive relief. The Company
filed motions to dismiss both suits on the basis that the plaintiff's
allegations failed to state a cause of action under the applicable state
statute.
F-22
<PAGE> 59
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The trial court denied both motions. On January 29, 1999, the Company filed its
appellate brief. The case was argued before the Court of Appeals on May 7, 1999.
On December 15, 1999, a settlement agreement was entered into by the parties
which, if approved by the Court, would result in the dismissal of both actions
with prejudice. Pursuant to the terms of the settlement, the Company will pay
$100,000 and will agree to redeem up to $675,000 of its debt securities at 75%
of par value or the purchase price of the security, whichever is less. The
Company's insurance carrier has agreed to contribute $1,250,000 toward this
settlement. It is expected that the Court will consider the fairness of the
settlement in May 2000. The Company believes the settlement will be approved by
the Court, and if so, there will be no material adverse impact on the Company.
In 1998, a former chief financial officer of the Company, filed a lawsuit
against the Company and its chief executive officer alleging that his employment
by the Company was wrongfully terminated, claiming breach of contract, fraud,
retaliatory discharge and related claims. The plaintiff seeks $3 million in
compensatory damages and punitive and treble damages. On December 31, 1998 the
Company filed a motion to dismiss this lawsuit on the basis that the plaintiff
has intentionally destroyed relevant evidence during the pendency of the case.
The court granted this motion on January 28, 1999 and dismissed the case with
prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or Amend the
judgement dismissing the case. The court denied the motion on April 23, 1999.
The plaintiff has filed an appeal with the Tennessee Court of Appeals. No date
for argument has been set in the Court of Appeals. The Company believes the suit
is without merit and will defend itself vigorously.
F-23
<PAGE> 60
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EARNINGS PER SHARE
The following tables reconcile earnings and weighted average shares used in the
earnings per share ("EPS") calculations for fiscal years 1999, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
Earnings from continuing operations before
extraordinary items and cumulative effect of
change in accounting policy $2,145,314 $ 9,212,817 $ 6,188,036
Gain on disposal of discontinued business segment -- -- 526,000
Extraordinary gain (loss) 2,393,512 (1,066,466) (186,124)
Cumulative effect of change in accounting policy -- -- (1,164,114)
----------------------------------------------
Numerator for basic earnings per share- earnings
available to shareholders $4,538,826 $ 8,146,351 $ 5,363,798
==============================================
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 6,517,717 8,190,593 8,244,572
Effect of dilutive securities:
Options 227,118 420,808 170,383
----------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversion 6,744,835 8,611,401 8,414,955
==============================================
BASIC EARNINGS PER SHARE:
Continuing operations before extraordinary
items and cumulative effect $ 0.33 $ 1.12 $ 0.75
Discontinued operations -- -- 0.06
Extraordinary gain (Loss) 0.37 (0.13) (0.02)
Cumulative effect of change in accounting policy -- -- (0.14)
----------------------------------------------
Net earnings $ 0.70 $ 0.99 $ 0.65
==============================================
</TABLE>
F-24
<PAGE> 61
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 26 DECEMBER 27, DECEMBER 28,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
DILUTED EARNINGS PER SHARE:
Continuing operations before extraordinary
items and cumulative effect $0.32 $1.07 $0.74
Discontinued operations -- -- 0.06
Extraordinary gain (Loss) 0.35 (0.12) (0.02)
Cumulative effect of change in accounting
policy -- -- (0.14)
-----------------------------------------
Net earnings $0.67 $0.95 $0.64
=========================================
</TABLE>
The Company's 7.5% debentures were convertible into 2,316,602, 2,316,602, and
2,283,252 shares of stock at December 28, 1997, December 27, 1998 and December
26, 1999, respectively, but were not included in the computation of diluted EPS,
as such securities were anti-dilutive.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, and
borrowings under lines of credit approximate fair values due to the short-term
maturities of these instruments. The carrying value of notes receivable
approximate fair value due to the recent advancement of funds at market interest
rates and terms based upon the nature of the loans. The carrying value of
industrial revenue bonds approximate fair value due to the weekly remarketing of
these instruments. The fair value of convertible subordinated debentures and
senior subordinated notes was based upon quoted market prices at those dates.
The convertible subordinated debentures and senior subordinated notes have the
following estimated fair values as of December 26, 1999 and December 27, 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Convertible subordinated
Debentures $ 31,190,000 $ 50,004,000 $ 33,480,000 $ 54,000,000
Senior subordinated
notes 36,974,000 56,021,000 44,210,000 68,016,000
----------------------------- -----------------------------
$ 68,164,000 $106,025,000 $ 77,690,000 $122,016,000
============================== =============================
</TABLE>
F-25
<PAGE> 62
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
As of December 26, 1999 and December 27, 1998, securities available-for-sale are
carried at fair value in accordance with SFAS No. 115.
8. STOCK OPTION PLAN
The Company's 1991 Stock Option Plan (the "Plan"), authorizes the grant to key
employees of options to purchase up to an aggregate of 616,667 shares of common
stock. The exercise price of options granted under the terms of the Plan must
not be less than 100% of the fair market value of the shares as of the date of
grant, or 110% of the fair market value for incentive stock options granted to
option holders possessing more than 10% of the total combined voting power of
all classes of stock of the Company. Under the Plan, the options are exercisable
at various periods from one to five years after date of grant and expire ten
years after date of grant. During the year ended December 29, 1996, an
additional 283,333 shares were authorized for future grants.
F-26
<PAGE> 63
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Plan for the years ended December 28, 1997,
December 27, 1998 and December 26, 1999, follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO OPTION
-------------------------------------
AVAILABLE FOR WEIGHTED AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
-------------------------------------
<S> <C> <C> <C>
December 29, 1996 236,781 641,858 $10.45
Granted (194,000) 194,000 13.25
Exercised -- (22,492) 9.76
Canceled 12,494 (12,494) 12.88
------------------------------------
December 28, 1997 55,275 800,872 11.11
Granted (722,537) 722,537 3.75
Exercised -- (500) 3.75
Canceled 800,872 (800,872) 11.11
------------------------------------
December 27, 1998 133,610 722,037 3.75
Granted (5,000) 5,000 5.50
Exercised -- (13,568) 3.75
Canceled 18,134 (18,134) 3.75
------------------------------------
December 26, 1999 146,744 695,335 3.76
====================================
</TABLE>
On September 23, 1998, the Company repriced approximately 723,000 stock options
that had been granted in previous years. The options were repriced to $3.75 per
share, which was the market value of the Company's stock on September 23, 1998.
These repriced options are included as cancellations and new grants in the table
above for the year ended December 27, 1998.
F-27
<PAGE> 64
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLAN (CONTINUED)
The weighted average fair value of options granted during the year was $3.75 and
$5.50 for the years ended December 28, 1998 and December 26, 1999, respectively.
The following table summarizes information relating to the stock options
outstanding as of December 26, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 26, CONTRACTUAL EXERCISE DECEMBER 26, EXERCISE
PRICE 1999 LIFE PRICE 1999 PRICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.75 307,334 2.13 $3.75 307,334 $3.75
3.75 66,001 4.05 3.75 66,001 3.75
3.75 66,000 5.33 3.75 52,800 3.75
3.75 93,000 6.59 3.75 55,800 3.75
3.75 158,000 7.42 3.75 63,200 3.75
5.50 5,000 9.39 5.50 -- --
-------- -------
695,335 545,135
======== =======
</TABLE>
Had the fair value of options granted under the plan beginning in 1996 been
recognized as compensation expense on a straight-line basis over the vesting
period of the options, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings As reported $4,538,826 $8,146,351 $5,363,798
Pro forma 3,898,931 7,539,654 4,889,823
Basic earnings As reported 0.70 0.99 0.65
Per share Pro forma 0.60 0.92 0.59
Diluted earnings As reported 0.67 0.95 0.64
Per share Pro forma 0.58 0.88 0.58
</TABLE>
F-28
<PAGE> 65
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLAN (CONTINUED)
The pro forma effect on net earnings for 1997, 1998 and 1999 is not
representative of the pro forma effect on net earnings in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999: no dividend yield for all
years; expected volatility of 45%, 33% and 32%, respectively; risk free interest
rates of 6.79%, 6.00% and 6.10%, respectively; and expected lives of 10, 9 and 9
years, respectively.
9. SHAREHOLDERS' EQUITY
In 1999 and prior years, the Company's Board of Directors authorized the
repurchase of various amounts of its common stock, so that through December 26,
1999, the total authorized amount of the Company's common stock repurchases was
$20,000,000. The cumulative number of shares repurchased as of December 26,
1999, was 2,897,300 shares at a cost of $17,199,579.
F-29
<PAGE> 66
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Current expense (benefit):
Federal $ (278,165) $2,215,788 $11,785,000
State (29,168) 75,247 (207,000)
-----------------------------------------------
(307,333) 2,291,035 11,578,000
Deferred expense (benefit) 2,216,333 4,289,965 (9,319,000)
-----------------------------------------------
$1,909,000 $6,581,000 $ 2,259,000
===============================================
</TABLE>
The difference between income taxes using the effective income tax rate and the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Federal income tax based on the
statutory rate $ 2,087,372 $ 5,754,428 $ 3,017,000
State income taxes, less
federal income tax benefit 218,876 603,393 317,000
State income tax refund
received, less Federal
provision -- (137,337) (1,115,000)
Minority interest (738,444) (250,352) --
Interest on deferred gain 250,028 314,015 --
Permanent differences & other 91,168 296,853 40,000
---------------------------------------------
$ 1,909,000 $ 6,581,000 $ 2,259,000
=============================================
</TABLE>
F-30
<PAGE> 67
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------------------------------
<C> <C> <C>
Deferred tax liabilities:
Differences between book and tax
basis of property $ (8,590,000) $ (7,548,000)
Profits not recognized on installment
sales (7,051,000) (5,434,000)
Direct financing leases (90,000) (114,000)
Other (130,000) --
--------------------------------
(15,861,000) (13,096,000)
Deferred tax assets:
Deferred profit on sales of hotels 12,799,000 11,996,000
Differences between book and tax losses
recognized by minority interests 638,000 742,000
Allowance for doubtful accounts 179,000 249,000
Other 156,000 236,035
--------------------------------
13,772,000 13,223,035
--------------------------------
Net deferred tax (liability) asset $ (2,089,000) $ 127,035
================================
</TABLE>
As of December 26, 1999 and December 27, 1998, the Company has recorded a
deferred tax liability resulting from the unrealized gain on securities
available-for-sale of $53,000 and $45,000, respectively.
In December 1997, the Company recorded state income tax refunds attributable to
certain restructuring changes. The effect of these refunds has been included as
a reduction to the 1997 state income tax provision, net of the federal taxes due
on such amount.
F-31
<PAGE> 68
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS
Effective January 1, 1996, the Company sold its sixty percent interest in a
corporation which owned five restaurants to the minority shareholder in exchange
for approximately $848,000. The entire purchase price, along with approximately
$1,250,000 of previously existing indebtedness of the corporation and the
minority shareholder, was financed by the Company over a seven year period with
interest accruing annually at the prime rate as defined in the note agreements.
As a result of the transaction, the Company initially deferred recognition of
the approximate $853,000 gain from the sale of this segment until such time
further principal payments on the note were received which would support full
collectibility of the note. For the year ended December 29, 1996, approximately
$40,000 was recorded as a gain on disposal of discontinued business segment. In
December 1997, management determined the amount to be fully collectible based on
positive cash flows of the restaurants and past collection experience;
therefore, the remaining pre-tax $813,000 was recorded as a gain on disposal of
discontinued business segment for the year ended December 28, 1997.
F-32
<PAGE> 69
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. SALE/LEASEBACK TRANSACTIONS
In November 1997, the Company entered into a sale and leaseback agreement for 14
of its Sumner Suites hotels. In June 1999, the Company entered into a similar
sale and leaseback agreement with the same party for an additional six of its
Sumner Suites hotels. The assets of the hotels were sold to a real estate
investment trust and the hotels continue to be operated by the Company. The
lease is classified as an operating lease. The original lease term was for ten
years with five renewal periods of ten years each. In 1999, the original lease
term was extended to expire June 30, 2011.
The Company sold hotel assets in 1997 with a net book value of approximately
$101.5 million for $140 million in cash. The gain of approximately $34.9 million
was initially deferred and is being recognized on the straight-line method over
the initial lease term, as amended in 1999, as a reduction of rent expense. The
1999 cash sale price of the six hotels was $65 million; these hotels had a net
book value of approximately $54 million. The $11 million gain was deferred and
is being recognized over the remainder of the 12-year lease term. The minimum
base rental is $21.3 million annually with contingent rent due of 8% of the
excess of the leased hotels' base revenues (as defined in the lease agreement)
beginning in 1999. Contingent rentals totaled $91,000 during 1999.
The Company was required to pay a deposit of $14 million (increased to $21.3
million in 1999) to be retained by the purchaser in the event of default or
nonobservance of the lease agreement. The deposit will be refunded to the
Company at the end of the lease term in the event no default has occurred. This
non-interest bearing deposit is included in long-term deposits on sale/leaseback
on the accompanying consolidated balance sheets.
The Company was also required to provide an additional deposit of $14 million.
This deposit, included in long-term deposits on sale/leaseback, earns interest
at a rate of 11.11% annually. Interest earned is credited to the required rent
payment due the lessor. The deposit will be refunded to the Company upon the
earlier of achievement of certain operating results of the leased hotels or
expiration of the lease.
F-33
<PAGE> 70
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. SALE OF HOTELS
During 1998, the Company sold 16 of its company-owned Shoney's Inn hotels for
$90 million. The sales price consisted of $22.5 million in cash with the balance
of $67.5 million in the form of interest-bearing promissory notes. Profit was
recognized on twelve of the sales under the full accrual method of accounting.
Profit of approximately $12 million on the other four hotels sold was accounted
for under the installment method, $77,000 of which was recognized in 1998, with
the remaining $11.9 million recognized in 1999 as the criteria for full accrual
sales accounting were satisfied. The deferred profit of $4.6 million and $7.3
million are netted against current notes receivable and non-current notes
receivable, respectively, as of December 27, 1998. All of the deferred profit
was recognized as of December 26, 1999. As of December 27, 1998, deferred
credits totaling $2.4 million related to the 12 hotels on which profit was
recognized under the full accrual method were recorded of which $262,000 was
used for the completion of renovation and replacement expenditures. The
remaining $2.1 million deferred credit is being reduced as the buyer reduces its
payments to the Company for payments of interest on debt assumed by the buyer.
As of December 26, 1999, the balance of this deferred credit was $1.3 million.
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for interest $ 14,030,265 $ 13,669,330 $ 11,800,125
================================================
Cash paid during the year for
income taxes $ 277,890 $ 2,572,681 $ 18,604,588
================================================
Significant non-cash investing and
financing activities:
Sales of hotels:
Notes receivable -- $ 67,500,001 $ 4,500,000
Property and equipment -- (67,500,001) (4,500,000)
------------------------------------------------
$ -- $ -- $ --
================================================
</TABLE>
F-34
<PAGE> 71
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. OPERATING SEGMENT INFORMATION
The Company's significant operating segments are hotel operations, franchising
and management and construction and development. The hotel operating segment has
exceeded 90%, 90%, and 80% of total revenues for the years ending December 28,
1997, December 27, 1998, and December 26, 1999, respectively. 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.
Revenues from the franchising and management segment include franchising
revenues from one controlled group of franchisees of 16 Shoney's Inns which
contributed approximately $426,000, or 13.7%, and $1.0 million, or 24.8%, of
total franchising and management revenues in 1998 and 1999, respectively.
Construction and development revenues earned in 1999 included two construction
contracts with one customer comprising approximately $11.0 million, or 97.7%, of
total construction revenues.
F-35
<PAGE> 72
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. OPERATING SEGMENT INFORMATION (CONTINUED)
A summary of the Company's operations by segment follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Revenues:
Hotel revenues from external
customers $ 66,188 $ 69,240 $ 71,945
Franchising and management 8,688 8,443 9,045
Construction and development 26,413 57,071 35,808
Elimination of intersegment
revenue franchising and
construction (19,715) (62,314) (41,689)
------------------------------------------
Total revenues $ 81,574 $ 72,440 $ 75,109
==========================================
Operating profit:
Hotel $ 350 $ 6,989 $ 16,780
Franchising and management (5,617) (6,140) (3,170)
Construction and development 1,340 (16) (111)
------------------------------------------
Total operating profit $ (3,927) $ 833 $ 13,499
==========================================
Total assets:
Hotel $ 200,773 $ 245,893 $ 201,302
Franchising and management 57,986 48,680 98,136
Construction and development 11,555 428 439
------------------------------------------
Total assets $ 270,314 $ 295,001 $ 299,877
==========================================
Capital expenditures:
Hotel $ 16,955 $ 71,416 $ 47,464
Franchising and management 3,126 954 8,443
Construction and development 20 103 --
------------------------------------------
Total capital expenditures $ 20,101 $ 72,473 $ 55,907
==========================================
Depreciation and amortization:
Hotel $ 5,920 $ 6,911 $ 9,765
Franchising and management 1,143 1,076 598
Construction and development 38 25 13
------------------------------------------
Total depreciation and amortization $ 7,101 $ 8,012 $ 10,376
==========================================
</TABLE>
F-36
<PAGE> 73
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. SUBSEQUENT EVENT
On March 16, 2000 the Company entered into a Sale and Purchase Agreement with
Prime Hospitality Corp. ("Prime") that contemplates a series of transactions in
which the Company will (i) sell to Prime the Company's leasehold interest in 20
Sumner Suites hotels currently leased from HPT Suite Properties Trust and
operated by the Company, (ii) sell to HPT Suite Properties Trust, which would
then lease to Prime, all of the Company's interest in four additional Sumner
Suites hotels currently owned and operated by ShoLodge, (iii) lease directly to
Prime the remaining three Sumner Suites hotels currently owned and operated by
the Company on terms similar to the existing lease agreement between the Company
and HPT Suite Properties Trust and (iv) sell to Prime two undeveloped hotel
sites. In addition, the agreement contemplates that Prime will engage the
Company to construct a hotel on each of the two undeveloped sites being
purchased from the Company and to provide other services to Prime in the future.
The Company expects to receive at closing approximately $54 million in cash and
securities consisting of outstanding debt instruments of the Company currently
held by Prime or an affiliate, future minimum annual rental payments of
approximately $3 million, and additional future annual revenues for services to
be provided to Prime in the future amounting to approximately $4 million per
year. As a condition to the transfer of the assets to Prime, the Company will
receive a release and return of its $14 million in cash currently securing its
lease guaranty with HPT Suite Properties Trust. The Company's $14 million lease
security deposit will be transferred to Prime as a part of the lease.
The Company will grant Prime the right to continue operating the hotels using
the Sumner Suites brand name for up to nine months after closing. As part of the
transaction the Company agrees to operate no other all-suites hotel in
competition with Prime within a defined geographic radius of each of the hotels
being sold. The radius is the same that exists with respect to the Sumner Suites
currently leased from HPT Suite Properties Trust and three miles for each of the
hotels in Texas. 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 closing of the pending transaction, which is expected to be in April, 2000,
is subject to a number of conditions including Prime's satisfaction with its due
diligence review of
F-37
<PAGE> 74
ShoLodge, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. SUBSEQUENT EVENT (CONTINUED)
the hotels and the approval of HPT Suite Properties Trust. It is possible that
the parties will not be able to successfully complete the transaction or that
the terms of the final transaction will vary from those presently contemplated.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information for
the years ended December 26, 1999 and December 27, 1998:
<TABLE>
<CAPTION>
QUARTERS
-------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------------------------------------------
(IN (000'S) EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenues $19,472 $17,559 $23,440 $21,102
Gross operating profit 6,545 5,930 7,472 3,099
Net income (loss) 376 3,344 856 (38)
Net income per share:
Basic .05 .47 .15 (.01)
Diluted .05 .41 .14 (.01)
1998
Revenues $23,614 $19,907 $15,671 $13,249
Gross operating profit 9,359 7,804 5,036 2,844
Net income (loss) 130 159 10,860 (3,003)
Net income (loss) per share:
Basic .02 .02 1.32 (.38)
Diluted .02 .02 1.05 (.38)
</TABLE>
F-38
<PAGE> 75
Shareholders and Board of Directors
ShoLodge, Inc.
We have audited the consolidated financial statements of ShoLodge, Inc. and
subsidiaries as of December 26, 1999 and December 27, 1998 and for the years
then ended, and have issued our report thereon dated March 17, 2000 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule in Item 14 of this registration statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
March 27, 2000
S-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShoLodge, Inc.
Hendersonville, Tennessee
We have audited the consolidated financial statements of ShoLodge, Inc. and
subsidiaries as of and for the year ended December 28, 1997, and have issued
our report thereon dated April 1, 1998, such report is included elsewhere in
this Form 10-K. Our audits also included the consolidated financial statement
schedule of ShoLodge, Inc. listed in Item 14. This consolidated financial
statements schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 1, 1998
S-2
<PAGE> 77
SHOLODGE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
Years ended December 28, 1997, December 27, 1998, and December 26, 1999
<TABLE>
<CAPTION>
ADDITIONS
CHARGED ADDITIONS
BALANCE AT TO COSTS CHARGED BALANCE
BEGINNING OF AND TO OTHER AT END
YEAR EXPENSES ASSETS DEDUCTIONS OF YEAR
<S> <C> <C> <C> <C> <C>
Year ended
December 28, 1997
Allowance for doubtful
accounts receivable $150,000 $202,500 $ -- $ -- $352,500
======== ======== ======= ========== ========
Year ended
December 27, 1998
Allowance for doubtful
accounts receivable $352,500 $427,904 $55,945 $(193,569) $642,780
======== ======== ======= ========= ========
Year ended
December 26, 1999
Allowance for doubtful
accounts receivable $642,780 $280,472 $ -- $(463,383) $459,869
======== ======== ======= ========= ========
</TABLE>
S-3
<PAGE> 1
EXHIBIT 10.(40)
SALE AND PURCHASE AGREEMENT
THIS SALE AND PURCHASE AGREEMENT (the "Agreement") is made and
entered into this 16th day of March, 2000, by and between SHOLODGE, INC., a
Tennessee corporation (herein "ShoLodge"), and PRIME HOSPITALITY CORP., a
Delaware corporation (herein "Prime").
W I T N E S S E T H:
WHEREAS, Prime and ShoLodge desire (i) that a wholly-owned
subsidiary of Prime acquire a leasehold interest in (A) twenty (20) Sumner
Suites hotels which are currently leased from HPT Suite Properties Trust, a
Maryland real estate investment trust, to Suite Tenant, Inc., a Tennessee
corporation and a wholly-owned subsidiary of ShoLodge, and (B) seven (7)
existing Sumner Suites hotels currently owned by wholly-owned subsidiaries of
ShoLodge, and (ii) that Prime acquire two (2) sites currently owned by
wholly-owned subsidiaries of ShoLodge for development as AmeriSuites hotels.
NOW, THEREFORE, in consideration of One Hundred Dollars ($100)
paid from Prime to ShoLodge as initial consideration as described herein, the
mutual terms and conditions contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following
terms shall have the following meanings:
"Additional Advance Payments" shall have the meaning set forth
in Section 3.2(b).
"Additional Buildings" shall have the meaning set forth in
Section 3.1.
"Additional Equipment" shall have the meaning set forth in
Section 3.1.
"Additional Hotel Operating Assets" shall have the meaning set
forth in Section 3.2.
"Additional Hotel Operating Assets Transfer Documents" shall
have the meaning set forth in Section 3.4
<PAGE> 2
"Additional Hotel Subsidiaries" means the wholly-owned
subsidiaries of ShoLodge which own the Additional HPT Hotels, identified by site
as follows:
Owner Site
----- ----
Carolina Inns, Inc. Pine Knoll Shores, North Carolina
Midwest Inns, Inc. Indianapolis, Indiana
Midwest Inns, Inc. Kansas City, Missouri
Sunshine Inns, Inc. Orlando, Florida
"Additional HPT Hotels" means the Sumner Suites hotels
currently operated on the Additional Land.
"Additional Inventory" shall have the meaning set forth in
Section 3.2(a).
"Additional Land" shall have the meaning set forth in Section
3.1.
"Additional Operating Agreements" shall have the meaning set
forth in Section 3.2(c).
"Additional Property" shall have the meaning set forth in
Section 3.1.
"Additional Property Documents" shall have the meaning set
forth in Section 3.3.
"Advance Payments" means the STI Advance Payments, the
Additional Advance Payments and the Texas Advance Payments.
"Affiliate" means, as applied to any Person, any other Person
who, directly or indirectly, controls, is controlled by, or is under common
control with, such Person. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct the management and
policies of a Person, whether through the ownership of shares, options,
warrants, interests, participations or other equivalents (regardless of how
designated) of or in a Person, whether voting or nonvoting, including common
stock, preferred stock or any other "equity security" (as such term is defined
in Rule 3a11-1 of the General Rules and Regulations promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended), by contract or otherwise.
"Agreement" means this Sale and Purchase Agreement.
"Assets" means collectively the STI Assets, the Additional
Property, the Additional Hotel Operating Assets, the Texas Property, the Texas
Hotel Operating Assets and the Development Sites.
"Benefit Plan" shall have the meaning set forth in Section
15.5.
- 2 -
<PAGE> 3
"Buildings" means the STI Buildings, the Additional Buildings
and the Texas Buildings.
"Closing" shall mean the conference to be held at 10:00 a.m.,
New York, New York time, on the Closing Date, at the offices of Willkie Farr &
Gallagher, 787 Seventh Avenue, New York, New York, or at such other time and
place on the Closing Date as the parties may mutually agree to in writing, at
which time the transactions contemplated by this Agreement shall be consummated,
or, if permitted as set forth in Section 17.1, at which time one (1) or more of
the transactions contemplated by this Agreement shall be consummated.
"Closing Date" shall mean the date on which the Closing
occurs, and, if the Closing with respect to all transactions contemplated herein
does not occur on the same date as contemplated in Section 17.1, the term
"Closing Date" with respect to each transaction contemplated herein shall mean
the date of the actual Closing with respect to each such transaction.
"Closing Documents" means all documents to be executed by
Prime, a Prime Subsidiary, ShoLodge or a ShoLodge Subsidiary to consummate the
transactions contemplated in this Agreement, including, without limitation, the
STI Transfer Documents, the Additional Property Documents, the Additional Hotel
Operating Assets Transfer Documents, the Texas Lease, the Texas Hotel Operating
Assets Transfer Documents, the Development Site Transfer Documents, the
Construction Contract and the Reservation Agreement; provided, however, in the
event there is more than one (1) Closing Date as contemplated in Section 17.1,
"Closing Documents" for each such Closing Date means only such of the documents
as described above as are necessary to consummate the transactions contemplated
in this Agreement being closed on such Closing Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Construction Contract" shall have the meaning set forth in
Section 7.1.
"Development Site Purchase Price" shall have the meaning set
forth in Section 6.2.
"Development Site Subsidiaries" means the wholly-owned
subsidiaries of ShoLodge which own the Development Sites, identified by site as
follows:
Owner Site
----- ----
Delaware Inns, Inc. Mt. Laurel, New Jersey
Virginia Inns, Inc. Fairfax County, Virginia
"Development Site Transfer Documents" shall have the meaning
set forth in Section 5.2.
"Development Sites" shall have the meaning set forth in
Section 5.1.
- 3 -
<PAGE> 4
"Due Diligence Period" means the thirty (30) day period
commencing on the Effective Date.
"Effective Date" shall mean the date this Agreement is fully
executed by ShoLodge and Prime.
"Encumbrance" means any security interest, pledge, mortgage,
lien (including environmental liens), personal property lease, charge, adverse
claim or restriction of any kind, including encumbrances or imperfections of
title of whatever nature.
"Equipment" means the STI Equipment, the Additional Equipment
and the Texas Equipment.
"ERISA" shall have the meaning set forth in Section 15.5.
"Existing HPT Hotels" means the Sumner Suites hotels currently
operated on the STI Land.
"Financial Information" shall have the meaning set forth in
Section 15.19.
"Hendersonville Restriction" shall have the meaning set forth
in Section 17.6.
"Hotel" and "Hotels" shall mean individually one of the
Existing HPT Hotels or one of the Additional HPT Hotels or one of the Texas
Hotels and collectively the Existing HPT Hotels, the Additional HPT Hotels and
the Texas Hotels.
"HPT" means Hospitality Properties Trust, a Maryland real
estate investment trust, and its successors and assigns.
"HPT Assignment and Security Agreement" means that certain
Assignment and Security Agreement dated as of November 19, 1997 between STI and
Landlord, as amended by that certain Second Amendment to Lease Agreement and
First Amendment to Incidental Documents dated as of June 29, 1999 among HPT,
Landlord, ShoLodge and STI, together with such subsequent amendments,
modifications and supplements thereto as shall have been approved by Prime in
writing prior to execution by STI, such approval not to be unreasonably
withheld, delayed or conditioned.
"HPT Documents" means the HPT Lease and the HPT Incidental
Documents.
"HPT Estoppel Certificate" means the estoppel certificate from
HPT in favor of Prime and the Prime HPT Subsidiary substantially in the form of
Exhibit H attached hereto and incorporated herein by this reference.
"HPT Incidental Documents" means the HPT Lease Guaranty, the
HPT Security Agreement, the HPT Stock Pledge and the HPT Assignment and Security
Agreement.
- 4 -
<PAGE> 5
"HPT Lease" means that certain Lease Agreement dated as of
November 19, 1997 between Landlord and STI, as amended by that certain First
Amendment to Lease Agreement dated as of March 5, 1999 between Landlord and STI,
by that certain Second Amendment to Lease Agreement and First Amendment to
Incidental Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and
STI and by that certain Third Amendment to Lease Agreement dated as of March 3,
2000 between Landlord and STI, together with such subsequent amendments,
modifications and supplements thereto as shall have been approved by Prime in
writing prior to execution by STI, such approval not to be unreasonably
withheld, delayed or conditioned.
"HPT Lease Amendment" shall have the meaning set forth in
Section 11.6.
"HPT Lease Guaranty" means that certain Limited Guaranty
Agreement dated as of November 19, 1997 executed by ShoLodge in favor of HPT and
Landlord, as amended by that certain Second Amendment to Lease Agreement and
First Amendment to Incidental Documents dated as of June 29, 1999 among HPT,
Landlord, ShoLodge and STI, together with such subsequent amendments,
modifications and supplements thereto as shall have been approved by Prime in
writing prior to execution by ShoLodge, such approval not to be unreasonably
withheld, delayed or conditioned.
"HPT Lease Guaranty Deposit" means the "Guaranty Deposit" in
the amount of Fourteen Million and No/100 Dollars ($14,000,000.00) deposited by
ShoLodge with HPT and Landlord to secure the obligations of ShoLodge under the
HPT Lease Guaranty.
"HPT Lease Security Deposit" means the "Retained Funds" in the
amount of Twenty-One Million Two Hundred Eighty Thousand and No/100 Dollars
($21,280,000.00) deposited by STI with Landlord to secure the obligations of STI
under the HPT Lease.
"HPT Real Property" means the STI Land, the STI Buildings, the
Additional Land and the Additional Buildings.
"HPT Security Agreement" means that certain Security Agreement
dated as of November 19, 1997 between STI and Landlord, as amended by that
certain Second Amendment to Lease Agreement and First Amendment to Incidental
Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI and by
that certain Second Amendment to Security Agreement dated as of March 3, 2000
between Landlord and STI, together with such subsequent amendments,
modifications and supplements thereto as shall have been approved by Prime in
writing prior to execution by STI, such approval not to be unreasonably
withheld, delayed or conditioned.
"HPT Stock Pledge" means that certain Stock Pledge dated as of
November 19, 1997 made by ShoLodge in favor of Landlord, as amended by that
certain Second Amendment to Lease Agreement and First Amendment to Incidental
Documents dated as of June 29, 1999 among HPT, Landlord, ShoLodge and STI,
together with such subsequent amendments, modifications and supplements thereto
as shall have been approved by Prime in writing prior to execution by ShoLodge,
such approval not to be unreasonably withheld, delayed or conditioned.
- 5 -
<PAGE> 6
"Indemnified Party" shall have the meaning set forth in
Section 19.4.
"Indemnifying Party" shall have the meaning set forth in
Section 19.4.
"Initial Consideration" shall have the meaning set forth in
Section 9.3.
"Inventory" means the STI Inventory, the Additional Inventory
and the Texas Inventory.
"Landlord" means HPT Suite Properties Trust, a Maryland real
estate investment trust, and its successors and assigns.
"Moore" means Moore and Associates, Inc., a Tennessee
corporation and a wholly-owned subsidiary of ShoLodge, and its successors and
assigns.
"Operating Agreements" means the STI Operating Agreements, the
Additional Operating Agreements and the Texas Operating Agreements.
"Permitted Exceptions" means (a) with respect to all Assets,
(i) liens for taxes, assessments and governmental charges with respect to an
Asset not yet due and payable or due and payable but not yet delinquent or as to
which adequate reserves are provided therefor, (ii) those Encumbrances
contemplated in this Agreement, and (iii) such other Encumbrances as shall be
approved or deemed approved by Prime pursuant to Section 12.1; (b) with respect
to the HPT Real Property only, the HPT Lease; (c) with respect to the Additional
Property only, the HPT Lease as amended or a separate lease as contemplated in
Section 3.3 and in Section 3.8, if applicable; (d) with respect to the Texas
Property only, the Texas Lease; (e) with respect to the Hendersonville,
Tennessee Hotel only, the Hendersonville Restriction; and (f) with respect to
the Real Property only, applicable zoning regulations and ordinances provided
the same do not prohibit or impair in any material respect use of such Real
Property as a hotel as currently operated or constructed or, as to the
Development Sites, as proposed to be operated or constructed.
"Person" means natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts and
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Post Termination Obligations" shall have the meaning set
forth in Section 14.1.
"Prime" means Prime Hospitality Corp., a Delaware corporation,
and its successors and permitted assigns.
"Prime Subsidiaries" means the Prime HPT Subsidiary and the
Prime Texas Subsidiary.
- 6 -
<PAGE> 7
"Prime HPT Subsidiary" means the wholly-owned subsidiary of
Prime which acquires the STI Assets and the Additional Hotel Operating Assets
and which leases the Additional Property pursuant to this Agreement, and its
successors and permitted assigns.
"Prime Texas Subsidiary" means the wholly-owned subsidiary of
Prime which acquires the Texas Hotel Operating Assets and which leases the Texas
Property pursuant to this Agreement, and its successors and permitted assigns.
"Purchase Price" shall have the meaning set forth in
Section 6.1.
"Real Property" means the STI Land, the STI Buildings, the
Additional Land, the Additional Buildings, the Texas Land, the Texas Buildings
and the Development Sites.
"Reservation Agreement" shall have the meaning set forth in
Section 8.1.
"ShoLodge" means ShoLodge, Inc., a Tennessee corporation, and
its successors and assigns.
"ShoLodge Subsidiaries" means STI, the Additional Hotel
Subsidiaries, Southeast, the Development Site Subsidiaries and Moore.
"Southeast" means Southeast Texas Inns, Inc., a Tennessee
corporation and a wholly-owned subsidiary of ShoLodge, and its successors and
assigns.
"STI" means Suite Tenant, Inc., a Tennessee corporation and a
wholly-owned subsidiary of ShoLodge, and its successors and assigns.
"STI Advance Payments" shall have the meaning set forth in
Section 2.1(c).
"STI Assets" shall have the meaning set forth in Section 2.1.
"STI Buildings" shall have the meaning set forth in Section
2.1(a).
"STI Equipment" shall have the meaning set forth in Section
2.1(a).
"STI Inventory" shall have the meaning set forth in Section
2.1(b).
"STI Operating Agreements" shall have the meaning set forth in
Section 2.1(d).
"STI Land" shall have the meaning set forth in Section 2.1(a).
"STI Leased Property" shall have the meaning set forth in
Section 2.1(a).
"STI Transfer Documents" shall have the meaning set forth in
Section 2.2.
- 7 -
<PAGE> 8
"Texas Advance Payments" shall have the meaning set forth in
Section 4.2(b).
"Texas Buildings" shall have the meaning set forth in Section
4.1.
"Texas Equipment" shall have the meaning set forth in Section
4.1.
"Texas Hotel Operating Assets" shall have the meaning set
forth in Section 4.2.
"Texas Hotel Operating Assets Transfer Documents" shall have
the meaning set forth in Section 4.4.
"Texas Hotels" means the Sumner Suites hotels currently
operated on the Texas Land.
"Texas Inventory" shall have the meaning set forth in Section
4.2(a).
"Texas Land" shall have the meaning set forth in Section 4.1.
"Texas Lease" shall have the meaning set forth in Section 4.3.
"Texas Operating Agreements" shall have the meaning set forth
in Section 4.2(c).
"Texas Property" shall have the meaning set forth in Section
4.1.
"Texas Real Property" means the Texas Land and the Texas
Buildings.
ARTICLE II
SALE OF EXISTING HPT HOTELS
2.1 Sale of STI Assets. ShoLodge hereby agrees to cause STI,
at the Closing and in the manner specified in Section 2.2 of this Agreement, to
sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary, and
Prime hereby agrees to cause the Prime HPT Subsidiary, at the Closing and in the
manner specified in Section 2.2 of this Agreement, to purchase from STI, all the
following (collectively, the "STI Assets"):
(a) all right, title and interest of STI in and to the HPT
Lease, including, without limitation, the HPT Lease Security Deposit and, except
as limited in the last paragraph of Section 19.3, the "FF&E Reserve" created
pursuant to the HPT Lease, and in and to (i) that certain real property more
particularly described on Exhibit A attached hereto and incorporated herein by
this reference (the "STI Land"); (ii) any and all buildings, structures and
similar improvements erected on, over, upon or under the STI Land on the Closing
Date (the "STI Buildings"); and (iii) all furniture, fixtures and equipment
located thereon or therein on the Closing Date (the "STI Equipment") (the STI
Land, the STI Buildings and the STI Equipment are referred to herein
collectively as the "STI Leased Property");
- 8 -
<PAGE> 9
(b) all merchandise, inventories, materials and supplies used
or intended for use or held for use in connection with and located on the
Closing Date at the STI Land (collectively, the "STI Inventory");
(c) all reservation and advance booking deposits and guest
security deposits (including interest, if any, accrued thereon) for guests or
future guests of the Existing HPT Hotels existing on the Closing Date (the "STI
Advance Payments");
(d) to the extent assignable, all of STI's right, title and
interest, if any, in and to all service contracts, vendor agreements,
maintenance agreements, utility contracts, cable service agreements, advertising
agreements, equipment leases and similar operating agreements relating to the
Existing HPT Hotels and in effect on the Closing Date (collectively, the "STI
Operating Agreements");
(e) to the extent assignable, all of STI's right, title and
interest, if any, in and to all licenses and permits for the sale and
on-premises consumption of liquor and other alcoholic beverages at the Existing
HPT Hotels in effect on the Closing Date; and
(f) all vehicles owned by STI and located at and used in
connection with the Existing HPT Hotels on the Closing Date.
2.2 Transfer of STI Assets. The sale, conveyance, transfer,
assignment and delivery of the STI Assets hereunder will be effected by the
delivery by STI to the Prime HPT Subsidiary at the Closing of the Assignment and
Assumption of Lease Agreement in the form of Exhibit E attached hereto and
incorporated herein by this reference, the Bill of Sale in the form of Exhibit F
attached hereto and incorporated herein by this reference, the Assignment and
Assumption of Contracts in the form of Exhibit G attached hereto and
incorporated herein by this reference and such other instruments of sale,
transfer, assignment and conveyance as STI and the Prime HPT Subsidiary shall
reasonably request in form and substance reasonably satisfactory to STI and the
Prime HPT Subsidiary (which shall include an assumption by the Prime HPT
Subsidiary of all liabilities of STI under the HPT Security Agreement and under
the HPT Assignment and Security Agreement which first accrue after the Closing
Date) (such documents being referred to herein as the "STI Transfer Documents").
The STI Assets shall be transferred free and clear of all Encumbrances, but
subject to the Permitted Exceptions which relate to the STI Assets and to the
STI Operating Agreements. From and after Closing, all liabilities of STI under
the STI Operating Agreements and under the instruments creating the Permitted
Exceptions which relate to the STI Assets and which first accrue after the
Closing Date shall be the responsibility of the Prime HPT Subsidiary.
2.3 HPT Lease Guaranty. As a condition to the transfer of the
STI Assets from STI to the Prime HPT Subsidiary, Prime will assume all
obligations of ShoLodge under the HPT Lease Guaranty which first accrue from and
after the Closing Date. ShoLodge will use its best efforts to obtain from HPT
and/or Landlord the return of the HPT Lease Guaranty Deposit. If ShoLodge is
unable to obtain the return of the HPT Lease Guaranty Deposit from HPT and/or
Landlord, Prime will pay to ShoLodge at Closing the sum of Fourteen Million and
No/100 Dollars
- 9 -
<PAGE> 10
($14,000,000.00) in cash or other immediately available funds in exchange for
the absolute assignment by ShoLodge to Prime of all right, title and interest of
ShoLodge in and to the HPT Lease Guaranty Deposit, so long as HPT and Landlord
agree or consent to such assignment and so long as the HPT Estoppel Certificate
acknowledges that (i) there are no existing defaults nor events which with the
giving of notice or the passage of time may become defaults by STI under the HPT
Lease nor any cause for HPT or Landlord to offset any obligation of STI under
the HPT Lease against the HPT Lease Guaranty Deposit, and (ii) as of the date of
the HPT Estoppel Certificate, the HPT Lease Security Deposit is Twenty-One
Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00) and the
HPT Lease Guaranty Deposit is Fourteen Million and No/100 Dollars
($14,000,000.00).
2.4 Further Assurances. ShoLodge covenants that at the Closing
and from time to time after the Closing, it will, upon the reasonable request of
the Prime HPT Subsidiary or Prime, cause STI to execute, acknowledge and
deliver, and to do or cause to be done, executed, acknowledged and delivered,
all such additional documents or actions as may be reasonably required by the
Prime HPT Subsidiary or Prime, in order more effectively to sell, convey,
transfer, assign and deliver to the Prime HPT Subsidiary the STI Assets in the
manner described in Sections 2.1 and 2.2 above, and to carry out the intention
and purposes of this Article II and the transactions contemplated hereby and to
evidence and preserve the ownership by the Prime HPT Subsidiary of the STI
Assets, provided neither ShoLodge nor STI shall incur any liability, cost or
expense not contemplated by this Agreement. The provisions of this Section 2.4
shall survive the Closing.
2.5 Sumner Suites Name. The Prime HPT Subsidiary shall be
allowed to continue operating each of the Existing HPT Hotels as a "Sumner
Suites" for a period of not more than nine (9) months from the Closing Date, at
which time all Existing HPT Hotels must be converted to another flag at the sole
cost and expense of the Prime HPT Subsidiary. The provisions of this Section 2.5
shall survive the Closing.
ARTICLE III
SALE OF ADDITIONAL HPT HOTELS
3.1 Sale of Additional Property to Landlord. ShoLodge hereby
agrees (i) to cause the Additional Hotel Subsidiaries, at the Closing and in the
manner specified in Section 3.3 of this Agreement, to sell, convey, transfer,
assign and deliver to Landlord all right, title and interest of the Additional
Hotel Subsidiaries in and to (A) that certain real property more particularly
described on Exhibit B attached hereto and incorporated herein by this reference
(the "Additional Land"); (B) any and all buildings, structures and similar
improvements erected on, over, upon or under the Additional Land on the Closing
Date (the "Additional Buildings"); and (C) all furniture, fixtures and equipment
located thereon or therein on the Closing Date (the "Additional Equipment") (the
Additional Land, the Additional Buildings and the Additional Equipment are
referred to herein collectively as the "Additional Property"); and (ii) to use
its best efforts to cause Landlord to lease the Additional Property to the Prime
HPT Subsidiary, and, if Landlord agrees to the same, Prime hereby agrees to
cause the Prime HPT Subsidiary, at the
- 10 -
<PAGE> 11
Closing and in the manner specified in Section 3.3 of this Agreement, to lease
the Additional Property from Landlord.
3.2 Sale of Additional Hotel Operating Assets. ShoLodge hereby
agrees to cause the Additional Hotel Subsidiaries, at the Closing and in the
manner specified in Section 3.4 of this Agreement, to sell, convey, transfer,
assign and deliver to the Prime HPT Subsidiary, and Prime hereby agrees to cause
the Prime HPT Subsidiary, at the Closing and in the manner specified in Section
3.4 of this Agreement, to purchase from the Additional Hotel Subsidiaries, all
the following (collectively, the "Additional Hotel Operating Assets"):
(a) all merchandise, inventories, materials and supplies used
or intended for use or held for use in connection with and located on the
Closing Date at the Additional Land (collectively, the "Additional Inventory");
(b) all reservation and advance booking deposits and guest
deposits (including interest, if any, accrued thereon) for guests or future
guests of the Additional HPT Hotels existing on the Closing Date (the
"Additional Advance Payments");
(c) to the extent assignable, all of the right, title and
interest of the Additional Hotel Subsidiaries, if any, in and to all service
contracts, vendor agreements, maintenance agreements, utility contracts, cable
service agreements, advertising agreements, equipment leases and similar
operating agreements relating to the Additional HPT Hotels and in effect on the
Closing Date (collectively, the "Additional Operating Agreements");
(d) to the extent assignable, all of the right, title and
interest of the Additional Hotel Subsidiaries, if any, in and to licenses and
permits for the sale and on-premises consumption of liquor and other alcoholic
beverages at the Additional HPT Hotels in effect on the Closing Date; and
(e) all vehicles owned by the Additional Hotel Subsidiaries
and located at and used in connection with the Additional HPT Hotels on the
Closing Date.
Notwithstanding the foregoing, the obligation of the Prime HPT Subsidiary to
accept the transfer of any or all of the Additional Hotel Operating Assets shall
be conditioned upon the lease of the corresponding Additional Property by the
Prime HPT Subsidiary as contemplated in Sections 3.1 and 3.3.
3.3 Transfer of Additional Property. The sale, conveyance,
transfer, assignment and delivery of the Additional Property hereunder will be
effected by the delivery by the Additional Hotel Subsidiaries to Landlord at the
Closing of instruments of sale, transfer, assignment and conveyance in form and
substance reasonably satisfactory to the Additional Hotel Subsidiaries and
Landlord, and the lease of the Additional Property from Landlord to the Prime
HPT Subsidiary shall be effected either by an amendment to the HPT Lease or by
separate lease which contains terms and provisions reasonably satisfactory to
Prime, but Prime shall not have reason to object to any terms and provisions
which are in the HPT Lease unless an objection to
- 11 -
<PAGE> 12
such terms and provisions is made in accordance with the provisions of Section
12.1; provided, however, the minimum annual rent under such lease with respect
to the Additional Property shall be Four Million Three Hundred Sixty-Five
Thousand and No/100 Dollars ($4,365,000.00), allocated as set forth in Exhibit P
attached hereto and incorporated herein by this reference (such documents being
referred to herein as the "Additional Property Documents"). Notwithstanding the
foregoing, ShoLodge, by written notice to Prime, may adjust the minimum annual
rent for the Additional Property and the allocation thereof by up to ten percent
(10%) of the amount thereof per Hotel as long as (i) the aggregate minimum
annual rent for the Additional Property and the Texas Property does not exceed
Seven Million Four Hundred Twenty-Three Thousand and No/100 Dollars
($7,423,000.00), and (ii) the lease of the Additional Property and the Texas
Property shall have the same initial term and renewal options as provided in the
HPT Lease. The Additional Property shall be transferred to Landlord and leased
by the Prime HPT Subsidiary free and clear of all Encumbrances, but subject to
the Permitted Exceptions which relate to the Additional Property and to the
Additional Operating Agreements. From and after Closing, all liabilities of the
Additional Hotel Subsidiaries under the Additional Operating Agreements and
under the instruments creating the Permitted Exceptions which relate to the
Additional Property and which first accrue after the Closing Date shall be the
responsibility of the Prime HPT Subsidiary.
3.4 Transfer of Additional Hotel Operating Assets. The sale,
conveyance, transfer, assignment and delivery of the Additional Hotel Operating
Assets hereunder will be effected by the delivery by the Additional Hotel
Subsidiaries to the Prime HPT Subsidiary at the Closing of the Bill of Sale in
the form of Exhibit F attached hereto and incorporated herein by this reference,
the Assignment and Assumption of Contracts in the form of Exhibit G attached
hereto and incorporated herein by this reference and such other instruments of
sale, transfer, assignment and conveyance as an Additional Hotel Subsidiary or
the Prime HPT Subsidiary shall reasonably request in form and substance
reasonably satisfactory to the Additional Hotel Subsidiaries and the Prime HPT
Subsidiary (such documents being referred to herein as the "Additional Hotel
Operating Assets Transfer Documents"). The Additional Hotel Operating Assets
shall be transferred free and clear of all Encumbrances, but subject to the
Permitted Exceptions which relate to the Additional Hotel Operating Assets and
to the Additional Operating Agreements. From and after Closing, all liabilities
of the Additional Hotel Subsidiaries under the Additional Operating Agreements
and under the instruments creating the Permitted Exceptions which relate to the
Additional Hotel Operating Assets and which first accrue after the Closing Date
shall be the responsibility of the Prime HPT Subsidiary.
3.5 Prime Guaranty. Prime will guarantee all obligations of
the Prime HPT Subsidiary with respect to the lease of the Additional Property
pursuant to an amendment to the HPT Lease Guaranty or a separate instrument
which contains terms and provisions reasonably satisfactory to Prime, but Prime
shall not have reason to object to any terms and provisions which are in the HPT
Lease Guaranty unless an objection to such terms and provisions is made in
accordance with the provisions of Section 12.1; provided, however, that (i) the
liability of Prime thereunder shall be limited to an amount equal to minimum
annual rent for the Additional Property for one (1) year, and (ii) Prime shall
not be required to increase the HPT Lease Guaranty Deposit pursuant to the HPT
Lease Guaranty (as amended in connection with such transaction) or to deposit a
"Guaranty Deposit" in connection with a separate guaranty.
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3.6 Further Assurances. ShoLodge covenants that at the Closing
and from time to time after the Closing, it will, upon the reasonable request of
the Prime HPT Subsidiary or Prime, cause the Additional Hotel Subsidiaries to
execute, acknowledge and deliver, and to do or cause to be done, executed,
acknowledged and delivered, all such additional documents or actions as may be
reasonably required by the Prime HPT Subsidiary or Prime, in order more
effectively to sell, convey, transfer, assign and deliver to the Prime HPT
Subsidiary the Additional Hotel Operating Assets in the manner described in
Sections 3.2 and 3.4 above, and to carry out the intention and purposes of this
Article III and the transactions contemplated hereby and to evidence and
preserve the ownership by the Prime HPT Subsidiary of the Additional Hotel
Operating Assets and the lease by the Prime HPT Subsidiary of the Additional
Property, provided neither ShoLodge nor the Additional Hotel Subsidiaries shall
incur any liability, cost or expense not contemplated by this Agreement. The
provisions of this Section 3.6 shall survive the Closing.
3.7 Sumner Suites Name. The Prime HPT Subsidiary shall be
allowed to continue operating each of the Additional HPT Hotels as a "Sumner
Suites" for a period of not more than nine (9) months from the Closing Date, at
which time all Additional HPT Hotels must be converted to another flag at the
sole cost and expense of the Prime HPT Subsidiary. The provisions of this
Section 3.7 shall survive the Closing.
3.8 Advance HPT Closing. ShoLodge, at its option, may proceed
to close the transfer of the Additional Property from the Additional Hotel
Subsidiaries to Landlord as contemplated in part (i) of Section 3.1 prior to the
Closing. In such event, the Additional Property will be leased from Landlord to
STI either by an amendment to the HPT Lease or by separate lease identical to
the amendment or separate lease contemplated in Section 3.3 (but with STI as the
tenant), and at Closing the interest of STI in the Additional Property will be
transferred to the Prime HPT Subsidiary in the same manner as the transfer of
the STI Leased Assets contemplated in Article II, including, without limitation,
with the same further assurances as set forth in Section 2.4. Without limiting
the generality of the foregoing, in such event, ShoLodge agrees to cause STI to
sell, convey, transfer, assign and deliver to the Prime HPT Subsidiary, and
Prime agrees to cause the Prime HPT Subsidiary, at the Closing, to purchase from
STI, all right, title and interest of STI in and to the HPT Lease (as so
amended) or the separate lease, as applicable, including without limitation, the
amount added to the "Retained Funds" under the HPT Lease if so amended or the
"Retained Funds" under such separate lease, as applicable, and, except as
limited in the last paragraph of Section 19.3, the "FF&E Reserve" created
pursuant to the HPT Lease (as so amended) or the separate lease, as applicable,
and in and to the Additional Property, such sale, conveyance, transfer,
assignment and delivery of the Additional Property to be effected by the
delivery by STI to the Prime HPT Subsidiary at the Closing of the Assignment and
Assumption of Lease Agreement in the form of Exhibit E attached hereto and
incorporated herein by this reference. Further, in such event, any guaranty by
ShoLodge of the lease to STI of the Additional Property (whether by virtue of an
amendment to the HPT Lease Guaranty or by separate instrument) shall be treated
like the HPT Lease Guaranty as described in Section 2.3 to the extent any such
guaranty by ShoLodge is consistent with Section 3.5. At least ten (10) days
prior to execution, ShoLodge shall deliver to Prime a copy of the amendment to
the HPT Lease or separate lease and a copy of the amendment to the HPT Lease
Guaranty or separate instrument as contemplated in this Section 3.8 for Prime's
written approval, such approval not to be
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unreasonably withheld, delayed or conditioned. In no event shall ShoLodge or any
ShoLodge Subsidiary execute any such amendment to the HPT Lease or separate
lease without Prime's prior written approval.
3.9 Direct Lease. ShoLodge, at its option, may cause the
Additional Property (or one (1) or more, but less than all, of the Additional
HPT Hotels and the portion of the Additional Land, the Additional Buildings and
the Additional Equipment relating thereto) to be leased to the Prime Texas
Subsidiary by the Additional Hotel Subsidiaries (or the appropriate Additional
Hotel Subsidiary or Subsidiaries, if only a portion of the Additional Property
is so leased) in the same manner as the Texas Property is leased to the Prime
Texas Subsidiary pursuant to Article IV, but with the terms of such lease being
consistent with Section 3.3. In such event, all applicable references to the
Texas Property in this Agreement shall be deemed to include the Additional
Property (or such Additional HPT Hotel or such Additional HPT Hotels and the
portion of the Additional Land, the Additional Buildings and the Additional
Equipment relating thereto), and all applicable references to Southeast in this
Agreement shall be deemed to include the appropriate Additional Hotel Subsidiary
or Subsidiaries.
ARTICLE IV
SALE OF TEXAS HOTELS
4.1 Lease of Texas Property. ShoLodge hereby agrees to cause
Southeast, at the Closing and in the manner specified in Section 4.3 of this
Agreement, to lease to the Prime Texas Subsidiary, and Prime hereby agrees to
cause the Prime Texas Subsidiary, at the Closing and in the manner specified in
Section 4.3 of this Agreement, to lease from Southeast, (A) that certain real
property more particularly described on Exhibit C attached hereto and
incorporated herein by this reference (the "Texas Land"); (B) any and all
buildings, structures and similar improvements erected on, over, upon or under
the Texas Land on the Closing Date (the "Texas Buildings"); and (C) all
furniture, fixtures and equipment located thereon or therein on the Closing Date
(the "Texas Equipment") (the Texas Land, the Texas Buildings and the Texas
Equipment are referred to herein collectively as the "Texas Property").
4.2 Sale of Texas Hotel Operating Assets. ShoLodge hereby
agrees to cause Southeast, at the Closing and in the manner specified in Section
4.4 of this Agreement, to sell, convey, transfer, assign and deliver to the
Prime Texas Subsidiary, and Prime hereby agrees to cause the Prime Texas
Subsidiary, at the Closing and in the manner specified in Section 4.4 of this
Agreement, to purchase from Southeast, all the following (collectively, the
"Texas Hotel Operating Assets"):
(a) all merchandise, inventories, materials and supplies used
or intended for use or held for use in connection with and located on the
Closing Date at the Texas Land (collectively, the "Texas Inventory");
(b) all reservation and advance booking deposits and guest
deposits (including interest, if any, accrued thereon) for guests or future
guests of the Texas Hotels existing on the Closing Date (the "Texas Advance
Payments");
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<PAGE> 15
(c) to the extent assignable, all of the right, title and
interest of Southeast, if any, in and to all service contracts, vendor
agreements, maintenance agreements, utility contracts, cable service agreements,
advertising agreements, equipment leases and similar operating agreements
relating to the Texas Hotels and in effect on the Closing Date (collectively,
the "Texas Operating Agreements");
(d) to the extent assignable, all of the right, title and
interest of Southeast, if any, in and to licenses and permits for the sale and
on-premises consumption of liquor and other alcoholic beverages at the Texas
Hotels in effect on the Closing Date; and
(e) all vehicles owned by Southeast and located at and used in
connection with the Texas Hotels on the Closing Date.
Notwithstanding the foregoing, the obligation of the Prime Texas Subsidiary to
accept the transfer of any or all of the Texas Hotel Operating Assets shall be
conditioned upon the lease of the Texas Property by the Prime Texas Subsidiary
as contemplated in Sections 4.1 and 4.3.
4.3 Lease of Texas Property. The lease of the Texas Property
from Southeast to the Prime Texas Subsidiary shall be effected by lease (the
"Texas Lease") which contains terms and provisions reasonably satisfactory to
Prime, but Prime shall not have reason to object to any terms and provisions
which are in the HPT Lease unless an objection to such terms and provisions is
made in accordance with the provisions of Section 12.1; provided, however, (i)
the Prime Texas Subsidiary shall be deemed to have deposited "Retained Funds" in
an amount equal to the same multiple of the minimum annual rent under such lease
with respect to the Texas Property as is required by Landlord with respect to
the Additional Property pursuant to an amendment to the HPT Lease or a separate
lease as contemplated in Section 3.3, and (ii) the minimum annual rent under
such lease with respect to the Texas Property shall be Three Million Fifty-Eight
Thousand and No/100 Dollars ($3,058,000.00), allocated as set forth in Exhibit P
attached hereto and incorporated herein by this reference. Notwithstanding the
foregoing, ShoLodge, by written notice to Prime, may adjust the minimum annual
rent for the Texas Property and the allocation thereof by up to ten percent
(10%) of the amount thereof per Hotel as long as (i) the aggregate minimum
annual rent for the Additional Property and the Texas Property does not exceed
Seven Million Four Hundred Twenty-Three Thousand and No/100 Dollars
($7,423,000.00), and (ii) the lease of the Additional Property and the Texas
Property shall have the same initial term and renewal options as provided in the
HPT Lease. The obligations of the Prime Texas Subsidiary under the Texas Lease
shall be secured by a security interest in the personal property located at the
Texas Real Property and in the "FF&E Reserve" created pursuant to the Texas
Lease and by a pledge of the stock of the Prime Texas Subsidiary pursuant to
documents which contain terms and provisions reasonably satisfactory to Prime,
but Prime shall not have reason to object to any terms and provisions which are
in the HPT Security Agreement, the HPT Assignment and Security Agreement or the
HPT Stock Pledge unless an objection to such terms and provisions is made in
accordance with the provisions of Section 12.1. The Texas Property shall be
leased by the Prime Texas Subsidiary free and clear of all Encumbrances, but
subject to the Permitted Exceptions which relate to the Texas Property and to
the Texas Operating Agreements. From and after Closing, all liabilities of
Southeast under the Texas Operating Agreements and under the
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<PAGE> 16
instruments creating the Permitted Exceptions which relate to the Texas Property
and which first accrue after the Closing Date shall be the responsibility of the
Prime Texas Subsidiary. The obligation of Southeast to deliver the "Retained
Funds" upon the expiration of the Texas Lease pursuant to the terms thereof
shall be guaranteed by ShoLodge pursuant to an instrument in form and substance
reasonably satisfactory to Prime and ShoLodge, but such undertaking by ShoLodge
shall terminate upon the transfer of the Texas Property to HPT or an Affiliate
of HPT or to another Person whose financial condition is equivalent to or better
than that of HPT on the date of such transfer, provided that such transferee has
assumed the obligation of Southeast to deliver the "Retained Funds" upon the
expiration of the Texas Lease.
4.4 Transfer of Texas Hotel Operating Assets. The sale,
conveyance, transfer, assignment and delivery of the Texas Hotel Operating
Assets hereunder will be effected by the delivery by Southeast to the Prime
Texas Subsidiary at the Closing of the Bill of Sale in the form of Exhibit F
attached hereto and incorporated herein by this reference, the Assignment and
Assumption of Contracts in the form of Exhibit G attached hereto and
incorporated herein by this reference and such other instruments of sale,
transfer, assignment and conveyance as Southeast or the Prime Texas Subsidiary
shall reasonably request in form and substance reasonably satisfactory to
Southeast and the Prime Texas Subsidiary (such documents being referred to
herein as the "Texas Hotel Operating Assets Transfer Documents"). The Texas
Hotel Operating Assets shall be transferred free and clear of all Encumbrances,
but subject to the Permitted Exceptions which relate to the Texas Hotel
Operating Assets and to the Texas Operating Agreements. From and after Closing,
all liabilities of Southeast under the Texas Operating Agreements and under the
instruments creating the Permitted Exceptions which relate to the Texas Hotel
Operating Assets and which first accrue after the Closing Date shall be the
responsibility of the Prime Texas Subsidiary.
4.5 Prime Guaranty. Prime will guarantee all obligations of
the Prime Texas Subsidiary with respect to the lease of the Texas Property
pursuant to an instrument which contains terms and provisions reasonably
satisfactory to Prime, but Prime shall not have reason to object to any terms
and provisions which are in the HPT Lease Guaranty unless an objection to such
terms and provisions is made in accordance with the provisions of Section 12.1;
provided, however, that (i) the liability of Prime thereunder shall be limited
to an amount equal to minimum annual rent for the Texas Property for one (1)
year, and (ii) Prime shall not be required to deposit a "Guaranty Deposit" in
connection with such guaranty.
4.6 Further Assurances. ShoLodge covenants that at the Closing
and from time to time after the Closing, it will, upon the reasonable request of
the Prime Texas Subsidiary or Prime, cause Southeast to execute, acknowledge and
deliver, and to do or cause to be done, executed, acknowledged and delivered,
all such additional documents or actions as may be reasonably required by the
Prime Texas Subsidiary or Prime, in order more effectively to sell, convey,
transfer, assign and deliver to the Prime Texas Subsidiary the Texas Hotel
Operating Assets in the manner described in Sections 4.2 and 4.4 above, and to
carry out the intention and purposes of this Article IV and the transactions
contemplated hereby and to evidence and preserve the ownership by the Prime
Texas Subsidiary of the Texas Hotel Operating Assets and the lease by the Prime
Texas Subsidiary of the Texas Property, provided neither ShoLodge nor Southeast
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<PAGE> 17
shall incur any liability, cost or expense not contemplated by this Agreement.
The provisions of this Section 4.6 shall survive the Closing.
4.7 Sumner Suites Name. The Prime Texas Subsidiary shall be
allowed to continue operating each of the Texas Hotels as a "Sumner Suites" for
a period of not more than nine (9) months from the Closing Date, at which time
all Texas Hotels must be converted to another flag at the sole cost and expense
of the Prime Texas Subsidiary. The provisions of this Section 4.7 shall survive
the Closing.
4.8 AmeriSuites Name. In the event that the Texas Lease is
terminated prior to the expiration of the term thereof due to a breach or
default by the Prime Texas Subsidiary, Prime and Southeast shall enter into a
license or franchise agreement whereby Southeast is given the right to operate
the Texas Hotels as "AmeriSuites" hotels, which agreement shall be the standard
license or franchise agreement, if any, then used, or most recently used if a
standard license or franchise agreement is not then being used, by Prime to
franchise "AmeriSuites" hotels, but with (i) a minimum term of ten (10) years,
(ii) a royalty equal to one-half (1/2) of the standard royalty for "AmeriSuites"
franchisees (provided Southeast shall pay full marketing and reservation fees),
and (iii) no "initial" fee or "license" fee due upon signing such agreement. The
provisions of this Section 4.8 shall survive the Closing.
4.9 HPT Lease. ShoLodge, at its option, may cause the Texas
Property (or one (1) or more, but less than all, of the Texas Hotels and the
portion of the Texas Land, the Texas Buildings and the Texas Equipment relating
thereto) to be leased to the Prime HPT Subsidiary by Landlord as if the Texas
Property (or the portion thereof) were Additional Property, but with the terms
of such lease being consistent with Section 4.3. In such event, all applicable
references to the Additional Property in this Agreement shall be deemed to
include the Texas Property (or such Texas Hotel or Texas Hotels and the portion
of the Texas Land, the Texas Buildings and the Texas Equipment relating
thereto), and all applicable references to the Additional Hotel Subsidiaries in
this Agreement shall be deemed to include Southeast. The failure of Landlord to
lease the Texas Property (or portion thereof) to the Prime HPT Subsidiary,
however, shall not constitute a condition precedent to the obligation of
ShoLodge to close pursuant to Section 10.6.
ARTICLE V
SALE OF DEVELOPMENT SITES
5.1 Sale of Development Sites. ShoLodge hereby agrees to cause
the Development Site Subsidiaries, at the Closing and in the manner specified in
Section 5.2 of this Agreement, to sell, convey, transfer, assign and deliver to
Prime, and Prime hereby agrees, at the Closing and in the manner specified in
Section 5.2 of this Agreement, to purchase from the Development Site
Subsidiaries, all right, title and interest of the Development Site Subsidiaries
in and to that certain real property more particularly described on Exhibit D
attached hereto and incorporated herein by this reference (the "Development
Sites").
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5.2 Transfer of Development Sites. The sale, conveyance,
transfer, assignment and delivery of the Development Sites hereunder will be
effected by the delivery by the Development Site Subsidiaries to Prime at the
Closing of a special warranty deed for each site in the form of Exhibit I
attached hereto and incorporated herein by this reference as to the Mt. Laurel,
New Jersey site and in the form of Exhibit J attached hereto and incorporated
herein by this reference as to the Fairfax County, Virginia site (such deeds
being referred to herein as the "Development Site Transfer Documents"). The
Development Sites shall be transferred free and clear of all Encumbrances, but
subject to the Permitted Exceptions which relate to the Development Sites. From
and after Closing, all liabilities of the Development Site Subsidiaries under
the instruments creating the Permitted Exceptions which relate to the
Development Sites and which first accrue after the Closing Date shall be the
responsibility of Prime.
ARTICLE VI
CONSIDERATION
6.1 Purchase Price. The total purchase price for the STI
Assets, the Additional Hotel Operating Assets, the Texas Hotel Operating Assets
and, if applicable, the interest of STI in the Additional Property and the
interest of Southeast in the Texas Property shall be Two Million and No/100
Dollars ($2,000,000.00) (the "Purchase Price"). Prime shall pay or cause a Prime
Subsidiary, as applicable, to pay the Purchase Price on the Closing Date as
follows:
(a) Three Hundred Fifty-Two Thousand Eight Hundred Eighty
and No/100 Dollars ($352,880.00) in cash or other
immediately available funds, to an account or
accounts designated by ShoLodge prior to Closing; and
(b) One Million Six Hundred Forty-Seven Thousand One
Hundred Twenty and No/100 Dollars ($1,647,120.00) by
the delivery to ShoLodge or to such other Person as
designated by ShoLodge of ShoLodge debt securities
which are held currently by Prime or an Affiliate of
Prime as follows:
(1) Two Hundred Thirty-Eight Thousand and No/100
Dollars ($238,000.00) face value of 9 3/4%
senior subordinated notes at 68% of face
value;
(2) Four Hundred Sixty-One Thousand and No/100
Dollars ($461,000.00) face value of 9.55%
senior subordinated notes at 68% of face
value; and
(3) One Million Eight Hundred Sixty Thousand and
No/100 Dollars ($1,860,000.00) face value of
7 1/2% convertible subordinated debentures
at 63% of face value.
The Purchase Price shall be allocated among the STI Assets, the Additional
Property Operating Assets, the Texas Property Operating Assets and, if
applicable, the interest of STI in the
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<PAGE> 19
Additional Property and the interest of Southeast in the Texas Property, as set
forth on Exhibit N attached hereto and made a part hereof.
6.2 Development Site Purchase Price. The total purchase price
for the Development Sites shall be Three Million Three Hundred Nineteen Thousand
Nine Hundred Thirty and No/100 Dollars ($3,319,930.00) (the "Development Site
Purchase Price"), which amount shall be payable by Prime to the Development Site
Subsidiaries in cash or other immediately available funds at Closing, One
Million Six Hundred Ninety-Seven Thousand Five Hundred Five and No/100 Dollars
($1,697,505.00) for the Mt. Laurel, New Jersey site and One Million Six Hundred
Twenty-Two Thousand Four Hundred Twenty-Five and No/100 Dollars ($1,622,425.00)
for the Fairfax County, Virginia site.
ARTICLE VII
CONSTRUCTION CONTRACT
7.1 Construction Contract. At the Closing, Prime shall enter
into, and ShoLodge shall cause Moore to enter into, an agreement (the
"Construction Contract") in form and substance reasonably satisfactory to Prime
and Moore whereby Moore will agree to construct for Prime, and Prime will engage
Moore to construct, an AmeriSuites hotel on each Development Site. The
Construction Contract shall provide for a fixed price of Seventy-Six Thousand
Five Hundred and No/100 Dollars ($76,500.00) per room (including land, building
and furniture, fixtures and equipment). The parties acknowledge that the fixed
price set forth in the preceding sentence includes the cost of acquisition of
the Development Sites, and, thus, the Development Site Purchase Price shall be
deducted from the fixed price otherwise payable to Moore during the course of
construction (as it will already have been paid to the Development Site
Subsidiaries at Closing). Disbursements to Moore of the fixed price less the
Development Site Purchase Price will be paid by Prime monthly during
construction based upon the percentage of completion, subject to retainage of
ten percent (10%). The Construction Contract shall further provide that Moore
shall construct on each Development Site a hotel building in accordance with the
plans and specifications which have been filed by ShoLodge, Moore or the
applicable Development Site Subsidiary with the local building code officials,
but with finishes and signage in accordance with the plans and specifications
described on Exhibit K attached hereto and incorporated herein by this
reference, all in accordance with all applicable laws, regulations, statutes and
orders. The parties acknowledge that the Construction Contract shall contain a
scheduled completion date, together with delay damages, among other terms, which
terms shall be negotiated during the Due Diligence Period. The provisions of
this Section 7.1 shall survive the Closing, but any conflict between the terms
of this Section 7.1 and the terms of the Construction Contract shall be governed
by the Construction Contract.
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<PAGE> 20
ARTICLE VIII
RESERVATION AGREEMENT
8.1 Reservation Agreement. At the Closing, Prime and ShoLodge
shall enter into an agreement (the "Reservation Agreement") in form and
substance reasonably satisfactory to Prime and ShoLodge whereby ShoLodge will
agree to provide to Prime, and Prime will engage ShoLodge to provide, exclusive
reservation services for all proprietary brand hotels owned, operated or
franchised by Prime or any Affiliate of Prime (including the Sumner Suites
hotels acquired by a Prime Subsidiary as contemplated herein, but such Sumner
Suites hotels may be removed from the ShoLodge reservation system upon
conversion to the AmeriSuites brand in Prime's sole discretion if the
Reservation Agreement has not then become effective as described in subparagraph
(d) below). The Reservation Agreement, among other provisions, will contain the
following terms:
(a) The term of the Reservation Agreement will be for
five (5) years from the date the Reservation
Agreement becomes effective as described in
subparagraph (d) below and ShoLodge begins providing
reservation services thereunder for all or all but an
insignificant number of such proprietary brand hotels
owned, operated or franchised by Prime or any
Affiliate of Prime, but Prime will have a right to
terminate the Reservation Agreement without penalty
at any time upon one hundred twenty (120) days prior
written notice to ShoLodge, such notice not to be
given earlier than the date two (2) years after the
Reservation Agreement becomes effective as described
in subparagraph (d) below and ShoLodge begins
providing reservation services thereunder for all or
all but an insignificant number of such proprietary
brand hotels owned, operated or franchised by Prime
or any Affiliate of Prime; provided, however, in the
event any of the Hotels are removed from the ShoLodge
reservation system, such two (2) year period during
which notice of termination may not be given shall be
extended for a period equal to the shorter of (i) the
time one (1) or more of the Sumner Suites hotels
acquired by a Prime Subsidiary as contemplated herein
is not on the ShoLodge reservation system, or (ii)
three (3) months.
(b) The Reservation Agreement will provide that Prime
will pay a monthly fee to ShoLodge in the amount of
one percent (1%) of gross room revenues and will pay
customary pass through costs such as commissions and
global distribution system fees.
(c) The Reservation Agreement will provide that Prime
will have the right of first offer and the right of
first refusal with respect to any proposed sale by
ShoLodge of the reservation system during the term of
the Reservation Agreement.
(d) The Reservation Agreement shall not become effective
until the day after (i) ShoLodge has notified Prime
that its reservation system complies with
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the software and hardware requirements set forth on
Exhibit Q hereto and incorporated herein by this
reference and (ii) Prime has confirmed in writing
that the ShoLodge reservation system does so comply,
provided that Prime shall have no more than a ninety
(90) day period following ShoLodge's notice to test
the system and confirm such compliance with whatever
tests Prime desires, in Prime's reasonable
discretion.
(e) The effective date of the Reservation Agreement must
occur within four hundred forty-five (445) days after
the date of execution of the Reservation Agreement by
ShoLodge and Prime or Prime shall have the option to
terminate the Reservation Agreement effective upon
written notice thereof to ShoLodge.
(f) The Reservation Agreement shall contain performance
standards together with termination rights related
thereto.
(g) The Reservation Agreement will provide that Prime
shall have the exclusive right to use the Sumner
Suites 1-800 number (1-800-74-SUITE) for the one (1)
year period commencing on the initial Closing Date
under this Agreement, after which time the right of
Prime to use such 1-800 number shall terminate;
provided, however, during such one (1) year period,
Prime shall cause all calls received on such 1-800
number which relate to a Hotel then operated by
ShoLodge or an Affiliate of ShoLodge to be forwarded
to the ShoLodge reservation system. ShoLodge shall
reimburse to Prime the actual out of pocket cost to
Prime to transfer such calls to the ShoLodge
reservation system, not to exceed One Dollar ($1.00)
per transferred call.
8.2 Termination Fee. Prime shall pay any required termination
fees to cancel its current agreement for reservation services.
8.3 Survival. The provisions of Article VIII shall survive the
Closing, but any conflict between the terms of Article VIII and the terms of the
Reservation Agreement shall be governed by the Reservation Agreement.
ARTICLE IX
PRICE ADJUSTMENTS; INITIAL CONSIDERATION
9.1 Closing Adjustments.
(a) The cash portion of the Purchase Price described in
Section 6.1(a) and the Development Site Purchase Price, as applicable, shall be
increased, by:
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(i) any cash on hand at the Hotels when a Prime Subsidiary
takes possession (any such cash shall be counted by representatives of ShoLodge
and Prime on the Closing Date);
(ii) any revenue generated by the operation of the Hotels
through and including the night before the Closing Date arising from accounts
receivable with respect to guests of the Hotels then in occupancy which in the
normal course of business would be received after the Closing (the amount of
such revenue to be determined by representatives of ShoLodge and Prime on the
Closing Date);
(iii) amounts paid prior to Closing for any ad valorem
real estate taxes and assessments relating to the Real Property on account of
any period from and after 12:01 a.m. of the Closing Date;
(iv) personal property taxes, gross receipts taxes, sales
taxes, excise taxes, hotel occupancy taxes or other similar taxes (but excluding
income and franchise taxes), if any, relating to the Assets paid prior to
Closing on account of any period from and after 12:01 a.m. of the Closing Date;
(v) amounts paid prior to Closing under any Operating
Agreement, the HPT Lease (including, if applicable, as amended, or pursuant to
the separate lease contemplated in Section 3.8) or any instrument creating a
Permitted Exception on account of any period from and after 12:01 a.m. of the
Closing Date;
(vi) accrued but unpaid interest earnings on the HPT Lease
Guaranty Deposit for any period prior to 12:01 a.m. of the Closing Date (if such
HPT Lease Guaranty Deposit is not returned from HPT and/or Landlord to ShoLodge
or STI);
(vii) any utility deposits relating to the Assets which
are transferred and remain on deposit after Closing for the benefit of a Prime
Subsidiary or Prime, as applicable; and
(viii) any other charges or fees customarily prorated by a
credit to the seller in the jurisdiction in which the Real Property is situated,
on customary terms.
(b) The cash portion of the Purchase Price described in
Section 6.1(a) and the Development Site Purchase Price, as applicable, shall be
decreased, by:
(i) any Advance Payments retained by STI, an Additional
Hotel Subsidiary, or Southeast, as applicable;
(ii) unpaid ad valorem real estate taxes and assessments
relating to the Real Property on account of any period prior to 12:01 a.m. of
the Closing Date;
(iii) unpaid personal property taxes, gross receipts
taxes, sales taxes, excise taxes, hotel occupancy taxes or other similar taxes
(but excluding income and franchise
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taxes), if any, relating to the Assets payable on account of any period prior to
12:01 a.m. of the Closing Date;
(iv) unpaid amounts payable under any Operating Agreement
(ShoLodge shall use its best efforts to cause all amounts due under the
Operating Agreements to be paid to the Closing Date), the HPT Lease (including,
if applicable, as amended, or pursuant to the separate lease contemplated in
Section 3.8) or any instrument creating a Permitted Exception on account of any
period prior to 12:01 a.m. of the Closing Date (for this purpose "Additional
Rent" (as defined in the HPT Lease) shall be calculated based on the "Total
Hotel Sales" (as defined in the HPT Lease) for the current year to the Closing
Date compared to "Base Total Hotel Sales" (as defined in the HPT Lease) for the
similar period of the applicable "Base Year" (as defined in the HPT Lease)); and
(v) unpaid rates, rents and charges for sewer, water, gas,
electricity, telephone and other utility services provided to the Hotels for any
period prior to 12:01 a.m. of the Closing Date (ShoLodge shall use commercially
reasonable efforts to cause meters to be read as of the Closing Date);
(vi) accrued but unpaid benefits due to employees of the
Hotels who are hired by Prime or a Prime Subsidiary, as applicable, which are
not paid by STI, ShoLodge or an Affiliate of ShoLodge directly to such employees
upon termination of employment; and
(vii) any other charges or fees customarily prorated by a
charge to the seller in the jurisdiction in which the Real Property is situated,
on customary terms.
(c) The intent of the foregoing is to credit or charge, as the
case may be, STI, the Additional Hotel Subsidiaries, Southeast or the
Development Subsidiaries, as applicable, with all revenues and expenses
respecting the Assets which are attributable to operations before the Closing
Date and to credit or charge, as the case may be, Prime or a Prime Subsidiary,
as applicable, with all such revenues and expenses attributable to operations on
and after the Closing Date. At Closing, STI, the Additional Hotel Subsidiaries
and Southeast, as applicable, shall provide the Prime HPT Subsidiary and the
Prime Texas Subsidiary, as applicable, with a list setting forth advance guest
bookings, conventions, meetings and any other booking commitments for the period
from and after the Closing Date.
9.2 Post-Closing Adjustments. If at any time following the
Closing Date, the calculation of an item listed in Section 9.1 above shall prove
to be incorrect or an item is discovered which should have been included in the
adjustments but which was omitted therefrom, the Person in whose favor the error
or omission was made shall pay the sum necessary to correct such error or
omission to the Person entitled to such payment promptly following receipt of
proof of such error or omission from such Person entitled to such payment,
provided that such proof is delivered to the Person from whom payment is
requested within thirty (30) days of the Closing Date. The adjustment of
"Additional Rent" pursuant to Section 9.1(b)(iv), however, shall be final and
shall not be further adjusted regardless of the actual amount of "Additional
Rent" for the year in which the Closing Date occurs.
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<PAGE> 24
If the amount of real estate taxes or assessments for the
current year is not known on the Closing Date, then the taxes or assessments
shall be apportioned on the basis of the taxes assessed for the preceding year
or some reasonable assessment agreed by the parties if a Hotel is in its first
year of operation. Notwithstanding the foregoing thirty (30) day limitation, the
amounts as computed shall be adjusted when the final tax assessment and tax
rates are determined.
Subject to the limitations set forth herein, the provisions of
this Section 9.2 shall survive the Closing.
9.3 Initial Consideration. On the date of execution of this
Agreement by Prime, Prime will deliver to ShoLodge a check in the amount of One
Hundred and No/100 Dollars ($100.00) as initial consideration for any option
granted in this Agreement (the "Initial Consideration"). The Initial
Consideration is non-refundable and shall be retained by ShoLodge regardless of
whether or not this Agreement is terminated pursuant to a right to do so
hereunder.
ARTICLE X
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SHOLODGE
Each and every obligation of ShoLodge and the ShoLodge
Subsidiaries to be performed hereunder shall be subject to the satisfaction,
prior to or on the date on which performance is due, of the following express
conditions precedent:
10.1 Compliance with Agreement. Prime and the Prime
Subsidiaries shall have performed and complied in all respects with all of their
obligations under this Agreement which are to have been performed or complied
with by Prime or the Prime Subsidiaries, as applicable, as of such date.
10.2 Representations and Warranties. The representations and
warranties made by Prime in this Agreement shall have been true and correct in
all material respects and such representations and warranties shall be true and
correct in all material respects as of the Closing Date with the same force and
effect as though such representations and warranties had been made on the
Closing Date.
10.3 Proceedings and Instruments Satisfactory. All
proceedings, corporate or other, to be taken by Prime or a Prime Subsidiary, as
applicable, in connection with the performance of this Agreement and all Closing
Documents to be executed by Prime and/or a Prime Subsidiary shall be complete to
the reasonable satisfaction of ShoLodge and ShoLodge's attorneys, and Prime and
the Prime Subsidiaries, as applicable, shall have made available to ShoLodge for
examination the originals or true and correct copies of all documents relating
to such proceedings which ShoLodge may reasonably request in connection with the
transactions contemplated by this Agreement.
10.4 Deliveries at Closing. Prime and the Prime Subsidiaries,
as applicable, shall have delivered or caused to be delivered to ShoLodge the
Closing Documents to be executed by
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Prime and/or a Prime Subsidiary, each properly executed, acknowledged or
notarized, if appropriate, and dated as of the Closing Date or such other date
as the parties shall agree, including, without limitation, the Construction
Contract (in form and substance reasonably satisfactory to Moore and including,
without limitation, those provisions set forth in Section 7.1) and the
Reservation Agreement (in form and substance reasonably satisfactory to ShoLodge
and including, without limitation, those provisions set forth in Section 8.1).
10.5 Other Documents. Prime and the Prime Subsidiaries, as
applicable, shall have delivered to ShoLodge or caused to be delivered to
ShoLodge such certificates and documents of officers of Prime and the Prime
Subsidiaries, as applicable, and public officials as shall be reasonably
requested by ShoLodge's counsel to establish the existence and good standing of
Prime and the Prime Subsidiaries, as applicable, and the due authorization and
enforceability of this Agreement and the Closing Documents to be executed by
Prime and/or a Prime Subsidiary, and the authorization of the transactions and
performance contemplated hereby and thereby by Prime and the Prime Subsidiaries.
10.6 HPT Closing. All transactions with HPT and Landlord as
contemplated in this Agreement, including, without limitation, the agreement or
consent of Landlord and HPT to the assignment by STI to the Prime HPT Subsidiary
of all of STI's right, title and interest in and to the HPT Lease, the amendment
of the HPT Lease and related documents to reflect the transfer of the STI Leased
Property and, if applicable, the Additional Property (as contemplated in Section
3.8) from STI to the Prime HPT Subsidiary and the change of the brand from
"Sumner Suites" to "AmeriSuites", the release by Landlord of STI of and from any
liability under the HPT Lease and related documents (including, without
limitation, any separate lease as contemplated in Section 3.8), the substitution
of a pledge of the stock of the Prime HPT Subsidiary for the existing pledge of
the stock of STI to Landlord, the release by HPT and Landlord of ShoLodge of and
from any liabilities under the HPT Lease Guaranty and, if applicable, any
separate guaranty (as contemplated in Section 3.8), if applicable, the agreement
or consent of HPT and Landlord to the absolute assignment by ShoLodge to Prime
of all of ShoLodge's right, title and interest in and to the HPT Lease Guaranty
Deposit, the transfer and conveyance of the Additional Property from the
Additional Hotel Subsidiaries to Landlord and, if applicable, the removal of any
Hotel from the HPT Lease or a separate lease (as contemplated in Section 3.8) to
accomplish a partial termination of this Agreement pursuant to Section 13.3 or
Section 13.4 (with minimum annual rent reduced by the applicable amount set
forth in Exhibit C to the HPT Lease or set forth in Exhibit P attached hereto
and incorporated herein by this reference, as applicable), shall have closed
pursuant to documents in form and substance reasonably satisfactory to ShoLodge.
Further, the HPT Estoppel Certificate shall acknowledge that (i) there are no
existing defaults nor events which with the giving of notice or the passage of
time may become defaults by STI under the HPT Lease nor any cause for HPT or
Landlord to offset any obligation of STI under the HPT Lease against the HPT
Lease Guaranty Deposit, and (ii) as of the date of the HPT Estoppel Certificate
the HPT Lease Security Deposit is Twenty-One Million Two Hundred Eighty Thousand
and No/100 Dollars ($21,280,000.00) and the HPT Lease Guaranty Deposit is
Fourteen Million and No/100 Dollars ($14,000,000.00).
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<PAGE> 26
10.7 Opinions of Counsel. ShoLodge shall have received a
written opinion from counsel to Prime regarding the organization and authority
of Prime and the Prime Subsidiaries, the due execution and delivery of this
Agreement and the Closing Documents by Prime and the Prime Subsidiaries, as
applicable, and such other matters with respect to the transactions contemplated
by this Agreement as ShoLodge may reasonably require, which opinion may have
customary and reasonable assumptions and qualifications.
In the event that the conditions to the performance by
ShoLodge and the ShoLodge Subsidiaries have not occurred by the Closing Date,
ShoLodge may terminate this Agreement by delivering written notice to Prime.
Thereafter, Prime and ShoLodge shall be released and relieved of all further
obligations, liabilities and claims hereunder, other than the performance by
each party of its Post Termination Obligations, and, as to a failure or refusal
by Prime to perform Prime's obligations hereunder, other than the right of
ShoLodge to pursue a suit for damages as described in Section 19.5(b)(i).
ARTICLE XI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRIME
Each and every obligation of Prime and the Prime Subsidiaries
to be performed hereunder shall be subject to the satisfaction prior to or on
the Closing Date of the following express conditions precedent:
11.1 Compliance with Agreement. ShoLodge and the ShoLodge
Subsidiaries shall have performed and complied in all respects with all of their
obligations under this Agreement which are to have been performed or complied
with by ShoLodge or the ShoLodge Subsidiaries, as applicable, prior to or on
such Closing Date.
11.2 Representations and Warranties. The representations and
warranties made by ShoLodge in this Agreement shall have been true and correct
in all material respects and such representations and warranties shall be true
and correct in all material respects as of the Closing Date with the same force
and effect as though such representations and warranties had been made on the
Closing Date.
11.3 Proceedings and Instruments Satisfactory. All
proceedings, corporate or other, to be taken by ShoLodge or a ShoLodge
Subsidiary, as applicable, in connection with the performance of this Agreement
and all Closing Documents to be executed by ShoLodge and/or a ShoLodge
Subsidiary shall be complete to the reasonable satisfaction of Prime and Prime's
attorneys, and ShoLodge and the ShoLodge Subsidiaries, as applicable, shall have
made available to Prime for examination the originals or true and correct copies
of all documents relating to such proceedings which Prime may reasonably request
in connection with the transactions contemplated by this Agreement.
11.4 Deliveries at Closing. ShoLodge and the ShoLodge
Subsidiaries, as applicable, shall have delivered or caused to be delivered to
Prime the Closing Documents to be
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<PAGE> 27
executed by ShoLodge and/or a ShoLodge Subsidiary, each properly executed,
acknowledged or notarized, if appropriate, and dated as of the Closing Date or
such other date as the parties shall agree, including, without limitation, the
Construction Contract (in form and substance reasonably satisfactory to Prime
and including, without limitation, those provisions set forth in Section 7.1)
and the Reservation Agreement (in form and substance reasonably satisfactory to
Prime and including, without limitation, those provisions set forth in Section
8.1.
11.5 Other Documents. ShoLodge and the ShoLodge Subsidiaries,
as applicable, shall have delivered to Prime or caused to be delivered to Prime
such certificates and documents of officers of ShoLodge and the ShoLodge
Subsidiaries, as applicable, and public officials as shall be reasonably
requested by counsel to Prime to establish the existence and good standing of
ShoLodge and the ShoLodge Subsidiaries, as applicable, and the due authorization
and enforceability of this Agreement and the Closing Documents to be executed by
ShoLodge and/or a ShoLodge Subsidiary, and the authorization of the transactions
and performance contemplated hereby and thereby by ShoLodge and the ShoLodge
Subsidiaries, as applicable.
11.6 HPT Closing. All transactions with HPT and Landlord as
contemplated in this Agreement, including, without limitation, the agreement or
consent of Landlord and HPT to the assignment by STI to the Prime HPT Subsidiary
of all of STI's right, title and interest in and to the HPT Lease, the amendment
of the HPT Lease and related documents (i) to acknowledge the assignment of
STI's interest in the HPT Lease and the STI Leased Property and, if applicable,
the Additional Property (as contemplated in Section 3.8) from STI to the Prime
HPT Subsidiary, (ii) to add the Additional Properties to the properties leased
from Landlord to STI (and the Prime HPT Subsidiary) by the HPT Lease, if
applicable, (iii) to remove any Hotel from the HPT Lease to accomplish a partial
termination of this Agreement pursuant to Section 13.3 or Section 13.4 (with
minimum annual rent reduced by the applicable amount set forth in Exhibit C to
the HPT Lease or set forth in Exhibit P attached hereto and incorporated herein
by this reference, as applicable), (iv) to reflect the change of the brand from
"Sumner Suites" to "AmeriSuites", and (v) to make such other modifications as
Prime or the Prime HPT Subsidiary reasonably may request consistent with the
provisions of this Agreement prior to the expiration of the Due Diligence Period
(such amendment being referred to herein as the "HPT Lease Amendment"), the
substitution of a pledge of the stock of the Prime HPT Subsidiary for the
existing pledge of the stock of STI to Landlord, the transfer and conveyance of
the Additional Property from the Additional Hotel Subsidiaries to Landlord, if
applicable, and, if applicable, the lease by separate document of the Additional
Property from Landlord to the Prime HPT Subsidiary, shall have closed pursuant
to documents in form and substance reasonably satisfactory to Prime. Further,
Prime shall have received the executed HPT Estoppel Certificate which
acknowledges that (i) there are no existing defaults nor events which with the
giving of notice or the passage of time may become defaults by STI under the HPT
Lease nor any cause for HPT or Landlord to offset any obligation of STI under
the HPT Lease against the HPT Lease Guaranty Deposit, and (ii) as of the date of
the HPT Estoppel Certificate the HPT Lease Security Deposit is Twenty-One
Million Two Hundred Eighty Thousand and No/100 Dollars ($21,280,000.00) and the
HPT Lease Guaranty Deposit is Fourteen Million and No/100 Dollars
($14,000,000.00).
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11.7 Condition of Assets.
(a) All of the Assets shall be in substantially the same
physical condition (including, without limitation, with respect to the
environmental condition of the Assets) as on the last day of the Due Diligence
Period, ordinary wear and tear excepted;
(b) No material default or event which with the giving of
notice and/or the lapse of time could constitute a material default shall have
occurred and be continuing under any Operating Agreement; and
(c) All material licenses, permits and other
authorizations necessary for the current use, occupancy and operation of the
Assets shall be in full force and effect in all material respects, including,
without limitation, any licenses and permits for the sale and on- premises
consumption of liquor and other alcoholic beverages.
11.8 Opinions of Counsel. Prime shall have received a written
opinion from counsel to ShoLodge regarding the organization and authority of
ShoLodge and the ShoLodge Subsidiaries, the due execution and delivery of this
Agreement and the Closing Documents by ShoLodge and the ShoLodge Subsidiaries,
as applicable, and such other matters with respect to the transactions
contemplated by this Agreement as Prime may reasonably require, which opinion
may have customary and reasonable assumptions and qualifications.
11.9 Security Deposit. Any addition to the HPT Lease Security
Deposit or any "Retained Funds" required to be deposited pursuant to a separate
lease, as applicable, with respect to the lease of the Additional Property from
Landlord to STI or the Prime HPT Subsidiary, as applicable, shall be deposited
by ShoLodge or a ShoLodge Affiliate with Landlord on or prior to the Closing
Date.
11.10 Resolution of Prime Objections. ShoLodge shall have
completed, to the reasonable satisfaction of Prime, the resolution of
"unacceptable items" identified pursuant to Sections 12.1 and 12.2 of this
Agreement which ShoLodge undertakes to resolve pursuant to such sections.
11.11 Title Policies for Development Sites. A title company
reasonably satisfactory to Prime shall be prepared, subject only to payment of
the applicable premium, endorsement and related fees and delivery of related
conveyance documents in recordable form, to issue title insurance policies
insuring Prime concerning the Development Sites, subject only to the Permitted
Exceptions.
In the event that the conditions to the performance by Prime
and the Prime Subsidiaries have not occurred by the Closing Date, Prime may
terminate this Agreement by delivering written notice to ShoLodge. Thereafter,
Prime and ShoLodge shall be released and relieved of all further obligations,
liabilities and claims hereunder, other than the performance by each party of
its Post Termination Obligations and, as to a failure or refusal by ShoLodge to
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perform ShoLodge's obligations hereunder, other than the right of Prime to
pursue a suit for damages as described in Section 19.5(a)(i).
Further, the obligation of Prime to acquire each Development
Site pursuant to Article V shall be subject to the receipt by Prime prior to or
on the Closing Date for such Development Site of evidence reasonably
satisfactory to Prime that all building permits necessary for the construction
of an AmeriSuites hotel thereon as contemplated in Article VII have been
obtained. In the event that such condition has not been satisfied as to a
Development Site on or before the scheduled (or last possible) Closing Date for
such Development Site, Prime shall have the right to terminate this Agreement as
to such Development Site only by giving written notice to ShoLodge at any time
thereafter, so long as ShoLodge has not satisfied such condition prior to
receipt of Prime's termination notice. In the event Prime timely elects to
terminate this Agreement pursuant to the preceding sentence with respect to a
Development Site, the Development Site Purchase Price shall be reduced by the
portion of the Development Site Purchase Price applicable to such Development
Site as set forth in Section 6.2 and thereafter ShoLodge and Prime shall be
released and relieved of all further obligations, liabilities and claims
hereunder with respect to such Development Site other than the performance by
each party of its Post Termination Obligations with respect to such Development
Site. Such termination shall not affect the rights and obligations of the
parties hereto with respect to the other Assets.
ARTICLE XII
DUE DILIGENCE
12.1 Title Policies; Surveys and Environmental Studies; HPT
Documents; Operating Agreements; Operating Permits and Licenses. Prior to the
execution of this Agreement, ShoLodge has delivered to Prime a copy of a title
policy (and all exceptions described therein), survey and environmental study
for each parcel constituting a part of the Real Property, a copy of the HPT
Documents, a copy of all Operating Agreements described on Exhibit L attached
hereto and incorporated herein by this reference and a copy of all certificates
of occupancy and operating permits and licenses relating to the Hotels. In the
event that any matter shown on such title policies, surveys or environmental
studies or any provision of the HPT Documents or any of the Operating Agreements
described on Exhibit L or any matter concerning the Hotels as revealed by an
examination of the certificates of occupancy and the operating permits and
licenses (or lack thereof) is not acceptable to Prime, in Prime's sole judgment,
Prime shall deliver written notice to ShoLodge on or prior to the last day of
the Due Diligence Period specifying in detail all such unacceptable items;
provided, however, that with respect to any of the foregoing items which have
not been delivered to Prime prior to the execution of this Agreement, the
deadline for Prime to deliver such written notice to ShoLodge shall end on the
later of (i) the last day of the Due Diligence Period or (ii) the date ten (10)
days after delivery of such item to Prime. Unless ShoLodge undertakes to resolve
such unacceptable items in a manner acceptable to Prime within five (5) days of
receipt of such notice, Prime may, by delivering written notice to ShoLodge
within five (5) days after the deadline for ShoLodge to undertake to resolve
such unacceptable items, terminate this Agreement, whereupon Prime and ShoLodge
shall be released and relieved of all further obligations, liabilities and
claims hereunder, other than the performance by each party of its Post
Termination Obligations. In the event that the Agreement is not terminated
pursuant to this Section 12.1, Prime shall be deemed to have approved all
exceptions to title as reflected on
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the title policies, the condition of the Real Property as reflected by the
surveys and environmental studies, all provisions of the HPT Documents and the
Operating Agreements described on Exhibit L and all matters which would be
revealed by an examination of the operating permits and licenses (but subject to
ShoLodge completing the resolution of the unacceptable items which ShoLodge has
undertaken to resolve).
12.2 Property Inspections. Beginning on the Effective Date,
Prime shall have the right to undertake a complete physical examination and
inspection of the Assets and to perform or have performed such engineering and
environmental tests as deemed necessary or appropriate by Prime. ShoLodge will
provide to Prime and its officers and other representatives, during normal
business hours, and with prior notice to ShoLodge, free and full access to the
Hotels and the other Assets to conduct such examinations and inspections and
will cooperate fully with any examination or inspection made by Prime, its
officers or representatives. All examinations and inspections shall be conducted
at such times and in such a manner as to minimize the disruption to the business
being conducted on the Real Property. ShoLodge shall also request that HPT
forward to Prime a copy of all examinations and inspections which HPT obtained
with respect to the Existing HPT Hotels or hereafter obtains with respect to the
Additional HPT Hotels. Should Prime discover any physical condition of the
Assets (including, without limitation, any environmental condition) which is not
acceptable to Prime and which is not eligible to be repaired with funds in the
"FF&E Reserve" established under the HPT Lease or the Texas Lease or a similar
fund created under a separate lease contemplated in Section 3.3 and in Section
3.8, as applicable, Prime shall deliver written notice to ShoLodge on or prior
to the last day of the Due Diligence Period specifying in detail all such
unacceptable items; provided, however, that with respect to any of the foregoing
examinations and inspections obtained by HPT with respect to the Existing HPT
Hotels or the Additional HPT Hotels, the deadline for Prime to deliver such
written notice to ShoLodge shall end on the later of (i) the last day of the Due
Diligence Period or (ii) the date ten (10) days after delivery of such item to
Prime or (iii) thirty (30) days after receipt by Prime of written notice from
HPT or ShoLodge that any such examinations and inspections obtained by HPT will
not be provided to Prime. Unless ShoLodge undertakes to repair such unacceptable
items in a manner acceptable to Prime within five (5) days of receipt of such
notice, Prime may, by delivering written notice to ShoLodge within five (5) days
after the deadline for ShoLodge to undertake to repair such unacceptable items,
terminate this Agreement, whereupon Prime and ShoLodge shall be released and
relieved of all further obligations, liabilities and claims hereunder, other
than the performance by each party of its Post Termination Obligations. In the
event that the Agreement is not terminated pursuant to this Section 12.2, Prime
shall be deemed to have approved the physical condition of the Assets as in
existence on the last day of the Due Diligence Period (but subject to ShoLodge
completing the repair of the unacceptable items which ShoLodge has undertaken to
repair).
12.3 Confidentiality. All materials delivered to Prime and all
results, information and reports generated from Prime's examinations and
inspections of the Assets shall be held in strict confidence and no copies of
such materials, results, information or reports shall be given to anyone (other
than employees, agents, attorneys and accountants of Prime who shall also agree
to keep such results, information and reports confidential) without the prior
written approval of ShoLodge. The provisions of this Section 12.3 shall survive
any termination of this Agreement.
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ARTICLE XIII
CERTAIN MATTERS PENDING THE CLOSING
13.1 Notice of Adverse Changes. Pending the Closing Date,
ShoLodge shall give to Prime prompt notice of the occurrence of any of the
following:
(a) the commencement or threat of commencement of any
proceeding at law or in equity or before any agency or administrative or
regulatory body or authority which could have a material adverse effect on any
of the Hotels or the operation of any of the Hotels;
(b) any notice of breach, default, claimed default or
termination of the HPT Lease or any Operating Agreement;
(c) any violation by STI, an Additional Hotel Subsidiary
or Southeast, as applicable, or notice of any alleged violation by STI, an
Additional Hotel Subsidiary or Southeast, as applicable, of any federal, state
or local law, statute, ordinance, rule or regulation, but only as relates to the
operation of the Hotels; or
(d) any material change in any condition with respect to
any of the Assets or any event or circumstance which makes any representation or
warranty of ShoLodge to Prime under this Agreement untrue or misleading in any
material respect (Prime agreeing, on learning of any such fact or condition,
promptly to notify ShoLodge thereof).
13.2 Operations Pending Closing. Pending the Closing Date,
STI, the Additional Hotel Subsidiaries and Southeast, as applicable, shall,
unless otherwise approved in writing by Prime:
(a) operate the Hotels in the ordinary course of business
of a first class hotel operation and in accordance with past practices
consistently applied so as to keep the Hotels in first class condition,
reasonable wear and tear excepted, and so as to maintain a first class hotel
operation and the reasonable goodwill of all tenants of the Hotels and all
employees, guests and other customers of the Hotels;
(b) maintain the Equipment in good operating condition
and repair and replace with equipment of similar value which is in good
operating condition or repair any of the Equipment which shall be worn out,
lost, stolen or destroyed (which maintenance, repair and replacement as to the
STI Equipment and, if applicable, the Additional Equipment may be made from
funds in the "FF&E Reserve" created pursuant to the HPT Lease or any separate
lease as contemplated in Section 3.8);
(c) not sell, lease, mortgage, pledge or otherwise
dispose of any of the Assets or any portion thereof, except for dispositions
contemplated in this Agreement and dispositions in the ordinary course of
business;
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(d) with respect to the personnel employed at the Hotels,
(i) not increase or otherwise change the rate or nature of the compensation
(including wages, salaries and bonuses) which is paid or payable to any such
employee other than in the ordinary course of business, and (ii) use reasonable
efforts to keep available to the applicable Prime Subsidiary the services of the
present employees at the Hotels (except those dismissed for cause or those who
voluntarily discontinue their employment);
(e) not (i) enter into or become obligated under any
Operating Agreement except for normal contracts entered into in the ordinary
course of business which can be terminated upon not more than thirty (30) days
notice without penalty and, if the party thereto delivering goods or performing
services is an Affiliate of ShoLodge, which contain fair market terms, or (ii)
in any manner change, modify, extend or renew any existing Operating Agreement
unless such Operating Agreement can be terminated upon not more than thirty (30)
days notice without penalty and, if the party thereto delivering goods or
performing services is an Affiliate of ShoLodge, unless such changes,
modifications, extensions or renewals are at fair market terms;
(f) maintain the Inventory in good condition and in
amount in accordance with past practices consistently applied (but as to bath
towels, hand towels, wash cloths, bath mats, sheets and pillow cases not less
than two (2) "turns" (as such term is used in the hotel industry) and as to
other linen items such as blankets, pillows and bed spreads, not less than one
(1) "turn" plus appropriate spare inventory of such other linen items);
(g) maintain in full force and effect policies of
liability and casualty insurance of the same type, character and coverage as the
policies currently carried with respect to the Assets and as required under the
HPT Lease or any separate lease as contemplated in Section 3.8;
(h) not in any manner change, modify, extend, renew or
terminate the HPT Lease, except as required by the terms thereof or except as
expressly permitted by this Agreement;
(i) maintain its books of account and records relating to
the Assets in accordance with sound accounting principles;
(j) use and operate the Hotels in compliance in all
material respects with applicable laws, statutes, rules and regulations and the
requirements of any mortgage, lease, Operating Agreement, Permitted Exception
and insurance policy affecting the Hotels or any Assets;
(k) pay or cause to be paid prior to delinquency all ad
valorem, occupancy and sales taxes due and payable with respect to any Asset or
the operation of the Hotels or establish or cause to be established adequate
reserves therefor;
(l) except as otherwise permitted hereby, not take any
action or fail to take action the result of which would have a material adverse
effect on an Asset or on the ability
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of the applicable Prime Subsidiary to operate the Hotels as first class hotels
after the Closing Date or which would cause any of the representations and
warranties contained in Article XV hereof to be untrue in any material respect
as of Closing;
(m) maintain the Buildings (including, but not limited
to, the mechanical systems, plumbing, electrical, wiring, appliances, fixtures,
heating, air conditioning and ventilating equipment, elevators, boilers,
equipment, roofs, structural members and furnaces) in substantially the same
condition as they are as of the last day of the Due Diligence Period, reasonable
wear and tear excepted (which maintenance as to the STI Buildings and, if
applicable, the Additional Buildings, may be made from funds in the "FF&E
Reserve" created pursuant to the HPT Lease or any separate lease as contemplated
in Section 3.8);
(n) not materially diminish the quality or quantity of
maintenance and upkeep services heretofore provided to the Assets;
(o) continue to use reasonable efforts to take guest room
reservations and to book functions and meetings and otherwise to promote the
business of the Hotels in accordance with current practices and at current
rates; provided, however, no such bookings shall be for more than six (6) months
in advance without the consent of Prime;
(p) promptly deliver to Prime upon Prime's request such
reports showing the revenue and expenses of the Hotels and all departments
thereof, together with such periodic information with respect to room
reservations and other bookings, as ShoLodge customarily keeps or receives
internally for its own use; and
(q) keep, observe and perform all its obligations in all
material respects under the HPT Lease, the Operating Agreements and all material
licenses, permits and other authorizations necessary for the current use,
occupancy and operation of the Assets, including, without limitation, any
licenses and permits for the sale and on-premises consumption of liquor and
other alcoholic beverages, consistent with ShoLodge's past practice.
13.3 Destruction of Assets. If prior to the Closing Date, any
Hotel suffers loss or damage on account of fire, flood, earthquake, accident,
act of war, civil commotion or other similar cause or event occurring after the
Effective Date such that STI has the right to terminate the HPT Lease as to such
Hotel or would have such right if such Hotel were leased by STI pursuant to the
HPT Lease and ShoLodge has not repaired such damage prior to the Closing Date,
Prime shall have the right to terminate this Agreement as to such damaged Hotel
(and the Assets related thereto) only by giving written notice to ShoLodge on or
prior to the Closing Date, in which event (i) the Purchase Price shall be
reduced by the applicable amount as reflected on Exhibit O attached hereto and
incorporated herein by this reference, (such reduction to come first from the
cash portion of the Purchase Price described in Section 6.1(a) and then from the
ShoLodge debt securities described in Section 6.1(b)) and Exhibit N shall be
appropriately modified, and (ii) if applicable, the "minimum annual rent"
described in Section 3.3 and in Section 4.3 shall be reduced by the applicable
amount as specified on Exhibit P attached hereto and incorporated herein by this
reference (as adjusted, if applicable, pursuant to Section 3.3 and
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Section 4.3). If Prime fails to terminate this Agreement as to a damaged Hotel
(and the Assets related thereto) by giving timely written notice of termination
as provided herein or if a Hotel is damaged but the damage is such that Prime
does not have an option to terminate this Agreement as to such damaged Hotel
(and the Assets related thereto), Prime shall consummate the transactions
contemplated hereunder (including, without limitation, as contemplated herein
with respect to such damaged Hotel (and the Assets related thereto)), in which
event the applicable Prime Subsidiary, except as otherwise provided in the HPT
Lease (or a separate lease contemplated in Section 3.8, if applicable), shall be
entitled to all insurance or other proceeds payable by reason of such loss or
damage to such damaged Hotel in excess of the amount spent by ShoLodge or a
ShoLodge Subsidiary to repair such damage (insurance or other proceeds in such
amount being payable to ShoLodge or such ShoLodge Subsidiary), and, in addition,
there shall be a reduction in the Purchase Price by the amount by which any
deductibles under the policies of insurance covering such loss or damage exceed
the amount spent by ShoLodge or a ShoLodge Subsidiary to repair such damage
which is not reimbursed from insurance or other proceeds. ShoLodge shall not
permit STI to terminate the HPT Lease or the separate lease contemplated in
Section 3.8 due to any casualty without the prior written approval of Prime,
such written approval not to be unreasonably withheld, delayed or conditioned.
In the event of a casualty to an Existing HPT Hotel or to an Additional HPT
Hotel such that Prime elects to terminate this Agreement as to such Hotel,
ShoLodge agrees that, at Prime's request, ShoLodge shall cause STI to terminate
the HPT Lease or the separate lease contemplated in Section 3.8 with respect to
such Hotel pursuant to the provisions thereof. Further, prior to commencing the
repair of any damage following a casualty event which would cost more than Two
Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in the aggregate to
repair, ShoLodge shall cause STI to obtain the prior written consent of Prime,
not to be unreasonably withheld, conditioned or delayed, to such repair.
In the event Prime timely elects to terminate this Agreement
pursuant to the preceding paragraph with respect to a damaged Hotel (and the
Assets related thereto), thereafter, ShoLodge and Prime shall be released and
relieved of all further obligations, liabilities and claims hereunder with
respect to such damaged Hotel (and the Assets related thereto), other than the
performance by each party of its Post Termination Obligations with respect to
such damaged Hotel (and the Assets related thereto). Such termination shall not
affect the rights and obligations of the parties hereto with respect to the
other Assets.
13.4 Condemnation. In the event of any actual or threatened
taking pursuant to the power of eminent domain of all or any portion of any HPT
Real Property or the Texas Real Property such that STI has the right to
terminate the HPT Lease as to such HPT Real Property or would have such right if
such HPT Real Property or such Texas Real Property were leased by STI pursuant
to the HPT Lease or any Development Site such that the taking would materially
adversely affect the operation of the hotel to be constructed on such property,
as applicable, or any proposed sale in lieu thereof, ShoLodge shall give written
notice thereof to Prime promptly after ShoLodge learns or receives notice
thereof, and Prime shall have the right to terminate this Agreement as to such
HPT Real Property or such Texas Real Property (and the Assets related thereto)
or as to such Development Site, as applicable, only by giving written notice to
ShoLodge on or prior to the date ten (10) days after receipt of such written
notice from ShoLodge, in which
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event (i) if applicable, the Purchase Price shall be reduced by the applicable
amount as reflected on Exhibit O attached hereto and incorporated herein by this
reference (such reduction to come first from the cash portion of the Purchase
Price described in Section 6.1(a) and then from the ShoLodge debt securities
described in Section 6.1(b)) and Exhibit N shall be appropriately modified, (ii)
if applicable, the Development Site Purchase Price shall be reduced by the
portion of the Development Site Purchase Price applicable to such Development
Site as set forth in Section 6.2, and (iii) if applicable, the "minimum annual
rent" in Section 3.3 and in Section 4.3 shall be reduced by the applicable
amount as specified on Exhibit P attached hereto and incorporated herein by this
reference (as adjusted, if applicable, pursuant to Section 3.3 and Section 4.3).
If Prime fails to terminate this Agreement as to any such HPT Real Property or
any such Texas Real Property (and the Assets related thereto) or as to any such
Development Site, as applicable, by giving timely written notice of termination
as provided herein or if the taking or threatened taking of such HPT Real
Property, Texas Real Property or Development Site, as applicable, is such that
Prime does not have an option to terminate this Agreement as to such HPT Real
Property or such Texas Real Property (and the Assets related thereto) or as to
such Development Site, as applicable, Prime shall consummate the transactions
contemplated hereunder (including, without limitation, as contemplated herein
with respect to such HPT Real Property or such Texas Real Property (and the
Assets related thereto) or such Development Site, as applicable), in which event
the applicable Prime Subsidiary or Prime, as applicable, except as otherwise
provided in the HPT Lease (or a separate lease contemplated in Section 3.8 if
applicable), shall be entitled to all proceeds, awards and other payments
arising out of such condemnation or sale (actual or threatened), but there shall
be no reduction in the Purchase Price. ShoLodge shall not permit STI to
terminate the HPT Lease or the separate lease contemplated in Section 3.8 due to
any taking pursuant to the power of eminent domain without the prior written
approval of Prime, such written approval of Prime not to be unreasonably
withheld, delayed or conditioned. In the event of a taking with respect to any
HPT Real Property, ShoLodge agrees that, at Prime's request, ShoLodge shall
cause STI to terminate the HPT Lease or the separate lease contemplated in
Section 3.8 with respect to such HPT Real Property pursuant to the provisions
thereof.
In the event Prime timely elects to terminate this Agreement
pursuant to the preceding paragraph with respect to any HPT Real Property or any
Texas Real Property (and the Assets related thereto) or a Development Site, as
applicable, thereafter, ShoLodge and Prime shall be released and relieved of all
further obligations, liabilities and claims hereunder with respect to such HPT
Real Property or such Texas Real Property (and the Assets related thereto), or
such Development Site, as applicable, other than the performance by each party
of its Post Termination Obligations with respect to such HPT Real Property or
such Texas Real Property (and the Assets related thereto) or such Development
Site, as applicable. Such termination shall not affect the rights and
obligations of the parties hereto with respect to the other Assets.
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<PAGE> 36
ARTICLE XIV
POST TERMINATION OBLIGATIONS
14.1 Post Termination Obligations. All costs and expenses
related to Prime's examination and inspection of the Assets shall be paid for by
Prime, and Prime agrees to indemnify and hold ShoLodge and the ShoLodge
Subsidiaries harmless from and against all such costs and expenses. Prime shall
not permit any liens to attach to the Assets by reason of the exercise of
Prime's inspection rights hereunder. Prime agrees that if this Agreement is
terminated for any reason, Prime will: (i) restore the Assets to the condition
which existed prior to any inspections, tests or other activities of Prime
(casualty, condemnation, ordinary wear and tear and acts or omissions of
ShoLodge or its Affiliates excepted); (ii) indemnify and hold ShoLodge and the
ShoLodge Subsidiaries harmless from and against any and all liens by
contractors, subcontractors, materialmen or laborers performing work or tests
for Prime and from and against any and all claims for damages by third parties
for damage to property or personal injuries to the extent arising out of or
attributable to the conduct of such work and tests and/or any other activities
of Prime or Prime's employees or agents; (iii) pay or reimburse ShoLodge and the
ShoLodge Subsidiaries for the payment of any expenses (including reasonable
attorney fees and court costs) incurred in connection with any of the foregoing;
and (iv) deliver to ShoLodge copies of all studies, reports, surveys, tests and
other materials of any kind or nature generated for or by Prime in connection
with Prime's inspection of the Assets. The foregoing obligations of Prime,
together with Prime's obligation to maintain the confidentiality of certain
matters as specified in Section 12.3, the obligation of each party to maintain
the confidentiality of certain matters as specified in Section 20.1 and the
obligation of each party with respect to costs and expenses set forth in Section
17.5, are referred to herein collectively as the "Post Termination Obligations."
Notwithstanding any provision herein to the contrary, it is agreed and
understood that a termination of this Agreement under any right granted
hereunder shall terminate all obligations of ShoLodge and Prime under this
Agreement except that such termination shall not terminate the provisions in
this Agreement relating to the Post Termination Obligations and except that any
termination due to the failure or refusal of a party to perform its obligations
hereunder shall not terminate the right of the other party hereto to pursue a
suit to recover damages in accordance with the provisions of Section 19.5(a)(i)
or Section 19.5(b)(i), as applicable. The Post Termination Obligations shall
survive any termination of this Agreement, and the right to pursue a suit to
recover damages in accordance with the provisions of Section 19.5(a)(i) and
Section 19.5(b)(i) shall survive any termination due to the failure or refusal
of a party to perform its obligations hereunder. Further, the obligations of
Prime set forth in (ii) and (iii) of the third sentence of this Section 14.1
shall survive the Closing.
ARTICLE XV
REPRESENTATIONS AND WARRANTIES OF SHOLODGE
ShoLodge hereby represents and warrants to Prime and to the
Prime Subsidiaries, as follows:
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15.1 Organization. ShoLodge is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee
and has the corporate power and authority to enter into and to perform this
Agreement and the Closing Documents to which ShoLodge is a party. Each ShoLodge
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the State of Tennessee and has the corporate power
and authority to perform its obligations as contemplated in this Agreement and
to enter into and to perform the Closing Documents to which each such ShoLodge
Subsidiary is a party. ShoLodge and each ShoLodge Subsidiary have duly qualified
to transact business in each jurisdiction in which the nature of the business
conducted by it requires such qualification, except where failure to do so could
not reasonably be expected to have a material adverse effect.
15.2 Authorization. The execution and delivery of this
Agreement by ShoLodge, the execution and delivery of all Closing Documents to be
executed by ShoLodge, and the consummation by ShoLodge of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of ShoLodge. The execution and delivery of all Closing Documents to be
executed by a ShoLodge Subsidiary, as applicable, and the consummation by each
ShoLodge Subsidiary, as applicable, of the transactions contemplated hereby and
thereby have been duly authorized by each such corporation's Board of Directors.
Neither the entering into this Agreement and the Closing Documents to be
executed by ShoLodge or a ShoLodge Subsidiary, as applicable, nor the
consummation of the transactions contemplated herein or therein will cause a
violation, default or breach by ShoLodge or a ShoLodge Subsidiary, as
applicable, of, or conflict with, any contracts, agreements or instruments to
which ShoLodge or a ShoLodge Subsidiary, as applicable, is a party or by which
ShoLodge or a ShoLodge Subsidiary, as applicable, is bound.
15.3 Valid and Binding Agreement. This Agreement constitutes,
and each of the Closing Documents to be executed by ShoLodge or a ShoLodge
Subsidiary, as applicable, will constitute upon execution by all parties
thereto, a valid and binding agreement of ShoLodge and the ShoLodge Subsidiaries
who are parties thereto, as applicable, enforceable in accordance with its
terms, subject as to enforceability to bankruptcy, insolvency and similar laws
affecting creditors' rights generally and to the availability of equitable
remedies.
15.4 No Violation. Neither the execution and delivery of this
Agreement, the execution and delivery of the Closing Documents to be executed by
ShoLodge or a ShoLodge Subsidiary, as applicable, nor the consummation by
ShoLodge and the ShoLodge Subsidiaries, as applicable, of the transactions
contemplated hereby or thereby violates or conflicts with any such corporation's
Charter or Bylaws or any agreement or other restriction of any kind to which any
such corporation is as a party or by which any such corporation is bound.
15.5 Employment Issues. The employees at the Hotels are not
represented by any union and, to the knowledge of ShoLodge, have not been
solicited with respect to organization or representation by any labor
organization or similar body. There are no employment agreements or other labor
agreements with respect to any employees at the Hotels. Except as set forth on
Exhibit M attached hereto and incorporated herein by this reference, there is
not any "employee benefit plan" as defined in ss. 3(3) of the Employment
Retirement Income Security Act of 1974,
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as amended ("ERISA"), nor any stock purchase plan, practice or arrangement, nor
any other material benefits, practice or arrangement relating to employees at
the Hotels (each such plan, practice or arrangement being referred to as a
"Benefit Plan"). ShoLodge is not currently required to contribute to any
multi-employer plans (as defined within the meaning of ss. 3(37) of ERISA) for
the benefit of the employees of any Hotel, nor has ShoLodge been required to
contribute to any multi-employer plans (as defined within the meaning of ss.
3(37) of ERISA) for the benefit of the employees at the Hotels, nor has ShoLodge
been required to contribute to any multi-employer plan for the benefit of the
employees at the Hotels within the last five (5) years. With respect to each
Benefit Plan set forth on Exhibit M, if any, ShoLodge has furnished Prime, to
the extent applicable to each Benefit Plan (i) complete and accurate copies of
the Benefit Plan, including all amendments, (ii) the most recent determination
letter from the Internal Revenue Service, (iii) the most recent actuarial
reports, and (iv) all reports of the Benefit Plan required by ERISA and the
regulations thereunder. The execution and delivery of this Agreement by ShoLodge
and the consummation of the transactions contemplated hereunder (x) do not
constitute a prohibited transaction within the meaning of ss. 406 of ERISA or
ss. 4975 of the Code, and (y) will not result in any obligation or liability of
Prime or ShoLodge to the Pension Benefit Guaranty Corporation in respect of any
Benefit Plan.
15.6 Site Disclosure.
(a) To the knowledge of ShoLodge, there is no pending or
threatened condemnation or similar proceeding affecting the Real Property or any
portion thereof, and to the knowledge of ShoLodge, no such action is presently
contemplated.
(b) To the knowledge of ShoLodge (i) all necessary permits and
licenses required for the operation of the Hotels have been obtained, and (ii)
no zoning, building or other federal, state or municipal law, ordinance,
regulation or restriction is violated by the continued operation of the Hotels
in the manner now being operated. No notice of zoning or building code
violations resulting from the improvements on the HPT Real Property or the Texas
Real Property or the continued operation of the Hotels thereon has been received
by ShoLodge.
(c) To the knowledge of ShoLodge and except as disclosed in
any environmental studies obtained by Prime or provided by ShoLodge to Prime,
(i) the Hotels have been operated in compliance with all environmental
regulations, and (ii) no pollutants or other toxic or hazardous substances,
including any solid, liquid, gaseous or thermal irritant or contaminant, such as
smoke, vapor, soot, fumes, alkalis, acids, chemicals or wastes, have been
stored, discharged, released, generated or allowed to escape at or from the Real
Property in violation of any environmental regulations, (iii) no underground
storage tanks are located on the Real Property or have been removed or filled,
and (iv) no investigation, administrative order, consent order or agreement,
litigation or settlement with respect to any of the foregoing is proposed,
threatened, anticipated or in existence with respect to the Real Property.
ShoLodge has not received any notice of any such investigation, administrative
order, consent order or agreement, litigation or settlement.
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(d) To the knowledge of ShoLodge, there are no structural,
electrical, mechanical, plumbing or other defects in any of the Hotels which
could have a material adverse effect on the operation of such Hotel.
15.7 Operating Agreements. Attached hereto as Exhibit L is a
schedule of all Operating Agreements in effect as of the Effective Date. There
are no material management, service, supply or maintenance contracts or
equipment leases or similar contracts or agreements in effect as of the
Effective Date with respect to the Assets other than the Operating Agreements
listed on Schedule L attached hereto and incorporated herein by this reference.
The copies of the Operating Agreements previously provided or made available to
Prime are true and complete copies of said Operating Agreements and, to
ShoLodge's knowledge, are valid and in full force and effect and no party has
breached any material condition or provision thereof. To ShoLodge's knowledge,
ShoLodge or the applicable ShoLodge Subsidiary has performed all of its material
obligations under each of the Operating Agreements. To ShoLodge's knowledge no
fact or circumstance has occurred which, by itself or with the passage of time
or the giving of notice or both, would constitute a default in any material
respect under any of the Operating Agreements. To ShoLodge's knowledge, all
other parties to the Operating Agreements have performed all of their
obligations thereunder in all material respects and are not in default
thereunder in any material respect. Except as set forth on Exhibit L or
disclosed to Prime, ShoLodge has received no notice of any intention of any of
the parties to any of the Operating Agreements to cancel the same, nor has
ShoLodge or the applicable ShoLodge Subsidiary canceled any of same.
15.8 Equipment. To the knowledge of ShoLodge, each item of
Equipment is in good operating condition and repair.
15.9 Brokers Fees. No brokers, finders or similar agents
acting on behalf of ShoLodge are entitled to any brokerage commission, finder's
fee or any similar compensation in connection with this Agreement or the
transactions contemplated hereby.
15.10 Litigation. ShoLodge has not received any written notice
of and, to ShoLodge's knowledge, no action or proceeding is pending or
threatened and no investigation looking toward such an action or proceeding has
begun, which (a) questions the validity of this Agreement or the HPT Lease or
any action taken or to be taken pursuant hereto, (b) will result in any material
adverse change in the business, operation, affairs or condition of any of the
Hotels, (c) will result in or subject any Asset to a material liability, or (d)
involves condemnation or eminent domain proceedings against any part of the
Assets.
15.11 Booking Agreements. All bookings of guest rooms and
meeting rooms which will be binding on a Prime Subsidiary subsequent to the
Closing Date were entered into in the ordinary course of business consistent
with past practice.
15.12 HPT Documents. The copy of the HPT Documents previously
provided or made available to Prime is a full and complete copy of the HPT
Documents and, to ShoLodge's knowledge, the HPT Documents are valid and in full
force and effect and no party has breached any material condition or provision
thereof, including, without limitation, as to STI, the provisions
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<PAGE> 40
of Section 9.1 of the HPT Lease concerning required insurance. To ShoLodge's
knowledge, STI has performed all of its material obligations under the HPT
Lease. To ShoLodge's knowledge no fact or circumstance has occurred which, by
itself or with the passage of time or the giving of notice or both, would
constitute a default in any material respect under the HPT Lease. To ShoLodge's
knowledge, Landlord has performed all of its obligations under the HPT Lease in
all material respects and is not in default thereunder in any material respect.
STI has not prepaid rent or additional rent or any other items under the HPT
Lease for more than one (1) month in advance.
15.13 Not A Foreign Person. Neither ShoLodge nor any ShoLodge
Subsidiary is a "foreign person" within the meaning of Section 1445 of the Code.
15.14 Insurance. ShoLodge has not received any written notice
from any insurance carrier of defects or inadequacies in any Asset which, if
uncorrected, would result in a termination of insurance coverage or a material
increase in the premiums charged therefor.
15.15 Adjacent Land. No land or facilities adjacent to any of
the Hotels is used in the operation of the Hotels except for access, parking and
utility easements as reflected in the title documents previously provided by
ShoLodge to Prime.
15.16 Trademarks. ShoLodge has received no written notice that
the use of the "Sumner Suites" trademark or tradename is in violation of any
trademark or tradename owned by any other Person, except for claims resolved in
favor of ShoLodge by final order.
15.17 Compliance with Laws. To ShoLodge's knowledge, each
Asset is in compliance in all material respects with all laws of governmental
authorities which are applicable to the Asset or the use or operation of such
Asset.
15.18 Taxes. In connection with the ownership and operation of
each Asset, to ShoLodge's knowledge, ShoLodge or a ShoLodge Subsidiary, as
applicable, has filed or will timely file all required federal, state and local
income, withholding, unemployment, FICA, excise, franchise, gross receipts,
property, sales, resort, use, occupancy and other tax returns either when due or
not later than the end of applicable extension periods. All taxes which have
become due and payable or may become due and payable prior to or after the
Closing on account of the Assets or the operation of the Hotels prior to the
Closing Date have been paid or will be paid when due, except liens for real
estate taxes which are not delinquent or which are being contested in good faith
or as to which adequate reserves are provided therefor (and none of such taxes
shall be assumed by Prime except to the extent the Purchase Price or the
Development Site Purchase Price is decreased for such taxes pursuant to Section
9.1(b)). After the Closing and except as contemplated to the contrary in the
preceding sentence, there shall be no liens on any of the Assets by reason of
any taxes payable on or before the Closing Date or pertaining to periods ending
on or before the Closing Date. To ShoLodge's knowledge, other than the amounts
disclosed by tax bills, no taxes or special assessments of any kind (special,
bond or otherwise) are or have been levied with respect to any of the Assets, or
any portion thereof, which are outstanding or unpaid,
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<PAGE> 41
other than amounts not yet due and payable or, if due and payable, not yet
delinquent or as to which adequate reserves are provided therefor.
15.19 Financial Information. All of ShoLodge's financial
information, including, without limitation, all books and records and financial
statements previously furnished to Prime ("Financial Information") is to
ShoLodge's knowledge true and correct in all material respects and presents
accurately the results of the operations of the Hotels for the periods indicated
and has been prepared in accordance with generally accepted accounting
principles. Since the date of the last financial statement included in
ShoLodge's Financial Information, there has been no material adverse change in
the financial condition or in the operations of the Hotels.
15.20 Leases. There are no leases, subleases, licenses or
other lettings of space within a Hotel that will remain in existence after the
Closing Date other than (i) the rights of guests in occupancy and the holders of
reservations for future occupancy of guest rooms or meeting rooms, (ii) the
rights set forth in the Operating Agreements, and (iii) the rights of the owner
of record of any license or permit for the sale and on-premises consumption of
liquor and other alcoholic beverages (which license shall remain in effect to
the extent contemplated in Section 18.1).
15.21 HTP Lease Security Deposit/HPT Lease Guaranty Deposit.
The amount of the HPT Lease Security Deposit is Twenty-One Million Two Hundred
Eighty Thousand and No/100 Dollars ($21,280,000.00). The amount of the HPT Lease
Guaranty Deposit is Fourteen Million and No/100 Dollars ($14,000,000.00).
When used herein the words "to the knowledge of ShoLodge" or
words of similar effect mean the actual knowledge of the current officers of
ShoLodge, without independent inquiry.
Prime acknowledges that Prime has not entered into this
Agreement based upon any representation, warranty, agreement, statement or
expression of opinion by ShoLodge or by any Person acting or allegedly acting
for or on behalf of ShoLodge as to the Assets or the condition of the Assets
(other than any warranty of title set out in the Closing Documents and other
than the representations and warranties specifically set forth in Article XV
hereof). Prime agrees that the Assets to be sold or leased to Prime or a Prime
Subsidiary hereunder are to be sold or leased to and accepted by Prime or a
Prime Subsidiary at Closing, AS IS, WHERE IS, WITH ALL FAULTS, IF ANY, AND
WITHOUT ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED (other
than (i) any warranty of title set out in the Closing Documents, (ii) the
representations and warranties specifically set forth in Article XV hereof, and
(iii) the obligation of ShoLodge to complete the "unacceptable items" identified
pursuant to Sections 12.1 and 12.2 of this Agreement which ShoLodge undertakes
to resolve pursuant to such sections).
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ARTICLE XVI
REPRESENTATIONS AND WARRANTIES OF PRIME
Prime hereby represents and warrants to ShoLodge and to the
ShoLodge Subsidiaries, as follows:
16.1 Organization. Prime is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power and authority to enter into and to perform this Agreement
and the Closing Documents to which Prime is a party. Each Prime Subsidiary is,
or prior to Closing will be, a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has, or will have
prior to Closing, the corporate power and authority to perform its obligations
as contemplated in this Agreement and to enter into and to perform the Closing
Documents to which each such Prime Subsidiary is a party. Prime and each Prime
Subsidiary have, or prior to Closing will have, duly qualified to transact
business in each jurisdiction in which the nature of the business conducted by
it requires such qualification, except where failure to do so could not
reasonably be expected to have a material adverse effect.
16.2 Authorization. The execution and delivery of this Agreement
by Prime, the execution of all Closing Documents to be executed by Prime and the
consummation by Prime of the transactions contemplated hereby and thereby have
been duly authorized by the Board of Directors of Prime. The execution and
delivery of all Closing Documents to be executed by a Prime Subsidiary, as
applicable, and the consummation by each Prime Subsidiary, as applicable, of the
transactions contemplated hereby and thereby have been, or prior to Closing will
be, duly authorized by such corporation's Board of Directors. Neither the
entering into this Agreement and the other Closing Documents to be executed by
Prime or a Prime Subsidiary, as applicable, nor the consummation of the
transactions contemplated herein or therein will cause a violation, default or
breach by Prime or a Prime Subsidiary, as applicable, of, or conflict with, any
contracts, agreements or instruments to which Prime or a Prime Subsidiary, as
applicable, is a party or by which Prime or a Prime Subsidiary, as applicable,
is bound.
16.3 Valid and Binding Agreement. This Agreement constitutes, and
each of the Closing Documents to be executed by Prime or a Prime Subsidiary, as
applicable, will constitute upon execution by all parties thereto, a valid and
binding agreement of Prime and the Prime Subsidiaries who are parties thereto,
as applicable, enforceable in accordance with its terms, subject as to
enforceability to bankruptcy, insolvency and similar laws affecting creditors'
rights generally and to the availability of equitable remedies.
16.4 No Violation. Neither the execution and delivery of this
Agreement, the execution and delivery of the Closing Documents to be executed by
Prime or a Prime Subsidiary, as applicable, nor the consummation by Prime and
the Prime Subsidiaries, as applicable, of the transactions contemplated hereby
or thereby violates or conflicts with either such corporation's Charter or
Bylaws or any agreement or other restriction of any kind to which either such
corporation is as a party or by which either such corporation is bound.
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<PAGE> 43
16.5 Brokers Fees. No brokers, finders or similar agents acting
on behalf of Prime are entitled to any brokerage commission, finder's fee or any
similar compensation in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE XVII
CLOSING
17.1 Closing. The Closing shall occur on such date as the parties
hereto may agree upon in writing for the closing of the transactions
contemplated hereby; provided, however, that such date shall not be later than
the date thirty (30) days after the last day of the Due Diligence Period;
provided, further, that if on such date the conditions precedent to Closing set
forth in Sections 10.6 and 11.6 have not been satisfied, ShoLodge, by written
notice to Prime, may postpone the Closing while ShoLodge diligently and
continuously attempts to satisfy such conditions precedent, such postponed
Closing to occur no later than the earlier of (i) the date one hundred five
(105) days after the last day of the Due Diligence Period, and (ii) the date
fifteen (15) days after such conditions precedent are satisfied; and provided,
further, that if on such date the condition precedent to Closing with respect to
one (1) or both of the Development Sites set forth in the last paragraph of
Article XI has not been satisfied, ShoLodge, by written notice to Prime, may
postpone the Closing as to such Development Site or Development Sites, as
applicable, while ShoLodge diligently and continuously attempts to satisfy such
condition precedent, such postponed Closing to occur no later than the earlier
of (i) the date one hundred eighty (180) days after the last day of the Due
Diligence Period, and (ii) the date fifteen (15) days after such condition
precedent is satisfied. Notwithstanding the foregoing or any other provision to
the contrary set forth in this Agreement, upon the receipt by ShoLodge from
Prime of (i) ten (10) days advance written notice, and (ii) the written waiver
by Prime of any right to terminate this Agreement pursuant to Section 12.1 or
Section 12.2, Prime, at Prime's option, may proceed to close all (but not less
than all) of the transactions contemplated herein other than the transaction
with respect to the Additional HPT Hotels as contemplated in Article III and
other than the transfer of one (1) or both of the Development Sites the Closing
of which has been postponed as described herein. In the event the transactions
contemplated by this Agreement are closed on more than one (1) date as
contemplated in this Section 17.1, the provisions of this Agreement shall be
interpreted to accommodate such separate Closings, and the provisions of this
Agreement relating to the transactions which have not closed shall remain in
effect following any Closing.
17.2 Closing Date Deliveries. At the Closing on the Closing Date:
(a) ShoLodge shall deliver, or cause to be delivered, to Prime, a
Prime Subsidiary or Landlord, as applicable: (1) the Closing Documents to be
signed by ShoLodge and/or a ShoLodge Subsidiary, as applicable, properly
executed by ShoLodge and/or the ShoLodge Subsidiaries, as applicable, (2) a
certificate of existence or similar document from the Secretary of State of the
State of Tennessee or from such other appropriate official in Tennessee
evidencing the due organization, valid existence and good standing of ShoLodge
and the ShoLodge Subsidiaries under the laws of the State of Tennessee, (3)
resolutions of ShoLodge and the ShoLodge Subsidiaries authorizing the
transactions contemplated hereby, certified by the Secretary
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<PAGE> 44
of ShoLodge and the ShoLodge Subsidiaries, (4) the HPT Estoppel Certificate, (5)
the HPT Lease Amendment, (6) title records for any vehicles transferred pursuant
to this Agreement, and (7) such other documents as Prime shall reasonably
request.
(b) Prime shall deliver, or cause to be delivered, to ShoLodge, a
ShoLodge Subsidiary or Landlord, as applicable: (1) the Closing Documents to be
signed by Prime and/or a Prime Subsidiary, as applicable, properly executed by
Prime and/or the Prime Subsidiaries, as applicable, (2) a certificate of
existence or similar document from the Secretary of State of the State of
Delaware or from such other appropriate official in Delaware evidencing the due
organization, valid existence and good standing of Prime and the Prime
Subsidiaries under the laws of the State of Delaware, (3) resolutions of Prime
and the Prime Subsidiaries authorizing the transactions contemplated hereby,
certified by the Secretary of Prime and the Prime Subsidiaries, and (4) such
other documents as ShoLodge shall reasonably request.
17.3 Possession. Possession of all tangible Assets will be
delivered by ShoLodge and the ShoLodge Subsidiaries, as applicable, to Prime or
a Prime Subsidiary, as applicable, on the Closing Date, and ShoLodge and the
ShoLodge Subsidiaries, as applicable, shall relinquish their use of or claims to
any and all intangible Assets on the Closing Date.
17.4 Employment Matters. At Closing, all employees working at the
Hotels shall be terminated by ShoLodge or a ShoLodge Subsidiary, as applicable,
and ShoLodge or such ShoLodge Subsidiary, as applicable, shall pay all salaries
and wages and, to the extent possible, all accrued but unsatisfied benefits of
such employees with regard to all periods of time prior to the Closing Date.
ShoLodge shall defend, indemnify and hold Prime and the Prime Subsidiaries, as
applicable, harmless from and against any and all loss, expense (including,
without limitation, reasonable attorneys' fees and court costs arising from the
enforcement of this indemnity), damage and liability arising from the
termination of any employees on the Closing Date, including, without limitation,
any claim, damage, penalty or fees, including reasonable attorneys' fees,
arising out of the failure of ShoLodge or a ShoLodge Subsidiary, as applicable,
to comply with all provisions of the Worker Adjustment and Retraining Act, as
amended, except to the extent any of the foregoing is caused by the failure of
Prime or a Prime Subsidiary, as applicable, to rehire such employees pursuant to
the next succeeding sentence and except to the extent the Purchase Price is
decreased for accrued but unpaid benefits due to such terminated employees
pursuant to Section 9.1(b)(vi). Immediately following the termination of all
employees working at the Hotels as contemplated herein, Prime shall hire, or
shall cause a Prime Subsidiary to hire, all such employees other than the
general manager, the assistant general manager and the director of sales at each
Hotel. Prior to the execution of this Agreement, ShoLodge has provided to Prime
a schedule of all employees working at the Hotels by classification, seniority,
rate of pay and accrued benefits. Prime may, during normal business hours and
with prior notice to ShoLodge during the Due Diligence Period, interview the
general managers, assistant general managers and directors of sales to determine
if Prime wants to employ such employees. The provisions of this Section 17.4
shall survive the Closing.
17.5 Closing Costs and Expenses. Prime shall pay or cause to be
paid the premium for any title policy insuring Prime or a Prime Subsidiary, as
applicable, as to the Real
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<PAGE> 45
Property. All costs of recording the transfer and assignment documents to Prime
or a Prime Subsidiary, as applicable, contemplated herein, including, without
limitation, any and all real estate transfer taxes, shall be paid in accordance
with local custom. Except as set forth in the preceding sentence, each party
shall be responsible for the payment of its own attorney's fees, copying
expenses and other costs and expenses incurred in connection with the
negotiation of this Agreement and the consummation of the transactions
contemplated hereunder. The provisions of this Section 17.5 shall survive the
Closing and any termination of this Agreement.
17.6 Hendersonville Restriction. At or prior to Closing, ShoLodge
shall cause to be recorded against the Hendersonville, Tennessee Hotel
restrictions and covenants (i) requiring the lessee under the HPT Lease during
the term thereof (including extensions and renewals) and thereafter the owner of
such property (A) to secure the approval (not to be unreasonably withheld,
delayed or conditioned) of the owner of the adjacent property on which
ShoLodge's corporate offices are located of any change, alteration, repair,
repainting or similar activity which affects the exterior of such Hotel or the
premises on which such Hotel is located except in an insignificant manner and
(B) to maintain such Hotel and such premises in a neat and attractive manner
consistent with the standard for AmeriSuites hotels, and (ii) providing for
common lawncare and maintenance of landscaping of such properties and the
adjacent bank property with the cost to be shared based on the square footage of
each property compared to the total square footage of all such property (the
"Hendersonville Restriction"). At least ten (10) days prior to recordation,
ShoLodge shall deliver to Prime a copy of the proposed Hendersonville
Restriction for Prime's written approval, such approval not to be unreasonably
withheld, delayed or conditioned. In no event shall the Hendersonville
Restriction be recorded without Prime's prior written approval. The portion of
the Hendersonville Restriction described in part (ii) of the first sentence of
this Section 17.6 shall be mutually restrictive as to all real property covered
thereby. The provisions of this Section 17.6 shall survive the Closing, but any
conflict between the terms of this Section 17.6 and the terms of the
Hendersonville Restriction shall be governed by the Hendersonville Restriction.
ARTICLE XVIII
POST CLOSING ITEMS
18.1 Operating Permits. Prime or a Prime Subsidiary, as
applicable, shall apply for new or modified operating permits and licenses,
including, without limitation, liquor licenses, if applicable, to reflect Prime
or a Prime Subsidiary, as applicable, as the new operator of the Hotels as soon
as possible after Closing. ShoLodge and the ShoLodge Subsidiaries, as
applicable, shall cooperate with Prime or a Prime Subsidiary, as applicable, in
its efforts to obtain new operating permits and licenses for the Hotels or
modifications to existing operating permits and licenses or, to the extent
permitted by applicable law, to maintain the existing operating permits and
licenses in effect until such time as the new or modified operating permits and
licenses may be obtained. Until such time as such new or modified operating
permits and licenses are obtained, ShoLodge and the ShoLodge Subsidiaries, as
applicable, to the extent permitted by applicable law, shall take all steps
reasonably necessary to enable the current operating permits and licenses, if
any, to be used in the operation of the Hotels and to permit the continued
operation of the Hotels,
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<PAGE> 46
including, without limitation, the uninterrupted sale and serving of alcoholic
beverages at the Hotels, if applicable. All costs and expenses incurred by
ShoLodge or a ShoLodge Subsidiary in connection with the foregoing shall be paid
by Prime or a Prime Subsidiary, as applicable, and Prime and the Prime
Subsidiaries shall defend, indemnify and hold ShoLodge and the ShoLodge
Subsidiaries harmless from and against any and all loss, expense (including,
without limitation, reasonable attorney's fees and court costs arising from the
enforcement of this indemnity), damage and liability arising from the foregoing,
and Prime and the Prime Subsidiaries shall cause ShoLodge and the ShoLodge
Subsidiaries, as applicable, to be named as additional insureds under their
liability insurance policies for the Hotels including, without limitation, under
their liquor liability or "dram shop" coverage with respect to the sale,
distribution or consumption of alcoholic beverages. Evidence of such insurance
shall be provided to ShoLodge at Closing, and such insurance must contain a
provision to the effect that it may not be canceled or modified without thirty
(30) days advance written notice from the insurer to ShoLodge (until such time
as the new or modified operating permits and licenses are received). The
provisions of this Section 18.1 shall survive the Closing.
18.2 Radius Restriction. For a twenty (20) year period commencing
on the Closing Date, neither ShoLodge nor any ShoLodge Affiliate shall own,
operate or franchise any all-suites hotel substantially similar in nature and
kind to the AmeriSuites hotels to be operated by Prime or a Prime Subsidiary, as
applicable, as contemplated in this Agreement anywhere within a certain
designated area of each Hotel, such area being as to the Existing HPT Hotels and
the Additional HPT Hotels the applicable "Restricted Trade Area" as set forth in
Exhibit B to the HPT Lease or the comparable provision of any separate lease
contemplated in Section 3.3 and in Section 3.8, as applicable, and being as to
the Texas Hotels a three (3) mile radius of each such Texas Hotel. The
foregoing, however, shall not limit ShoLodge or any ShoLodge Affiliate from (i)
developing or constructing any all-suites hotel substantially similar in nature
and kind to the AmeriSuites hotels contemplated herein within such restricted
area as long as such hotel is both (A) operated by someone other than ShoLodge
or a ShoLodge Affiliate, and (B) owned by someone other than ShoLodge or a
ShoLodge Affiliate, or (ii) owning, operating or franchising (A) any "Shoney's"
brand all-suites hotel within such restricted area, or (B) any other hotel
within such restricted area as long as such other hotel is not an all-suites
hotel substantially similar in nature and kind to the AmeriSuites hotels
contemplated herein. The provisions of this Section 18.2 shall survive the
Closing. Prime shall have the right to any remedies available to it at law or in
equity, including without limitation, injunction, in the event ShoLodge or any
ShoLodge Affiliate violates the covenant set forth in this Section 18.2.
ARTICLE XIX
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATIONS; REMEDIES
19.1 Survival of Representations. All representations and
warranties made by any party in this Agreement shall be true and correct in all
material respects as of Closing and, subject to the limitations described in
Section 19.6 below, shall survive the Closing hereunder.
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<PAGE> 47
19.2 Indemnification by Prime. Prime hereby indemnifies and holds
ShoLodge and the ShoLodge Subsidiaries harmless from and against, and agrees to
promptly defend ShoLodge and the ShoLodge Subsidiaries from and reimburse
ShoLodge and the ShoLodge Subsidiaries for, any and all losses, damages, costs,
expenses, liabilities, obligations, suits, actions, proceedings (formal or
informal), investigations, settlements and claims of any kind (including,
without limitation, reasonable attorney fees and other legal costs and expenses)
which ShoLodge or the ShoLodge Subsidiaries may at any time suffer or incur, or
become subject to, as a result of or in connection with:
(a) the representations and warranties made by Prime in this
Agreement having been untrue or incorrect in any material respect;
(b) any failure by Prime to carry out, perform, satisfy and
discharge any of the covenants, agreements, undertakings, liabilities or
obligations of Prime under this Agreement; and
(c) except to the extent the Purchase Price or the Development
Site Purchase Price has been increased pursuant to Section 9.1(a) for the
obligation in question, the operation of the Hotels on and after the Closing
Date, including, without limitation, the following:
(i) any obligation arising out of an accident, injury,
death or damage whatsoever caused to any Person or loss of
property occurring on or after the Closing Date in or about the
Assets or any part thereof; and
(ii) any obligation arising out of any actions or
omissions of Prime or a Prime Subsidiary or its or their agents,
representatives, employees or contractors relating to the Assets
on or after the Closing Date.
19.3 ShoLodge's Indemnity. ShoLodge hereby indemnifies and holds
Prime and the Prime Subsidiaries harmless from and against, and agrees promptly
to defend Prime and the Prime Subsidiaries from and reimburse Prime and the
Prime Subsidiaries for, any and all losses, damages, costs, expenses,
liabilities, obligations, suits, actions, proceedings (formal or informal),
investigations, settlements and claims of any kind (including, without
limitation, reasonable attorney fees and other legal costs and expenses) which
Prime or the Prime Subsidiaries may at any time suffer or incur, or become
subject to, as a result of or in connection with:
(a) the representations and warranties made by ShoLodge in this
Agreement having been untrue or incorrect in any material respect;
(b) any failure by ShoLodge to carry out, perform, satisfy and
discharge any of the covenants, agreements, undertakings, liabilities or
obligations of ShoLodge under this Agreement;
(c) except to the extent the Purchase Price or the Development
Site Purchase Price has been decreased pursuant to Section 9.1(b) for the
obligation in question, the operation of the Hotels prior to the Closing Date,
including, without limitation, the following:
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<PAGE> 48
(i) any obligation arising out of an accident, injury,
death or damage whatsoever caused to any Person or loss of
property occurring prior to the Closing Date in or about the
Assets or any part thereof;
(ii) any obligation arising out of any actions or
omissions of ShoLodge or a ShoLodge Subsidiary or its or their
agents, representatives, employees or contractors relating to the
Assets prior to the Closing Date; and
(iii) accounts payable with respect to goods or services
provided to or for the Hotels prior to the Closing Date; and
(d) any failure of ShoLodge or any ShoLodge Subsidiary to comply
with any bulk sales law or like statute in connection with the transactions
contemplated herein.
Notwithstanding the foregoing, ShoLodge shall have no obligation
to indemnify Prime or the Prime Subsidiaries with respect to any representation
or warranty concerning the condition of the STI Assets, the Additional Property
or the Texas Property or any portion thereof to the extent such condition can be
corrected (by maintenance, repair or replacement) pursuant to the terms of the
HPT Lease or the Texas Lease with funds in the "FF&E Reserve" created pursuant
to the HPT Lease (or a similar fund created under a separate lease contemplated
in Section 3.3 and in Section 3.8) or the Texas Lease, as applicable.
19.4 Notification of Claims.
(a) A party or parties entitled to be indemnified pursuant to
Section 19.2 or 19.3 hereof or otherwise pursuant to this Agreement (the
"Indemnified Party") shall notify the party or parties liable for such
indemnification (the "Indemnifying Party") in writing of any claim or demand
which the Indemnified Party has determined has given or could give rise to a
right of indemnification under this Agreement. Subject to the Indemnifying
Party's right to defend in good faith third party claims as hereinafter
provided, the Indemnifying Party shall satisfy its obligations under this
Article XIX or otherwise pursuant to this Agreement within thirty (30) days
after the receipt of written notice thereof from the Indemnified Party.
(b) If the Indemnified Party shall notify the Indemnifying Party
of any claim or demand pursuant to Section 19.4(a), and if such claim or demand
relates to a claim or demand asserted by a third party against the Indemnified
Party which the Indemnified Party asserts is a claim or demand for which the
Indemnifying Party must indemnify or hold harmless the Indemnified Party under
Section 19.2 or 19.3 hereof or otherwise pursuant to this Agreement, the
Indemnifying Party shall have the right to employ counsel to defend any such
claim or demand asserted against the Indemnified Party. The Indemnified Party
shall have the right to cooperate at its expense in the defense of any such
claim or demand. The Indemnifying Party shall notify the Indemnified Party in
writing, within thirty (30) days after the date of the notice of claim given by
the Indemnified Party to the Indemnifying Party under Section 19.4(a) of its
election to defend in good faith any such third party claim or demand. So long
as the Indemnifying Party is defending in good faith any such claim or demand
asserted by a third party against the Indemnified
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<PAGE> 49
Party, the Indemnified Party shall not settle or compromise such claim or
demand. The Indemnified Party shall make available to the Indemnifying Party or
its agents all records and other materials in the Indemnified Party's possession
reasonably required by the Indemnifying Party for its use in contesting any
third party claim or demand. Whether or not the Indemnifying Party elects to
defend any such claim or demand, the Indemnified Party shall have no obligation
to do so.
19.5 Remedies.
(a) If ShoLodge fails or refuses to timely perform ShoLodge's
obligations hereunder, Prime shall have only the following options: (i) to
terminate this Agreement as provided in Article XI and thereupon this Agreement
shall terminate, and Prime and ShoLodge shall be relieved and released of any
further obligations, claims and liabilities hereunder, except for the
performance by each party of its Post Termination Obligations which shall remain
enforceable, and except that Prime may pursue a suit against ShoLodge for
damages resulting from any failure or refusal of ShoLodge to perform ShoLodge's
obligations hereunder prior to such termination, or (ii) to pursue any and all
remedies available to Prime at law or in equity, including, without limitation,
a suit for specific performance.
(b) If Prime fails or refuses to timely perform Prime's
obligations hereunder, ShoLodge shall have only the following options: (i) to
terminate this Agreement as provided in Article X and thereupon this Agreement
shall terminate, and Prime and ShoLodge shall be relieved and released of any
further obligations, claims and liabilities hereunder, except for the
performance by each party of its Post Termination Obligations which shall remain
enforceable and except that ShoLodge may pursue a suit against Prime for damages
resulting from any failure or refusal of Prime to perform Prime's obligations
hereunder prior to such termination, or (ii) to pursue any and all remedies
available to ShoLodge at law or in equity, including, without limitation, a suit
for specific performance.
(c) Notwithstanding anything to the contrary expressed or implied
in this Agreement, the sole and exclusive remedy of Prime and the Prime
Subsidiaries for any breach of any representation or warranty of ShoLodge
contained in this Agreement shall be as follows: (i) prior to Closing, to
terminate this Agreement pursuant to Article XI; and (ii) on and after Closing,
to obtain indemnification from ShoLodge pursuant to this Article XIX. Prime and
the Prime Subsidiaries shall have no other right or remedy with respect to the
breach of any representation or warranty of ShoLodge contained in this Agreement
at law or in equity.
19.6 Limitations. Notwithstanding the foregoing, unless notice of
any claim for any indemnification obligation of ShoLodge for any breach of any
representation or warranty of ShoLodge contained in this Agreement has been
given to ShoLodge within twelve (12) months after the Closing, no claim may be
asserted against, and no action, suit or proceeding may be brought against,
ShoLodge. Further, notwithstanding anything contained herein to the contrary,
neither Prime nor the Prime Subsidiaries shall have the right to recover damages
against ShoLodge for the breach of any representation or warranty of ShoLodge
contained herein as to which Prime or a Prime Subsidiary had knowledge prior to
or at Closing, and neither ShoLodge nor any
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<PAGE> 50
ShoLodge Subsidiary shall have the right to recover damages against Prime for
the breach of any representations or warranty of Prime contained herein as to
which ShoLodge or any ShoLodge Subsidiary had knowledge prior to or at Closing.
19.7 Survival. The provisions of this Article XIX shall survive
the Closing of the transactions contemplated by this Agreement, and the
provisions of Section 19.4 shall survive the termination of this Agreement and
apply with respect to indemnification obligations constituting a part of the
Post Termination Obligations. Further, the provisions of Section 19.5(a)(i) and
Section 19.5(b)(i) concerning a suit for damages shall survive the termination
of this Agreement pursuant to Section 19.5.
ARTICLE XX
MISCELLANEOUS
20.1 Confidentiality. Each of the parties hereto agrees and
undertakes to retain in confidence and to require its respective employees,
consultants and agents to retain in confidence, all information obtained in
connection with this Agreement and the transactions and disclosures contemplated
hereby which information is not generally ascertainable from public sources.
Except as required by law, each of the parties further agrees not to make any
disclosure to non-parties, or any public announcements, regarding this Agreement
or the transactions contemplated hereby without the prior consent of the other
party hereto. It is understood and agreed, however, that this section will not
be construed as an obligation to refrain from business activities in the future
that are similar to the business in which the parties hereto are now engaged.
The provisions of this Section 20.1 shall survive the Closing and any
termination of this Agreement.
20.2 Parties in Interest. Except as otherwise expressly provided
herein, all the terms and provisions of this Agreement shall be binding upon,
shall inure to the benefit of, and shall be enforceable by the respective heirs,
beneficiaries, personal and legal representatives, successors, and assigns of
the parties hereto. Notwithstanding the foregoing, Prime shall not assign its
rights under this Agreement without the prior written approval of ShoLodge, and
any attempted assignment without such approval shall be null and void.
20.3 Entire Agreement; Amendments. This Agreement, including the
exhibits and other documents and writings referred to herein or delivered
pursuant hereto, which form a part hereof, contains the entire understanding of
the parties with respect to this subject matter. There are no restrictions,
agreements, promises, warranties, covenants, or undertakings other than those
expressly set forth herein or therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to its subject
matter. This Agreement may be amended only by a written instrument duly executed
by the parties or their respective successors or permitted assigns. Any
condition to a party's obligations hereunder may be waived by such party in
writing.
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<PAGE> 51
20.4 Headings. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
20.5 Notices. Any notice, request or other communication to be
given by any party hereunder shall be in writing and shall be deemed effective
three (3) business days after deposit in the United States Registered or
Certified Mail, postage prepaid, return receipt requested, or one (1) business
day after delivery to an overnight courier service for next business day
delivery or upon delivery in person, or upon sending via telecopy with a copy
deposited in the United States first class mail, addressed to such party as
follows:
20.6 If to ShoLodge, then to:
ShoLodge, Inc.
130 Maple Drive North
Hendersonville, TN 37075
Attn: Leon Moore
Telecopy: (615)264-1758
and with a copy to:
Boult, Cummings, Conners & Berry, PLC
414 Union Street, Suite 1600
Nashville, TN 37219
Attn: Patrick L. Alexander, Esq.
Telecopy: (615)252-6362
20.7 If to Prime, then to:
Prime Hospitality Corp.
700 Route 46 East
Fairfield, NJ 07004
Attn: Douglas W. Vicari
Telecopy: (973) 882-7635
and with a copy to:
Prime Law Department
700 Route 46 East
Fairfield, NJ 07004
Attn: Joseph Bernadino, Esq.
Telecopy: (973)882-1787
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
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<PAGE> 52
20.8 Counterparts. This Agreement may be executed simultaneously
in several counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
20.9 Severability. If any provision, clause or part of this
Agreement or the application thereof under certain circumstances is held
invalid, the remainder of this Agreement or the application of such provision,
clause or part under other circumstances shall not be affected thereby.
20.10 Time of Essence. Time is of the essence in this Agreement,
and all dates and time periods specified herein shall be strictly observed.
20.11 Enforcement Expenses. The prevailing party in any action
commenced due to the breach hereof shall be entitled to recover its costs,
expenses and reasonable attorney's fees incurred in the enforcement of this
Agreement.
20.12 Survival. The provisions of this Agreement which by their
terms survive or must survive in order to accomplish the purpose of such
provisions shall survive the termination of this Agreement.
20.13 Governing Laws. This Agreement shall be construed and
enforced in accordance with the laws of the State of Delaware.
20.14 Representation by Counsel. The parties acknowledge that
each party to this Agreement has been represented by counsel and such counsel
have participated in the negotiation and preparation of this Agreement. This
Agreement shall be construed without regard to any presumption or rule requiring
that it be construed or constructed against the party who has drafted or caused
the Agreement to be drafted.
20.15 Notice by Counsel. Anything contained in this Agreement to
the contrary notwithstanding, all notices pursuant to this Agreement, whether
from ShoLodge to Prime or from Prime to ShoLodge, will be effective if executed
by and sent by the attorney of the party sending such notice. Prime and ShoLodge
hereby agree that if a notice is given hereunder by counsel, such counsel may
communicate directly in writing with all principals, as may be required to
comply with the notice provisions of this Agreement.
20.16 No Recording. ShoLodge and Prime hereby acknowledge that
neither this Agreement nor any memorandum, affidavit or other instrument
evidencing this Agreement or relating hereto (other than the closing documents
contemplated hereunder) shall ever be recorded in the real property records
where any of the Real Property is located.
20.17 Exclusive Contract. Beginning on the Effective Date and
continuing until the termination of this Agreement, unless ShoLodge obtains the
prior approval of Prime, ShoLodge shall not enter into an agreement to sell,
lease or otherwise transfer and convey the Assets or any portion thereof to
anyone other than Prime or a Prime Subsidiary; provided,
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<PAGE> 53
however, that the foregoing shall not apply to the sale of such portion of the
Assets as would be sold in the ordinary course of business notwithstanding the
transactions contemplated herein or to the sale of such portion of the Assets to
Landlord as is contemplated herein.
(signatures on following page)
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<PAGE> 54
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly signed, all as of the date first above written.
SHOLODGE, INC.
By: /s/ Leon Moore
---------------------------------------
Date:3-15-00 Title: President
------------------------------------
PRIME HOSPITALITY CORP.
By: /s/ Douglas Vacari
---------------------------------------
Date:3-16-00 Title: Senior Vice President
------------------------------------
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<PAGE> 55
EXHIBIT A
LEGAL DESCRIPTIONS
(STI LAND)
A - 1
<PAGE> 56
EXHIBIT B
LEGAL DESCRIPTIONS
(ADDITIONAL LAND)
B - 1
<PAGE> 57
EXHIBIT C
LEGAL DESCRIPTIONS
(TEXAS LAND)
C - 1
<PAGE> 58
EXHIBIT D
LEGAL DESCRIPTIONS
(DEVELOPMENT SITES)
D - 1
<PAGE> 59
[Mt. Laurel, NJ]
EXHIBIT D
Property Description
That certain parcel of real property situate in the Township of Mount Laurel and
the Township of Evesham, Burlington County, New Jersey, being (i) the property
designated as Proposed Parcel No. 3 (consisting of the property designated on
the Mount Laurel Township Tax Map as Block 1300.03, Lot 5.02, and the property
designated on the Evesham Township Tax Map as Block 1, Lot 3.02), on that
certain map entitled "Final Subdivision Plan Block 1300.03 Lot 5 Mount Laurel
Township & Block 1 Lot 3 Evesham Township Burlington County, New Jersey"
prepared by Marc Associates, Inc., dated September 8, 1997, revised through
January 28, 1998, and recorded on April 6, 1998 in the Burlington County Clerk's
Office as Map No. 3175481, and (ii) the property designated on the Mount Laurel
Township Tax Map as Block 1300.03, Lot 6. The property designated on the Mount
Laurel Township Tax Map as Block 1300.03 Lots 5.02 and 6 was consolidated by
Declaration of Consolidation dated May 4, 1999, recorded on May 28, 1999 in the
Burlington County Clerk's Office in DB 5697, page 565. All such property is more
particularly described according to ALTA/ACSM Land Title Survey of Marc
Associates, Inc. dated May 4, 1998, revised September 19, 1998, September 22,
1998 and October 10, 1998 (Seifert Proj. No. 5018) as follows:
BEGINNING at a point in the Westerly right of way line of New Jersey State
Highway Route 73, said point being the Southerly end of a curve having a radius
of 35 feet, connecting the said right of way line of Route 73 with the Southerly
right of way line of Crawford Place and extending; thence,
(1) Along the said line of Route 73 South 24 degrees 15 minutes 20 seconds East
a distance of 290.60 feet to a point in the division line between Block 1300.03,
Lots 6 and 11.01, thence
(2) South 87 degrees 39 minutes 10 seconds West along the said division line a
distance of 233.02 feet to an angle point in same, thence
(3) South 24 degrees 15 minutes 20 seconds East a distance of 229.97 feet
crossing over the division line between Mt. Laurel and Evesham Townships to a
point in the division line between Block 1, Lot 3.02 and Block 1.12, Lot 1 in
the Township of Evesham, thence
(4) South 01 degrees 53 minutes 20 seconds East along said division line a
distance of 215.46 feet to an angle point in same, thence
(5) South 89 degrees 31 minutes 25 seconds West along said line a distance of
646.40 feet to a point in the division line between Block 1, Lots 3.01 and 3.02,
thence
D - 2
<PAGE> 60
[Mt. Laurel, NJ]
EXHIBIT D
Property Description
(continued)
(6) North 11 degrees 08 minutes 27 seconds West a distance of 553.96 feet
crossing over the division line between Mt. Laurel and Evesham Townships to a
point in the said Southerly right of way line of Crawford Place, thence
(7) North 78 degrees 51 minutes 33 seconds East along said right of way line a
distance of 518.52 feet to a point of curvature in same, thence
(8) Curving to the left along said right of way line with a radius of 560.00
feet, an arc distance of 128.08 feet having a central angle of 13 degrees 06
minutes 16 seconds to a point of tangency in same, thence
(9) North 65 degrees 45 minutes 17 seconds East along said right of way line a
distance of 97.07 feet to a point of curvature in same, thence
(10) Curving to the right with a radius of 35 feet, an arc distance of 54.97
feet with a central angle of 89 degrees 59 minutes 23 seconds to the point and
place of BEGINNING.
Containing 10.23 acres of land, more or less.
D - 3
<PAGE> 61
[Fairfax County, VA]
Exhibit D
Property Description
Lot 3 (containing 3.5400 acres), Being a Division of Parcel 21-1,
Westfields, The International Corporate Center at Dulles, as the same appears
platted, dedicated and recorded by Deed of Resubdivision recorded in Deed Book
10581, at Page 1482, among the land records of Fairfax County, Virginia
TOGETHER WITH AND SUBJECT TO a non-exclusive easement for ingress
and egress along the "Common Driveway" and an easement for utilities on both
sides of such "Common Driveway", as set forth in that certain instrument
entitled Ingress-Egress Easement Agreements dated as of April 28, 1988, and
recorded April 28, 1988, in Deed Book 7011 at Page 1281, among the land records
of Fairfax County, Virginia, as amended by instrument entitled Amendment to
Ingress Egress Easement Agreement and Relocation of Common Driveway dated as of
May 14, 1998, and recorded May 15, 1998, in Deed Book 10395 at Page 1222, among
the aforesaid land records.
D - 4
<PAGE> 62
EXHIBIT E
ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT ("Assignment")
is made and delivered on this _____ day of __________, 2000, by SUITE TENANT,
INC., a Tennessee corporation ("Assignor"), to ____________________, a Delaware
corporation ("Assignee").
W I T N E S S E T H :
WHEREAS, by Lease Agreement dated as of November 19, 1997 (the
"Lease Agreement"), HPT Suite Properties Trust, a Maryland real estate
investment trust ("Lessor"), as landlord, leased to Assignor, as tenant, certain
parcels of land and improvements thereon as more particularly described in the
Lease Agreement; and
WHEREAS, the Lease Agreement was amended by that certain First
Amendment to Lease Agreement (the "First Amendment") dated as of March 5, 1999,
between Lessor and Assignor; and
WHEREAS, the Lease Agreement was further amended by that certain
Second Amendment to Lease Agreement and First Amendment to Incidental Documents
(the "Second Amendment") dated as of June 29, 1999, among Hospitality Properties
Trust, Lessor, ShoLodge, Inc. and Assignor; and
WHEREAS, the Lease Agreement was further amended by that certain
Third Amendment to Lease Agreement (the "Third Amendment") dated as of March 3,
2000, between Lessor and Assignor (the Lease Agreement as amended by the First
Amendment, the Second Amendment and the Third Amendment is collectively referred
to herein as the "Lease"); and
WHEREAS, Assignor now desires to assign its interest under the
Lease to Assignee, and Assignee desires to assume all of Assignor's obligations
under the Lease which first accrue from and after the date of this Assignment,
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the mutual receipt and
legal sufficiency of which are hereby acknowledged, Assignor hereby grants,
assigns, transfers and sets over to Assignee all of Assignor's right, title and
interest in, to and under the Lease (including, without limitation, the
"Retained Funds" and the "FF&E Reserve" (both as described in the Lease)) and
the leasehold estate of Assignor as created by the Lease, together with any and
all easement rights of any kind appurtenant to and benefitting the premises
demised under the Lease and with all right, title and interest of Assignor in
and to any and all buildings, structures and improvements now or hereafter
erected on, over, upon or under the premises demised under the Lease and
together with all right,
E - 1
<PAGE> 63
title and interest of Assignor in and to the "Fixtures" and the "Leased Personal
Property" (both as described in the Lease).
TO HAVE AND TO HOLD the same unto Assignee, its successors and
assigns, from the date hereof and for the rest of the term mentioned in the
Lease, subject to the terms, covenants, provisions and conditions of the Lease,
and subject to all existing title encumbrances of record.
Assignee hereby assumes and agrees to perform all obligations,
covenants and agreements of Assignor under the Lease arising from and after the
date hereof and to be bound by all the respective terms and provisions thereof
from and after the date hereof.
Except as expressly provided otherwise in the Purchase Agreement
described below, Assignor hereby agrees to indemnify and hold Assignee harmless
from and against any and all liability, loss, costs, damages and expenses,
including reasonable attorneys' fees, incurred by Assignee as a result of
Assignor's failure to perform its obligations under the Lease which arose before
the date of this instrument.
Except as expressly provided otherwise in the Purchase Agreement
described below, Assignee hereby agrees to indemnify and hold Assignor harmless
from and against any and all liability, loss, costs, damages and expenses,
including reasonable attorneys' fees, incurred by Assignor as a result of
Assignee's failure to perform its obligations under the Lease which arise from
and after the date of this instrument.
This Assignment is made pursuant to and subject to the terms and
provisions of that certain Sale and Purchase Agreement dated ___________, 2000,
between ShoLodge, Inc. and Prime Hospitality Corp. (the "Purchase Agreement").
Assignor agrees to perform, execute and/or deliver or cause to be
performed, executed and/or delivered any and all such further acts and
assurances as Assignee may reasonably require to perfect Assignee's interest in
the Lease and the leasehold estate assigned by this Assignment.
Simultaneously with the execution and delivery of this
Assignment, Assignor has executed and delivered to Assignee various other
instruments of transfer and conveyance. Nothing herein contained shall be deemed
to limit or restrict the properties, assets and rights conveyed, assigned or
transferred to or acquired by Assignee by such other instruments.
This Assignment may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
E - 2
<PAGE> 64
IN WITNESS WHEREOF, the parties have executed this Assignment on
the date set forth above.
ASSIGNOR:
SUITE TENANT, INC., a Tennessee corporation
By:
-----------------------------------------
Title:
--------------------------------------
ASSIGNEE:
-------------------------------------------,
a Delaware corporation
By:
----------------------------------------
Title:
-------------------------------------
E - 3
<PAGE> 65
EXHIBIT F
BILL OF SALE
____________________ (herein "Seller"), a Tennessee corporation
having an office at 130 Maple Drive North, Hendersonville, Tennessee 37075, in
consideration of Ten and No/100 Dollars ($10.00), receipt of which is hereby
acknowledged, does hereby sell, assign, transfer and set over to
____________________ (herein "Buyer"), a Delaware corporation having an office
at 700 Route 46 East, Fairfield, New Jersey 07004, all of Seller's right, title
and interest in and to the [STI] [Additional] [Texas] Inventory and the [STI]
[Additional] [Texas] Advance Payments (as those terms are defined in the
Purchase Agreement described below).
This Bill of Sale is made pursuant to and subject to the terms
and provisions of that certain Sale and Purchase Agreement (the "Purchase
Agreement") dated _________, 2000, between ShoLodge, Inc. and Prime Hospitality
Corp.
Seller agrees to perform, execute and/or deliver or cause to be
performed, executed and/or delivered any and all such further acts and
assurances as Buyer may reasonably require to more fully vest in Buyer title to
any and all of the properties transferred by this Bill of Sale.
Simultaneously with the execution and delivery of this Bill of
Sale, Seller has executed and delivered to Buyer various other instruments of
transfer and conveyance. Nothing herein contained shall be deemed to limit or
restrict the properties, assets and rights conveyed, assigned or transferred to
or acquired by Buyer by such other instruments.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be
executed by an officer duly authorized the ____ day of __________, 2000.
________________, a Tennessee corporation
By:
----------------------------------------
Title:
-------------------------------------
STATE OF ___________ )
COUNTY OF __________ )
The foregoing instrument was acknowledged before me this _____
day of __________, 2000, by ____________________, the __________ of
____________________, a Tennessee corporation, on behalf of the corporation.
----------------------------------
Notary Public
My commission expires:
------------
F - 1
<PAGE> 66
EXHIBIT G
ASSIGNMENT AND ASSUMPTION OF CONTRACTS
FOR VALUE RECEIVED, ____________________, a Tennessee
corporation ("Assignor"), hereby conveys, assigns, transfers and sets over unto
____________________, a Delaware corporation ("Assignee"), to the extent
assignable, all the right, title and interest of Assignor, if any, in and to the
[STI] [Additional] [Texas] Operating Agreements (as that term is defined in the
Purchase Agreement described below).
Assignee hereby accepts the foregoing conveyance, assignment and
transfer and hereby assumes all obligations of Assignor under the [STI]
[Additional] [Texas] Operating Agreements accruing from and after the date
hereof. Except as expressly provided otherwise in the Purchase Agreement,
Assignor does hereby indemnify and hold Assignee harmless against any liability
under the [STI] [Additional] [Texas] Operating Agreements accruing prior to the
date hereof, and, except as expressly provided otherwise in the Purchase
Agreement, Assignee does hereby indemnify and hold Assignor harmless against any
liability under the [STI] [Additional] [Texas] Operating Agreements accruing
from and after the date hereof.
This Assignment and Assumption of Contracts is made pursuant to
and subject to the terms and provisions of that certain Sale and Purchase
Agreement dated ___________, 2000, between ShoLodge, Inc. and Prime Hospitality
Corp. (the "Purchase Agreement").
Assignor agrees to perform, execute and/or deliver or cause to
be performed, executed and/or delivered any and all such further acts and
assurances as Assignee may reasonably require to perfect Assignee's interest in
the properties assigned by this Assignment and Assumption of Contracts.
Simultaneously with the execution and delivery of this
Assignment and Assumption of Contracts, Assignor has executed and delivered to
Assignee various other instruments of transfer and conveyance. Nothing herein
contained shall be deemed to limit or restrict the properties, assets and rights
conveyed, assigned or transferred to or acquired by Assignee by such other
instruments.
This Assignment and Assumption of Contracts may be executed
simultaneously in several counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
G - 1
<PAGE> 67
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment and Assumption of Contracts the _____ day of _____________, 2000.
ASSIGNOR:
__________________, a Tennessee corporation
By:
----------------------------------------
Title:
-------------------------------------
ASSIGNEE:
___________________, a Delaware corporation
By:
----------------------------------------
Title:
-------------------------------------
G - 2
<PAGE> 68
EXHIBIT H
HPT ESTOPPEL CERTIFICATE
THIS ESTOPPEL CERTIFICATE (this "Certificate") is made as of the
_____ day of ___________, 2000, by HOSPITALITY PROPERTIES TRUST, a Maryland real
estate investment trust ("HPT"), and by HPT SUITE PROPERTIES TRUST, a Maryland
real estate investment trust ("Lessor"), to and for the benefit of PRIME
HOSPITALITY CORP., a Delaware corporation, and its successors and assigns
("Prime"), and __________________________, a Delaware corporation and a
wholly-owned subsidiary of Prime, and its successors and assigns ("Assignee").
W I T N E S S E T H:
WHEREAS, by Lease Agreement dated as of November 19, 1997 (the
"Lease Agreement"), Lessor, as landlord, leased to Suite Tenant, Inc., a
Tennessee corporation ("Lessee"), as tenant, certain parcels of land and
improvements thereon as more particularly described in the Lease Agreement; and
WHEREAS, the Lease Agreement was amended by that certain First
Amendment to Lease Agreement (the "First Amendment") dated as of March 5, 1999,
between Lessor and Lessee; and
WHEREAS, the Lease Agreement was further amended by that certain
Second Amendment to Lease Agreement and First Amendment to Incidental Documents
(the "Second Amendment") dated as of June 29, 1999, among HPT, Lessor, ShoLodge,
Inc. ("ShoLodge") and Lessee; and
WHEREAS, the Lease Agreement was further amended by that certain
Third Amendment to Lease Agreement (the "Third Amendment") dated as of March 3,
2000, between Lessor and Lessee (the Lease Agreement as amended by the First
Amendment, the Second Amendment and the Third Amendment is referred to herein
collectively as the "Lease"); and
WHEREAS, the Lease was guaranteed by ShoLodge pursuant to that
certain Limited Guaranty Agreement dated as of November 19, 1997 (the "Guaranty
Agreement") made by ShoLodge in favor of HPT and Lessor; and
WHEREAS, the Guaranty Agreement was amended by the Second
Amendment (the Guaranty Agreement as amended by the Second Amendment is referred
to herein collectively as the "Guaranty"); and
WHEREAS, the obligations of Lessee under the Lease were secured
pursuant to (i) that certain Security Agreement dated as of November 19, 1997
between Lessee and Lessor, such Security Agreement having been amended by the
Second Amendment and by that certain Second Amendment to Security Agreement
dated as of March 3, 2000 between Lessor and Lessee
H - 1
<PAGE> 69
(such Security Agreement as so amended is referred to herein as the "Security
Agreement"), and (ii) that certain Assignment and Security Agreement dated as of
November 19, 1997 between Lessee and Lessor, such Assignment and Security
Agreement having been amended by the Second Amendment (such Assignment and
Security Agreement as amended by the Second Amendment is referred to herein
collectively as the "Assignment and Security Agreement"); and
WHEREAS, Assignee intends to assume the obligations of Lessee
under the Lease, the Security Agreement and the Assignment and Security
Agreement and to acquire the interest of Lessee under the Lease; and
WHEREAS, Prime intends to assume the obligations of ShoLodge
under the Guaranty and to acquire the interest of ShoLodge in and to the
"Guaranty Deposit" held by HPT and/or Lessor under the Guaranty; and
WHEREAS, Assignee would not acquire such leasehold interest and
consummate certain other transactions in connection therewith and Prime would
not assume the obligations of ShoLodge under the Guaranty and acquire the
"Guaranty Deposit" held by HPT and/or Lessor under the Guaranty, but for the
truth and accuracy of the matters set forth in this Certificate.
NOW, THEREFORE, with the knowledge that Assignee intends to rely
upon the truth of this Certificate in consummating its acquisition of Lessee's
interest as tenant under the Lease and certain related transactions, Lessor
hereby certifies and agrees as follows:
(1) That Lessor is the landlord under the Lease.
(2) That attached hereto is a true and accurate copy of the
Lease, the Security Agreement, the Assignment and Security Agreement and the
Guaranty. There are no subordination and/or non-disturbance agreements
pertaining to the Lease granted by Lessor for the benefit of any holder of a
security interest in the leased premises or the improvements thereon.
(3) That the Lease Agreement has not been modified, changed,
altered or amended in any respect, except as expressly set forth in the First
Amendment, the Second Amendment and the Third Amendment.
(4) That the Lease has been duly executed and delivered on behalf
of Lessor pursuant to proper authority therefor and constitutes a legally valid
instrument binding and enforceable upon Lessor in accordance with its terms.
(5) That the term of the Lease commenced on November 19, 1997 and
will expire on June 30, 2011, subject to extension as provided therein.
(6) That the Lease is in full force and effect and that there
exists no default nor state of facts which with the giving of notice or the
passage of time would constitute a default thereunder on the part of Lessor or
on the part of Lessee.
H - 2
<PAGE> 70
(7) That Lessee has paid all rent due under the Lease through and
including ____________. No additional charges or fees are due and payable by
Lessee as of the date hereof pursuant to the Lease.
(8) That the amount of the "Retained Funds" under the Lease is
$21,280,000.00.
(9) That the amount of the "Guaranty Deposit" described in and
held by HPT and/or Lessor under the Guaranty is $14,000,000.00.
(10) That there is no cause for HPT or Lessor to offset any
obligation of Lessee under the Lease against the "Guaranty Deposit" described in
and held by HPT and/or Lessor pursuant to the Guaranty.
(11) That Lessor and HPT each consent to the assignment of the
Lease from Lessee to Assignee including, without limitation, the assignment from
Lessee to Assignee of all of Lessee's right, title and interest in and to the
"Retained Funds" and the "FF&E Reserve" under the Lease, pursuant to the form
attached, and, from and after the effective date of such assignment, Lessor
shall recognize Assignee as the tenant under the Lease.
(12) That HPT and Lessor each consent to the assignment by
ShoLodge to Prime of all of ShoLodge's right, title and interest in and to the
"Guaranty Deposit" described in and held by HPT and/or Lessor pursuant to the
Guaranty.
IN WITNESS WHEREOF, HPT and Lessor have executed this Estoppel
Certificate as of the date above first written.
HOSPITALITY PROPERTIES TRUST, a
Maryland real estate investment trust
By:
------------------------------------
Title:
---------------------------------
HPT SUITE PROPERTIES TRUST, a Maryland
real estate investment trust
By:
------------------------------------
Title:
----------------------------------
H - 3
<PAGE> 71
EXHIBIT I
SPECIAL WARRANTY DEED
(MT. LAUREL, NEW JERSEY)
Record and Return to: Prepared by:
Joseph Bernadino
c/o Prime Hospitality Corp.
P.O. Box 2700 ---------------------------------
Fairfield, NJ 07007 Joseph Bernadino, Esq.
DEED
This Deed is made on ________________, 2000
BETWEEN
DELAWARE INNS, INC., a Tennessee corporation, having an address
at 130 Maple Drive North, Hendersonville, Tennessee 37075, hereinafter referred
to as "Grantor,"
AND
PRIME HOSPITALITY CORP., a Delaware corporation, having an
address at 700 Route 46 East, Fairfield, New Jersey 07004, hereinafter referred
to as "Grantee."
TRANSFER OF OWNERSHIP. The Grantor grants and conveys (transfers
ownership of) the property described below to the Grantee. This transfer is made
for the sum of ____________________________________ and _____/100 Dollars
($___________). The Grantor acknowledges receipt of this money.
TAX MAP REFERENCE. (N.J.S.A. 46:15-1.1 and 46:15-2.1) The
property is designated as Block 1300.03, Lot 5.02 and Lot 6 on the Mount Laurel
Township Tax Map, and Block 1, Lot 3.02 on the Evesham Township Tax Map.
[ ] No property tax identification number is available on the date of
this Deed. (Check box if applicable.)
PROPERTY. The property consists of the land and all the buildings
and structures on the land in the Township of Mount Laurel and Township of
Evesham, County of Burlington and State of New Jersey. The legal description is:
SEE EXHIBIT A ATTACHED HERETO AND MADE A PART HEREOF.
I - 1
<PAGE> 72
PROMISES BY GRANTOR. The Grantor promises that the Grantor has
done no act to encumber the property. This promise is called a "covenant as to
grantor's acts" (N.J.S.A. 46:4-6). This promise means that the Grantor has not
allowed anyone else to obtain any legal rights which affect the property (such
as by making a mortgage or allowing a judgment to be entered against the
Grantor)
SIGNATURES. Grantor signs this Deed as of the date at the top of the first
page.
DELAWARE INNS, INC.
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
STATE OF ____________ :
: SS.
COUNTY OF __________ :
I CERTIFY that on _____________, 2000, __________________
personally came before me and acknowledged under oath, to my satisfaction, that
this person:
(a) is the __________ of Delaware Inns, Inc., the Grantor in this
Deed;
(b) signed and delivered this Deed with the full authority of
Grantor as the duly authorized act of Grantor; and
(c) entered into this Deed for the amount of $__________ as the
full and actual consideration paid or to be paid.
-----------------------------------
Notary Public or
Attorney at Law of
-----------------
I - 2
<PAGE> 73
EXHIBIT A
PROPERTY DESCRIPTION
That certain parcel of real property situate in the Township of Mount Laurel and
the Township of Evesham, Burlington County, New Jersey, being (i) the property
designated as Proposed Parcel No. 3 (consisting of the property designated on
the Mount Laurel Township Tax Map as Block 1300.03, Lot 5.02, and the property
designated on the Evesham Township Tax Map as Block 1, Lot 3.02), on that
certain map entitled "Final Subdivision Plan Block 1300.03 Lot 5 Mount Laurel
Township & Block 1 Lot 3 Evesham Township Burlington County, New Jersey"
prepared by Marc Associates, Inc., dated September 8, 1997, revised through
January 28, 1998, and recorded on April 6, 1998 in the Burlington County Clerk's
Office as Map No. 3175481, and (ii) the property designated on the Mount Laurel
Township Tax Map as Block 1300.03, Lot 6. The property designated on the Mount
Laurel Township Tax Map as Block 1300.03 Lots 5.02 and 6 was consolidated by
Declaration of Consolidation dated May 4, 1999, recorded on May 28, 1999 in the
Burlington County Clerk's Office in DB 5697, page 565. All such property is more
particularly described according to ALTA/ACSM Land Title Survey of Marc
Associates, Inc. dated May 4, 1998, revised September 19, 1998, September 22,
1998 and October 10, 1998 (Seifert Proj. No. 5018) as follows:
BEGINNING at a point in the Westerly right of way line of New Jersey State
Highway Route 73, said point being the Southerly end of a curve having a radius
of 35 feet, connecting the said right of way line of Route 73 with the Southerly
right of way line of Crawford Place and extending; thence,
(1) Along the said line of Route 73 South 24 degrees 15 minutes 20 seconds East
a distance of 290.60 feet to a point in the division line between Block 1300.03,
Lots 6 and 11.01, thence
(2) South 87 degrees 39 minutes 10 seconds West along the said division line a
distance of 233.02 feet to an angle point in same, thence
(3) South 24 degrees 15 minutes 20 seconds East a distance of 229.97 feet
crossing over the division line between Mt. Laurel and Evesham Townships to a
point in the division line between Block 1, Lot 3.02 and Block 1.12, Lot 1 in
the Township of Evesham, thence
(4) South 01 degrees 53 minutes 20 seconds East along said division line a
distance of 215.46 feet to an angle point in same, thence
(5) South 89 degrees 31 minutes 25 seconds West along said line a distance of
646.40 feet to a point in the division line between Block 1, Lots 3.01 and 3.02,
thence
(6) North 11 degrees 08 minutes 27 seconds West a distance of 553.96 feet
crossing over the division line between Mt. Laurel and Evesham Townships to a
point in the said Southerly right of way line of Crawford Place, thence
I - 3
<PAGE> 74
(7) North 78 degrees 51 minutes 33 seconds East along said right of way line a
distance of 518.52 feet to a point of curvature in same, thence
(8) Curving to the left along said right of way line with a radius of 560.00
feet, an arc distance of 128.08 feet having a central angle of 13 degrees 06
minutes 16 seconds to a point of tangency in same, thence
(9) North 65 degrees 45 minutes 17 seconds East along said right of way line a
distance of 97.07 feet to a point of curvature in same, thence
(10) Curving to the right with a radius of 35 feet, an arc distance of 54.97
feet with a central angle of 89 degrees 59 minutes 23 seconds to the point and
place of BEGINNING.
Containing 10.23 acres of land, more or less.
I - 4
<PAGE> 75
EXHIBIT J
SPECIAL WARRANTY DEED
(FAIRFAX COUNTY, VIRGINIA)
THIS DEED, made the ______ day of _____________, 2000, by and
between VIRGINIA INNS, INC., a Tennessee corporation ("Grantor"); and PRIME
HOSPITALITY CORP., a Delaware corporation ("Grantee").
W I T N E S S E T H:
THAT FOR and in consideration of the sum of Ten Dollars ($10.00),
cash in hand paid, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor does hereby grant,
bargain, sell and convey with SPECIAL WARRANTY of title unto Grantee all of that
certain tract or parcel of land more particularly described on Exhibit A
attached hereto and made a part hereof, together with all improvements thereon
and all rights, licenses, easements, benefits and appurtenances thereunto, lying
and being situated in Fairfax County, Virginia (the "Property").
AND BEING the same property conveyed to Grantor by deed recorded
in Deed Book 10666 at Page 1941, among the land records of Fairfax County,
Virginia (the "Land Records").
SUBJECT TO all restrictions, covenants, conditions,
rights-of-way, easements and other matters of record, including, without
limitation, the covenants, restrictions, easements, charges and liens set forth
in that certain Declaration of Protective Covenants and Restrictions for
Westfields, The International Corporate Center at Dulles dated January 20, 1986
and recorded among the Land Records in Deed Book 6309 at Page 533, as
subsequently amended (collectively, the "Declaration"). The Declaration shall
run with the land and every part thereof and shall be binding upon and inure to
the benefit of all owners, lessees, licensees and occupants and their successors
as set forth in the Declaration.
WITNESS the following signature and seal:
VIRGINIA INNS, INC., a Tennessee corporation
By:
------------------------------------------
Title:
---------------------------------------
J - 1
<PAGE> 76
STATE OF _______________
COUNTY OF _______________, to wit:
The foregoing instrument was acknowledged before me this _____
day of ___________, 2000, by __________________, __________ of VIRGINIA INNS,
INC., a Tennessee corporation, on behalf of the company.
(SEAL)
-------------------------
Notary Public
My Commission expires:
---------------------
J - 2
<PAGE> 77
Exhibit A
Description of the Property
Lot 3 (containing 3.5400 acres), Being a Division of Parcel 21-1,
Westfields, The International Corporate Center at Dulles, as the same appears
platted, dedicated and recorded by Deed of Resubdivision recorded in Deed Book
10581, at Page 1482, among the land records of Fairfax County, Virginia
TOGETHER WITH AND SUBJECT TO a non-exclusive easement for ingress
and egress along the "Common Driveway" and an easement for utilities on both
sides of such "Common Driveway", as set forth in that certain instrument
entitled Ingress-Egress Easement Agreements dated as of April 28, 1988, and
recorded April 28, 1988, in Deed Book 7011 at Page 1281, among the land records
of Fairfax County, Virginia, as amended by instrument entitled Amendment to
Ingress Egress Easement Agreement and Relocation of Common Driveway dated as of
May 14, 1998, and recorded May 15, 1998, in Deed Book 10395 at Page 1222, among
the aforesaid land records.
J - 3
<PAGE> 78
EXHIBIT K
AMERISUITES FINISHES AND SIGNAGE
PLANS AND SPECIFICATIONS
K - 1
<PAGE> 79
EXHIBIT L
OPERATING AGREEMENTS
L - 1
<PAGE> 80
EXHIBIT M
EMPLOYEE BENEFIT PLANS
1. ShoLodge 401(K) Plan, plan number 777853, with the Aetna Life
Insurance and Annuity Company. Plan was effective 01-01-2000 and expires
12-31-2001. Plan is open to all eligible employees. ShoLodge contributes
(matches) 20% of employees first 6% of wages to the plan.
2. ShoLodge Group Health Plan, group policy GP-602251, effective
01-01- 1999, with Aetna Life Insurance Company. Plan provides for comprehensive
medical coverage, accidental death and dismemberment and life insurance to
certain eligible employees. ShoLodge pays 80% of eligible employees premiums and
50% of employees dependent premiums for those employees who select dependent
coverage.
3. ShoLodge Employee Handbook for Hotel Operations, dated
01-01-2000. This provides for certain benefits such as vacation, sick pay and
holiday pay for eligible employees.
M - 1
<PAGE> 81
EXHIBIT N
PURCHASE PRICE ALLOCATION
Present Value of HPT Lease Guaranty
Deposit $11,000,000
less reserve for operating deficits $ 9,000,000
-----------
Purchase Price $ 2,000,000
N - 1
<PAGE> 82
EXHIBIT O
PURCHASE PRICE REDUCTION
<TABLE>
<CAPTION>
Property Amount
-------- ------
<S> <C>
Tempe, AZ $ 94,624
Tucson, AZ 80,220
Tampa, FL 40,525
Atlanta (Airport), GA 96,962
Atlanta (Gwinnett Mall), GA 106,488
Atlanta (Cumberland Mall), GA 90,212
Fort Wayne, IN 91,098
Columbus, OH 126,084
Albuquerque, NM 108,252
Hendersonville, TN 70,598
Austin, TX 86,758
El Paso, TX 85,986
Dallas, TX 105,166
San Antonio (Riverwalk), TX 132,818
Colorado Springs, CO 115,789
Overland Park, KS 116,842
Irving (Las Colinas), TX 115,789
Charlotte, NC 107,368
Alpharetta, GA 108,421
Sterling (Loudoun Tech), VA 120,000
--------------------------- ----------
Total $2,000,000
</TABLE>
0 - 1
<PAGE> 83
EXHIBIT P
MINIMUM ANNUAL RENT
<TABLE>
<CAPTION>
Additional Property Amount
------------------- ------
<S> <C>
Pine Knoll Shores, NC $ 939,000
Indianapolis, IN 1,142,000
Kansas City, MO 1,142,000
Orlando, FL 1,142,000
Subtotal $4,365,000
<CAPTION>
Texas Property Amount
-------------- ------
<S> <C>
Grand Prairie, TX 1,142,000
Houston (Hobby Airport), TX 1,032,000
San Antonio (Crossroads), TX 884,000
Subtotal $3,058,000
Total $7,423,000
</TABLE>
P - 1
<PAGE> 84
EXHIBIT Q
RESERVATION SYSTEM REQUIREMENTS
Q - 1
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENTAGE OF
VOTING STOCK
JURISDICTION OF OWNED BY
NAME OF CORPORATION INCORPORATION SHOLODGE, INC.
<S> <C> <C>
MOBAT, Inc. Tennessee 100%
Shoney's Inn of Lebanon, Inc. Tennessee 100%
Nashville Air Associates, Inc. Tennessee 100%
Moore and Associates, Inc. Tennessee 100%
Virginia Inns, Inc. Tennessee 100%
Sumner Venture, Inc. Tennessee 100%
ShoLodge Franchise Systems, Inc. Tennessee 100%
Sunshine Inns, Inc. Tennessee 100%
LAFLA Inn, Inc. Tennessee 100%
Midwest Inns, Inc. Tennessee 100%
Southeast Texas Inns, Inc. Tennessee 100%
The Hotel Group, Inc. Kansas 100%(1)
Delaware Inns, Inc. Tennessee 100%
Carolina Inns, Inc. Tennessee 100%
Alabama Lodging Corporation Tennessee 100%
ShoLodge Beverage Corporation Texas 100%(2)
Suite Tenant, Inc. Tennessee 100%
</TABLE>
- --------------
(1) Through Midwest Inns, Inc.
(2) Through Southeast Texas Inns, Inc.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-14463) of ShoLodge, Inc. pertaining to senior subordinated
notes and the related Prospectus, the Registration Statement (Form S-8 No.
33-52092) pertaining to the 1991 Stock Option Plan, and in the related
Prospectus, the Registration Statement (Form S-8 No. 333-29881) pertaining to
the 1991 Stock Option Plan, as amended and the related Prospectus and the
Registration Statement (Form S-3 No. 33-77910) pertaining to the convertible
subordinated debentures due 2004 and the related prospectus of our report dated
March 17, 2000 with respect to the consolidated financial statements and
schedules of ShoLodge, Inc. included in the Annual Report (Form 10-K) for the
year ended December 26, 1999.
ERNST & YOUNG LLP
Atlanta, Georgia
March 23, 2000
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-52092 and 333-29881 on Form S-8 and 333-14463 and 33-77910 on Form S-3 of
ShoLodge, Inc. of our report dated April 1, 1998, appearing in this Annual
Report on Form 10-K of ShoLodge, Inc. for the year ended December 28, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 26, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 3,386,937
<SECURITIES> 0
<RECEIVABLES> 16,575,296
<ALLOWANCES> 459,869
<INVENTORY> 0
<CURRENT-ASSETS> 25,926,269
<PP&E> 148,698,134
<DEPRECIATION> 23,821,643
<TOTAL-ASSETS> 270,313,913
<CURRENT-LIABILITIES> 13,271,486
<BONDS> 125,550,557
0
0
<COMMON> 1,000
<OTHER-SE> 90,877,339
<TOTAL-LIABILITY-AND-EQUITY> 270,313,913
<SALES> 66,187,974
<TOTAL-REVENUES> 81,573,902
<CGS> 0
<TOTAL-COSTS> 85,500,415
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,136,415
<INCOME-PRETAX> 4,054,314
<INCOME-TAX> 1,909,000
<INCOME-CONTINUING> 2,145,314
<DISCONTINUED> 0
<EXTRAORDINARY> 2,393,512
<CHANGES> 0
<NET-INCOME> 4,538,826
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.67
</TABLE>
