SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
- -----
| X | Annual Report Pursuant to Section 13 or 15(d) of
- ----- The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
- -----
| | Transition Report Pursuant to Section 13 or 15(d) of
- ----- The Securities Exchange Act of 1934
Commission File Number 000-02290
Efficiency Lodge, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-0898219
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5342 Old Floyd Road, P.O. Box 635, Mableton, GA 30126
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (770) 819-0039
Name of exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.10 par value per share
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that 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
----
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form 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-KSB or any amendment to this Form 10-KSB. -----
| X |
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State issuer's revenues for its most recent fiscal year. $5,363,959.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock as of a
specified date within the past 60 days: as of March 1, 1999, there were
52,602 shares of Common Stock, $0.10 par value, outstanding held by non-
affiliates of the issuer, with an aggregate value of $184,107 (based
upon a value of $3.50 per share, the price at which shares were
purchased from one of the registrant's former majority shareholders on
December 31, 1998 there is no established trading market for the
Common Stock, and the issuer does not know of any sales made in the last
sixty days).
At March 1, 1999, there were issued and outstanding 572,918 shares
of Common Stock, par value $0.10 per share.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Efficiency Lodge, Inc., formerly known as Southern Acceptance
Corporation (the "Company"), was incorporated in 1962 as a Georgia
corporation, and engaged in the business of real estate sales and
development in Georgia. Specifically, the Company purchased or built
and operated motels and apartments. In 1974, the Company filed for
bankruptcy under Chapter XI of the federal bankruptcy laws. It emerged
from bankruptcy in 1980 with a few remaining properties. After selling
most of its remaining operating properties in the early 1980s, the
Company continued to engage to a limited extent in the purchase and sale
of real estate in Georgia. In addition to earning commissions from such
real estate sales, the Company earned interest on its notes receivable,
rental income from its rental properties, and income from the purchase
and sale of investment properties. The principal executive offices of
the Company are located at 5342 Old Floyd Road, Mableton, Georgia
30126, and its telephone number at that address is (770) 819-0039.
On January 22, 1996, the Company entered into an Agreement and Plan
of Merger with Efficiency Lodge, Inc., a Georgia corporation ("ELI")
pursuant to which ELI would be merged into the Company, with the Company
as the surviving corporation assuming ELI's name (the "Merger"). The
Merger was effective on December 31, 1996. In the Merger, the ELI
shareholders received approximately 1,102.6 shares of the common stock
of the surviving corporation for each share of ELI (approximately 95% of
the surviving corporation). Shareholders of the Company immediately
prior to the Merger received one share of the common stock of the
surviving corporation for each one hundred shares of pre-Merger common
stock of the Company held by them, with any resulting fractional shares
being cashed out at $0.10 per pre-Merger share.
ELI was formed in January 1993 as the result of the consolidation
of five existing companies, each of which operated an extended-stay
lodging facility. ELI engaged in the business of developing and owning
lodging facilities that offer both temporary and long-term
accommodations ("Efficiency Lodges" or "Lodges"). The Company now owns
and operates nine Efficiency Lodges, which are located in or near East
Point, Douglasville, Atlanta, Dekalb County, Carrollton, Cartersville,
Forest Park, Kennesaw and Columbus, Georgia. The Lodges have an
aggregate of 1,051 guest rooms. In the following description of the
Company's business, activities and properties, ELI's business,
activities and properties, except as otherwise indicated, are described
as those of the Company.
Extended-stay lodges such as the Efficiency Lodges are designed to
serve guests who require lodging for a minimum of seven days in rooms
designed to include functional space and, in particular, fully-equipped
cooking facilities. The extended-stay lodging industry (which includes
economy extended-stay motels) is a relatively small but growing part of
the lodging industry. Management of the Company believes that the
consumer demand for economy extended-stay lodges is underserved and
increasing. The economic, social and demographic changes in the United
States contributing to the demand for extended-stay lodging include,
among others, the restructuring of corporate America, the increased
mobility of the population of the United States, the increase in single-
person households, the travel requirements of a service economy and the
increasingly strict credit standards of many apartment operators. Unlike
most types of rental property which are generally subject to leases of
six months or longer, extended-stay lodges, including Efficiency Lodges,
may raise or lower rents (i.e., room rates) with much greater frequency
based upon occupancy levels. Typical guests in economy extended-stay
properties include people on short-term work or training assignments,
individuals in the midst of relocation for business or personal reasons,
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military and government personnel, recreational travelers, and persons
who cannot meet the credit standards of apartments.
OPERATIONS
The Company's operations manual guides on-site management of each
Lodge, which is managed by a Property Manager, who resides on site, and
an Assistant Manager. Managers are trained in all aspects of extended-
stay lodge operations, with particular emphasis placed on customer
service. The managers are trained to provide conscientious customer
service, they are provided with incentives to exercise the authority
granted to them, and they are efficiently supervised through management
information systems and on-site audits by the Company's management,
which visits and inspects each Efficiency Lodge on a regular basis to
ensure that consistency and quality standards are being met. Managers
and staff receive bonuses based on both performance and occupancy.
Each Efficiency Lodge is computerized with a software package that
handles all on-site transactions and record keeping. The software
provides on-site management with a database of updated information such
as available units, units needing cleaning or repairs, room charges due,
guest payment history, and telephone volume. Operating results are
compiled and reviewed regularly. The Company's corporate office handles
purchasing supplies and virtually all payments of property expenses.
Each of the Efficiency Lodges collects data about each new guest,
including his or her occupation, permanent residence, length of stay and
how they learned about the Lodge. The Company uses this information in
the preparation of advertising and sales materials for each specific
Efficiency Lodge. The Company employs various marketing techniques,
including billboard and print as well as direct marketing to potential
customer groups.
For 1998, the overall average occupancy rate for the Company's
Lodges was 85%, the average weekly rental rate was $151.69 and the
revenue per available room was $128.66.
BUSINESS STRATEGY
The Company intends to (i) develop additional Lodges, (ii) purchase
motels for conversion to the Efficiency Lodge format or purchase
existing economy extended-stay motels that meet current Company
acquisition criteria, and (iii) realize increased lease revenues from
growth in room revenues. The Company will focus initially on
development and acquisition opportunities available in the Southeastern
United States. The Company may build or acquire additional Lodges by
borrowing the funds, by exchanging capital stock, by raising capital
through the issuance and sale of equity, or through its cash flow.
In considering opportunities for developing additional Lodges, the
Company gives strong consideration to demographic and traffic studies,
and it reviews the availability and pricing of suitable sites, the costs
and risks of developing, the availability of financing, as well as
economic variables and any other factors deemed relevant. This data is
compared against site selection criteria employed by the Company and
compiled from the base of existing Lodges. Each site must satisfy the
two most important variables: a high daily automobile traffic count and
a significant amount of employment within a three-mile radius.
The Company may acquire additional economy extended-stay lodges and
convert them to Efficiency Lodges. In appropriate circumstances, the
Company also may acquire and convert conventional motels into Efficiency
Lodges.
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The Company considers investments in existing properties, including
properties that would require complete renovation, which meet one or
more of the following criteria: (i) the facility is located in an area
with relatively high demand for rooms, a relatively low supply of
extended-stay lodges, and barriers to easy entry into the lodge
business, such as a scarcity of suitable sites or zoning restrictions;
and (ii) the facility is in an attractive location that the Company
believes could benefit significantly by becoming an Efficiency Lodge.
COMPETITION
The lodging industry is highly competitive. Each Efficiency Lodge
is located in a developed area that includes motels and other lodges and
in some cases other economy extended-stay lodges. The Company does not
believe that any single competitor or small number of competitors is
dominant in the markets in which the Lodges are located. The number of
competitive facilities in a particular area has a material effect on
occupancy and revenues of the Lodges. The Company seeks to compete
based on the prices charged, the quality of the facilities, and service
to guests.
The Company competes for investment opportunities with entities
which have substantially greater financial resources than the Company
and which as a consequence may be in a position to accept more risk than
the Company, including risks with respect to the locations of
facilities. Such competition may reduce the number of suitable
investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of removal
or remediation of certain hazardous, toxic or petroleum substances on
such property. Such laws often impose such liability without regard to
whether the owner or operator knew of, or was responsible for, the
presence of such substances. Furthermore, a person that arranges for
the disposal or transports for disposal or treatment a hazardous, toxic,
or petroleum substance to another property may be liable for the costs
of removal or remediation of substances released into the environment at
that property. The costs of remediation or removal of such substances
may be substantial, and the presence of such substances, or the failure
to conduct remediation promptly, may adversely affect the value of the
real estate or the owner's ability to sell the real estate or to borrow
using the real estate as collateral.
Phase I environmental audits have been obtained on all of the
Lodges. The Phase I audits were intended to identify potential sources
of contamination for which the Lodges may be responsible and to assess
the status of environmental regulatory compliance. These audits
included historical reviews of the Lodges, reviews of certain public
records, preliminary investigations of the sites and surrounding
properties, screening for the presence of asbestos, PCB's, and
underground storage tanks, and the preparation and issuance of a written
report. The Phase I assessments did not include invasive procedures,
such as soil sampling or ground water analysis.
The Phase I audit reports have not revealed any environmental
liability that the Company believes would have a material adverse effect
on the Company's business, assets, or results of operations, nor is the
Company aware of any such liability. Nevertheless, it is possible that
these reports do not reveal all environmental liabilities or that there
are material environmental liabilities of which the Company is unaware.
The Company believes that the Lodges are in compliance in all
material respects with all federal, state, and local ordinances and
regulations regarding hazardous or toxic substances and other
environmental matters. The Company has not been notified by any
governmental authority of any material noncompliance, liability, or
claim relating to hazardous or toxic substances or other environmental
issues in connection with any of its present or former properties.
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GOVERNMENTAL REGULATION
A number of states regulate the licensing of lodging facilities by
requiring registration, disclosure statements, and compliance with
specific standards of conduct. The Company believes that each of its
facilities has the necessary permits and approvals to operate the
respective businesses, and the Company intends to obtain such permits
and approvals for its new facilities. The Company is also subject to
laws governing its relationship with employees, including minimum wage
requirements, overtime, working conditions, and work permit
requirements. An increase in the minimum wage rate, employee benefit
costs, or other costs associated with employees could adversely affect
the Company. Both at the federal and state level, from time to time,
there are proposals under consideration to increase the minimum wage.
Under the Americans with Disabilities Act ("ADA"), all public
accommodations are required to meet certain federal requirements related
to access and use by disabled persons. Although the Company has
attempted to satisfy ADA requirements in the design of its facilities,
if a material ADA claim were successfully asserted against the Company,
the claim could result in a judicial order requiring the Company to take
additional steps to comply with some aspect of the ADA. Such additional
steps can necessitate the expenditure of substantial sums, a fine would
be imposed, or the private litigants could be awarded damages. These
and other initiatives can adversely affect the Company as well as the
lodging industry in general.
EMPLOYEES
As of December 31, 1998, the Company had no employees. Instead,
the Company leases approximately 44 full-time employees, including
members of management, pursuant to an agreement with Team Staff, Inc.
Under the Company's agreement with Team Staff, the Company selects its
employees who are hired by Team Staff, which provides administrative
services and is responsible for the payment of all employee wages,
payroll taxes and employee benefits. The Company also occasionally
hires part-time employees through Team Staff. The Company has elected to
lease employees to minimize its administrative expenses and to take
advantage of economies of scale offered by Team Staff in providing
workers' compensation insurance, employee benefits and administrative
services. The Company is charged a fee for the employee and
administrative services received. The fee is based on the hourly rate
of the employee and hours worked plus a percentage of gross wages for
payroll taxes, insurance and other benefits. The lease was renewed on
June 1, 1998, and may be terminated by the Company on June 1, 1999. The
Company believes that its relationship with its leased employees is
good.
TRADEMARKS
The Company has registered the service mark "Efficiency Lodge" in
the state of Georgia and with the United States Patent and Trademark
Office for hotel and motel services. The registration extends until
2003 and is thereafter renewable for ten-year periods.
CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on
Form 10-KSB contains forward-looking statements. These statements
involve a number of risks and uncertainties that could cause actual
results to differ materially from those reflected in such statements.
Some of these risks might include, but are not limited to, those
discussed in "Competition" section above. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the factors described in other
documents the Company files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-QSB to
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be filed by the Company in 1999 and any Current Reports on Form 8-K
filed by the Company.
YEAR 2000
The "year 2000 issue" arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or
decision-making functions. Many of these programs may fail due to an
inability to properly interpret date codes beginning January 1, 2000.
For example, such programs may misinterpret "00" as the year 1900 rather
than 2000. In addition, some equipment, being controlled by
microprocessor chips, may not deal appropriately with the year "00".
The Company has evaluated its computer systems to determine which
modifications and expenditures are necessary to make the systems
compatible with year 2000 requirements. It has implemented an upgrade
on its operational software on almost all of its terminals which its
consultant has represented will be Year 2000 compatible. The Company
has done limited testing of the software upgrade and has not found a
problem in processing dates after 1999. If the Company encounters
problems next year in the use of this software, it is ready to perform
all necessary functions manually. The Company believes its credit card
processing software is Year 2000 compliant based on representations made
to it by its vendor, but the Company is able at any time to require
other modes of payment (cash or money order). The Company utilizes
outside payroll services, but it believes that function could be handled
manually as well if problems arise after the end of this year. The
Company has considered whether there are any hardware or embedded
software devices whose failure after the end of the year could have an
adverse effect on the Company's operations, and it believes there are
none.
The Company currently estimates that the total cost of any
additional modifications to its hardware or software systems that may be
found to be required or desirable will not be significant. However,
there can be no assurance that all necessary modifications will be
identified and corrected or that unforeseen difficulties or costs will
not arise. In addition, there can be no assurance that the systems of
other companies on which the Company's systems rely will be modified on
a timely basis, or that the failure by another company to properly
modify its systems will not negatively impact the systems or operations
of the Company. In addition, the Company has no means of assessing the
impact on its business of any general failure of transportation,
utilities and telecommunications facilities external to its operations
that may result from the Year 2000 problem.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company constructed all but one of the Company's Efficiency
Lodges using a standard design, with similar architectural styles and
guest room floor plans and similar construction materials. Two
Efficiency Lodges were purchased from another operator. Each Efficiency
Lodge includes guest rooms, a manager's apartment, an office and a guest
laundry room. Each guest room contains a combination living room and
bedroom, a bathroom, a closet, a fully-equipped kitchenette, and a table
and chairs. Guest services, which are minimal in comparison to motels
or hotels, typically include limited front desk hours and limited maid
service, and extra charges for amenities, such as televisions.
Each Efficiency Lodge is an economy extended-stay facility with
room rates that are typically lower than those charged by most motels
and hotels in its market. Although daily rates are available, most
guests at the Efficiency Lodges choose to occupy rooms on a weekly
basis, at rates which, as of December 31, 1998, ranged from $109 to $144
per week for single occupancy. The Efficiency Lodges are able to charge
lower rates because of the elimination of certain amenities found in
higher-priced lodging facilities, such as restaurants, cocktail lounges,
meeting rooms, retail shops, pools and other large common areas, which
the Company has found to be unnecessary for the comfort and enjoyment of
its extended-stay guests, and because it uses economical furniture,
fixtures and equipment. The Company provides its extended-stay guests
with free access to satellite TV, convenience items for sale in the
front office, and an on-premises laundry facility.
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In 1998, the Company refinanced the notes on several of its Lodges.
The following lodges secure a note to one lender, with an outstanding
balance at December 31, 1998, of approximately $10,420,389. The loan
accrues interest at 8.02% annually and matures in 2018. This amount
also includes the purchase of Town Center Lodge in Kennesaw, Georgia and
the new lodge opened by the Company in Columbus, Georgia.
EAST POINT LODGE. This two-story Lodge is located at 1275 Norman
Berry Drive near East Point, Georgia on approximately two-thirds of an
acre. The Lodge has been owned by the Company since 1987. The
property, which has 40 guest rooms.
DOUGLASVILLE LODGE. This two-story, 148-room Lodge is located in
Douglasville, Georgia on Highway 92. The Lodge has been owned by the
Company since 1988.
FULTON LODGE. This two-story Lodge is located on a approximately
2.77 acres at 4050 Wendell Drive in Atlanta. The Company has owned this
152-room Lodge since 1989.
WEST GEORGIA LODGE. This two-story lodge with 128 guest rooms is
located on 4.18 acres on Bankhead Highway in Carrollton, Georgia.
DEKALB LODGE. This 100-room lodge was completed in March 1997 and
acquired by the Company at that time.
TOWNCENTER LODGE. This two-story lodge with 119 guest rooms was
acquired on August 18, 1998.
The following lodge was also refinanced in 1998 and now secures
long-term debt with an aggregate outstanding balance at December 31,
1998, of approximately $3,130,000. The loan matures in 2024 and
accrues interest at 8.95% annually.
FOREST PARK LODGE. This two-story Lodge is located on
approximately 2.28 acres in Forest Park, a commercial area of Atlanta.
The property has 120 guest rooms and an approximately 2,500 square-foot
auxiliary building used for office and retail space.
The following lodge secures an adjustable rate mortgage with an
aggregate outstanding balance at December 31, 1998 of approximately
$2,073,866. The loan accrues interest at 1 1/2% over prime and matures
in 2013.
COLUMBUS LODGE. This two-story lodge with 120 guest rooms was
opened in August of 1998.
The following lodge secures debt to two lenders, including the
former owner of the property, with outstanding balances at December 31,
1998, aggregating approximately $2,209,761. The first mortgage matures
in 2019, and the second matures in 2025. The loans accrue interest at
10.25% annually.
BARTOW LODGE. A two-story, 124-room facility, this Lodge is
located on approximately 3.89 acres near Highway 20 in Cartersville,
Georgia. The Company has owned this Lodge since July 1995.
Total debt of the Company as of December 31, 1998, was
approximately $18,584,016.
As of December 31, 1998, there were no lease agreements in effect
for any of the Lodges, nor any contracts in place to sell any such
properties.
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For further information about the operation of the Lodges, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
In the opinion of the Company's management, the Company's
properties are adequately covered by insurance, and the Company believes
the properties are in good condition.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No meeting of Shareholders was held during 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
There is no public trading market for the Company's Common Stock.
As of January 1, 1999, there were 572,918 outstanding shares of Common
Stock and approximately 3,000 holders of record of such shares.
Although there are currently no legal or contractual restrictions on the
payment of dividends by the Company, the Company has not paid dividends
in the last two years.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Total assets on December 31, 1998 were $17,528,292, an increase of
$5,681,982 from the same date in 1997. This increase can be attributed
to the opening of Columbus Lodge in July 1998 and the purchase of Town
Center Lodge in August 1998. Total liabilities on December 31, 1998
were $18,839,721 compared to $11,741,874 at December 31, 1997. This
increase of $7,097,847 primarily resulted from long term debt incurred
as a result of financing the Columbus and Town Center Lodges.
Revenue for the year ending December 31, 1998 was $5,363,959
compared to $4,377,122 for the year ended December 31, 1997, an increase
of $986,837, or 22%. This increase was attributable to the opening of
the Columbus Lodge in July 1998 and the purchase of Town Center Lodge in
August 1998.
Operating expenses increased from $2,818,570 in 1997 to $3,313,632
in 1998, an increase of $495,062. This increase in expenses can
generally be divided into expenses related to the opening and operation
of Columbus Lodge and the purchase of Town Center Lodge.
Management fees increased from $169,487 in 1997 to $204,474 in
1998. Beginning September 1996, Management fees were paid on a
percentage of gross revenue, and the increase is attributable to an
increase in revenue of the Company. Office supplies were $15,187 in
1998 compared to $27,550 in 1997; repairs and maintenance expenses were
$60,610 in 1998 compared to $74,659 in 1997; subcontracting labor
expenses associated with cleaning were $41,225 in 1998 compared to
$11,519 in 1997; and general subcontract labor was $102,679 in 1998
compared to $88,717 in 1997. Interest expense increased to $1,387,426
in 1998 from $1,189,272 in 1997.
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The Company completed a new Lodge in Columbus, Georgia and opened
it in August 1998. It was financed through a loan from Columbus Bank
and Trust along with current operating funds of the Company. The
Company also purchased an existing Lodge in Kennesaw, Georgia for
$3,000,000. It was financed from proceeds of a loan from Finova Realty
Capital, Inc.
The Company also refinanced $11,400,000 as a refinancing of a
number of the Company's existing properties.
In December, 1998, the Company purchased 470,765 shares of common
stock from one of its major shareholders. This stock is currently held
by the Company as treasury stock, and 250,000 shares of which are
pledged to secure a loan.
Net income before taxes increased to $357,812 in 1998 from $342,191
in 1997, an increase of $15,621. Net income was $231,812 in 1998
compared to $214,126 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations primarily with
cash flow from operations. For the year ended December 31, 1998, the
Company generated $796,071 in cash flow compared to $702,394 for the
year ended December 31, 1997. In December 1998, the Company borrowed
$750,000 from Chapple, Inc. for operating cash purposes. The loan is due
January 7, 2000 and bears interest at 9%. The loan is secured by the
pledge of 250,000 shares of the Company's treasury stock. The Company
had cash balances of $921,220 and $169,246 at December 31, 1998 and
1997, respectively.
The Company anticipates building or acquiring additional Lodges in
the future and may seek to do so by incurring debt, exchanging capital
stock, through cash flow or by issuing equity. The Company is currently
in negotiations to purchase a motel in southeast Georgia.
The Company anticipates that the cash flow from operations will be
sufficient to meet its current and future working capital needs.
Management intends for financing to be utilized only for the acquisition
or construction of new Lodges and not for working capital. Management's
anticipation of meeting working capital needs through current operations
is based on the past performance of the Lodges, which have not
historically required borrowings to finance working capital needs.
However, there can be no assurance in the future that any new or
existing facility will be able to fully fund its working capital needs
through operations.
There are no other commitments for financing. The Company may,
however, seek to increase its debt, issue equity securities or negotiate
additional debt. Any such commitment would be subject to such terms as
approved by the Company's Board of Directors.
Two risk factors which may affect costs related to operations and
development, and thus affect liquidity, are increases in interest rates
and inflation. Management of the Company recognizes these factors and
intends to manage to reduce these risks. However, there can be no
assurance that present or future performances will be in accordance with
management's expectations.
YEAR 2000
The Company utilizes various computer software packages as tools in
running its accounting and operations. Management plans to implement
any necessary vendor upgrades and modifications to ensure continued
functionality with respect to the widely discussed software problems
associated with the Year 2000. At present, management does not expect
that material incremental costs will be incurred in the aggregate or in
any single future year.
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FORWARD-LOOKING STATEMENTS
To the extent the information contained in this discussion and
analysis of the consolidated financial statements of the Company and the
information included elsewhere in the 1998 Annual Report on Form 10-KSB
are viewed as forward-looking statements, the reader is cautioned that
various risks and uncertainties exist that could cause actual future
results to differ materially from that inferred by the forward-looking
statements. Among the risks and uncertainties that should be considered
are: (i) dependence on senior management; (ii) risks associated with
the lodging industry; (iii) risks associated with compliance with
environmental regulations and other government regulations, and (iv)
risks associated with financing. The reader is further cautioned that
risks and uncertainties may exist that have not been mentioned herein
due to their unforeseeable nature, but which, nevertheless, may impact
the Company's future operations.
ITEM 7. FINANCIAL STATEMENTS.
The response to this item is included herein beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors are elected by the Company's shareholders at annual
meetings and serve until their successors are duly elected and
qualified. Of the current directors of the Company, two were appointed
by the Board of Directors of the Company at the time of the Merger, and
the other directors were elected by the shareholders. The Company did
not hold a meeting of shareholders in 1998, so the directors of the
Company remain on the Board and will continue to serve until their
successors are duly elected and qualified. Officers may be elected by
the Company's Board of Directors annually, and they serve until their
successors are duly elected and qualified. Accordingly, the current
officers of the Company are serving until their successors are so
elected and qualified.
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<TABLE>
<CAPTION>
Name (Age) Position(s) Business Experience During the Past Five Years
- ---------- ----------- ----------------------------------------------
<S> <C> <S>
W. Ray Barnes (58) Director, Mr. Ray Barnes has served as a director, President
President and and Chief Executive Officer of ELI and its
Chief predecessors since 1986. Mr. Barnes has owned and
Executive operated Barnes Store in Mableton, Georgia since
Officer, Chief 1954. He is also a director of Georgia State Bank
Financial and Community Financial Corporation and a director
Officer and of Alabama National Bancorporation since
Chief December 1998.
Accounting
Officer
Arthur L. Crowe, Jr. (73) Director Mr. Crowe has served as a director of the Company
since 1994. Mr. Crowe, an attorney, has maintained
a solo practice since 1989, and also currently serves
as counsel with the law firm of Cauthorn & Phillips,
P.C. in Marietta, Georgia.
Joseph A. Cochran (67) Director Mr. Cochran has been a director of the Company and
its affiliates, Piedmont Southern Co., Pacemaker
Properties, Inc., Ramco Inns of Georgia, Inc., SAC
Building, Piedmont Southern Insurance Agency and
SAC Holdings, since 1966 and President of each of
the foregoing affiliates since 1990. Mr. Cochran, an
attorney, has been a member of the law firm of
Cochran Camp & Snipes since 1966.
Ken F. Thigpen (57) Director Mr. Thigpen has served as a director of the
Company, Piedmont Southern Co., Pacemaker
Properties, Inc., Ramco Inns of Georgia, Inc., SAC
Building, Piedmont Southern Insurance Agency, and
SAC Holdings since 1994, and as a director of ELI
since 1994. Mr. Thigpen has been President and
Chief Executive Officer of Georgia State Bank since
1990.
Dr. Roy W. Sweat, D.C. Director Dr. Sweat has been a director of the Company,
(70) Piedmont Southern Co., Pacemaker Properties, Inc.,
Ramco Inns of Georgia, Inc., SAC Building,
Piedmont Southern Insurance Agency, and SAC
Holdings since 1963 and Vice President of each of
the foregoing affiliates since 1990. Dr. Sweat, a
chiropractor, is president of Sweat Chiropractic
Clinic, P.C.
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934,
each executive officer, director and beneficial owner of 10% or more of
the Company's Common Stock is required to file certain forms with the
Securities and Exchange Commission. A report of beneficial ownership of
the Company's Common Stock on Form 3 is due at the time such person
becomes subject to the reporting requirement and a report on Form 4 or 5
must be filed to reflect changes in beneficial ownership occurring
-11-
<PAGE>
thereafter. The Company believes that all filing requirements applicable
to its officers and directors were complied with during the 1998 fiscal
year.
ITEM 10. EXECUTIVE COMPENSATION.
MANAGEMENT COMPENSATION
The following table sets forth the compensation paid to Ray Barnes,
chief executive officer of ELI.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Name and Principal
Position Year Salary Other <F1>
---------------------------------------------------
Ray Barnes, 1998 $50,000 $204,474
President and Chief 1997 $50,000 $169,487
Executive Officer, 1996 $50,000 $117,500
Chief Financial
Officer and Chief
Accounting Officer
_______________
[FN]
<F1> Ray Barnes, doing business as Barnes Store, is paid a fee for
management of the Company's properties. See Item 12 "Certain
Relationships and Related Transactions."
[FN]
DIRECTORS' COMPENSATION
Directors of the Company received $250 for each meeting of the
Board of Directors attended in 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PERSONS BENEFICIALLY OWNING GREATER THAN FIVE PERCENT OF THE COMPANY'S
COMMON STOCK
The following table sets forth the persons known by the Company to
own beneficially more than five percent of the Company's voting
securities.
Name and Address of Amount and Nature Percent of
Title of Class Beneficial Owner of Beneficial Owner Common Stock
- -------------- ------------------- -------------------- ------------
Common Stock W. Ray Barnes 496,195 86.6%
1680 Seayes Road
P.O. Box 21
Mableton, GA 30059
-12-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Company's common stock by management of the Company, as reflected in the
stock records of the Company or provided to the Company by the beneficial
owners.
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Owner Common Stock
- ------------------- ------------------- ------------
W. Ray Barnes 496,195 86.6%
1680 Seayes Road
P.O. Box 21
Mableton, GA 30059
Arthur L. Crowe, Jr. 5,211 *
567 Colston Road
Marietta, GA 30014
Joseph A. Cochran 348 *
2950 Atlanta Street
Smyrna, GA 30080
Ken F. Thigpen 10,233 1.8%
2572 Oakwood Trace
Smyrna, GA 30080
Dr. Roy W. Sweat, D.C. 7,706 1.3%
4735 River Court
Duluth, GA 30155
All officers and directors as a group 520,316 90.7%
____________
* Less than one percent
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has in place a management agreement with W. Ray Barnes (doing
business as Barnes Store) pursuant to which Mr. Barnes provides management of
the Company's properties in exchange for 4% of gross revenues of the Company
less hotel/motel taxes and sales taxes. The agreement may be canceled by
either party upon 60 days notice. In 1998, the Company paid $204,474 to Mr.
Barnes for such management services.
The Company entered into an Agreement for Sales and Purchase of Goods,
effective September 1, 1996, with W. Ray Barnes (doing business as Barnes
Store) pursuant to which Mr. Barnes furnishes merchandise and supplies at
distributor's price plus 1% for the maintenance of the Company's facilities
and for the construction of new units to the extent such merchandise and
supplies are available to Mr. Barnes through Barnes Store's purchasing
agreement with wholesalers. The agreement is cancelable by either party upon
60 days notice. In 1998, the Company purchased maintenance supplies totaling
$284,215 from Mr. Barnes.
-13-
<PAGE>
Another note receivable of Ray Barnes, a majority shareholder, in the
principal amount of $464,016 (plus accrued interest of $81,618) bears interest
at 7% and matures on September 25, 2012. Monthly payments of $4,224.50 began
September 25, 1997.
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
a) EXHIBITS. The exhibits filed as part of this Annual report on Form
10-KSB are as follows:
Exhibit No. Description
- ----------- -----------
3.1 Restated and Amended Articles of Incorporation of
the Company (incorporated by reference to Exhibit
3.1 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997, as
filed with the Commission on April 15, 1998).
3.2 Bylaws of Efficiency Lodge, Inc., as amended
(incorporated by reference to Exhibit 3.2 of the
Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997, as filed with
the Commission on April 15, 1998).
10.1 Towncenter Lodge Purchase Agreement by and between
Efficiency Lodge, Inc. and Towncenter Lodge, Inc.
(incorporated by reference to Exhibit 2.1 of the
Company's 8-K as filed with the Commission on
September 3, 1998).
10.2 Promissory Note by and between Efficiency Lodge,
Inc. and Chapple, Inc., dated January 7, 1999.
10.3 Promissory Note by and between Efficiency Lodge,
Inc. and Belgravia Capital Corporation, dated August
18, 1998.
21 Subsidiaries of the Registrant (incorporated by
reference to the Company's 10-K for the fiscal year
ended December 31, 1995, as filed with the Commission
on April 9, 1996).
27 Financial Data Schedule (for SEC use only)
b) REPORTS ON FORM 8-K.
The Company filed an 8-K Amendment, reporting an Item 7: Financial
Statements, Pro Forma Financial Informaiton and Exhibits, with the Commission
on November 2, 1998. This report described the real property acquired in the
Town Center Lodge acquisition and included audited financial statements of Town
Center Lodge, Inc. as of December 31, 1997.
-14-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
EFFICIENCY LODGE, INC.
December 31, 1998
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENTS OF EARNINGS F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Efficiency Lodge, Inc.
We have audited the accompanying consolidated balance sheet of
Efficiency Lodge, Inc. (a Georgia Corporation) and subsidiaries as of
December 31, 1998, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1998. These financial
statements are the responsibility of the 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 generally accepted
auditing standards. Those standards require that we plan and perform
the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Efficiency Lodge, Inc. and subsidiaries as of December 31, 1998,
and the consolidated results of their operations and their cash flows
for each of the two years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Atlanta, Georgia
February 4, 1999
F-2
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1998
ASSETS
Property and equipment, net (note B) $ 15,121,958
Cash 921,220
Inventory 45,460
Due from stockholder (note F) 80,969
Note receivable - stockholder (note C) 464,016
Interest receivable - stockholder (note C) 81,618
Loan fees, net of accumulated amortization (note D) 478,493
Other assets 334,558
------------
$ 17,528,292
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable (note E) $ 18,584,016
Accounts payable 66,451
Customer deposits 32,564
Other liabilities 19,690
Deferred taxes (note H) 137,000
------------
Total liabilities 18,839,721
STOCKHOLDERS' EQUITY
Common stock - $.10 par value, 7,500,000 shares
authorized; 1,043,683 shares issued 104,368
Additional paid-in capital 52,674
Retained earnings 179,206
------------
336,248
Less 470,765 shares of common stock in treasury at cost (1,647,677)
------------
(1,311,429)
------------
$ 17,528,292
============
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31,
1998 1997
-------------- -------------
Revenue $ 5,363,959 $ 4,377,122
Operating expenses 3,313,632 2,818,570
----------- -----------
Operating profit 2,050,327 1,558,552
Other expense (income)
Interest income (35,177) (33,881)
Interest expense 1,387,426 1,189,272
Write off of loan closing costs (Note D) 322,281 -
Other, net 17,985 60,970
----------- -----------
1,692,515 1,216,361
----------- -----------
Net earnings before income taxes 357,812 342,191
Income tax expense (note H) 126,000 128,065
----------- -----------
Net earnings $ 231,812 $ 214,126
----------- -----------
Earnings per common share - basic $ .22 $ .21
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common stock
----------------------- Additional
Number of paid-in Accumulated Treasury
shares Par Value capital deficit stock Total
---------- ---------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,026,880 $ 102,688 $ 52,674 $ (159,904) $ - $ (4,542)
Net earnings for the year - - - 214,126 - 214,126
Dividends to shareholders of
record on December 30, 1996 - - - (106,828) - (106,828)
Issuance of stock related to the
Merger wtih Southern
Acceptance Corporation,
par value $0.10 per share (note I) 16,803 1,680 - - - 1,680
--------- -------- -------- --------- ----------- -----------
Balance at December 31, 1997 1,043,683 104,368 52,674 (52,606) - 104,436
Net earnings for the year - - - 231,812 - 231,812
Repurchase of shares
on December 31, 1998 (470,765) - - - (1,647,677) (1,647,677)
---------- -------- -------- --------- ----------- -----------
Balance at December 31, 1998 572,918 $ 104,368 $ 52,674 $ 179,206 $ (1,647,677) $ (1,311,429)
========== ========= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net earnings $ 231,812 $ 214,126
Adjustments to reconcile net earnings
to net cash provided by operating activities
Depreciation and amortization 613,619 477,082
Loss on sale of assets - 46,953
Write off of loan closing costs 322,281 -
Changes in assets and liabilities
(Increase) decrease in interest receivable 13,988 (14,067)
Increase in inventories (11,540) (7,948)
Increase in other assets (210,255) (31,730)
Increase (decrease) in accounts payable 15,600 (5,766)
Increase in customer deposits 5,988 6,569
(Decrease) increase in other liabilities (160,422) 55,175
Decrease in deferred taxes (25,000) (38,000)
------------ -----------
Net cash provided by operating activities 796,071 702,394
Cash flows from investing activities
Purchases of property and equipment (5,497,320) (1,661,223)
Repayments of due from stockholder 159,991 -
Repayments by (advances to) affiliates 178,747 (71,154)
Other - 52,468
------------ -----------
Net cash used by investing activities (5,158,582) (1,679,909)
Cash flows from financing activities
Payments for repurchase of common stock (1,647,677)
Proceeds from notes payable 16,440,000 1,700,000
Payments made on notes payable (9,078,312) (478,101)
Payments for loan origination costs (499,516) (128,254)
Distributions made to stockholders - (106,828)
Payments made on due to stockholder (100,010) -
------------ -----------
Net cash provided by financing activities 5,114,485 986,817
============ ===========
</TABLE>
F-6
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Net increase in cash 751,974 9,302
Cash at beginning of year 169,246 159,944
------------ -----------
Cash at end of year $ 921,220 $ 169,246
============ ===========
Supplemental cash flow information
Cash paid during the year for interest $ 1,387,426 $ 1,104,811
------------ -----------
Cash paid during the year for income taxes $ 325,894 $ -
============ ===========
</TABLE>
Noncash investing and financing activities
During 1997, the Company issued an additional 16,803 shares in
connection with the December 1996 merger with Southern Acceptance
Corporation.
During 1997, the Company forgave a receivable of $282,602 as part of
the purchase of a lodge facility.
During 1997, the Company sold a building. As part of the
transaction, the purchaser assumed the remaining debt of $37,963.
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the accounting policies consistently applied in the
accompanying consolidated financial statements follows.
1. Principles of Consolidation
---------------------------
Efficiency Lodge, Inc. (the "Company") consolidates the accounts of
all majority owned subsidiaries. All significant inter-company
transactions and balances have been eliminated.
2. Nature of Operations
--------------------
The Company owns and operates lodging facilities in Georgia which
offer both temporary (minimum seven days) and long-term
accommodations which include fully-equipped cooking facilities and
on-premises laundry facilities. Customers include people on short-
term work or training assignments, recreational travelers, and
people in the midst of relocation.
3. Inventory
---------
Inventory consists of personal care items and snack foods for resale
and is stated at the lower of cost or market using the first-in,
first-out method.
4. Property and Equipment
----------------------
Property and equipment are recorded at cost including capitalized
interest cost incurred during the period of construction.
Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated
service lives using the straight-line method for buildings and
accelerated methods for furniture and equipment. Facilities are
evaluated annually and written down to net realizable value when
management believes that the undepreciated cost cannot be recovered
through future cash flows.
5. Loan Fees
---------
Loan fees and other associated closing costs are recorded at cost.
Amortization is calculated using the straight-line method over the
term of the related loan.
F-8
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
6. Income Taxes
------------
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates applied to taxable income. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance
is provided for deferred tax assets when it is more likely than not
that the asset will not be realized.
7. Cash Equivalents
----------------
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
8. Earnings Per Share
------------------
Earnings per share is computed based upon the weighted average
number of shares outstanding during the period. The weighted
average number of shares outstanding during 1998 and 1997 was
1,042,393 shares and 1,043,683 shares, respectively.
There are no outstanding potentially dilutive securities.
Accordingly, earnings per common share assuming dilution is the same
as basic earnings per common share.
9. Use of Estimates
----------------
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-9
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31,
1998:
Depreciable
lives
-----------
Buildings and improvements 31-39 years $ 14,165,659
Furniture and equipment 5-7 years 2,009,099
-------------
16,174,758
Less: accumulated depreciation (3,466,993)
-------------
12,707,765
Land 2,414,193
-------------
$ 15,121,958
=============
NOTE C - NOTE RECEIVABLE - STOCKHOLDER
The $464,016 note receivable from stockholder bears interest at 7%, matures on
September 25, 2012 and is uncollateralized. Accrued interest on this note
totalled $81,618 as of December 31, 1998. Interest income on this note
totalled $32,481 and $32,848 for the years ended December 31, 1998 and 1997,
respectively.
NOTE D - LOAN FEES
Loan fees were as follows as of December 31, 1998:
Loan fees $ 585,516
Less: accumulated amortization (107,023)
-------------
Net loan fees $ 478,493
=============
During the year, net loan closing costs totaling $322,281 relating
to loans that were refinanced were written off.
F-10
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE E - NOTES PAYABLE
Notes payable consists of the following at December 31, 1998.
Variable rate mortgage notes 10.5%, payments
of principal and interest totalling $12,206 per
month, maturing in 2019 $ 1,231,899
Fixed rate mortgage notes - 8.02 to 10.00%, payments
of principal and interest totaling $170,303
per month, maturing on various dates through 2025 16,602,117
Fixed rate note - 9%, principal and interest due in 2000,
collateralized by 250,000 shares of the Company's
treasury stock 750,000
-----------
$ 18,584,016
===========
The mortgage notes payable are collateralized by all of the Company's real
property. One mortgage note payable requires monthly payments of $14,127
into a capital replacement reserve fund held by the mortgagee. Disbursements
from the fund are subject to approval by the mortgagee. The balance in this
fund was $60,500 at December 31, 1998, and is included in other assets.
Future maturities of long-term debt as of December 31, 1998 are as follows:
1999 $ 1,008,726
2000 276,896
2001 294,602
2002 313,540
2003 334,613
Thereafter 16,355,639
-----------
$ 18,584,016
===========
F-11
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE F - RELATED PARTY TRANSACTIONS
Management fees of $204,474 and $169,487 were paid in 1998 and 1997,
respectively, to a stockholder. The Company entered into an
agreement for management services with this stockholder effective
September 1, 1996. Under the agreement, the Company will pay four
percent of gross revenues less certain taxes for management services
provided by the stockholder. This agreement has no specified
expiration date and may be terminated at any time by either party.
As of December 31, 1998, $80,969 was due from a stockholder. This
unsecured receivable is non-interest bearing and has no specified
repayment terms.
During 1998 and 1997, the Company purchased maintenance supplies
totalling $284,215 and $172,347, respectively, from a stockholder.
During 1998, the Company purchased a newly constructed lodging
facility for approximately $2,250,000 from a company owned by two
stockholders.
NOTE G - FINANCIAL INSTRUMENTS
The carrying amount of mortgage notes payable is a reasonable
estimate of their fair value based on the borrowing rates currently
available to the Company for loans with similar terms.
Due to the terms and conditions of the amounts due from a
stockholder, it is not practicable to estimate the fair value of
these receivables.
NOTE H - INCOME TAXES
Income tax expense for 1998 and 1997 of approximately $126,000 and
$128,000, respectively, consists of $151,000 current expense and
$25,000 deferred benefit for 1998 and $166,000 current expense and
$38,000 deferred benefit for 1997. This expense differs from the
expense based on the Federal statutory rate due primarily to state
income taxes. At December 31, 1997 and 1998, the Company's deferred
tax liability is due solely to the difference between the income tax
basis of property and equipment and the amount reported in the
financial statements.
F-12
<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE I - MERGER AND ACQUISITIONS
Merger with Southern Acceptance Corporation
-------------------------------------------
On December 31, 1996, Efficiency Lodge, Inc. (ELI) merged with
Southern Acceptance Corporation, Inc. (SAC). Pursuant to the
merger, SAC shareholders received one share of the surviving
corporation's common stock for each one hundred shares of SAC's
common stock. Each shareholder of SAC otherwise entitled to receive
a fractional share, received, in lieu thereof, a cash payment of
$.10 for each unconverted share of SAC common stock held by the
shareholder. In addition, 975,536 shares of the surviving
corporation's common stock were issued in exchange for the 900
outstanding shares of ELI's common stock. Pursuant to the terms of
the merger, SAC is the surviving corporation and changed its name to
Efficiency Lodge, Inc.
The merger was recorded under the purchase method of accounting with
ELI being considered the acquiring company. Accordingly, the
purchase price has been allocated to SAC's assets and liabilities
based upon their fair values at the date of acquisition. SAC's
results of operations will be included in the Company's statement of
earnings from the date of acquisition. The net purchase price was
allocated as follows:
Property and equipment $ 132,626
Note receivable 100,000
Cash 17,731
Other assets 479
Note payable (38,943)
Other liabilities (19,431)
Deferred taxes (38,000)
--------
$ 154,462
========
Acquisition of Town Center Lodge
--------------------------------
On August 18, 1998, the Company acquired substantially all of the
assets of an existing extended stay lodge known as Town Center Lodge
for $3,000,000 plus other acquisition costs of approximately
$126,000. The unaudited pro forma information for the periods set
forth below give effect to the acquisition as if it had occurred on
January 1, 1997 and 1998. The pro forma information is presented
for informational purposes only and is not necessarily indicative of
the results of operations that actually would have been achieved had
this transaction been consummated at the beginning of the periods
indicated.
F-14<PAGE>
Efficiency Lodge, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE I - MERGERS AND ACQUISITIONS - Continued
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Revenue $ 5,861,071 $ 5,232,410
Operating expenses 3,643,220 3,353,226
----------- -----------
Operating profit 2,217,851 1,879,184
Other expense
Interest expense 1,564,952 1,437,976
Write off of loan closing costs 322,281 -
Other 5,512 27,089
----------- -----------
Net earnings before tax 325,106 414,119
Income tax expense 113,572 144,203
Net income $ 211,534 $ 269,916
=========== ===========
Earnings per common share - basic $ 0.20 $ 0.26
=========== ===========
</TABLE>
F-14
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EFFICIENCY LODGE, INC.
By: /s/ W. Ray Barnes
--------------------------------------
W. Ray Barnes
President and Chief Executive Officer
Date: March 30, 1999
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Company in the capacities set forth and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Position Date
--------- -------- -----
<S> <C> <C>
/s/ W. Ray Barnes President and Chief Executive Date: March 17, 1999
- ------------------------- Officer and Director, (Principal
W. Ray Barnes Executive Officer, Principal
Financial Officer, Principal
Accounting Officer)
/s/ Arthur L. Crowe, Jr. Director Date: March 16, 1999
- -------------------------
Arthur L. Crowe, Jr.
/s/ Joseph A. Cochran Director Date: March 17, 1999
- -------------------------
Joseph A. Cochran
Director Date: March 17, 1999
- -------------------------
Ken F. Thigpen
/s/ Roy W. Sweat Director Date: March 17, 1999
- -------------------------
Roy W. Sweat
</TABLE>
PROMISSORY NOTE
(FIXED -- DEFEASANCE)
$10,460,000 Atlanta, Georgia
August 18, 1999
FOR VALUE RECEIVED, EFFICIENCY LODGE (CONDUIT), INC., a Georgia
corporation, as maker, having its principal place of business at 166
Anderson Street, Suite 225, Marietta, Georgia 30060 ("Borrower"), hereby
unconditionally promises to pay to the order of BELGRAVIA CAPITAL
CORPORATION, a California corporation, as payee, having an address at c/o
Wells Fargo Bank, N.A., Commercial Mortgage Servicing, 1320 Willow Pass
Road, Suite 205, Concord, California 94520 ("Lender"), or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of TEN MILLION FOUR HUNDRED SIXTY THOUSAND DOLLARS
($10,460,000), in lawful money of the United States of America with interest
thereon to be computed from the date of the funding of this Note at the
Applicable Interest Rate (defined below) in accordance with the terms of
this Note.
ARTICLE 1: PAYMENT TERMS
Borrower agrees to pay sums under this Note in installments as follows:
(a) a constant payment of $___________ on October 1, 1998 and on the
first day of each calendar month thereafter up to an including August 1,
2008 (each, a "Payment Date"); each of the payments to be applied as
follows: (i) first, to the payment of interest computed at the Applicable
Interest Rate; and (ii) the balance toward the reduction of the principal
sum; and
(b) the balance of the principal sum and all interest thereon on
September 1, 2008 (the "Maturity Date").
ARTICLE 2: INTEREST
The interest rate on this Note is _____________ hundredths percent
(___%) per annum (the "Applicable Interest Rate"). Interest on the
principal sum of this Note shall be calculated on the basis of a three
hundred sixty (360) day year based on the actual number of days elapsed in
such period.
ARTICLE 3: DEFAULT AND ACCELERATION
If any payment required in this Note is not paid (a) prior to the fifth
(5th) day after a Payment Date, (b) on the Maturity Date or (c) on the
happening of any other default, after the expiration of any applicable
<PAGE>
notice and grace periods, herein or under the terms of the Security
Instrument or any of the Other Security Documents (as defined in the
Security Instrument) (collectively, an "Event of Default"), at the option of
Lender (i) the whole of the principal sum of this Note, (ii) interest,
default interest, late charges and other sums, as provided in this Note, the
Security Instrument or the Other Security Documents, (iii) all other monies
agreed or provided to be paid by Borrower in this Note, the Security
Instrument or the Other Security Documents, (iv) all sums advanced pursuant
to the Security Instrument to protect and preserve the Property (defined
below) and the lien and the security interest created thereby, and (v) all
sums advanced and costs and expenses incurred by Lender in connection with
the Debt (defined below) or any part thereof, any renewal, extension, or
change of or substitution for the Debt or any part thereof, or the
acquisition or perfection of the security therefor, whether made or incurred
at the request of Borrower or Lender (all the sums referred to in (i)
through (v) above shall collectively be referred to as the "Debt") shall
without notice become immediately due and payable.
ARTICLE 4: DEFAULT INTEREST
Borrower agrees that upon the occurrence of an Event of Default, Lender
shall be entitled to receive and Borrower shall pay interest on the entire
unpaid principal sum at a per annum rate equal to the lesser of (a) five
percent (5%) plus the Applicable Interest Rate and (b ) the maximum interest
rate which Borrower may by law pay (the "Default Rate"). The Default Rate
shall be computed from the occurrence of the Event of Default until the
earlier of the date upon which the Event of Default is cured or the date
upon which the Debt is paid in full. Interest calculated at the Default
Rate shall be added to the Debt, and shall be deemed secured by the Security
Instrument. This clause, however, shall not be construed as an agreement or
privilege to extend the date of the payment of the Debt, nor as a waiver of
any other right or remedy accruing to Lender by reason of the occurrence of
any Event of Default.
ARTICLE 5: LATE CHARGE
If any monthly installment payable under this Note is not paid prior to
the fifth (5th) day after the applicable Payment Date, Borrower shall pay to
Lender upon demand an amount equal to the lesser of five percent (5%) of
such unpaid sum or the maximum amount permitted by applicable law to defray
the expenses incurred by Lender in handling and processing the delinquent
payment and to compensate Lender for the loss of the use of the delinquent
payment and the amount shall be secured by the Security Instrument and the
Other Security Documents.
ARTICLE 6: PREPAYMENT; DEFEASANCE
(a) The principal balance of this Note may not be prepaid in whole or
in part except as expressly permitted pursuant hereto; provided, however, if
no Event of Default exists, Borrower may prepay the principal balance of
this Note without premium or penalty (i) in whole during the three (3)
months prior to the Maturity Date or (ii) in whole or in part in connection
-2-
<PAGE>
with a prepayment resulting from the application of insurance proceeds or
condemnation awards pursuant to Sections 3.3 and 3.6 of the Security
Instrument or changes in tax and debt credit pursuant to Sections 7.3 (a) or
(b) of the Security Instrument, but in each instance Borrower shall be
required to pay all other sums due hereunder, and no principal amount repaid
may be reborrowed.
(b) Provided no Event of Default exists, and subject to the
satisfaction of the terms and conditions of this Article 6, Borrower may
elect, at any time after the date which is the earlier of (i) the second
anniversary of the date that is the "Startup day," within the meaning of
Section 860G(a) (9) of the Internal Revenue Code of 1986, as amended from
time to time or any successor statute (the "Code"), of a "real estate
mortgage, investment conduit" within the meaning of Section 860D of the Code
("REMIC") that holds this Note or (ii) five (5) years from the date hereof,
and prior to the Maturity Date, to obtain a release (the "Release") of the
Property from the lien of the Security Instrument (defined below) by
delivering to Lender (a "Defeasance"), as security for the payment of all
interest and principal due and to become due pursuant to this Note through
the Maturity Date, plus the principal balance of this Note scheduled to be
outstanding on the Anticipated Maturity Date, Defeasance Collateral (defined
below) sufficient, through the scheduled payment of interest and principal
in accordance with its terms (without consideration of any reinvestment of
interest therefrom), to provide for payments prior, but as close as
possible, to all successive Payment Dates after the Defeasance Date (defined
below) through and including the Maturity Date, and in amounts equal to or
greater than the scheduled payment of interest and principal due under this
Note, including the principal balance of this Note scheduled to be
outstanding on the Maturity Date ("Scheduled Defeasance Payments").
(c) As a condition precedent to a Defeasance, and prior to any
Release, Borrower shall have complied with all of the following:
(i) Borrower shall provide not less than thirty (30) days prior
written notice to Lender specifying a Payment Date upon which it intends to
effect a Defeasance hereunder (the "Defeasance Date").
(ii) All accrued and unpaid interest on the principal balance of
this Note to and including the Defeasance Date and the scheduled
amortization payment due on such Defeasance Date, and all other sums due
under this Note, the Security Instrument and the Other Security Documents,
shall be paid in full on or prior to the Defeasance Date.
(iii) Borrower shall execute and deliver to Lender any and all
certificates, opinions, documents or instruments required by Lender in
connection the Defeasance and Release, including, without limitation, a
pledge and security agreement satisfactory to Lender creating a first
priority lien on the Defeasance Collateral (a "Defeasance Security
Agreement").
(iv) Borrower shall have delivered to Lender an opinion of
Borrower's counsel in form and substance satisfactory to Lender stating (A)
that the Defeasance Collateral and the proceeds thereof have been duly and
validly assigned and delivered to Lender and that Lender has a valid,
-3-
<PAGE>
perfected, first priority lien and security interest in the Defeasance
Collateral delivered by Borrower and the proceeds thereof, (B) that if the
holder of this Note shall at the time of the Release be a REMIC, (1) the
Defeasance Collateral has been validly assigned to the REMIC Trust which
holds this Note (the "REMIC Trust'), (2) the Defeasance has been effected in
accordance with the requirements of Treasury Regulation 1.860(g)-2(a)(8) (as
such regulation may be amended or substituted from time to time) and will
not be treated as an exchange pursuant to Section 1001 of the IRS Code and
(3) the tax qualification and status of the REMIC Trust as a REMIC will not
be adversely affected or impaired as a result of the Defeasance and (C)
delivery of the Defeasance Collateral and the grant of a security interest
therein to Lender shall not constitute an avoidable preference under Section
547 of the U.S. Bankruptcy Code or applicable state law.
(v) Borrower shall have delivered to Lender written confirmation
from the Rating Agencies (defined in the Security Instrument) that such
Defeasance will not result in a withdrawal, downgrade or qualification of
the then current ratings by the applicable Rating Agencies of the Securities
(defined in the Security Instrument). If required by the Rating Agencies,
Borrower shall, at Borrower's expense, also deliver or cause to be delivered
a non-consolidation opinion with respect to the Defeasance Obligor (as
defined below), if any, in form and substance satisfactory to Lender and the
Rating Agencies.
(vi) Borrower shall have delivered to Lender a certificate
satisfactory to Lender given by Borrower's independent certified public
accountant (which accountant shall be satisfactory to Lender) certifying
that the Defeasance Collateral shall generate monthly amounts equal to or
greater than the Scheduled Defeasance Payments.
(d) In connection with any Defeasance hereunder, if Borrower shall
continue to own any assets other than the Defeasance Collateral following
the Release, Borrower shall, at Borrower's expense, establish or designate a
successor entity, which shall be a single purpose, bankruptcy remote entity
acceptable to Lender (the "Defeasance Obligor") and Borrower shall transfer
and assign all obligations, rights and duties under and to this Note and the
Defeasance Security Agreement together with the pledged Defeasance
Collateral, to such Defeasance Obligor. Such Defeasance Obligor shall
assume the obligations under the Note and any Defeasance Security Agreement
and shall be bound by and obligated under Sections 3.1, 7.2, 7.4(a), 11.2,
11.7 and 14.2 and Articles 13 and 15 of the Security Instrument; provided,
however, that all references therein to "Property" or "Personal Property"
shall be deemed to refer only to the Defeasance Collateral delivered to
Lender, and Borrower shall be relieved of its obligations under such
documents and, except with respect to any provisions therein which by their
terms expressly survive payment of the Debt in full, the Other Security
Documents.
(e) The term "Defeasance Collateral" as used herein shall mean direct,
non-callable obligations of the United States of America for the payment of
which its full faith and credit is pledged, each of which shall be duly
endorsed by the holder thereof as directed by Lender or accompanied by a
written instrument of transfer in form and substance wholly satisfactory to
Lender (including, without limitation, such instruments as may be required
by the depository institution holding such securities or by the issuer
thereof, as the case may be, to effectuate book-entry transfers and pledges
-4-
<PAGE>
through the book-entry facilities of such institution) in order to perfect
upon the delivery of the Defeasance Collateral the first priority security
interest therein in favor of the Lender in conformity with all applicable
state and federal laws governing the granting of such security interests.
Borrower shall authorize and direct that the payments received from such
obligations shall be made directly to Lender or Lender's designee and
applied to satisfy the obligations of Borrower or, if applicable, the
Defeasance Obligor, under the Note.
(f) Any revenue, documentary stamp or intangible taxes or any other
tax or charge due in connection with the Defeasance shall be paid by
Borrower simultaneously with the occurrence of any Defeasance.
(g) Upon Borrower's compliance with all of the conditions to
Defeasance and a Release set forth in this Article 6, Lender shall release
the Property from the lien of the Security Instrument and the Other Security
Documents. All costs and expenses of Lender incurred in connection with the
Defeasance and Release, including, without limitation, Lender's counsel's
fees and expenses, shall be paid by Borrower simultaneously with the
delivery of the Release documentation.
(h) If a Default Prepayment (defined below) occurs, Borrower shall pay
to Lender the entire Debt, including, without limitation, an amount (the
"Default Consideration") equal to the greater of (i) the amount (if any)
which when added to the then outstanding principal amount of the Note will
be sufficient to purchase Defeasance Collateral providing the required
Scheduled Defeasance Payments or (ii) one percent (1%) of the Default
Prepayment.
For purposes of this Note, the term "Default Prepayment" shall mean a
prepayment of the principal amount of this Note made after the occurrence of
any Event of Default or an acceleration of the Maturity Date under any
circumstances, including, without limitation, a prepayment occurring in
connection with reinstatement of the Security Instrument provided by statute
under foreclosure proceedings or exercise or a power of sale, any statutory
right of redemption exercised by Borrower or any other party having a
statutory right to redeem or prevent foreclosure, any sale in foreclosure or
under exercise of a power of sale or otherwise.
ARTICLE 7: SECURITY
This Note is secured by those certain Deeds to Secure Debt and Security
Agreement dated the date hereof in the principal sum of $10,460,000 given by
Borrower to (or for the benefit of) Lender covering the fee estate of
Borrower in certain premises located in Fulton, Douglas, Carroll, Cobb and
DeKalb Counties, State (Commonwealth) of Georgia, and other property, as
more particularly described therein (collectively, the 'Property") and
intended to be duly recorded in said Counties (collectively, the "Security
Instrument"), and by the Other Security Documents.
-5-
<PAGE>
ARTICLE 8: LOAN CHARGES
This Note, the Security Instrument and the Other Security Documents are
subject to the express condition that at no time shall Borrower be obligated
or required to pay interest on the principal balance due hereunder at a rate
which could subject Lender to either civil or criminal liability as a result
of being in excess of the maximum interest rate which Borrower is permitted
by applicable law to contract or agree to pay. If by the terms of this
Note, the Security Instrument and the Other Security Documents, Borrower is
at any time required or obligated to pay interest on the principal balance
due hereunder at a rate in excess of such maximum rate, the Applicable
Interest Rate or the Default Rate, as the case may be, shall be deemed to be
immediately reduced to such maximum rate and all previous payments in excess
of the maximum rate shall be deemed to have been payments in reduction of
principal and not on account of the interest due hereunder. All sums paid
or agreed to be paid to Lender for the use, forbearance, or detention of the
Debt, shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full stated term of the Note
until payment in full so that the rate or amount of interest on account of
the Debt does not exceed the maximum lawful rate of interest from time to
time in effect and applicable to the Debt for so long as the Debt is
outstanding.
ARTICLE 9: WAIVERS
Borrower and all others who may become liable for the payment of all or
any part of the Debt do hereby severally waive presentment and demand for
payment, notice of dishonor, protest and notice of protest and non-payment
and all other notices of any kind, except for notices expressly provided for
in this Note, the Security Instrument or the Other Security Documents. No
release of any security for the Debt or extension of time for payment of
this Note or any installment hereof, and no alteration, amendment or waiver
of any provision of this Note, the Security Instrument or the Other Security
Documents made by agreement between Lender or any other person or party
shall release, modify, amend, waive, extend, change, discharge, terminate or
affect the liability of Borrower, and any other person or entity who may
become liable for the payment of all or any part of the Debt, under this
Note, the Security Instrument or the Other Security Documents. No notice to
or demand on Borrower shall be deemed to be a waiver of the obligation of
Borrower or of the right of Lender to take further action without further
notice or demand as provided for in this Note, the Security Instrument or
the Other Security Documents. If Borrower is a partnership, corporation or
limited liability company, the agreements contained herein shall remain in
full force and effect, notwithstanding any changes in the individuals or
entities comprising the Borrower, and the term "Borrower," as used herein,
shall include any alternate or successor entity, but any predecessor entity,
and its partners or members, as the case may be, shall not thereby be
released from any liability. (Nothing in the foregoing sentence shall be
construed as a consent to, or a waiver of, any prohibition or restriction on
transfers of interests in Borrower which may be set forth in the Security
Instrument or any Other Security Document.)
-6-
<PAGE>
ARTICLE 10: WAIVER OF TRIAL BY JURY
BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN
CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN
EVIDENCED BY THIS NOTE, THE APPLICATION FOR THE LOAN EVIDENCED BY THIS NOTE,
THIS NOTE, THE SECURITY INSTRUMENT OR THE OTHER SECURITY DOCUMENTS OR ANY
ACTS OR OMISSIONS OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN
CONNECTION THEREWITH.
ARTICLE 11: EXCULPATION
(a) Notwithstanding anything to the contrary contained in this Note,
the Security Instrument or any Other Security Document (but subject to the
provisions of subsections (b), (c) and (d) of this Article 11), Lender shall
not enforce the liability and obligation of Borrower to perform and observe
the obligations contained in this Note or the Security Instrument by any
action or proceeding wherein a money judgment or any deficiency judgment or
other judgment establishing any personal liability shall be sought against
Borrower or any principal, director, officer, employee, beneficiary,
shareholder, partner, member, trustee, agent or affiliate of Borrower or any
person owning, directly or indirectly, any legal or beneficial interest in
Borrower, or any successors or assigns of any of the foregoing
(collectively, the "Exculpated Parties"), except that Lender may bring a
foreclosure action, action for specific performance or other appropriate
action or proceeding to enable Lender to enforce and realize upon this Note,
the Security Instrument, the Other Security Documents, and the interest in
the Property, the Rents (as defined in the Security Instrument) and any
other collateral given to Lender to secure this Note; provided, however,
subject to the provisions of subsections (b), (c) and (d) of this Article
11, that any judgment in any such action or proceeding shall be enforceable
against Borrower only to the extent of Borrower's interest in the Property,
in the Rents and in any other collateral given to Lender to secure this
Note. Lender, by accepting this Note and the Security Instrument, agrees
that it shall not, except as otherwise provided in this Article 11, sue for,
seek or demand any deficiency judgment against Borrower or any of the
Exculpated Parties, in any such action or proceeding, under or by reason of
or under or in connection with this Note, the Security Instrument or the
Other Security Documents. The provisions of this Article 11 shall not,
however, (i) constitute a waiver, release or impairment of any obligation
evidenced or secured by this Note, the Security Instrument or the Other
Security Documents delivered to Lender; (ii) impair the right of Lender to
name Borrower as a party defendant in any action or suit for judicial
foreclosure and sale under the Security Instrument; (iii) affect the
validity or enforceability of any indemnity, guaranty, master lease or
similar instrument made in connection with this Note, the Security
Instrument, or the Other Security Documents; (iv) impair the right of Lender
to obtain the appointment of a receiver; (v) impair the enforcement of the
Assignment of Leases and Rents executed in connection herewith; (vi) impair
the right of Lender to enforce the provisions of Section 12.2 of the
Security Instrument; or (vii) impair the right of Lender to obtain a
deficiency judgment or other judgment on the Note against Borrower if
necessary to obtain any insurance proceeds or condemnation awards to which
-7-
<PAGE>
Lender would otherwise be entitled under the Security Instrument; provided,
however, Lender shall only enforce such judgment to the extent of the
insurance proceeds and/or condemnation awards.
(b) Notwithstanding the provisions of this Article 11 to the contrary,
Borrower shall be personally liable to Lender for the Losses (as defined in
the Security Instrument) it incurs due to: (i) fraud or intentional
misrepresentation by Borrower or any of the Exculpated Parties in connection
with the execution and the delivery of this Note, the Security Instrument or
the Other Security Documents or any documents of certificate now or at any
time during the term of the Loan evidenced by this Note; (ii) Borrower's
misapplication or misappropriation of Rents received by Borrower after the
occurrence of and during the continuance of an Event of Default; (iii)
Borrower's misapplication or misappropriation of tenant security deposits or
Rents collected in advance; (iv) the misapplication or the misappropriation
of insurance proceeds or condemnation awards; (v) Personal Property (as
defined in the Security Instrument) taken from the Property by or on behalf
of Borrower or any of the Exculpated Parties and not replaced with Personal
Property of the same utility and of the same or greater value; (vi) any act
of arson by Borrower or any of the Exculpated Parties; or (vii) any fees or
commissions paid by Borrower after the occurrence of and during the
continuance of an Event of Default of any Exculpated Party in violation of
the terms of this Note, the Security Instrument or the Other Security
Documents.
(c) Notwithstanding the foregoing, the agreement of Lender not to
pursue recourse liability as set forth in subsection (a) above SHALL BECOME
NULL AND VOID and shall be of no further force and effect in the event of
Borrower's default under Article 8 of the Security Instrument or if the
Property or any part thereof shall become an asset in (i) a voluntary
bankruptcy or insolvency proceeding, or (ii) an involuntary bankruptcy or
insolvency proceeding (other than one filed by Lender) which is not
dismissed within ninety (90) days of filing.
(d) Nothing herein shall be deemed to be a waiver of any right which
Lender may have under Section 506(a), 506(b), 1111(b) or any other provision
of the U.S. Bankruptcy Code to file a claim for the full amount of the
indebtedness secured by the Security Instrument or to require that all
collateral shall continue to secure all of the indebtedness owing to Lender
in accordance with this Note, the Security Instrument and the Other Security
Documents.
ARTICLE 12: AUTHORITY
Borrower (and the undersigned representative of Borrower, if any)
represents that Borrower has full power, authority and legal right to
execute and deliver this Note, the Security Instrument and the Other
Security Documents and that this Note, the Security Instrument and the Other
Security Documents constitute valid and binding obligations of Borrower.
-8-
<PAGE>
ARTICLE 13: GOVERNING LAW
This Note shall be governed, construed, applied and enforced in
accordance wit the laws of the State of Georgia.
ARTICLE 14: NOTICES
All notices required or permitted hereunder shall be given as provided
in the Security Instrument.
ARTICLE 15: INCORPORATION BY REFERENCE
All of the terms, covenants and conditions contained in the Security
Instrument and the Other Security Documents are hereby made part of this
Note to the same extent and with the same force as if they were fully set
forth herein.
ARTICLE 16: MISCELLANEOUS
(a) Wherever pursuant to this Note it is provided that Borrower pay
any costs and expenses, such costs and expenses shall include, but not be
limited to, reasonable legal fees and disbursements of Lender, whether with
respect to retained firms, the reimbursement for the expenses of in-house
staff, or otherwise. Borrower shall pay to Lender on demand any and all
expenses, including legal expenses and reasonable attorneys' fees, incurred
or paid by Lender in enforcing this Note, whether or not any legal
proceeding is commenced hereunder, together with interest thereon at the
Default Rate from the date paid or incurred by Lender until such expenses
are paid by Borrower.
(b) This Note may not be modified, amended, waived, extended, changed,
discharged or terminated orally or by any act or failure to act on the part
of Borrower or Lender, but only by an agreement in writing signed by the
party against whom enforcement of any modification, amendment, waiver,
extension, change, discharge of termination is sought.
(c) If Borrower consists of more than one person or party, the
obligations and liabilities of each person or party shall be joint and
several.
(d) Whenever used, the singular number shall include the plural, the
plural number shall include the singular, and the words "Lender" and
"Borrower" shall include their respective successors, assigns, heirs,
executors and administrators.
[NO FURTHER TEXT ON THIS PAGE]
-9-
<PAGE>
IN WITNESS WHEREOF, Borrower has duly executed this Note as of the day
and year first above written.
BORROWER:
Signed, sealed and delivered in the EFFICIENCY LODGE (CONDUIT), INC., a
presence of: Georgia corporation
[unreadable] By: /s/ W.Ray Barnes
Witness Name: W. Ray Barnes
Title: President
/s/ Lori. B. Merbeth (CORPORATE SEAL)
Notary Public
My Commission Expires:_______________
(NOTARIAL SEAL)
-10-
PROMISSORY NOTE
$ 750,000.00 Dated: JANUARY 7 , 1998
Principal Amount SEVEN HUNDRED State of Georgia
FIFTY THOUSAND & NO/100
FOR VALUE RECEIVED, the undersigned hereby jointly and severally
promise to pay to the order of CHAPPLE INC.
, the sum of
Dollars ($ SEVEN HUNDRED FIFTY THOUSAND & NO/100), together with interest
thereon at the rate of 9% per annum on the unpaid balance. Said sum shall
be paid in the manner following:
MONTHLY INTEREST ONLY...PRINCIPAL AND INTEREST AT MATURITY..JANUARY 7, 2000
All payments shall be first applied to interest and the balance to
principal. This note may be prepared, at any time, in whole or in part,
without penalty. All prepayments shall be applied in reverse order of
maturity.
This note shall be at the option of any holder hereof be immediately
due and payable upon the failure to make any payment due hereunder within
Thirty days of its due date.
In the event this note shall be in default, and placed with an attorney
for collection, then the undersigned agree to pay all reasonable attorney's
fees and costs of collection. Payments not made within five (5) days of due
date shall be subject to a late charge of Five & of said payment. All
payments hereunder shall be made to such address as may from time to time be
designated by any holder hereof:
<PAGE>
The undersigned and all other parties to this note, whether as
endorsers, guarantors or sureties, agree to remain fully bound hereunder
until this note shall be fully paid and waive demand, presentment and
protest and all notices thereto and further agree to remain bound,
notwithstanding any extension, renewal, modification, waiver, or other
indulgence by any holder or upon the discharge or release of any obligor
hereunder to this note, or upon the exchange, substitution, or release of
any collateral granted as security for this note. No modification or
indulgence by any holder hereof shall be binding unless in writing; and any
indulgence on any one occasion shall not be an indulgence for any other or
future occasion. Any modification or change of terms, hereunder granted by
any holder hereof, shall be valid and binding upon each of the undersigned,
notwithstanding the acknowledgment of any of the undersigned, and each of
the undersigned does hereby irrevocably grant to each of the others a power
of attorney to enter into any such modification on their behalf. The rights
of any holder hereof shall be cumulative and not necessarily successive.
This note shall take effect as a sealed instrument and shall be construed,
governed and enforced in accordance with the laws of the State first
appearing at the head of this note. The undersigned hereby execute this
note as principals and not as sureties.
Signed in the presence of:
_______________________________ Efficiency Lodge, Inc.
/s/ Bonnie L. Byers /s/ W. Ray Barnes - President
GUARANTY
We the undersigned jointly and severally guaranty the prompt and
punctual payment of all monies due under the aforesaid note and agree to
remain bound until fully paid.
In the presence of:
_______________________________ Efficiency Lodge, Inc.
/s/ Bonnie L. Byers /s/ W. Ray Barnes - President
<PAGE>
FOR VALUE RECEIVED EFFICIENCY LODGE INC.
___________________________________________________
hereby sell, assign and transfer unto CHAPPLE INC.
_____________________________________
____________________ (250,000) Shares of the COMMON STOCK Stock
--------
of the EFFICIENCY LODGE, INC.
___________________________________________________________________________
Standing in _______________________________________________________________
Name on the books of said EFFICIENCY LODGE, INC.
_________________________________________________
Represented by Certificate No. 3884 herewith and
_________________________
do hereby irrevocably constitute and appoint ______________________________
EFFICIENCY LODGE, INC. attorney to transfer the said
_____________________________________
stock on the books of the within named Company with full power of
substitution in the premises.
Date: JANUARY 7, 1999
________________________
EFFICIENCY LODGE, INC.
In Presence of:
/s/ W. Ray Barnes - President
/s/ Bonnie L. Byers
Bonnie L. Byers
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000092066
<NAME> EFFICIENCY LODGE, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 921,220
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 45,460
<CURRENT-ASSETS> 0
<PP&E> 18,588,951
<DEPRECIATION> 3,466,993
<TOTAL-ASSETS> 17,528,292
<CURRENT-LIABILITIES> 0
<BONDS> 18,584,016
0
0
<COMMON> 104,368
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<INTEREST-EXPENSE> 1,387,426
<INCOME-PRETAX> 357,812
<INCOME-TAX> 126,000
<INCOME-CONTINUING> 231,812
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<NET-INCOME> 231,812
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
