10-Q 1 e10-q.txt SHOLODGE INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------------------------------- For the Second Quarter Ended July 9, 2000 Commission File No. 0-19840 --------------------------------------------- SHOLODGE, INC. (Exact name of registrant as specified in its charter) --------------------------------------------- TENNESSEE 62-1015641 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 130 MAPLE DRIVE NORTH, HENDERSONVILLE, TENNESSEE 37075 (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615) 264-8000 --------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. As of August 23, 2000, there were 5,663,668 shares of ShoLodge, Inc. common stock outstanding. 2 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 9, DECEMBER 26, 2000 1999(1) (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,216,667 $ 3,386,937 Restricted cash 14,141,815 1,605,513 Accounts receivable-trade, net 5,019,173 4,853,252 Construction contracts receivable 428,795 7,674,104 Costs and estimated earnings in excess of billings on construction contracts 9,550,010 3,588,071 Income taxes receivable 974,218 3,335,543 Prepaid expenses 455,359 573,064 Notes receivable-net 842,498 468,762 Other current assets 158,667 441,023 ------------------------------------ Total current assets 49,787,202 25,926,269 NOTES RECEIVABLE, NET 63,288,526 60,887,262 PROPERTY AND EQUIPMENT 108,615,249 148,698,134 Less accumulated depreciation and amortization (22,044,915) (23,821,643) ------------------------------------ 86,570,334 124,876,491 LAND UNDER DEVELOPMENT OR HELD FOR SALE 9,210,892 9,186,608 DEFERRED CHARGES,NET 7,597,334 8,407,623 DEPOSITS ON SALE/LEASEBACK 0 35,280,000 INTANGIBLE ASSETS 3,028,940 3,122,173 OTHER ASSETS 2,198,881 2,627,487 ------------------------------------ TOTAL ASSETS $ 221,682,109 $ 270,313,913 ====================================
(1) Derived from fiscal year ended December 26, 1999 audited financial statements. See notes to consolidated financial statements. 3 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
JULY 9, DECEMBER 26, 2000 1999(1) (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 13,913,734 $ 9,594,955 Taxes other than on income 834,651 1,448,602 Current portion of long-term debt and capitalized lease obligations 562,320 2,227,929 ------------------------------------ Total current liabilities 15,310,705 13,271,486 OTHER LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT PORTION 105,437,727 125,550,557 DEFERRED INCOME TAXES 2,089,297 2,089,297 DEFERRED GAIN ON SALE/LEASEBACK 4,129,962 36,307,820 DEFERRED CREDITS 2,675,639 1,283,605 MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 757,853 932,809 ------------------------------------ TOTAL LIABILITIES 130,401,183 179,435,574 ------------------------------------ SHAREHOLDERS' EQUITY: Series A redeemable nonparticipating stock (no par value; 1,000 shares authorized, no shares outstanding) 0 0 Common stock (no par value; 20,000,000 shares authorized 5,701,978 shares issued and outstanding as of July 9, 2000 and 5,372,578 shares issued and outstanding as of December 26, 1999) 1,000 1,000 Additional paid-in capital 43,840,879 42,484,275 Retained earnings 66,116,698 65,512,322 Unrealized gain on securities available for sale (net of tax) 71,912 80,321 Treasury stock (17,548,915) (17,199,579) Less notes receivable from officer, net of discount of $331,000 (1,200,648) 0 ------------------------------------ TOTAL SHAREHOLDERS' EQUITY 91,280,926 90,878,339 ------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 221,682,109 $ 270,313,913 ====================================
(1) Derived from fiscal year ended December 26, 1999 audited financial statements. See notes to consolidated financial statements. 4 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE TWENTY-EIGHT WEEKS ENDED JULY 9, 2000 AND JULY 11, 1999
12 WEEKS ENDED 28 WEEKS ENDED JULY 9, JULY 11, JULY 9, JULY 11, 2000 1999 2000 1999 --------------------------------------------------------------- REVENUES: Hotel $ 17,603,898 $ 16,402,332 $ 39,805,704 $ 34,661,033 Franchising and management 935,003 744,841 1,832,314 1,667,263 Construction and development 2,930,034 412,286 7,062,805 703,551 --------------------------------------------------------------- Total revenues 21,468,935 17,559,459 48,700,823 37,031,847 COSTS AND EXPENSES: Operating expenses: Hotel 13,099,115 10,704,002 28,786,421 22,748,054 Franchising and management 565,928 527,021 1,384,111 1,164,179 Construction and development 3,155,874 398,910 7,178,996 644,848 --------------------------------------------------------------- Total operating expenses 16,820,917 11,629,933 37,349,528 24,557,081 General and administrative 1,399,930 1,748,620 2,802,193 3,463,149 Rent expense, net 4,672,679 2,556,106 10,038,424 5,569,638 Depreciation and amortization 1,310,440 1,640,265 3,417,215 4,104,295 --------------------------------------------------------------- Loss from operations (2,735,031) (15,465) (4,906,537) (662,316) OTHER INCOME AND (EXPENSES): Interest expense (2,517,466) (3,325,135) (6,136,051) (6,999,788) Interest income 1,471,683 1,217,580 3,343,671 3,097,940 Gain on sale of property and leasehold interests 4,381,795 7,370,825 4,680,819 11,980,081 Other income 124,438 134,629 282,131 454,995 --------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES, MINORITY INTERESTS AND EXTRAORDINARY GAIN 725,419 5,382,434 (2,735,967) 7,870,912 INCOME TAX (BENEFIT) EXPENSE 367,000 2,049,000 (830,000) 2,279,000 MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED SUBSIDIARIES & PARTNERSHIPS (7,949) 10,878 (26,878) (1,871,624) --------------------------------------------------------------- EARNINGS BEFORE EXTRAORDINARY ITEM 350,470 3,344,312 (1,932,845) 3,720,288 EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT (net of related tax effect of $1,401,000 and $1,555,000 respectively) 2,286,214 0 2,537,221 0 --------------------------------------------------------------- NET EARNINGS $ 2,636,684 $ 3,344,312 $ 604,376 $ 3,720,288 =============================================================== EARNINGS PER COMMON SHARE Basic: Earnings per share from continuing operations $ 0.07 $ 0.47 $ (0.36) $ 0.51 Extraordinary gain, net of tax effect $ 0.43 $ 0.00 $ 0.47 $ 0.00 Net earnings $ 0.50 $ 0.47 $ 0.11 $ 0.51 =============================================================== Diluted: Earnings per share from continuing operations $ 0.07 $ 0.41 $ (0.36) $ 0.50 Extraordinary gain, net of tax effect $ 0.43 $ 0.00 $ 0.47 $ 0.00 Net earnings $ 0.50 $ 0.41 $ 0.11 $ 0.50 =============================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 5,318,268 7,178,978 5,325,393 7,250,680 Diluted 5,321,614 9,685,234 5,375,852 7,477,153 ---------------------------------------------------------------
See notes to consolidated financial statements. 5 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY EIGHT WEEKS ENDED JULY 9, 2000 AND JULY 11, 1999 (UNAUDITED)
28 WEEKS ENDED JULY 9, JULY 11, 2000 1999 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: (LOSS) EARNINGS BEFORE EXTRAORDINARY ITEMS ($ 1,932,845) $ 3,720,288 ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO NET CASH USED IN OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 3,417,215 4,104,295 AMORTIZATION OF DEFERRED CHARGES RECORDED AS INTEREST EXPENSE 408,185 778,356 RECOGNITION OF PREVIOUSLY DEFERRED GAINS (2,526,455) (2,747,622) GAIN ON SALE OF PROPERTY AND LEASEHOLD INTERESTS (4,680,819) (11,980,081) INCREASE IN MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 26,878 1,871,624 COMPENSATION EXPENSE 151,955 0 CHANGES IN ASSETS AND LIABILITIES: INCREASE IN TRADE RECEIVABLES (165,921) (1,346,354) DECREASE IN CONSTRUCTION CONTRACT RECEIVABLES 7,245,309 0 INCREASE IN ESTIMATED EARNINGS IN EXCESS OF BILLING ON CONSTRUCTION CONTRACTS (5,961,939) 0 INCREASE IN INCOME AND OTHER TAXES RECEIVABLE 197,530 1,116,753 DECREASE (INCREASE) IN PREPAID EXPENSES 117,705 (608,546) DECREASE IN OTHER ASSETS 257,717 433,571 INCREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 975,423 70,008 -------------------------------- NET CASH USED IN OPERATING ACTIVITIES (2,470,062) (4,587,708) CASH FLOWS FROM INVESTING ACTIVITIES: INCREASE IN RESTRICTED CASH (12,536,302) (472,591) PAYMENTS RECEIVED ON NOTES RECEIVABLE 75,000 12,267,668 CAPITAL EXPENDITURES (2,016,390) (13,256,028) PROCEEDS FROM SALE OF PROPERTY AND LEASEHOLD INTERESTS 38,560,676 65,198,026 PROCEEDS FROM SALE OF LEASEHOLD INTERESTS, NET OF EXPENSES 13,832,482 0 INCREASE OF DEPOSITS ON SALE/LEASEBACK OF HOTELS (4,295,000) (7,280,000) -------------------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 33,620,466 56,457,075 CASH FLOWS FROM FINANCING ACTIVITIES: PAYMENTS FOR DEFERRED LOAN COSTS (159,008) (417,382) PROCEEDS FROM LONG-TERM DEBT 12,800,500 13,399,754 PAYMENTS ON LONG-TERM DEBT (28,225,407) (32,169,672) PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (189,590) (103,679) DISTRIBUTIONS TO MINORITY INTERESTS (201,834) 0 EXERCISE OF STOCK OPTIONS 4,001 41,505 PURCHASE OF TREASURY STOCK (349,336) (6,096,319) -------------------------------- NET CASH USED IN FINANCING ACTIVITIES (16,320,674) (25,345,793) NET INCREASE IN CASH AND CASH EQUIVALENTS 14,829,730 26,523,574 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,386,937 2,480,984 -------------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,216,667 $ 29,004,558 ================================
See notes to consolidated financial statements. 6 SHOLODGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In Management's opinion, the information and amounts furnished in this report reflect all adjustments which are necessary for the fair presentation of the financial position and results of operations for the periods presented. All adjustments are of a normal and recurring nature. The condensed consolidated balance sheet at December 26, 1999 has been derived from the audited consolidated financial statements at that date. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1999. The fiscal year consists of a 52/53 week year ending the last Sunday of the year. The Company's fiscal quarters have 16, 12, 12, and 12 weeks in first, second, third and fourth quarters, respectively, in each fiscal year. When the 53rd week occurs in a fiscal year, it is added to the fourth fiscal quarter, making it 13 weeks in length. The Company has historically reported lower earnings in the first and fourth quarters of the year due to the seasonality of the Company's business. The results of operations for the quarters and year-to-date periods ended July 9, 2000 and July 11, 1999 are not necessarily indicative of the operating results for the entire year. B. COMPREHENSIVE INCOME Comprehensive income includes net income and other comprehensive income which is defined as non-owner transactions in equity. The following table sets forth (in thousands) the amounts of other comprehensive income included in equity for the two quarters ended July 9, 2000 and July 11, 1999.
7/09/00 7/11/99 ------- ------- Net unrealized (loss) gain on securities available for sale for the two quarters ($8) $25
7 C. EARNINGS PER SHARE Earnings per share was computed by dividing net income by the weighted average number of common shares outstanding. The following table reconciles earnings and weighted average shares used in the earnings per share calculations for the fiscal quarters and fiscal year-to-date periods ended July 9, 2000, and July 11, 1999:
12 WEEKS ENDED 28 WEEKS ENDED -------------- -------------- July 9, July 11, July 9, July 11, 2000 1999 2000 1999 BASIC: EARNINGS BEFORE EXTRAORDINARY ITEMS $ 350,470 $3,344,312 ($1,932,845) $3,720,288 EXTRAORDINARY GAIN 2,286,214 -- 2,537,221 -- ---------- ---------- ----------- ---------- NET EARNINGS APPLICABLE TO COMMON STOCK $2,636,684 $3,344,312 $ 604,376 $3,720,288 ========== ========== =========== ========== SHARES: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,318,268 7,178,978 5,325,393 7,250,680 ========== ========== =========== ========== BASIC EARNINGS PER SHARE: BEFORE EXTRAORDINARY ITEMS $ 0.07 $ 0.47 $ (0.36) $ 0.51 EXTRAORDINARY GAIN 0.43 -- 0.47 -- ---------- ---------- ----------- ---------- NET EARNINGS $ 0.50 $ 0.47 $ 0.11 $ 0.51 ========== ========== =========== ========== DILUTED: EARNINGS BEFORE EXTRAORDINARY ITEMS $ 350,470 $3,344,312 $(1,932,845) $3,720,288 EXTRAORDINARY GAIN 2,286,214 -- 2,537,221 -- ---------- ---------- ----------- ---------- NET EARNINGS APPLICABLE TO COMMON STOCK 2,636,684 3,344,312 604,376 3,720,288 DILUTIVE EFFECT OF 7.5% CONVERTIBLE DEBENTURES -- 579,462 -- -- ---------- ---------- ----------- ---------- NUMERATOR FOR DILUTED EARNINGS PER SHARE $2,636,684 $3,923,774 $ 604,376 $3,720,288 ========== ========== =========== ========== SHARES: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,318,268 7,178,978 5,325,393 7,250,680 EFFECT OF DILUTIVE SECURITIES (OPTIONS) 3,346 189,654 50,459 226,473 EFFECT OF DILUTIVE SECURITIES (7.5% CONVERTIBLE DEBENTURES) -- 2,316,602 -- -- ---------- ---------- ----------- ---------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 5,321,614 9,685,234 5,375,852 7,477,153 ========== ========== =========== ========== DILUTED EARNINGS PER SHARE: BEFORE EXTRAORDINARY ITEMS $ 0.07 $ 0.41 $ (0.36) $ 0.50 EXTRAORDINARY GAIN 0.43 -- 0.47 -- ---------- ---------- ----------- ---------- NET EARNINGS $ 0.50 $ 0.41 $ 0.11 $ 0.50 ========== ========== =========== ==========
8 D. OPERATING SEGMENT INFORMATION The Company's significant operating segments are hotel operations, franchising and management, and construction and development. None of the Company's segments conduct foreign operations. Operating profit includes the operating revenues and expenses directly identifiable with the operating segment. Identifiable assets are those used directly in the operations of each segment. A summary of the Company's operations by segment follows (in thousands of dollars):
12 Weeks Ended 28 Weeks Ended July 9, July 11, July 9, July 11, 2000 1999 2000 1999 --------- --------- -------- -------- Revenues: Hotel revenues from external customers $ 17,604 $ 16,401 $ 39,806 $ 34,661 Franchising and management 2,123 1,841 4,505 4,044 Construction and development 3,225 4,244 8,696 11,027 Elimination of intersegment revenue franchising, management, construction and development (1,483) (4,927) (4,306) (12,700) --------- --------- -------- -------- Total revenues $ 21,469 $ 17,559 $ 48,701 $ 37,032 ========= ========= ======== ======== Operating profit (loss): Hotel $ (1,434) $ 1,713 $ (2,100) $ 2,755 Franchising and management (1,124) (1,707) (2,770) (3,366) Construction and development (177) (21) (37) (51) --------- --------- -------- -------- Total operating profit (loss) $ (2,735) $ (15) $ (4,907) $ (662) ========= ========= ======== ======== Capital expenditures: Hotel $ 551 $ 4,662 $ 1,842 $ 12,238 Franchising and management 25 682 173 998 Construction and development 1 -- 1 20 --------- --------- -------- -------- Total capital expenditures $ 577 $ 5,344 $ 2,016 $ 13,256 ========= ========= ======== ======== Depreciation and amortization: Hotel $ 1,030 $ 1,384 $ 2,766 $ 3,459 Franchising and management 274 247 637 625 Construction and development 6 9 14 20 --------- --------- -------- -------- Total depreciation and amortization $ 1,310 $ 1,640 $ 3,417 $ 4,104 ========= ========= ======== ========
As of As of July 9, December 26, 2000 1999 -------- -------- Total assets: Hotel $145,931 $200,773 Franchising and management 65,316 57,986 Construction and development 10,435 11,555 -------- -------- Total assets $223,275 $270,314 ======== ========
9 E. RELATED PARTY TRANSACTION On July 5, 2000, the Board of Directors accelerated the vesting in options to purchase 40,000 shares of common stock. Immediately thereafter, the president and chief executive officer of the Company exercised vested employee stock options for 408,333 shares of the Company's common stock, at the exercise price of $3.75 per share. He executed non-interest bearing, unsecured, full-recourse promissory notes totaling $1.5 million with maturity dates coinciding with the expiration dates of each option grant, ranging from February 11, 2002, to May 30, 2007. The closing market price of the Company's common stock on July 5, 2000, was $3.31 per share. The Company has recorded the notes receivable of $1.5 million, net of unearned discount of $331,000, assuming a market interest rate of 8.50%. Compensation expense has been recorded in the amount of $152,000 (the fair value of shares received less the present value of the notes receivable using an 8.50% discount rate). The fair value of shares issued of $1.4 million has been recorded as paid-in capital and the notes receivable are recorded as a deduction from shareholders' equity. F. CONTINGENCIES The Company is a party to legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company. The following is a summary of certain legal action against the Company which was recently concluded. In 1998, a former chief financial officer of the Company, filed a lawsuit against the Company and its chief executive officer alleging that his employment by the Company was wrongfully terminated, claiming breach of contract, fraud, retaliatory discharge and related claims. The plaintiff sought $3 million in compensatory damages and punitive and treble damages. On December 31, 1998 the Company filed a motion to dismiss this lawsuit on the basis that the plaintiff has intentionally destroyed relevant evidence during the pendency of the case. The court granted this motion on January 28, 1999 and dismissed the case with prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or Amend the Judgment dismissing the case. The court denied the motion on April 23, 1999. The plaintiff filed an appeal with the Tennessee Court of Appeals. On May 12, 2000, the Court of Appeals ordered the plaintiff to file a bond for costs on appeal or else show cause why his appeal should not be dismissed for failure to comply with Tenn. R. App. P. 6. The plaintiff failed to respond, so on June 1, 2000, the Court ordered the appeal dismissed. This case is now concluded. G. SALE/LEASEBACK TRANSACTION In May 2000, the Company entered into a sale and leaseback agreement for four of its Sumner Suites hotels. The assets of the hotels were sold to Hospitality Properties Trust ("HPT"), a real estate investment trust, and the hotels continued to be operated by the Company until the sale of leasehold interests on July 9, 2000 as described in Note H below. The Company initially deferred the gain of $3.7 million and was recognizing it on the straight-line method over the initial lease term, as a reduction of rent expense. As a part of the lease, the Company was required to pay an additional security deposit of $4.3 million, which was also assigned as a part of the sale of leasehold interests on July 9, 2000. 10 H. SALE OF LEASEHOLD INTERESTS On July 9, 2000, the Company completed a transaction with Prime Hospitality Corp. ("Prime") in which it sold to Prime all of its leasehold interest in 24 Sumner Suites hotels, for a total of $15.6 million. The Company received $100,000 in cash, $13.9 million in the form of an escrow fund and retired its debt securities held by Prime with a face value of $2.6 million and a fair value of $1.6 million. As a part of the transaction, the Company assigned its interest to Prime in two deposits related to the lease, the $14.0 million guaranty deposit and $25.6 million in lease security deposits and the related supplies inventory at each hotel. The Company also agreed to construct two hotels on sites presently owned by the Company. These projects will be funded by the $13.9 million escrow money from the sale and any excess escrow funds will then be released to the Company. The Company also gave HPT, the owner of the 24 Sumner Suites whose leasehold rights were assigned to Prime, the right to exchange one or both of two specific hotels included in the leasehold group for these two new properties, upon completion of their construction, without payment or receipt of any additional consideration. If the Company does not consent to the property exchange, then HPT can require the Company to purchase the two properties. The Company further agreed to lease to Prime three other Sumner Suites hotels, which the Company owns. The 11-year lease provides for initial minimum annual rental payments of $2.9 million, increasing to $3.1 million if the lease is extended, and also provides for percentage rents based on hotel sales, as defined. Prime will convert all 27 existing Sumner Suites to the AmeriSuites brand. The Company agreed to not operate any other all-suites hotels in competition with Prime within a defined geographic radius of each of the hotels being sold. This restriction will not prevent the Company from developing hotels for others in the restricted area or operating or franchising any Shoney's Inn brand hotel in the restricted area. The Company recognized a gain of $3.6 million, continued to defer gains of $4.1 million from the sale/leaseback on two of the hotels, and recognized extraordinary gains related to the early extinguishment of the debt securities received from Prime of $855,000, all before income tax. The Company will recognize the deferred gains from the sale/leaseback when HPT exercises the exchange option or requires the Company to purchase the two properties, or these rights expire. In addition, the Company agreed to construct one 124-room AmeriSuites hotel for Prime on a site presently owned by Prime at a construction and development price of $76,500 per room, less Prime's cost of the land. The Company also agreed to provide reservation services to Prime for all of its existing hotels, for a fee based on a percentage of room revenue. 11 I. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (in thousands of dollars):
28 Weeks Ended -------------- July 9, July 11, 2000 1999 Investing: Proceeds from sale of property arising from note receivable $2,850 $0 Proceeds from sale of leasehold interests arising from repurchase of long-term debt at a discount $1,618 $0 Financing: Exercise of stock options financed by notes receivable $1,531 $0
12 ShoLodge, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. The Company develops, owns and, through July 9, 2000, operated all-suites hotels under the Sumner Suites brand name, and is an operator and the exclusive franchisor of Shoney's Inns. The Company's 27 Sumner Suites hotels owned and operated through July 9, 2000 are mid-scale, all-suites hotels located in Arizona, Colorado, Florida, Georgia, Indiana, Kansas, New Mexico, North Carolina, Ohio, Tennessee, Texas and Virginia. See "Prime Transaction" below for a discussion of the transaction which transferred the operations of all of the 27 Sumner Suites hotels to Prime Hospitality Corp. ("Prime") effective with the close of business on July 9, 2000. As of July 9, 2000, the Shoney's Inn lodging system consists of 76 Shoney's Inns containing 7,344 rooms of which 16 containing 1,822 rooms are owned or managed by the Company. Shoney's Inns are currently located in 21 states with a concentration in the Southeast. Sumner Suites hotels were marketed primarily to business travelers and, to a lesser extent, leisure travelers by offering an all-suite setting in a convenient location at an attractive price/value relationship. Sumner Suites offered mid-scale accommodations at rates between $75 and $100 per night and were usually located in or near business or leisure travel destinations in mid-sized and larger metropolitan markets. A typical Sumner Suites contains from 110 to 135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room, and offers a deluxe continental breakfast. Subsequent to the end of the second quarter of this year, the Company will no longer operate these hotels, which are to be re-flagged as AmeriSuites by Prime within the next few months. There are no plans to develop and operate Sumner Suites hotels in the near term. The Company is, however, developing this type of hotel for third parties, including new AmeriSuites hotels for Prime. Shoney's Inns operate in the upper economy limited-service segment and are designed to appeal to both business and leisure travelers, with rooms usually priced between $40 and $65 per night. The typical Shoney's Inn includes 60 to 120 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not offer full food service, most offer continental breakfast and most of the Shoney's Inns are located adjacent or in close proximity to Shoney's restaurants. Management believes that its strategy of locating most of its Shoney's Inns in close proximity to free-standing Shoney's restaurants has given it a competitive advantage over many other limited-service lodging chains by offering guest services approximating those of full-service facilities without the additional capital expenditures, operating costs or higher room rates. 13 The Company's operations have been supplemented by contract revenues from construction and development of hotels for third parties. Revenues from these activities have varied widely from period to period, depending upon whether the Company's construction and development activities were primarily focused on its own facilities or on outside projects. Construction revenues are recognized on the percentage of completion basis. SALE OF LEASEHOLD INTERESTS On July 9, 2000, the Company completed a transaction with Prime Hospitality Corp. ("Prime") in which it sold to Prime all of its leasehold interest in 24 Sumner Suites hotels, for a total of $15.6 million. The Company received $100,000 in cash, $13.9 million in the form of an escrow fund and retired its debt securities held by Prime with a face value of $2.6 million and a fair value of $1.6 million. As a part of the transaction, the Company assigned its interest to Prime in two deposits related to the lease, the $14.0 million guaranty deposit and $25.6 million in lease security deposits and the related supplies inventory at each hotel. The Company also agreed to construct two hotels on sites presently owned by the Company. These projects will be funded by the $13.9 million escrow money from the sale and any excess escrow funds will then be released to the Company. The Company also gave HPT, the owner of the 24 Sumner Suites whose leasehold rights were assigned to Prime, the right to exchange one or both of two specific hotels included in the leasehold group for these two new properties, upon completion of their construction, without payment or receipt of any additional consideration. If the Company does not consent to the property exchange, then HPT can require the Company to purchase the two properties. The Company further agreed to lease to Prime three other Sumner Suites hotels, which the Company owns. The 11-year lease provides for initial minimum annual rental payments of $2.9 million, increasing to $3.1 million if the lease is extended, and also provides for percentage rents based on hotel sales, as defined. Prime will convert all 27 existing Sumner Suites to the AmeriSuites brand. The Company agreed to not operate any other all-suites hotels in competition with Prime within a defined geographic radius of each of the hotels being sold. This restriction will not prevent the Company from developing hotels for others in the restricted area or operating or franchising any Shoney's Inn brand hotel in the restricted area. The Company recognized a gain of $3.6 million, continued to defer gains of $4.1 million from the sale/leaseback on two of the hotels, and recognized extraordinary gains related to the early extinguishment of the debt securities received from Prime of $855,000, all before income tax. The Company will recognize the deferred gains from the sale/leaseback when HPT exercises the exchange option or requires the Company to purchase the two properties, or these rights expire. 14 In addition, the Company agreed to construct one 124-room AmeriSuites hotel for Prime on a site presently owned by Prime at a construction and development price of $76,500 per room, less Prime's cost of the land. The Company also agreed to provide reservation services to Prime for all of its existing hotels, for a fee based on a percentage of room revenue. RESULTS OF OPERATIONS For the Fiscal Quarters and Fiscal Year-to-date Periods Ended July 9, 2000 and July 11, 1999 Total operating revenues for the quarter ended July 9, 2000, were $21.5 million, or 22.3% more than the total operating revenues of $17.6 million reported for the second quarter of 1999. For the fiscal year-to-date period ended July 9, 2000, total operating revenues were $48.7 million, or 31.5% more than the total operating revenues of $37.0 million for the comparable period in 1999. Revenues from hotel operations in the second fiscal quarter of 2000 increased by $1.2 million, or 7.3%, from the $16.4 million reported for the same period last year. For the 40 same hotels opened for all of both quarterly periods, an increase of 0.1% in average daily room rates, from $69.77 in second quarter 1999 to $69.86 in second quarter 2000, and an increase in average occupancy rates on these hotels from 55.9% to 59.1% this year, resulted in an increase in same hotel revenues of 5.2% from $16.1 million in second quarter 1999 to $17.0 million in second quarter 2000. The one additional hotel opened in the fourth quarter of 1999 contributed $476,000 to hotel operating revenues in second quarter this year. One hotel which was sold in June 2000 contributed $161,000 to hotel revenues in second quarter this year, compared with $278,000 in second quarter 1999. Revenues from hotel operations in the first two fiscal quarters of 2000 increased by $5.1 million, or 14.8%, from the $34.7 million reported for the same period last year. For the 37 same hotels opened for all of both year-to-date periods, a decrease of 0.2% in average daily room rates, from $68.81 in 1999 to $68.66 in 2000, and an increase in average occupancy rates on these hotels from 53.7% to 56.7% this year, resulted in an increase in same hotel revenues of 5.0% from $32.6 million in 1999 to $34.2 million in 2000. The four hotels opened since the end of 1998 contributed $5.2 million to hotel operating revenues in the first two quarters of this year, compared with $1.6 million for the same period last year. The hotel which was sold in June 2000 contributed $379,000 to hotel revenues in the first two quarters of this year, compared with $482,000 for the same period in 1999. 15 Through July 9, 2000, the Company owned and operated two hotel brands - Shoney's Inns and Sumner Suites hotels. RevPAR (revenue per available room) for the 15 Company-owned Shoney's Inns decreased from $27.09 in second quarter 1999 to $25.88 in second quarter 2000. The 27 Sumner Suites hotels' RevPAR increased by 8.4%, from $45.25 in second quarter 1999 to $49.03 in second quarter 2000. The 26 Sumner Suites same-hotels' RevPAR increased by 8.8%, from $45.25 in second quarter 1999 to $49.25 in second quarter this year. For the first two quarters of this year, the RevPAR for all 15 Company-owned Shoney's Inns decreased from $24.83 in 1999 to $23.76 this year; the 14 same hotel Shoney's Inns' RevPAR during this same period decreased from $25.02 in 1999 to $23.99 this year. For the first two quarters of this year, the RevPAR for all 27 Sumner Suites hotels increased from $43.17 in 1999 to $47.76 this year; the 23 same hotel Sumner Suites hotels' RevPar during this same period increased from $43.98 in 1999 to $47.73 this year. Franchising and management revenues increased by $190,000, or 25.5%, in second quarter 2000 from second quarter 1999. Initial franchise and franchise termination fees increased by $253,000 from second quarter of last year, which was offset by a $63,000 decrease in royalty and reservation fees, due primarily to lower revenues upon which such fees are based. Initial franchise fee revenue and termination fees vary from quarter to quarter depending on the level of franchise sales activities and the number of franchises terminated. Franchising and management revenues increased by $165,000, or 9.9%, in the first two quarters of this year from the same period last year. Initial franchise and franchise termination fees increased by $341,000 from the first two quarters of last year, which was offset by a $176,000 decrease in royalty and reservation fees, due primarily to lower revenues upon which such fees are based, but also due to a $40,000 decrease in reservation fees due to the cancellation of reservation services by one hotel chain in March of 1999. Three new franchised hotels opened near the end of the second quarter 2000, and as of July 9, 2000, there was one franchised Shoney's Inn under construction, which is expected to open in early 2001. Revenues from construction and development activities were $2.9 million in second quarter 2000 on four third party construction contracts in progress versus $412,000 in second quarter 1999 on three third party construction contracts in progress. For the first two quarters of this year, revenues from construction and development activities were $7.1 million on seven third party construction contracts in progress versus $704,000 in the first two quarters of 1999 on three third party construction contracts in progress. As of July 9, 2000, there were two third party construction contracts in progress. Operating expenses from hotel operations for the second quarter of 2000 increased by $2.4 million, or 22.4%, from $10.7 million in second quarter 1999, due partially to the $1.2 million increase in hotel operating revenues. The four Sumner Suites hotels opened in 1999 and first quarter 2000 caused hotel operating expenses to increase by $1.0 million over second quarter last year. Hotel operating expenses on the 37 same-hotels increased by 14.7%, or $1.4 million, in second quarter 2000 over second quarter 1999. The 16 operating expenses as a percentage of operating revenues for this activity increased from 65.3% in second quarter 1999 to 74.4% in second quarter 2000; operating expenses as a percentage of operating revenues on the 37 same-hotels increased from 65.4% in second quarter 1999 to 73.4% in second quarter 2000. Increases in hotel operating expenses on same-hotels were primarily in the areas of payroll related costs, repairs and maintenance, uncollectible accounts receivable, operating supplies, and security. Payroll related costs increased significantly in second quarter of this year due to the Prime transaction (see above discussion). Since the announcement of the prospective transaction in first quarter, it was necessary to maintain the hotel staffing positions at the 27 Sumner Suites hotels to the date operations of these hotels were assumed by Prime (July 9, 2000). These costs included bonuses to stay until the transaction was consummated, payment of accrued vacation for those employees transferred to Prime or who resigned or were terminated, termination pay, regular second quarter bonuses to be paid, and payroll taxes and travel expenses associated with these costs. Operating expenses from hotel operations for the first two quarters of 2000 increased by $6.0 million, or 26.5%, from $22.7 million in the first two quarters of 1999, due partially to the $5.1 million increase in hotel operating revenues. The four Sumner Suites hotels opened in 1999 and first quarter 2000 caused hotel operating expenses to increase by $2.3 million over the first two quarters of 1999. Hotel operating expenses on the 37 same-hotels increased by 18.0%, or $3.8 million, in the first two quarters of this year over the comparable period last year. The operating expenses as a percentage of operating revenues for this activity increased from 65.6% in the first two quarters of 1999 to 72.3% in the first two quarters of 2000; operating expenses as a percentage of operating revenues on the 37 same-hotels increased from 64.0% in the first two quarters of 1999 to 71.9% in the first two quarters of 2000. Increases in hotel operating expenses on same-hotels were primarily in the areas of payroll related costs, repairs and maintenance, uncollectible accounts receivable, operating supplies, and security. Payroll related costs increased significantly in second quarter of this year due to the impacts of the Prime transaction described above. Since the announcement of the proposed transaction in first quarter, it was necessary to maintain the hotel staffing positions at the 27 Sumner Suites hotels to the date operations of these hotels were assumed by Prime (July 9, 2000). These costs included bonuses to stay until the transaction was consummated, termination pay, and payroll taxes and travel expenses associated with these costs. Franchising and management operating expenses increased by $39,000, or 7.4%, from second quarter 1999 to second quarter 2000, and by $220,000, or 18.9% from the first two quarters of 1999 to the first two quarters of this year. The increases were primarily in the areas of (1) reservation center equipment expenses and payroll and related benefits and (2) franchise administrative expenses; particularly, advertising, postage and freight, dues and subscriptions, and hotel inspection expenses. Construction and development costs in second quarter of this year were $3.2 million on the four third party construction contracts in progress versus $399,000 in first quarter 1999 on the three third party construction contract in progress at that time. 17 Construction and development costs in the first two quarters of this year were $7.2 million on the five third party construction contracts in progress versus $645,000 in the first two quarters of 1999 on the three third party construction contract in progress at that time. The Company reflected a loss from the construction and development activities due to fewer contracts than the existing overhead costs. General and administrative expenses in the second quarter of this year decreased by $349,000, or 19.9%, from second quarter 1999, and in the first two quarters of this year they decreased by $661,000, or 19.1%. These decreases were due primarily to decreased professional fees, travel expenses and telephone expenses. Rent expense increased by $2.1 million in second quarter this year from last year's second quarter, which represents the base rent paid in the second quarter of this year on the six Sumner Suites hotels sold and leased back on June 29, 1999, and the four Sumner Suites hotels sold and leased back on May 11, 2000. For the first two quarters of this year, rent expense increased by $4.5 million from the comparable period last year, of which $4.4 million represents the increase in base rent paid on the ten Sumner Suites hotels sold and leased back in June of 1999 and May of 2000. The balance of the increase is due to increases in percentage rent paid on the hotels sold and leased back and to a reduction in deferred gain accretion which reduces rent expense on those hotels. Depreciation and amortization expense decreased by $330,000, or 20.1%, from second quarter 1999, and for the first two quarters, decreased by $687,000, or 16.7% from the same period last year. The sale-leaseback of 6 Sumner Suites hotels in June, 1999, and 4 Sumner Suites hotels in May, 2000, reduced depreciation expense in both the second quarter of this year and the first two quarters of this year from the comparable periods in 1999. Interest expense in the second quarter of this year decreased by $808,000, or 24.3%, from second quarter last year, while interest income increased by $254,000, or 20.9%, from second quarter 1999, for a net decrease of $1.1 million in net interest expense. Interest expense in the first two quarters of this year decreased by $864,000, or 12.3%, from the first two quarters last year, while interest income increased by $246,000, or 7.9%, from the first two quarters of 1999, for a net decrease of $1.1 million in year-to-date net interest expense. These reductions in net interest expense were due to a paydown of $7.5 million of the Company's outstanding debt using a portion of the $38.4 million gross proceeds of the sale lease-back of four hotels on May 11 of this year and to the interest income earned from the temporary investment of the remaining proceeds from that transaction in interest bearing instruments. The gain recognized on sale of property and leasehold interests in second quarter 2000 totaled $4.4 million, and includes a gain of $3.6 million recognized on the sale of the Company's leasehold interest in 24 Sumner Suites hotels which had been previously sold and leased back, at which time the gain had been deferred and was being amortized over the lease term. Additionally, a Shoney's Inn was sold in second quarter at a gain of $755,000. The gain on sale of property in second quarter 1999 totaling $7.4 million relates to four of the 16 hotels sold in third quarter 1998, the recognition of which was 18 originally deferred and recognized on the installment method. The gain on sale of property and leasehold interests in the first two quarters of this year was $4.7 million, consisting of the two transactions in the second quarter and $299,000 recognized in first quarter from a recognition of deferred gains related to the sale of two Shoney's Inns in 1998. The gain on sale of property in the first two quarters of 1999 was $12.0 million, of which $11.9 million relates to the recognition of previously deferred gain related to four of the 16 hotels sold in third quarter 1998, which was being recognized on the installment method. Other income decreased by $10,000 from second quarter 1999 to second quarter 2000, and by $173,000 from the first two quarters of 1999 to the first two quarters of 2000. Other income can vary widely from quarter to quarter due to the nature of this income and its varied sources. Minority interests in earnings of consolidated subsidiaries and partnerships decreased from $1.9 million in the first two quarters of 1999 to $27,000 in the first two quarters of 2000, due primarily to the 40% minority interest in $4.6 million of the gain on sale of property recognized in first quarter 1999, described above. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows used in operating activities were $2.5 million in the first two quarters of 2000, compared with $4.6 million used in operating activities in the first two quarters of 1999. The Company's cash flows provided by investing activities were $33.6 million in the first two quarters of 2000, compared with $56.5 million for the comparable period in 1999. The Company requires capital principally for the construction and acquisition of new lodging facilities and the purchase of equipment and leasehold improvements. Capital expenditures for such purposes were $2.0 million in the first two quarters of 2000 and $13.3 million in the first two quarters of 1999. Proceeds from the sale of property and leasehold interests were $38.6 million in the first two quarters of 2000 versus $65.2 million for the comparable period in 1999. In the second quarter of 2000, the Company sold and leased back four hotels and sold a fourth hotel for a combination of cash and a note; in the second quarter of 1999, the Company sold and leased back six hotels. Net cash used in financing activities was $16.3 million in the first two quarters of 2000 compared with $25.3 million in the first two quarters of 1999. Repayments, net of borrowings, on long-term debt and capitalized lease obligations were $15.6 million in the first two quarters of 2000 versus $18.9 million in the first two quarters of 1999. The repayments in the first two quarters of 2000 include $15.5 million of long-term debt repurchased in the open market. In the first two quarters of 2000, the Company repurchased 80,000 shares of its common stock for $349,000; in the first two quarters of 1999, the Company repurchased 1,112,000 shares of its common stock for $6.1 million pursuant to a plan to repurchase up to $20.0 million of the Company's outstanding common stock. 19 The Company's $25.2 million revolving credit facility with a group of five banks matured on June 30, 1999. It was repaid in full on June 29, 1999, from a portion of the $65.0 million gross proceeds from a sale/leaseback transaction involving six of the Company's Sumner Suites hotels. The Company established a new three-year credit facility with a new bank group effective August 27, 1999. The new credit facility is for an initial amount of $30.0 million (a $10.0 million term loan and a $20.0 million revolving line of credit), secured by a pledge of certain promissory notes payable to the Company received in connection with the sale of 16 of the Company's lodging facilities in the third quarter of 1998. The borrowing base is the lower of (a) 85% of the outstanding principal amount of the pledged notes, (b) 65% of the appraised market value of the underlying real property collateral securing the pledged notes, or (c) $30.0 million. The interest rate is at the lender's base rate plus 50 basis points and the Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contains covenants which, inter alia, limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company's ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company's minimum net worth. As of July 9, 2000, the Company had $10.0 million in borrowings outstanding under this credit facility, consisting of the three-year term loan of $10.0 million; the remaining availability under this credit facility as of July 9, 2000, was $16.8 million ($3.2 million was used in second quarter 2000 to secure the Company's guaranty of a subsidiary's letter of credit). The Company also maintains a $1 million unsecured line of credit with another bank, bearing interest at the lender's prime rate, maturing May 31, 2001. As of July 9, 2000, the Company had no borrowings outstanding under this credit facility. The Company opened four new Sumner Suites hotels in 1999 (including three in the first two quarters of 1999) and none in the first two quarters of 2000. As of the end of the second fiscal quarter of 2000, two hotels were under construction which are expected to open in second quarter 2001. The Company estimates that approximately $13.0 million in capital funds will be necessary to complete the construction of the two hotels under construction. These two hotels may be exchanged upon completion for two of the 24 Sumner Suites hotels that are included in the leasehold interests sold to Prime (See above discussion of Sale of Leasehold Interests). The Company has escrowed $13.9 million to finish these two hotels. The Company has decided to cease its development of new Sumner Suites hotels in the near term. This decision was based on current market conditions, rooms supply in certain areas, capital availability, and the Sale of Leasehold Interests discussed above. The Company's Board of Directors has previously authorized the use of up to $20.0 million for the repurchase of shares of the Company's common stock. The purchases, including block purchases, are to be made from time to time in the open market at prevailing market prices, or in privately negotiated transactions at the 20 Company's discretion. No time limit has been placed on the duration of the stock repurchase plan, and the Company may discontinue the plan at any time. As of the end of the second fiscal quarter of 2000, approximately 3.0 million shares had been repurchased at a cost of $17.5 million. On May 11, 2000, the Company sold and leased back four Sumner Suites hotels, adding these four hotels to the existing lease of 20 other hotels. Net proceeds from this transaction were $33.7 million, of which $7.5 million was used to reduce long-term indebtedness of the Company. The balance of $26.2 million was temporarily invested in money market funds until needed. This transaction represented the first closing transaction as a part of the series of contemplated transactions pursuant to an agreement entered into with Prime on March 16, 2000 (reference "Pending Prime Transaction" discussion in Item 7 of the Company's 1999 Form 10-K and footnote H of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q). The assumption by Prime of the Company's leasehold interest in the 24 Sumner Suites hotels leased from HPT Suite Properties Trust and the Company's lease of three Sumner Suites hotels to Prime occurred on July 9, 2000. The Company is investigating various alternatives to maximize shareholder value. These alternatives could include, without limitation, a continuation of the development and operation of Sumner Suites and the franchising and operation of Shoney's Inns, a sale of the remaining Shoney's Inns, negotiating new credit arrangements, developing hotels for other owners, the repurchase of additional shares of the Company's common stock or outstanding debt securities, or any combination of these or other strategies. The Company believes that a combination of cash on hand, the collection of notes receivable, net cash provided by operations, borrowings under existing and new revolving credit facilities or mortgage debt, and available furniture, fixture and equipment financing packages will be sufficient to fund its scheduled hotel development, stock repurchase plan, debt repayments and operations for the next twelve months. MARKET RISK There have been no material changes in the Company's exposure to market risk in the second fiscal quarter ended July 9, 2000. FORWARD-LOOKING STATEMENT DISCLAIMER The statements appearing in this report which are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including delays in concluding or the inability to conclude transactions, the establishment of competing facilities and services, cancellation of leases or contracts, changes in applicable laws and regulation, in margins, demand fluctuations, access to debt or equity financing, adverse uninsured determinations in existing or future litigation or regulatory proceedings and other risks. 21 PART II - OTHER INFORMATION Item 1. ShoLodge Franchise Systems, Inc. v. Ambe Hotels & Investments, et al, Chancery Court for Davidson County, Tennessee, Case No. 00-1865-II. On June 14, 2000, the Company filed an action against Ambe Hotels & Investments and other parties arising out of Ambe's failure to pay royalty and other fees to the Company pursuant to the License Agreement concerning the Shoney's Inn in Orlando, Florida. On July 7, 2000, the Company reached a settlement with the defendants pursuant to which the defendants agreed to pay the Company $175,000 in past due royalty fees and in termination fees. The defendants had paid $10,000 of the settlement amount by July 9, 2000, and the balance of $165,000 was received on August 22, 2000. The action will be dismissed with prejudice with the receipt of this final payment. ShoLodge Franchise Systems, Inc. v. Skyland Inn, LLC, et al, Chancery Court for Davidson County, Tennessee, Case No. 00-1637-II. On May 25, 2000, the Company filed a declaratory judgment action against Skyland Inn, LLC, the franchisee of the Shoney's Inn in Asheville, North Carolina, and other parties. On or about July 20, 2000, the Company reached a settlement with the defendants pursuant to which Skyland Inn, LLC agreed to pay the Company $20,000 and agreed to execute a Promissory Note in the amount of $180,000 in favor of the Company in satisfaction of Skyland's obligations under the terms of the License Agreement. The Company has received a payment of $20,000 in cash and has received an executed Promissory Note in the amount of $180,000. The action will be dismissed with prejudice in the immediate future. Michael A. Corbett v. ShoLodge, Inc. and Leon Moore, Chancery Court for Sumner County, Tennessee, No. 98C-184. In this action, filed on June 12, 1998, Michael A. Corbett, the former Chief Financial Officer of ShoLodge, claims that he was wrongfully terminated by the Company and has asserted claims against the Company and its chief executive officer, Leon Moore, for breach of contract, fraud, retaliatory discharge and related claims. The plaintiff sought $3,000,000 in compensatory damages and sought punitive and treble damages in addition. The defendants filed an answer to the complaint on July 9, 1998. On December 31, 1998, the Company filed a motion to dismiss this lawsuit on the basis that Mr. Corbett had intentionally destroyed relevant evidence during the pendency of the case. The Court heard oral argument on the motion on January 28, 1999, and granted the motion at the conclusion of the hearing and dismissed the case with prejudice. On March 8, 1999, Mr. Corbett filed a Motion to Alter or Amend the Judgment dismissing the case, which the Court denied. The plaintiff appealed the dismissal of the case to the Tennessee Court of Appeals. On May 12, 2000, the Tennessee Court of Appeals ordered the plaintiff to file a bond for costs on appeal or else show cause why his appeal should not be dismissed for failure to comply with Tenn. R. App. P. 6. The plaintiff failed to respond; therefore, the Court ordered the appeal dismissed on June 1, 2000. This case is now concluded. No material developments occurred during the second quarter ended July 9, 2000 with respect to any other pending litigation. Reference is made to Form 10-Q for first fiscal quarter ended April 16, 2000. Item 4. Submission of Matters to a vote of Security Holders At the Company's Annual Meeting of Shareholders held on May 26, 2000, 5,307,578 shares were outstanding and eligible to vote. The shareholders considered and voted to reelect the following director:
Name of Nominee Vote Cast --------------- --------- For Withheld --- -------- Leon Moore 5,113,621 31,285
22 Item 6. Exhibits and Reports on Form 8-K 6(a) Exhibits - 10.1 Purchase and Sale Agreement by and between ShoLodge, Inc. and certain of its Affiliates, as Sellers, and HPT Suite Properties Trust, as Purchaser, dated May 11, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on May 26, 2000. 10.2 Agreement to Lease between HPT Suite Properties Trust and Suite Tenant, Inc. dated May 11, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on May 26, 2000. 10.3 Fourth Amendment to Lease Agreement and Amendment to Incidental Documents entered into between Hospitality Properties Trust, HPT Suite Properties Trust, ShoLodge, Inc. and Suite Tenant, Inc., dated May 11, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on May 26, 2000. 10.4 Sale and Purchase Agreement by and between ShoLodge, Inc. and Prime Hospitality Corp., dated as of March 16, 2000. Incorporated by reference to the Company's Annual Report on Form 10-K, filed with the Commission on March 27, 2000. 10.5 First Amendment to Sale and Purchase Agreement by and between ShoLodge, Inc. and Prime Hospitality Corp., dated as of July 9, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on July 24, 2000. 10.6 Lease Agreement by and between Southeast Texas Inns, Inc., as landlord, and May-Ridge, L.P., as tenant, dated as of July 9, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on July 24, 2000. 10.7 Contractor and Development Agreement by and between Prime Hospitality Corp., as owner, Moore & Associates, Inc., as contractor, and ShoLodge, Inc., as guarantor, dated as of July 9, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on July 24, 2000. 10.8 Interim Agreement for Reservation Services by and between ShoLodge, Inc. and Prime Hospitality Corp., dated as of July 9, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on July 24, 2000. 10.9 Agreement for Reservation Services by and between ShoLodge, Inc. and Prime Hospitality Corp., dated as of July 9, 2000. Incorporated by reference to the Company's Report on Form 8-K, filed with the Commission on July 24, 2000. 27 Financial Data Schedule for Quarter Ended July 9, 2000 6(b) Reports on Form 8-K A Form 8-K was filed on May 26, 2000, relating to the completion of a sale-leaseback transaction involving four Sumner Suites hotels on May 11, 2000. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ShoLodge, Inc. Date: August 24, 2000 S/ Leon Moore -------------------------------------------- Leon Moore President, Chief Executive Officer, Principal Executive Officer, Director Date: August 24, 2000 S/ Bob Marlowe -------------------------------------------- Bob Marlowe Secretary, Treasurer, Chief Accounting Officer, Principal Accounting Officer, Chief Financial Officer, Director