-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NNWAPUZ5lkiSFkL1iPhv8AaJ1XAhAemCPf9t5nnGIKU49Hm+kOAXtc1YO0y6750Y puyL23aXlsiRmFMO2uHACg== 0000950144-02-003335.txt : 20020415 0000950144-02-003335.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-003335 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011230 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOLODGE INC CENTRAL INDEX KEY: 0000881924 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 621015641 STATE OF INCORPORATION: TN FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19840 FILM NUMBER: 02598218 BUSINESS ADDRESS: STREET 1: 130 MAPLE DR N CITY: HENDERSONVILLE STATE: TN ZIP: 37075 BUSINESS PHONE: 6152648000 MAIL ADDRESS: STREET 1: 130 MAPLE DRIVE NORTH CITY: HENDERSONVILLE STATE: TN ZIP: 37075 10-K405 1 g75199e10-k405.txt SHOLODGE, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001 COMMISSION FILE NUMBER 0-19840 SHOLODGE, INC. (Exact name of registrant as specified in its charter) TENNESSEE 62-1015641 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 130 MAPLE DRIVE, NORTH, HENDERSONVILLE, TENNESSEE 37075 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (615) 264-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, NO PAR VALUE RIGHTS TO ACQUIRE SERIES A SUBORDINATED PREFERRED STOCK (Title of Class) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant on March 21, 2002, was approximately $11,500,000. The market value calculation was determined using the last sale price of registrant's common stock on March 21, 2002, as reported on The Nasdaq Stock Market, and assumes that all shares beneficially held by executive officers and directors of the registrant are shares owned by "affiliates," a status which each of the officers and directors individually disclaims. Shares of common stock, no par value, outstanding on March 21, 2002, were 5,118,778. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FROM WHICH PORTIONS ARE PART OF FORM 10-K INCORPORATED BY REFERENCE - ------------------------------------------------------------------------------- Part III Proxy Statement for registrant's annual meeting of shareholders to be held during the second quarter of fiscal 2002. Part IV Registration Statement on Form S-1, Commission File No. 33-44504. Part IV Registration Statement on Form S-3, Commission File No. 33-77910. Part IV Registration Statement on Form S-8, filed with the Commission on June 24, 1997 PART I ITEM 1. BUSINESS. GENERAL 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 were mid-scale, all-suites hotels located in Arizona, Colorado, Florida, Georgia, Indiana, Kansas, New Mexico, North Carolina, Ohio, Tennessee, Texas and Virginia. See "Sale of Leasehold Interests" below for a discussion of the transaction which transferred the operations of all of the 27 Sumner Suites hotels to Prime Hospitality Corp. ("Prime") effective with the close of business on July 9, 2000. As of December 30, 2001, the Shoney's Inn lodging system consisted of 70 Shoney's Inns containing 6,681 rooms of which 30 containing 3,612 rooms are owned or managed by the Company. Shoney's Inns are currently located in 16 states with a concentration in the Southeast. There are no plans to develop and operate Sumner Suites hotels in the near term. The Company is, however, developing this type of hotel for third parties, including new AmeriSuites hotels for Prime. Also, the Company retains ownership of the Sumner Suites registered trademark and may continue to develop hotels under this name in the longer term. Shoney's Inns operate in the upper economy limited-service segment and are designed to appeal to both business and leisure travelers, with rooms usually priced between $40 and $65 per night. The typical Shoney's Inn includes 60 to 120 rooms and, in most cases, meeting rooms. Although Shoney's Inns do not offer full food service, most offer continental breakfast and most of the Shoney's Inns are located adjacent or in close proximity to Shoney's restaurants. Management believes that its strategy of locating most of its Shoney's Inns in close proximity to free-standing Shoney's restaurants has given it a competitive advantage over many other limited-service lodging chains by offering guest services approximating those of full-service facilities without the additional capital expenditures, operating costs or higher room rates. The Company's operations have been supplemented by contract revenues from construction and development of hotels for third parties. Revenues from these activities have varied widely from period to period, depending upon whether the Company's construction and development activities were primarily focused on its own facilities or on outside projects. Construction revenues are recognized on the percentage of completion basis. The Company also franchises and manages Shoney's Inns, earning revenues from royalties, reservation services, and management services provided to the franchisees, and reservation services provided to other hotel chains and independent hotel operators. The Company also leases hotels and restaurants to others, earning rental income from these third party lessees. The Company was incorporated under the laws of the State of Tennessee in 1976. -1- 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 then owned by the Company. One of these construction projects was completed in October 2001, and the hotel opened on October 3, 2001. The other project was completed and the hotel opened on February 7, 2002. These projects were funded by the $13.9 million escrow money from the sale and any excess escrow funds were to be released to the Company. No excess funds were available to be released upon completion of the two hotels. The Company also gave Hospitality Properties Trust ("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 did not consent to the property exchange, then HPT could have required the Company to purchase the two properties. As of December 30, 2001, the completed hotel was being operated by the Company as an AmeriSuites hotel, subject to HPT's exchange option being exercised and consummated. The exchange subsequently occurred on March 14, 2002. The other hotel was completed and opened by the Company as an AmeriSuites hotel on February 7, 2002, and is being operated by the Company pending the exchange, which is expected to occur before the end of the Company's first fiscal quarter ending April 21, 2002. The Company further agreed to lease to Prime three other Sumner Suites hotels, which the Company owns. The 11-year lease provides for initial minimum annual rental payments of $2.9 million, increasing to $3.1 million if the lease is extended, and also provides for percentage rents based on hotel sales, as defined. Prime has converted all 27 of the Sumner Suites hotels to the AmeriSuites brand. The Company agreed to not operate any other all-suites hotels in competition with Prime within a defined geographic radius of each of the hotels being sold. This restriction will not prevent the Company from developing hotels for others in the restricted area or operating or franchising any Shoney's Inn brand hotel in the restricted area. The Company recognized a gain of $3.6 million, continued to defer gains of $4.1 million from previous sale/leaseback transactions on two of the hotels subject to possible exchange, and recognized extraordinary gains related to the early extinguishment of the debt securities received from Prime of $855,000, all before income tax. In addition, the Company agreed to construct one 124-room AmeriSuites hotel for Prime on a site presently owned by Prime at a construction and development price of $76,500 per room, less Prime's cost of the land. This construction was completed in the fourth quarter of 2001. The Company also agreed to provide reservation services to Prime for all of its existing hotels, for a fee based on a percentage of room revenue. -2- Reservation service fees are now included in franchising and management revenues. The reservation system technology was enhanced in order to accommodate Prime's requirements, and was ready to add these additional hotel properties in early 2001. However, Prime failed to commence use of the Company's reservation services as agreed, and on June 25, 2001, the Company filed an arbitration proceeding against Prime, seeking $20 million in monetary damages. The parties have selected an arbitrator, and the arbitration hearing has been scheduled to begin on April 15, 2002. GROWTH STRATEGY The Company's strategy is to increase cash flow and earnings by (i) increasing Revenue Per Available Room "REVPAR") in Company-owned inns while maintaining the Company's attractive room price/value relationships and controlling operating costs, (ii) expanding the Shoney's Inn system through the addition of new franchised units, (iii) utilizing the Company's experience in developing all-suite hotels to construct and develop hotels for others, and (iv) expanding the number of lodging facilities served by the Company's proprietary central reservation center ("InnLink"). Internal Growth. The Company seeks to increase cash flow and earnings from its existing hotels through increases in REVPAR while controlling operating costs. The Company seeks to increase REVPAR by increasing average daily room rates and supporting or increasing occupancy rates through targeted marketing and advertising strategies, employing promotional activities in local markets and capitalizing on the Company's proprietary central reservation system. In addition, the Company is committed to sustaining the quality of its properties through an ongoing renovation and maintenance program in order to increase REVPAR. The Company seeks to minimize costs throughout its operations primarily through the use of an in-house development and construction team and increased economies of scale in purchasing. Expansion of Shoney's Inn System. In the recent past the Company has focused on expanding the Shoney's Inn system principally through the addition of new franchises. Two franchised Shoney's Inns were opened in fiscal 2001, five hotels left the Shoney's Inn system, and two Company-owned Shoney's Inns were sold to franchisees. As of 2001 fiscal year-end, there were 70 Shoney's Inns (of which 12 are Company owned) with a total of 6,681 rooms. The Company targets existing Shoney's Inn franchisees, other hotel brand developers and contacts within the industry as potential franchisees for additional Shoney's Inns. Reservation Services. The Company provides reservation services to its Shoney's Inn franchisees and to other hotel chains and independent hotel operators. This call center ("InnLink") continues to expand its customer base, currently serving approximately 550 hotels as compared with approximately 100 hotels a year ago. The Company is continuing to aggressively market this service, capitalizing on its state of the art technology. Development of Additional All-Suite Hotels. Currently, no Sumner Suites hotels are owned, under construction, or planned for the near term. The Company has developed and opened two AmeriSuites hotels for Prime on sites that it owns. See "Sale of Leasehold Interests" above. The Company is developing and constructing all-suite hotels for third parties and expects to continue to do so in the immediate future. In addition to the strategies described above, the Company may from time to time investigate various alternatives to maximize shareholder value. -3- These alternatives could include, without limitation, 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. SHONEY'S INNS CONCEPT Shoney's Inns are limited-service hotels positioned in the upper economy segment to appeal to both business and leisure travelers and are located in 16 states in markets ranging from small towns to larger metropolitan areas. Shoney's Inns are generally located in proximity to interstate highways, major streets and highways providing convenient access to business establishments. Most of the Shoney's Inns are located adjacent or in close proximity to a Shoney's restaurant. Management believes that its strategy of locating its Shoney's Inns in close proximity to free-standing Shoney's restaurants gives it a competitive advantage over many other limited-service lodging chains. Daily room rates at Shoney's Inns range from $40 to $65 and vary depending upon a number of factors, including location, competition and type of room. For fiscal 2001, the average daily room rate for Company-owned Shoney's Inns was $50.89. Historically, the typical Shoney's Inn has been a two story, exterior corridor, brick veneer building with plate glass fronts, containing 100 to 125 rooms. New prototypes for Shoney's Inns include a four story, interior corridor, brick or stucco building containing 100 to 120 rooms as well as smaller prototype buildings containing 80 rooms. In some cases franchisees construct smaller Shoney's Inns. Each room is professionally decorated and is generally furnished with two double beds, a dresser, table and chairs and a color television. Amenities featured at most Shoney's Inns include swimming pools, meeting rooms, facsimile machine service and continental breakfast. The Company believes that Shoney's Inns provides its guests with quality accommodations at an attractive price/value relationship within the upper economy segment. HOTEL CONSTRUCTION AND DEVELOPMENT The Company's construction subsidiary has a full time staff who manage, supervise, control and perform the construction of the hotels being developed by the Company. Subcontractors are employed by the Company for most of the major construction components of a new hotel, including electrical and mechanical work. The Company intends to continue to build hotels for others. The Company believes that its construction experience and its relationship with many subcontractors will facilitate the effective development of additional hotels. The Company devotes significant resources to the identification and evaluation of potential sites for hotels. In the past, the Company has generally targeted mid-sized to larger metropolitan markets for locating Sumner Suites hotels. The Company has typically targeted markets with populations of 500,000 or more that have high levels of business development and multiple sources of room demand. The site selection process focuses on the competitive environment, including room and occupancy rates and proximity to business parks, office buildings, and other demand generators. The -4- Company's franchisees focus on sites for their Shoney's Inns in proximity to interstate highway access roads and major streets and highways providing convenient access to local business establishments and tourist attractions. The construction phase of a hotel generally requires six months after the selection and acquisition of the site and all approvals and permits have been obtained. The Company's experience in selection and acquisition of sites has varied and generally averages six months. The approval and permitting phase can occur simultaneously with site acquisition and generally requires three months. The entire development process generally ranges from 10 to 12 months, but may take longer. SALES AND MARKETING The Company directs marketing efforts on behalf of its Company-owned inns primarily to business travelers, whom management believes have represented the largest segment of its customers in recent years. Key to the success of the Shoney's Inn chain is the Franchise Service Manager Program. Currently three Franchise Service Managers ("FSM") provide sales direction and hands-on assistance to all inns with the goal of helping them achieve their property financial, guest service and operational goals. Each FSM takes personal ownership of the properties in his/her region and provides assistance through regular property visits and constant phone communications. The Director of Marketing directs the FSM program and oversees management of the national advertising fund, into which all Shoney's Inns pay 1% of revenue to support national marketing efforts such as the FSM program, the publications of the annual Vacation and Travel Directory and Group Tour Guide, participation in travel shows and targeted niche advertising. Programs designed to target the primary markets of business travelers and mature leisure travelers provide brand recognition. All Shoney's Inns participate in the Sho Business frequent business traveler program entitling members to receive the lowest available corporate rate as well as express check-in upon presentation of their membership card. Additionally the Company attempts to capitalize on the Shoney's brand name recognition in the over 50-age group with two programs designed for mature travelers. As an approved "Preferred Provider" of AARP, all Shoney's Inns provide members of AARP with a 15% discount off the standard room rate at all times. Our "Any Senior" program provides a 10% discount on the standard room rate to any traveler age 55 or older. Shoney's Inns are promoted to the group tour market through the annual publication of the Group Tour Guide, annual participation in three major tour operator marketplaces and by direct mail. In addition, InnLink provides a Group Tour Specialist to assist tour operators in contacting and booking Shoney's Inns. The non-professional group planner is targeted through advertisements in publications such as Reunions Magazine and through participation in travel shows targeting the non-professional planner. -5- The Company annually publishes a Shoney's Inn system directory showing for each inn, its address and telephone number, location as indicated on a locator map, a brief description of the facilities, services and amenities provided and other relevant information such as proximity to area attractions, businesses and restaurants. These directories are distributed in each Shoney's Inn and state travel centers and are provided directly to travel agents, sponsors of group tours, corporate travel departments and other selected potential customers. The Company also maintains a comprehensive on line directory with reservations booking capabilities at www.shoneysinn.com. Travel Agents. The Company has a policy of paying travel agents a commission, standard in the hotel industry, on all revenue booked by them. The Company, with respect to both owned and franchised Shoney's Inns, has joined the TACS-Lite Program administered by Perot Systems. TACS-Lite (Travel Agent Commission Settlement) is a program where each hotel property reports to the Company each week by fax (or by electronic transmission if capable) all of its room sales generated through travel agents. The Company in turn forwards this information to Perot Systems which automatically generates checks each month to travel agents across the country for the total commissions earned. The Company believes that travel agents are more likely to book guests into a Shoney's Inn knowing that their commissions will be paid by Perot Systems without the travel agent having to go to the trouble and expense of billing each separate location. LODGING OPERATIONS Hotel Management. Overall hotel operations are the responsibility of the Director of Hotel Operations. The hotels are further managed by regional managers, who directly supervise the general manager of each property. The general manager of each hotel is fully responsible for day-to-day operations and is compensated by salary and bonus systems which reward revenue and operating margin performance. Each general manager, in conjunction with senior management, develops the property's operating budget and is held accountable for meeting the goals and objectives of the hotel. Reservation System. The Company's proprietary central reservation system, InnLink, provides important support for the room reservation process for Shoney's Inns and is marketed to other chains as well. Other chains that contract with the Company for the service include Baymont Inns & Suites, Key West Inns and Wilson Inns & Hotels. InnLink operates 24 hours a day, 7 days a week. The InnLink system may be accessed by individual travelers as well as by travel agents, tour and group booking agents at 1-800-552-4667 for Shoney's Inns. Electronically, InnLink is accessed through numerous global distribution systems (e.g., SABRE Travel Information Network, Galileo International, Amadeus and WorldSpan). The reservation system includes specially designed hotel reservation software, with adequate capacity, and state of the art hardware and telecommunications devices. The Company believes that approximately 11% of room sales for Shoney's Inns are made through InnLink. Quality Control. To ensure quality and consistency, the Company regularly inspects each of its company owned and/or operated hotels and each Shoney's Inn in the -6- Shoney's Inn system for compliance with facility and service standards. Generally, in addition to its ongoing refurbishment activities, the Company fully renovates each of the Company-owned Shoney's Inns after approximately seven years of operation. Training. The Company utilizes the services of an "opening team" to assist with hiring and training new staff and opening new Company-owned hotels. The opening team trains local hotel personnel in front desk operations, operational policies, hotel accounting and cash handling procedures, record-keeping, housekeeping and laundry, maintenance and repair, marketing, personnel management, purchasing, quality assurance and sales. Sales training includes a team of direct sales personnel that assists the local staff in the actual pre-selling of rooms. An opening team generally remains on site for one to four weeks depending on the prior experience of the local general manager. FRANCHISE OPERATIONS Franchise Sales. The Company markets the Shoney's Inn franchise principally to existing Shoney's Inn franchisees, other hotel brand developers and other prospects known through management's contacts in the lodging industry. The Company employs one full-time licensed franchise salesman. The Company also markets franchises through advertisements in trade publications and participation in trade shows and franchising conventions. Management believes that the Company attracts potential new franchisees by offering a comparable level of franchisee support services at a lower price than its competitors. Management periodically monitors the initial fee, royalty fee, advertising fee, reservation fee and other charges imposed by other franchisors with whom the Company competes and believes that the fees charged by the Company are competitive and, in most cases, lower than such other franchisors. Fees. Under the standard Shoney's Inn franchise arrangement offered to prospective franchisees, a potential franchisee pays a $2,500 application fee. Upon approval of the application, the Company and the franchisee enter into a 20-year license agreement, and the franchisee generally pays a license fee equal to the greater of $250 per room or $15,000. The application fee is applied against the license fee. Under the standard Shoney's Inn franchise arrangement offered to prospective franchisees, the franchisee pays monthly royalties of 3.5% of the licensed hotel's gross sales during the term of the license agreement. Additionally, a marketing cooperative fee of 1% of gross sales and a fee for participation in the Shoney's Inn central reservation system of 1% of gross sales are charged. Franchisee Services. Management believes that the support the Company offers to franchisees is a significant factor in determining its success as a franchisor and that the Company's successful record as a Shoney's Inn builder, owner and operator evidences valuable experience and abilities which can enhance the franchisee support function. As franchisor, the Company draws on its own operational experience to assist franchisees. Once a Shoney's Inn is constructed, the Company requires the franchisee to send the site general manager to a management training class conducted by the Company -7- covering topics including human resources, sales and marketing, yield management and cost controls. Currently the Company does not charge for the training program but reserves the right to do so in the future. The Company inspects every Shoney's Inn at least three times a year, at least two of which are unannounced, through its Quality Standards and Compliance program, using trained field representatives. The Company encourages franchisees to renovate each of the Shoney's Inns after approximately seven years of operations, in the same manner that the Company renovates its own hotels. The Company offers to provide management services to Shoney's Inn franchisees pursuant to contractual arrangements. The Company's fee for these services is a percentage of the managed hotel's gross revenues. Currently, the Company manages eighteen hotels under contract arrangement. LICENSE AGREEMENT WITH SHONEY'S Under the License Agreement with Shoney's, Inc., the Company acts as exclusive franchisor of Shoney's Inns and has certain rights to use and to license the use of the service marks "Shoney's Inn" and "Shoney's Inn & Suites" in connection with lodging operations. Under the License Agreement, Shoney's retains certain rights, including the right to approve the styles, shapes, colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks are displayed, the nature and extent of on-site food and beverage service and the terms of franchise agreements (other than the maximum fees and other financial terms). Further, Shoney's retains the right to terminate the License Agreement under limited circumstances, including the bankruptcy of the Company, the failure to comply with the terms of the License Agreement and the failure to desist from conduct likely to impair Shoney's goodwill and reputation. Prior to October 25, 1996, the License Agreement entitled Shoney's to receive a portion of the franchise fees collected by the Company. Shoney's right to receive such fees was terminated on October 25, 1996. LODGING INDUSTRY Smith Travel Research divides lodging chains into various segments based on price. Shoney's Inns are included in the economy segment. Sumner Suites were included in the mid-scale (without food and beverage) segment. The following tables illustrate certain comparative information regarding REVPAR and its components for the years indicated:
AVERAGE AVERAGE DAILY REVPAR OCCUPANCY RATE ROOM RATE (1) ------ -------------- ------------- 1999 2000 2001 1999 2000 2001 1999 2000 2001 ------ ------ ------ ---- ---- ---- ------ ------ ------ Industry-wide $51.42 $54.13 $50.99 63.3% 63.5% 60.1% $81.27 $85.24 $84.85 Economy segment 28.77 30.68 30.47 58.1 58.5 56.2 49.52 52.44 54.22 Mid-scale (w/o food and beverage) segment 41.81 43.76 42.78 65.1 65.0 62.3 64.22 67.32 68.67 All Shoney's Inns 27.23 25.32 24.56 54.1 50.6 49.9 50.36 50.00 49.26 Company-owned Shoney's Inns 24.24 23.41 24.88 48.3 46.5 48.9 50.13 50.31 50.89 All Sumner Suites (2) 43.63 47.76 N/A 56.3 61.8 N/A 77.54 77.32 N/A
-8- (1) Room revenues divided by the number of rented rooms. (2) Year 2000 represents only the first 28 weeks of the fiscal year to the date of sale of the leasehold interests to Prime. No Sumner Suites were operated in 2001. Source: Smith Travel Research, Standard Historical Trend Report for years ended 1999, 2000 and 2001, for industry wide, economy, and mid-scale (w/o food and beverage), and the Company's internal data for all Shoney's Inns and Sumner Suites statistics. COMPETITION The lodging industry is highly competitive. In franchising the Shoney's Inn system and managing its own lodging facilities, the Company encounters competition from numerous lodging companies, many of which have greater industry experience, name recognition, and financial and marketing resources than the Company. While the actual competition for individual lodging facilities varies by location, the primary competition for Shoney's Inns includes lodging chains such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns and Travelodge. The Company's Sumner Suites hotels experienced competition from chains such as Embassy Suites, Residence Inn, Courtyard by Marriott, Quality Suites, AmeriSuites, Comfort Suites, and Springhill Suites. Each of the Company's hotels is located in a developed area that includes competing lodging facilities, and the Company expects that most of its future hotels which it constructs will be located in similar areas. Management believes that the principal competitive factors in its lodging operations are room rates, quality of accommodations, name recognition, supply and availability of alternative lodging facilities, service levels, reputation, reservation systems and convenience of location. In its franchising operations, the principal competitive factors are fee structure and support services. Management further believes that the Company is presently competitive in all these respects. GOVERNMENT REGULATION The Company is subject to various federal, state and local laws, regulations and administrative practices affecting its business. The Company's lodging operations must comply with provisions relating to health, sanitation and safety standards, equal employment, minimum wages, building codes and zoning ordinances, and licenses to operate lodging facilities. The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission ("FTC") Rules on Franchising. The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. Federal and state environmental regulations are not expected to have a material effect on the Company's operations, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of lodging facilities and add to their cost. A significant portion of the Company's personnel are paid at rates related to federal minimum wages and, accordingly, increases in the minimum wage could adversely affect the Company's operating results. -9- The Americans with Disabilities Act (the "ADA") prohibits discrimination on the basis of disability in public accommodations and employment. The ADA became effective as to public accommodations in January 1992 and as to employment in July 1992. The Company currently designs its lodging facilities to be accessible to the disabled and believes that it is in substantial compliance with all current applicable regulations relating to accommodations for the disabled. The Company intends to comply with future regulations relating to accommodating the needs of the disabled. SERVICE MARKS The Company has the right to use the "Shoney's Inn" and "Shoney's Inn & Suites" service marks in its lodging operations under its License Agreement with Shoney's (See "License Agreement with Shoney's" above). The "Shoney's Inn" and "Shoney's Inn & Suites" marks may not be used in certain limited areas in southern and western Virginia and in northeastern Tennessee; however, the Company does not believe that these limitations are material to its present business or its expansion strategy. The Company believes that its ability to use the Shoney's marks is material to its business. The Company has registered the service mark "InnLink," which it uses in connection with its reservation system, with the United States Patent and Trademark Office. The Company has registered the service mark "Sumner Suites" with the United States Patent and Trademark Office. INSURANCE The Company maintains general liability insurance and property insurance for all its locations and operations, as well as specialized coverage, including guest property and liquor liability insurance, in connection with its lodging business. The costs of insurance coverage and the availability of liability insurance coverage have varied widely in recent years. While the Company believes that its present insurance coverage is adequate for its current operations, there can be no assurance that the coverage is sufficient for all future claims or will continue to be available in adequate amounts or at a reasonable cost. EMPLOYEES As of December 30, 2001 the Company had approximately 550 employees, including approximately 140 in the Company's corporate headquarters. The company's employees are not represented by a labor union. The Company considers its relationships with employees to be good. ITEM 2. PROPERTIES. The Company's corporate headquarters, owned by the Company, is located in Hendersonville, Tennessee and contains approximately 42,000 square feet of space including storage and employee cafeteria. Management believes that its corporate headquarters building contains sufficient space to accommodate the Company's currently anticipated needs. Eleven of the twelve Company-owned Shoney's Inns, the three AmeriSuites hotels -10- leased to another hotel operator, and the Company-owned Baymont Inn & Suites are located on sites owned by the Company either directly or through subsidiaries. The remaining Shoney's Inn is located on a site that is leased pursuant to a long-term lease involving both the land and improvements. ITEM 3. LEGAL PROCEEDINGS. The Company is subject to litigation from time to time in the ordinary course of its business. The Company is not aware of any legal action pending or threatened against it that would have a material impact on the consolidated financial position or results of operations of the Company. On June 25, 2001 the Company filed an arbitration proceeding against Prime Hospitality Corporation ("Prime") based on Prime's failure to commence use of the Company's reservation services for a fee as agreed by Prime in an Agreement for Reservation Services dated July 9, 2000. The Company is seeking $20 million in monetary damages. The parties have selected an arbitrator, and the arbitration hearing has been scheduled to begin on April 15, 2002. There is no assurance that the Company will be successful in the proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. No matters were submitted to a vote of security holders in the fourth quarter of 2001. -11- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is traded in the over-the-counter market and is quoted on The Nasdaq Stock Market ("NASDAQ") under the symbol "LODG." The prices set forth below reflect the high and low sales prices for the Company's Common Stock as reported by NASDAQ for the periods indicated.
FISCAL 2000 HIGH LOW ----------- ---- --- First Quarter 5.13 3.47 Second Quarter 4.25 3.00 Third Quarter 5.69 3.25 Fourth Quarter 6.00 4.63 FISCAL 2001 HIGH LOW ----------- ---- --- First Quarter 5.38 4.63 Second Quarter 5.78 4.75 Third Quarter 6.25 3.83 Fourth Quarter 6.00 3.83 FISCAL 2002 HIGH LOW ----------- ---- --- First Quarter (through March 21, 2002) 6.00 5.70
On March 21, 2002, the last reported sale price for the Company's Common Stock as reported by NASDAQ was $5.75 per share. As of March 21, 2002, there were approximately 48 holders of record of the Company's Common Stock and approximately 650 beneficial owners. The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain its earnings to finance future development of its business, and therefore does not anticipate paying any cash dividends in the foreseeable future. The Company's primary revolving credit agreement prohibits the payment of dividends without the lender's consent. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth on the following page as of and for each of the five fiscal years in the period ended December 30, 2001 have been derived from the Company's audited Consolidated Financial Statements. The Consolidated Financial Statements for each of the three fiscal years in the period ended December 30, 2001, which have been audited by independent auditors, are included elsewhere in this Report. The information set forth on the following page should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the related notes thereto included elsewhere in this Report. -12- SHOLODGE, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (amounts in thousands except for per share data)
FISCAL YEAR ENDED DEC.28, DEC.27, DEC.26, DEC.31, DEC.30, 1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- REVENUES: Hotel $ 71,945 $ 69,240 $ 66,188 $ 46,431 $ 13,677 Franchising and management 3,164 3,119 4,152 3,606 3,971 Construction and development -- 81 11,234 12,037 27,480 Rent 442 532 483 1,955 3,468 Other income 395 30 360 49 337 ---------- ---------- ---------- ---------- ---------- Total revenues 75,946 73,002 82,417 64,078 48,933 COSTS AND EXPENSES: Hotel 42,988 44,934 46,282 34,485 11,015 Franchising and management 2,301 2,393 2,420 2,460 2,192 Construction and development -- 71 9,826 12,571 25,692 Rent expense 1,991 9,838 13,530 10,333 582 General and administrative 3,953 6,358 6,342 5,019 5,927 Depreciation and amortization 10,376 8,012 7,101 5,786 4,661 ---------- ---------- ---------- ---------- ---------- Total expenses 61,609 71,606 85,501 70,654 50,069 ---------- ---------- ---------- ---------- ---------- Operating earnings (loss) 14,337 1,396 (3,084) (6,576) (1,136) ---------- ---------- ---------- ---------- ---------- Gain on sale of property and leasehold interests 3,819 20,511 15,002 4,901 3,762 Interest expense (11,298) (10,415) (12,136) (10,486) (8,454) Interest income 1,762 4,949 6,182 6,464 6,377 ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes, minority interests, and extraordinary items 8,620 16,441 5,964 (5,697) 549 Income taxes (2,259) (6,581) (1,909) 1,777 (145) Minority interests in earnings of consolidated subsidiaries & partnerships (173) (647) (1,910) (57) (58) ---------- ---------- ---------- ---------- ---------- Earnings (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting policy 6,188 9,213 2,145 (3,977) 346 Discontinued operations: Gain on disposal of discontinued business segment, net of income tax effect 526 -- -- -- -- Extraordinary gains (losses), net of income tax benefit (186) (1,067) 2,394 4,555 566 Cumulative effect of change in accounting policy, net of income tax effect (1,164) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net earnings $ 5,364 $ 8,146 $ 4,539 $ 578 $ 912 ========== ========== ========== ========== ==========
-13- Earnings per common share Basic: Earnings (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting policy $ 0.75 $ 1.12 $ 0.33 $ (0.73) $ 0.06 ======= ========= ======== ========= ========= Net Earnings $ 0.65 $ 0.99 $ 0.70 $ 0.11 $ 0.16 ======= ========= ======== ========= ========= Diluted: Earnings (loss) from continuing operations before extraordinary items and cumulative effect of a change in accounting policy $ 0.74 $ 1.07 $ 0.32 $ (0.72) $ 0.06 ======= ========= ======== ========= ========= Net Earnings $ 0.64 $ 0.95 $ 0.67 $ 0.10 $ 0.16 ======= ========= ======== ========= ========= Weighted average common shares outstanding Basic 8,245 8,191 6,518 5,472 5,465 ======= ========= ======== ========= ========= Diluted 8.245 8,611 6,745 5,554 5,530 ======= ========= ======== ========= ========= Balance sheet data: Working capital $54,120 $ (19,109) $ 12,655 $ 7,964 $ (3,369) Total assets 299,877 295,001 270,314 204,631 206,587 Long-term debt and capitalized leases 154,638 128,946 125,551 94,169 89,701 Shareholders' equity 95,352 98,099 90,878 90,322 89,273
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company derives revenue primarily from hotel room sales at its Sumner Suites hotels (through July 9, 2000) and Company-owned Shoney's Inn hotels. The Company also receives management fees for services it performs for eighteen franchised Shoney's Inns. The Company derives additional revenue from franchise fees it receives as the exclusive franchiser of Shoney's Inns. The Company's hotel operations have been supplemented by contract revenues from construction and development of hotels for third parties. Revenues from these activities have varied widely from period to period, depending upon whether the Company's construction and development activities were primarily focused on its own facilities or on outside projects. Construction revenues are recognized on the percentage of completion basis. The Company's hotel operations have historically been seasonal in nature, reflecting higher occupancy rates during spring and summer months, which may be expected to cause fluctuations in the Company's quarterly revenues and earnings from hotel operations. The Company's fiscal year ends on the last Sunday of the calendar year. -14- RESULTS OF OPERATIONS The following table sets forth, for the periods indicted, the percentage relationship of certain items of revenue and expense to the total revenues of the Company.
Fiscal Year Ended ------------------------------------------------- Dec.26, Dec.31, Dec.30, 1999 2000 2001 ---- ---- ---- Revenues: Hotel 80.3% 72.5% 28.0% Franchising and management 5.0% 5.6% 8.1% Construction and development 13.6% 18.8% 56.1% Rent income 0.6% 3.1% 7.1% Other income 0.4% 0.1% 0.7% ---- ---- ---- Total revenues 100.0% 100.0% 100.0% ------ ------ ------ Costs and expenses: Hotel 56.2% 53.8% 22.5% Franchising and management 2.9% 3.8% 4.5% Construction and development 11.9% 19.6% 52.5% Rent expense, net 16.4% 16.1% 1.2% General and administrative 7.7% 7.8% 12.1% Depreciation and amortization 8.6% 9.0% 9.5% ---- ---- ---- Total expenses 103.7% 110.3% 102.3% ------ ------ ------ Operating (loss) (3.7)% (10.3)% (2.3)% ---- ---- ---- Gain on sale of property 18.2% 7.6% 7.7% Interest expense (14.7)% (16.4)% (17.3)% Interest income 7.5% 10.1% 13.0% ---- ---- ---- Earnings (loss) before income taxes, minority interests and extraordinary items 7.2% (8.9)% 1.1% Income taxes (2.3)% 2.8% (0.3)% Minority interests in earnings of consolidated subsidiaries and partnerships (2.3)% (0.1)% (0.1)% ---- ---- ---- Earnings before extraordinary items 2.6% (6.2)% 0.7% Extraordinary gains, net of income tax benefit 2.9% 7.1% 1.2% ---- ---- ---- Net earnings 5.5% 0.9% 1.9% ==== ==== ====
FOR THE FISCAL YEARS ENDED DECEMBER 30, 2001 AND DECEMBER 31, 2000 For the fiscal year ended December 30, 2001, total revenues decreased 23.6% to $48.9 million from $64.1 million for the fiscal year ended December 31, 2000. The Company owned and operated two hotel brands (Sumner Suites and Shoney's Inns) until mid-2000, and primarily one brand (Shoney's Inns) in the last two quarters of - 15 - 2000 and during fiscal 2001. The Company owned and operated one AmeriSuites hotel and one Baymont Inn & Suites beginning in late 2001. Revenues from hotel operations in fiscal 2001 decreased by 70.5% to $13.7 million from $46.4 million for fiscal year 2000. For the 12 hotels opened for all of both years (same hotels), average daily room rates in 2001 decreased 0.7% to $51.17 from $51.51 in 2000, and average occupancy rates increased from 44.5% in 2000 to 48.5% in 2001, resulting in an increase in same hotel revenues per available room (RevPAR) of 8.4%, from $22.90 in 2000 to $24.83 in 2001. RevPAR for all Company-owned Shoney's Inns increased by 6.3% in 2001 from 2000, from $23.41 to $24.88. The increases in the Shoney's Inns RevPAR were due primarily to the improved economic conditions in the Houston, Texas, market area where five of the Company-owned Shoney's Inns are located. The remaining (non-same) hotels contributed $1.0 million to hotel revenues in 2001 compared with $34.7 million in 2000. The $1.0 million revenues from non-same hotels in 2001 was from two hotels in which the Company sold its interests in the first quarter of 2001, one new hotel which opened in the third quarter of 2001, and one hotel which was acquired in the fourth quarter of 2001. The $34.7 million revenues from non-same hotels in 2000 was from 28 hotels in which the Company sold its interests in the second quarter of 2000 and the two hotels sold in the first quarter of 2001. Franchising and management revenues in fiscal 2001 increased by 10.1% from 2000, to $4.0 million in 2001 from $3.6 million in 2000. In fiscal 2001 and 2000, initial franchise and franchise termination fees totaled $314,000 and $615,000, respectively. Exclusive of these non-recurring franchise revenues, the remaining franchising and management revenues increased by $666,000, or 22.3%, from 2000 to 2001, including an increase in management fee revenues of $891,000 which was due entirely to 17 new management contracts which became effective in April 2001. At the end of fiscal 2001 there were 58 franchised Shoney's Inns in operation compared with 59 at the end of fiscal 2000; this decrease was due to five terminations, two new franchised Inns added, and two Company-owned Inns sold to franchisees during 2001. As of December 30, 2001, there were no franchised Shoney's Inns under construction. Revenues from construction and development activities in 2001 were $27.5 million compared with $12.0 million in fiscal 2000. The 2001 revenues earned were primarily from four hotel construction contracts being performed for third parties, two of which were still in progress at year-end, while 2000 revenues earned were from three hotel construction contracts being performed for third parties, two of which were still in progress at year-end. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract work and the timing of those projects. Rent revenue was $3.5 million in 2001, compared with $2.0 million in 2000. The entire $1.5 million increase was due to the lease of three hotels effective July 10, 2000, to Prime Hospitality Corp. These three hotels had been previously operated by the Company. Other income increased by $288,000 in 2001 from 2000. Other income can vary widely from period to period due to the nature of this income and its varied sources. Hotel operating expenses for fiscal 2001 decreased by $23.5 million, or 68.1%, to $11.0 million from $34.5 million in 2000. The sale of the Company's interest in one Shoney's Inn and all 27 of its Sumner Suites hotels in second quarter 2000 and the sale of - 16 - two Shoney's Inns in the first quarter of 2001 accounted for a decrease of $24.2 million in hotel operating expenses from 2000 to 2001. Hotel operating expenses on the two hotels added in late 2001 were $230,000. Hotel operating expenses on the 12 same-hotels increased by $514,000, or 5.3%, in 2001 over 2000. The operating expenses as a percentage of operating revenues for this activity increased from 74.3% in 2000 to 80.5% in 2001. Operating expenses as a percentage of operating revenues on the 12 same-hotels decreased from 82.9% to 81.0% from 2000 to 2001. Increases in hotel operating expenses on same hotels were primarily in the areas of payroll-related costs, utilities, and insurance. Franchising and management operating expenses decreased by $268,000, or 10.9%, from 2000 to 2001. This was due primarily to reduced central reservation center expenses caused by the cancellation of reservation services in November of 2000 on the 27 hotels of which the Company's operating interests had been sold in mid-2000. Construction and development costs in 2001 were $25.7 million compared with $12.6 million in 2000. The costs incurred were directly related to the revenues earned from the third party construction contracts in progress in 2001 compared with the third party construction contracts in progress in 2000, two of which were still in progress at year-end 2000 and two of which were still in progress at year-end 2001. Rent expense decreased by $9.8 million, or 94.4%, in 2001 from 2000. The decrease was due to (1) the Company's sale of its leasehold interest in 24 of its Sumner Suites hotels on July 9, 2000, which had previously been sold and leased back, (2) the lease of another Sumner Suites hotel on July 9, 2000, to a tenant who assumed a land lease on that hotel, and (3) the sale of a Shoney's Inn in June, 2000, on which the purchaser assumed the existing land lease. As of December 30, 2001, the Company was obligated on only one hotel lease; in 2001, rent expense on this lease was $582,000. General and administrative expenses increased by $909,000, or 18.1%, from 2000 to 2001. The increase was due primarily to increased insurance costs, professional fees, and travel expenses. Depreciation and amortization expenses decreased by $1,125,000, or 19.4%, from 2000 to 2001. This decrease was due primarily to the sale and leaseback of four hotels in May of 2000, combined with the sale of another hotel in June of 2000 and two hotels in April of 2001. The Company opened one new Company-owned hotel in October of 2001 and acquired one hotel in November of 2001. One new hotel was under construction at the end of the year. The gain recognized on the sale of property in 2001 was $3.8 million compared with $4.9 million in 2000. The gain of $3.8 million in 2001 included $3.6 million from the Company's sale of one hotel and three restaurants. Another hotel was sold in 2001, but the gain was deferred and is being recognized under the installment method of accounting until full accrual accounting is warranted. Approximately $175,000 of the gain on the sale of two of the restaurants was also deferred and is being recognized under the installment method of accounting. The $4.9 million recognized in 2000 included $3.6 million from 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 - 17 - 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 and $299,000 was recognized in first quarter from the recognition of previously deferred gains related to the sale of two Shoney's Inns in 1998. The remaining $207,000 gain in 2000 was from the sale of land held for resale and miscellaneous real estate. Interest expense decreased by $2.0 million, while interest income decreased by $86,000 from 2000 to 2001, for a total decrease of $2.1 million in net interest expense. The decrease in interest expense resulted primarily from interest expense reductions from the extinguishments of debt from the repurchase of $45.8 million of the Company's outstanding subordinated debt in the open market and in privately negotiated transactions beginning October 1, 1999 and continuing through 2001, of which $33.2 million of these extinguishments occurred in 2000 and 2001. Additional debt reductions, including a paydown of $7.5 million of the Company's outstanding debt using a portion of the $38.4 million gross proceeds from the sale-leaseback of four hotels in May of 2000, further reduced interest expense. Partially offsetting these reductions in interest expense was interest incurred to the Internal Revenue Service due to a tax payment deficiency for 1997, assessed based upon an audit by the Service (see Footnote 9 to the consolidated financial statements). The decrease in interest income in 2001 from 2000 was due primarily to the net effect of a reduction in the interest rate on 15 mortgage notes receivable in mid-2001, and an increase in interest earned on mortgage notes receivable from the seller-financed portion of the proceeds of the sale of one hotel in June 2000 and two hotels in April 2001. The extraordinary gains from early extinguishments of debt in 2001 and 2000 were the result of the repurchase of $3.4 million and $29.8 million, respectively, of the Company's previously issued subordinated debt at a discount from face value, net of the write-off of related unamortized deferred financing costs. FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999 For the fiscal year ended December 31, 2000, total revenues decreased 22.3% to $64.1 million from $82.4 million for the fiscal year ended December 26, 1999. The Company owned and operated two hotel brands - Sumner Suites and Shoney's Inns. Revenues from hotel operations in fiscal 2000 decreased by 29.9% to $46.4 million from $66.2 million for fiscal year 1999. For the 14 hotels opened for all of both years (same hotels), average daily room rates in 2000 decreased 0.2% to $50.43 from $50.55 in 1999, and average occupancy rates decreased from 47.9% in 1999 to 46.6% in 2000, resulting in a decrease in same hotel revenues per available room (RevPAR) of 2.9%, from $24.22 in 1999 to $23.52 in 2000. RevPAR for all Company-owned Shoney's Inns declined by 3.4% in 2000 from 1999, from $24.24 to $23.41. The decreases in the Shoney's Inns RevPAR were due primarily to increased competition from new hotels. The remaining (non-same) hotels contributed $32.1 million to hotel revenues in 2000 compared with $51.8 million in 1999. The $32.1 million revenues from non-same hotels in 2000 was from 28 hotels in which the Company sold its interests in the second quarter of 2000. The $51.8 million revenues from non-same hotels in 1999 was from 24 of those 28 hotels which were open for all of 1999 and 4 of them which opened during the year 1999. The 27 Sumner Suites hotels' RevPAR increased by 9.5% in 2000 over 1999, from $43.63 to $47.76. - 18 - Franchising and management revenues in fiscal 2000 decreased by 13.1% from 1999, to $3.6 million in 2000 from $4.2 million in 1999. A settlement agreement entered into between the Company and an ex-franchisee whereby the ex-franchisee agreed to pay the Company $575,000 in cash and $200,000 each year for the next three years, resulted in the recognition of $1.2 million in franchising revenues in 1999. In fiscal 1999 and 2000, other termination fees totaled $13,000 and $560,000, respectively. Exclusive of these non-recurring franchise revenues, the remaining franchising and management revenues increased by $70,000, or 2.3%, from 1999 to 2000. At the end of fiscal 2000 there were 59 franchised Shoney's Inns in operation compared with 61 at the end of fiscal 1999; this decrease was due to seven terminations compared with five additions during 2000. As of December 31, 2000, there were no franchised Shoney's Inns under construction. Revenues from construction and development activities in 2000 were $12.0 million compared with $11.2 million in fiscal 1999. The 2000 revenues earned were primarily from three hotel construction contracts being performed for third parties, two of which were still in progress at year-end, while 1999 revenues earned were from three hotel construction contracts being performed for third parties, one of which was still in progress at year-end. Revenues from construction and development can vary widely from period to period depending upon the volume of outside contract work and the timing of those projects. Rent revenue was $2.0 million in 2000, compared with $483,000 in 1999. The entire $1.5 million increase was due to the lease of three hotels effective July 10, 2000, to Prime Hospitality Corp. These three hotels had been previously operated by the Company. Other income decreased by $311,000, or 86.4%, in 2000 from 1999. Other income can vary widely from period to period due to the nature of this income and its varied sources. Hotel operating expenses for fiscal 2000 decreased by $11.8 million, or 25.5%, to $34.5 million from $46.3 million in 1999. The sale of the Company's interest in one Shoney's Inn and all 27 of its Sumner Suites hotels in second quarter 2000 accounted for a decrease of $12.2 million in hotel operating expenses from 1999 to 2000. Hotel operating expenses on the 14 same-hotels increased by $433,000, or 3.9%, in 2000 over 1999. The operating expenses as a percentage of operating revenues for this activity increased from 69.9% in 1999 to 74.3% in 2000. Operating expenses as a percentage of operating revenues on the 14 same hotels increased from 76.4% to 79.8% from 1999 to 2000. Increases in hotel operating expenses on same hotels were primarily in the areas of payroll-related costs and regional general and administrative expenses. Franchising and management operating expenses increased by $40,000, or 1.7%, from 1999 to 2000. Construction and development costs in 2000 were $12.6 million compared with $9.8 million in 1998. The costs incurred were directly related to the revenues earned from the three third party construction contracts in each of the two years, one of which was still in progress at year-end 1999 and two of which were still in progress at year-end 2000. Rent expense decreased by $3.2 million, or 23.6%, in 2000 from 1999. The decrease was due to (1) the Company's sale of its leasehold interest in 24 of its - 19 - Sumner Suites hotels on July 9, 2000, which had previously been sold and leased back, (2) the lease of another Sumner Suites hotel on July 9, 2000, to a tenant who assumed a land lease on that hotel, and (3) the sale of a Shoney's Inn in June, 2000, on which the purchaser assumed the existing land lease. As of December 31, 2000, the Company was obligated on only one hotel lease; in 2000, rent expense on this lease was $625,000. General and administrative expenses declined by $1.3 million, or 20.9%, from 1999 to 2000. Excluding expensing of pre-development costs for sites no longer deemed probable of development in the amount of $623,000 in 1999, general and administrative expenses declined by $700,000, or 12.2%, from 1999 to 2000. This was due primarily to reductions in general and administrative expenses made possible by the Company's sale of its interests in 28 hotels in mid-2000. Depreciation and amortization expenses decreased by $1.3 million, or 18.5%, from 1999 to 2000. This decrease was due primarily to the sale and leaseback of four hotels in May of 2000, combined with the sale of another hotel in June of 2000. The Company opened no new Company-owned hotels in 2000, and none were under construction at the end of the year. Interest expense decreased by $1.7 million, while interest income increased by $281,000 from 1999 to 2000, for a decrease of $2.0 million in net interest expense. The decrease in interest expense resulted primarily from interest expense reductions from the extinguishments of debt from the repurchase of $42.4 million of the Company's outstanding subordinated debt in the open market and in privately negotiated transactions beginning October 1, 1999 and continuing through 2000. The increase in interest income in 2000 over 1999 was due primarily to interest earned at a higher interest rate on mortgage notes receivable from the sale of 16 hotels in third quarter 1998, and to interest earned on the seller-financed portion of the proceeds of the sale of one hotel in June 2000. The gain recognized on the sale of property in 2000 was $4.9 million compared with $15.0 million in 1999. The $4.9 million recognized in 2000 included $3.6 million from 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 and $299,000 was recognized in first quarter from the recognition of previously deferred gains related to the sale of two Shoney's Inns in 1998. The remaining $207,000 gain in 2000 was from the sale of land held for resale and miscellaneous real estate. $11.9 million of the $15.0 million recognized in 1999 was due to the recognition of previously deferred gains related to four of the 16 hotels sold in 1998, which was being recognized on the installment method of accounting. The other $3.1 million was from the sale in 1999 of land held for resale. Minority interests in earnings of consolidated subsidiaries and partnerships decreased by $1.9 million from 1999 to 2000. The 1999 minority interests included $1.8 million which represented the 40% minority interest in $4.6 million of the gain on sale of property in 1998 which was recognized in 1999. - 20 - The extraordinary gains from early extinguishments of debt in 2000 and 1999 were the result of the repurchase of $29.8 million and $12.6 million, respectively, of the Company's previously issued subordinated debt at a discount from face value, net of the write-off of related unamortized deferred financing costs. CRITICAL ACCOUNTING POLICIES AND PRACTICES The Company has prepared its financial statements in conformity with accounting principles generally accepted in the United States, and these statements necessarily include some amounts that are based upon informed judgments and estimates of management. The Company's significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements. The Company's critical accounting policies are subject to judgments and uncertainties which affect the application of such policies. The Company's financial position or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from reported amounts, adjustments are made in subsequent periods to reflect more current information. The Company's critical accounting policies and practices include impairment of long-lived assets, collectibility of accounts and notes receivable, percentage of completion accounting for construction contracts, and income taxes. The following is a brief discussion of these more significant accounting policies and practices used by the Company. Impairment of Long-Lived Assets: The Company records impairment losses on long-lived assets used in operations and intangibles when indicators of impairment are present and the undiscounted cash flows related to those assets are less than their carrying amounts. The Company records impairment losses on long-lived assets under development or held for sale when indications of impairment are present and the estimated fair value less costs to sell is less than the carrying amount. The Company's impairment review process relies on management's judgment regarding the indicators of impairment, the remaining lives of assets used to generate assets' undiscounted cash flows, and the fair value of assets at a particular point in time. Under different assumptions or conditions, the asset impairment analysis may yield a different result, which would alter the gain or loss on the eventual disposition of the asset. Collectibility of Accounts and Notes Receivable: The Company continuously monitors collections from its customers and debtors under notes receivable and maintains allowances for doubtful accounts based upon historical experience and any specific customer collection issues that are identified. While such credit losses have historically been within the Company's expectations, there can be no assurance that the historical experience will continue at the same level in the future. Notes receivable are generally secured by first mortgages on the underlying assets. The majority of these are from a group of companies that are affiliated with one another, creating a concentration of credit risk. In the event the fair values of the underlying assets were to be less than the balances of the first mortgage notes (which are cross-defaulted and cross-collateralized), the notes receivable could be under-collateralized. Percentage of Completion Accounting for Construction Contracts: Construction and development revenues earned on fixed price contracts are recognized based upon the - 21 - percentage of completion method, measured by the percentage of cost incurred to total estimated cost for each contract. The total estimated cost of each contract involves the use of various estimating techniques to project costs of completion. These percentage of completion and cost estimates involve various assumptions and projections relative to the outcome of future events, such as price and timing of construction materials, labor costs, and overhead costs. The Company reevaluates its contract cost estimates periodically and reflects changes in estimates in the current and future periods. Income Taxes: The Company uses the liability method to account for income taxes. The preparation of consolidated financial statements involves estimating the Company's current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. An assessment of the recoverability of the deferred tax assets is made, and a valuation allowance may be established based upon this assessment. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows provided by operating activities were $8.0 million in 2001, compared with cash flows used in operating activities of $1.2 million in 2000 and $22.6 million in 1999. Earnings (losses) before extraordinary items were $346,000 in 2001, $(4.0) million in 2000, and $2.1 million in 1999. Depreciation and amortization was $4.7 million, $5.8 million, and $7.1 million in 2001, 2000, and 1999, respectively, the declines each year being the result of the sale of properties in 1999, 2000, and 2001, in excess of new properties being opened during these years. The Company recognized $3.8 million, $4.9 million, and $15.0 million from gains on sale of property during 2001, 2000 and 1999, respectively, of which $299,000 and $11.9 million during 2000 and 1999, respectively, was from the sale of 16 lodging facilities in 1998, a portion of which was deferred under the installment method of accounting. The gain of $3.8 million in 2001 included $3.6 million from the Company's sale of one hotel and three restaurants. Another hotel was sold in 2001, but the gain was deferred and is being recognized under the installment method of accounting until full accrual accounting is warranted. Approximately $175,000 of the gain on the sale of two of the restaurants was also deferred and is being recognized under the installment method of accounting. The remaining $4.6 million gain on sale of property in 2000 represented $4.4 million from the sale of the Company's interest in 25 lodging facilities and $207,000 from the sale of other real estate. The $1.9 million cash provided by minority interests in earnings of consolidated subsidiaries and partnerships in 1999 included $1.8 million from one partnership which sold one of the 16 lodging facilities in 1998 upon which the deferred gain was recognized in 1999 in the amount of $4.6 million. The construction contracts receivable and estimated earnings in excess of billings on construction contracts increased by $4.6 million in 2001 compared with a decrease of $8.8 million in 2000 and an increase of $11.2 million in 1999; the decrease in 2000 was due to two construction contracts for third parties in 1999, which were completed in late 1999 and in 2000, which were not billable until the projects were completed. Increases in accounts payable and accrued expenses provided $6.7 million cash in 2001 as compared with cash used of $5.4 million and $1.8 million in 2000 and 1999, respectively. An increase in accounts receivable of $926,000 and $1.6 million in 2001 and 1999, respectively, contrasts to a decrease in accounts receivable of $2.2 - 22 - million in 2000. The changes in accounts receivable and accounts payable in 2000 were due primarily to the Company's sale of its operating interests in 27 of its hotels in mid-2000. The Company's cash flows used in investing activities were $4.7 million in 2001, as compared with cash flows provided by investing activities of $28.6 million in 2000 and $54.9 million in 1999. The Company collected $12.3 million from notes receivable in 1999, of which $12.2 million related to two hotel properties sold in 1997 and 1998. Proceeds from the sale of property and leasehold interests were $2.9 million, $53.5 million, and $70.9 million in 2001, 2000, and 1999, respectively. These amounts in 2000 and 1999 include the net proceeds from the sale/leaseback of four hotels in 2000 and six hotels in 1999. In addition to the sale/leaseback transactions in 1999 and 2000, several other parcels of land held for resale were sold for cash, and in 2000 one hotel was sold for a cash down payment of $550,000. In 2001, three restaurants and two hotels were sold for a combination of cash and seller-financed notes, resulting in cash proceeds of $2.9 million. The significant increase in restricted cash in 2000 was the result of $14.2 million escrowed for the construction of two hotels subject to a swap option related to the transfer of the Company's leasehold interest in 24 hotels in July 2000. The construction of these two hotels used $12.4 of the escrowed funds, reducing the restricted cash accordingly. One of the two hotels opened in October of 2001 and the other one opened in early 2002. The Company has required capital principally for the construction and acquisition of new lodging facilities and the purchase of equipment and leasehold improvements. Capital expenditures for such purposes were $20.9 million, $8.8 million, and $20.1 million in 2001, 2000, and 1999, respectively. Net cash used in financing activities was $6.0 million in 2001, compared with $25.4 million in 2000 and $31.4 million in 1999. In 1999, the Company repurchased 2.1 million shares of its common stock for $11.8 million pursuant to a plan to repurchase up to $12.5 million of the Company's outstanding common stock. In July of 1999 the Company increased the authorized amount to repurchase an additional $7.5 million of common stock pursuant to the plan, increasing the total amount authorized to $20.0 million. In 2000, 238,000 shares were repurchased for $1.2 million. In November of 2001 the Company increased the authorized amount to repurchase an additional $3.0 million of common stock pursuant to the plan, increasing the total amount authorized to $23.0 million. In 2001, 457,000 shares were repurchased for $1.9 million. In the second quarter of 1999 the Company announced its plan to use up to $12.0 million of its Company funds to repurchase a portion of its $54.0 million outstanding convertible subordinated debentures, and repurchased $4.0 million of this debt for $2.5 million in 1999. In the third quarter of 2000 the Company increased the total amount authorized to $20.0 million, and repurchased $21.0 million of this debt for $15.4 million in 2000. The Company increased the total amount authorized to $25.0 million in November of 2001. An additional $3.4 million of this debt was repurchased for $2.3 million in 2001. In the third quarter of 1999 the Company announced its plan to use up to $15 million of its Company funds to repurchase a portion of its outstanding $67.7 million senior subordinated notes. In 1999, the Company repurchased $8.6 million of these debt securities at a cost of $5.8 million, and in 2000, the Company repurchased an additional $8.8 million of these debt securities at a cost of $6.2 million. The Company established a three-year credit facility with a financial institution effective August 27, 1999. An amendment to the credit facility became effective - 23 - October 3, 2001, which, among other changes, extended the maturity to September 30, 2004. The credit facility is for $30 million (a $10 million term loan and a $20 million revolving line of credit), secured by a pledge of certain promissory notes payable to the Company received in connection with the sale 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 million. Effective October 3, 2001, the interest rate on the term loan is at the lender's base rate plus 100 basis points, and the interest rate on the revolving line of credit is at the lender's base rate plus 250 points, with a floor of 7.00% on both portions of the facility. The Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contains covenants which limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company's ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company's minimum net worth. As of December 30, 2001, the Company had $13 million in borrowings outstanding under this credit facility, consisting of the $10 million term loan and $3 million on the revolving line 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, 2002. As of December 30, 2001, the Company had no borrowings outstanding under this credit facility. As of the end of 2001, one hotel was under construction. The funds required to complete the construction and furnishing of this hotel were held in escrow at the end of 2001. The Company has acquired two sites for future development and expects to develop hotels for third parties on these sites, requiring no Company funds to complete the development of these sites. In 2000, the Company sold its interests in all of its Sumner Suites hotels, and has no plans to develop additional Sumner Suites hotels in the immediate future. Under the terms of the trust indenture governing the senior subordinated notes issued in 1996 and 1997, the Company is obligated to redeem at par up to 5% annually of the notes issued under the indenture beginning in 1999. Approximately $3.1 million, $2.9 million, and $3.0 million of these notes were redeemed under this provision on December 1, 2001, December 1, 2000 and December 1, 1999, respectively. The Company is investigating various alternatives to maximize shareholder value. These alternatives could include, without limitation, the franchising and operation of additional 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 existing cash, the collection of notes receivable, net cash provided by operations, and borrowings under existing credit facilities or mortgage debt, will be sufficient to fund its scheduled hotel development, stock repurchase plan, debt repayments and operations for at least the next twelve months. - 24 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, ("SFAS No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 was effective July 1, 2001, and SFAS No. 142 is effective January 1, 2002. Under the new rules in SFAS No. 142, goodwill and indefinite lived intangible assets will no longer be amortized effective January 1, 2002, but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS No. 142 is expected to result in an increase in net income of approximately $263,000 ($0.05 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, ("SFAS No. 121"), and the accounting and reporting provisions of APB No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 removes goodwill from its scope and clarifies other implementation issues related to SFAS No. 121. SFAS No. 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of this statement were adopted at the beginning of fiscal 2002 and had no material effect on the Company's results of operations or financial position. 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, collectibility of notes receivable, changes in applicable laws and regulation, in margins, demand fluctuations, access to debt or equity financing, adverse uninsured determinations in existing or future litigation or regulatory proceedings and other risks. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company has not entered into any transactions using derivative financial instruments. - 25 - The Company is exposed to market risk from changes in interest rates. The Company holds notes receivable that earn interest at variable rates. A hypothetical one-percentage point change in interest rates would change annual interest income by $605,000 based on the balances of these variable-rate notes receivable at December 30, 2001. Changes in interest rates also impact interest expense on long-term variable-rate debt. A hypothetical one-percentage point change in interest rates would change annual interest expense by $179,000 based on the balances of variable-rate long-term debt at December 30, 2001. Management believes that market risk as a result of interest rate changes would have a minimal effect on the fair value of the Company's fixed-rate debt because the fair value of the Company's debt is traded based more on the public's perception of the nature of the debt than on any fundamental changes in the debt markets; therefore, a hypothetical change in interest rates would not necessarily impact the fair value of the Company's fixed rate debt. There were no significant changes in the Company's market risk in the fiscal year ended December 30, 2001, and management foresees no significant changes in the Company's exposure to fluctuations in interest rates in the near future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements required by Item 8 are filed at the end of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the directors and officers of the Company under the heading "Election of Director" to be contained in the Company's Proxy Statement with respect to the next Annual Meeting of Shareholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under the heading "Executive Compensation" and the information under the heading "Performance Graph" to be contained in the Company's Proxy Statement with respect to the next Annual Meeting of Shareholders are incorporated herein by reference. - 26 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the heading "Security Ownership of Certain Beneficial Owners and Management" to be contained in the Company's Proxy Statement with respect to the next Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the heading "Certain Transactions" to be contained in the Company's Proxy Statement with respect to the next Annual Meeting of Shareholders is incorporated herein by reference. - 27 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE (a) 1. Financial Statements: The following Financial Statements are included herein: Independent Auditors' Report F-1 Consolidated Balance Sheets at December 30, 2001 and December 31, 2000 F-2 - F-3 Consolidated Statements of Earnings for each of the three years in the period ended December 30, 2001 F-4 - F-5 Consolidated Statements of Shareholders' Equity and Comprehensive Earnings for each of the three years in the period ended December 30, 2001 F-6 - F-7 Consolidated Statements of Cash Flows for each of the three years in the period ended December 30, 2001 F-8 - F-9 Notes to consolidated financial statements F-10 - F-33 2. Financial Statement Schedules: Independent Auditors' Report F-1 Schedule II - Valuation and Qualifying Accounts S-1 All other schedules required by Regulation S-X are omitted as the required information is inapplicable or the information requested thereby is set forth in the financial statements or the notes thereto. 3. Exhibits: The exhibits required by Item 601 of Regulation S-K and paragraph (c) of this Item 14 are listed below. Management contracts and compensatory plans and arrangements required to be filed as exhibits to this form are: 10(14) -- 1991 Stock Option Plan 10(15) -- First Amendment to 1991 Stock Option Plan 10(16) -- Second Amendment to 1991 Stock Option Plan 10(17) -- Key Employee Supplemental Income Plan
- 28 -
EXHIBIT NUMBER EXHIBIT - ----------------------------------------------------------------------------------------------------------------------- 3(1) -- Amended and Restated Charter. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 3(2) -- Articles of Amendment to Charter creating Series A Subordinated Preferred Stock. Incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Commission on July 3, 1997 3(3) -- Articles of Amendment to Amended and Restated Charter dated September 8, 1997. Incorporated by reference to the Company's Annual Report on Form 10-K, filed with the Commission on April 13, 1998 3(4) -- Amended and Restated Bylaws. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 3(5) -- Amendment to the Amended and Restated Bylaws adopted on July 31, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K, filed with the Commission on April 13, 1998 4(1) -- Amended and Restated Charter. Section 6 of the Amended and Restated Charter is included in Exhibit 3(1) 4(2) -- Indenture dated as of June 6, 1994, by and between the Registrant and Third National Bank in Nashville, Tennessee, Trustee, relating to $54,000,000 in 71/2Convertible Subordinated Debentures due 2004. Incorporated by reference to the Company's Registration Statement on Form S-3, Commission File No. 33-77910, filed with the Commission on April 19, 1994 4(3) -- Indenture dated as of November 15, 1996, by and between the Registrant and Bankers Trust Company, Trustee, relating to Senior Subordinated Notes. Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 20, 1996 4(4) -- First Supplemental Indenture dated as of November 15, 1996 by and between the Registrant and Bankers Trust Company, Trustee, relating to 9 3/4% Senior Subordinated Notes due 2006, Series A. Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 20, 1996 4(5) -- Second Supplemental Indenture dated as of September 25, 1997 by and between the Registrant and Bankers Trust Company, Trustee, relating to 9.55% Senior Subordinated Notes due 2007, Series B. Incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on September 30, 1997
The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, any and all instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries, the total amount of which does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. - 29 -
EXHIBIT NUMBER EXHIBIT - ----------------------------------------------------------------------------------------------------------------------- 10(1) -- Amended and Restated Partnership Agreement of Demonbreun Hotel Associates, Ltd., dated October 22, 1991. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(2) -- Agreement of Limited Partnership of Shoney's Inn North, Ltd., dated December 31, 1987. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(3) -- Partnership Agreement of Shoney's Inn of Atlanta, N.E., dated December 26, 1988. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(4) -- Partnership Agreement of Shoney's Inn of Stockbridge, dated December 26, 1988. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(5) -- Joint Venture Agreement of Atlanta Shoney's Inns Joint Venture, dated May 4, 1988. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(6) -- Amended and Restated Limited Partnership Agreement of Shoney's Inn of Gulfport, Ltd., dated January 1, 1987. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(7) -- Second Amended and Restated Limited Partnership Agreement of Shoney's Inn of Bossier City, Ltd., dated January 1, 1987. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(8) -- Second Amended and Restated Limited Partnership Agreement of Shoney's Inns of New Orleans, Ltd., dated January 1, 1987. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991 10(9) -- 1991 Stock Option Plan. Incorporated by reference to the Company's Registration statement on Form S-8, filed with the Commission on June 24, 1997 10(10) -- First Amendment to 1991 Stock Option Plan. Incorporated by reference to the Company's Registration statement on Form S-8, filed with the Commission on June 24, 1997 10(11) -- Second Amendment to 1991 Stock Option Plan. Incorporated by reference to the Company's Registration statement on Form S-8, filed with the Commission on June 24, 1997 10(12) -- Key Employee Supplemental Income Plan. Incorporated by reference to the Company's Registration statement on Form S-1, Commission File No. 33-44504, filed with the Commission on December 12, 1991
- 30 - 10(13) -- Rights Agreement between the Registrant and SunTrust, Atlanta, as Rights Agent, dated as of June 27, 1997. Incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Commission on July 3, 1997 10(14) -- Loan and Security Agreement by and among The Hotel Group, Inc., as Borrower, the Registrant, as Holdings, and the financial institutions that are signatories thereto, the Lenders, and Foothill Capital Corporation, as Agent, dated as of August 27, 1999. Incorporated by reference to the Company's Current Report on Form 8-K dated September 15, 1999, filed with the Commission on September 28, 1999. 10(15) -- Amendment Number One to Loan and Security Agreement between and among The Hotel Group, Inc., a Borrower, the Registrant, as Holdings, and the financial institutions that are signatories thereto, the Lenders, and Foothill Capital Corporation, as Agent, dated as of October 3, 2001.* 10(16) -- Sale and Purchase Agreement 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(17) -- 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 Current Report on Form 8-K, filed with the Commission on July 24, 2000. 10(18) -- 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 Current Report on Form 8-K filed with the Commission on May 26, 2000. 10(19) -- Agreement to Lease between HPT Suite Properties Trust and Suite Tenant, Inc., dated May 11, 2000. Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on May 26, 2000. 10(20) -- 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 Current Report on Form 8-K filed with the Commission on May 26, 2000. 10(21) -- Lease Agreement by and between Southeast Texas Inns, Inc., ad landlord, and May-Ridge, L.P., as tenant, dated as of July 9, 2000. Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on July 24, 2000. 10(22) -- 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 Current Report on Form 8-K, filed with the Commission on July 24, 2000.
- 31 - 10(23) -- 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 Current Report on Form 8-K, filed with the Commission on July 24, 2000. 10(24) -- 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 Current Report on Form 8-K filed with the Commission on July 24, 2000. 10(25) -- Amended and Restated License Agreement entered into September 27, 2000 by and between Shoney's Inc., ShoLodge Franchise Systems, Inc and the Company. Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 15, 2000. 21 -- Subsidiaries of the Registrant* 23(1) -- Consent of Ernst & Young LLP*
* Filed herewith (b) No reports on Form 8-K were filed during the fourth quarter ended December 30, 2001. (c) Exhibits required by Item 601 of Regulation S-K are listed above. (d) All financial statement schedules required by Regulation S-X are filed following the Financial Statements listed above. - 32 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHOLODGE, INC. Date: March 29, 2002 /s/ Leon Moore ------------------------------------- Leon Moore Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------------------------------------------------------------------------- /s/ Leon Moore President, Chief Executive March 29, 2002 - ------------------------ Officer, Principal Executive Leon Moore Officer, Director /s/ Bob Marlowe Secretary, Treasurer, Chief March 29, 2002 - ------------------------ Financial Officer, Chief Bob Marlowe Accounting Officer, Principal Accounting Officer, Director /s/ Richard L. Johnson Executive Vice President, March 29, 2002 - ------------------------ Director Richard L. Johnson /s/ Earl H. Sadler Director March 29, 2002 - ------------------------ Earl H. Sadler /s/ Helen L. Moskovitz Director March 29, 2002 - ------------------------ Helen L. Moskovitz /s/ David M. Resha Director March 29, 2002 - ------------------------ David M. Resha
- 33 - Report of Independent Auditors Shareholders and Board of Directors ShoLodge, Inc. We have audited the accompanying consolidated balance sheets of ShoLodge, Inc. and subsidiaries as of December 30, 2001 and December 31, 2000 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 30, 2001. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ShoLodge, Inc and subsidiaries at December 30, 2001 and December 31, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Nashville, Tennessee March 22, 2002 F-1 ShoLodge, Inc. and Subsidiaries Consolidated Balance Sheets
DECEMBER 30, December 31, 2001 2000 ------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 2,704,161 $ 5,339,689 Restricted cash 200,000 200,000 Accounts receivable : Trade, net of allowance for doubtful accounts of $184,404 and $380,314 for 2001 and 2000, respectively 3,557,591 2,631,494 Construction contracts 4,016,502 2,405,629 Costs and estimated earnings in excess of billings on construction contracts 3,063,747 42,844 Income taxes receivable -- 4,750,074 Prepaid expenses 365,849 311,513 Notes receivable, net 1,728,340 909,656 Other current assets 153,766 146,850 ------------------------------------- Total current assets 15,789,956 16,737,749 Notes receivable, net 68,227,306 63,044,920 Restricted cash 1,781,747 14,193,534 Property and equipment 123,112,190 114,361,649 Less accumulated depreciation and amortization (21,944,927) (23,526,651) ------------------------------------- 101,167,263 90,834,998 Land under development or held for sale 9,254,986 8,231,714 Deferred charges, net 6,111,825 6,721,247 Intangible assets, net 2,795,659 2,949,008 Other assets 1,457,907 1,917,918 ------------------------------------- $ 206,586,649 $ 204,631,088 =====================================
F-2 ShoLodge, Inc. and Subsidiaries Consolidated Balance Sheets (continued)
DECEMBER 30, December 31, 2001 2000 ------------------------------------- LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 14,171,631 $ 7,518,321 Taxes payable other than on income 476,809 384,352 Income taxes payable 3,859,873 -- Current portion of long-term debt 650,700 870,636 ------------------------------------- Total current liabilities 19,159,013 8,773,309 Long-term debt, less current portion 89,701,381 94,169,013 Deferred income taxes 992,275 4,290,423 Deferred gain on sale/leaseback 4,129,962 4,129,962 Deferred credits 2,545,004 2,218,519 Minority interests in equity of consolidated subsidiaries and partnerships 786,477 728,222 ------------------------------------- Total liabilities 117,314,112 114,309,448 Shareholders' equity: Preferred stock (no par value; 1,000,000 shares authorized; no shares issued) -- -- Series A redeemable nonparticipating stock (no par value; 1,000 shares authorized; no shares issued) -- -- Common stock (no par value; 20,000,000 shares authorized, 5,088,278 and 5,544,211 shares issued and outstanding as of December 30, 2001 and December 31, 2000, respectively) 1,000 1,000 Additional paid-in capital 23,519,506 25,425,175 Retained earnings 67,001,529 66,089,984 Unrealized gain on securities available-for-sale, net of income taxes 100,307 53,231 Notes receivable from officer, net of discount of $181,444 and $283,499 as of December 30, 2001 and December 31, 2000, respectively (1,349,805) (1,247,750) ------------------------------------- Total shareholders' equity 89,272,537 90,321,640 ------------------------------------- $ 206,586,649 $ 204,631,088 =====================================
See accompanying notes. F-3 ShoLodge, Inc. and Subsidiaries Consolidated Statements of Earnings
YEAR ENDED ---------------------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 26, 2001 2000 1999 ---------------------------------------------------------- Revenues: Hotel $ 13,677,402 $ 46,430,544 $ 66,187,974 Franchising and management 3,970,821 3,606,243 4,151,550 Construction and development 27,479,885 12,036,744 11,234,378 Rent 3,467,744 1,955,324 483,443 Other income 336,595 48,982 359,604 ---------------------------------------------------------- Total revenues 48,932,447 64,077,837 82,416,949 Cost and expenses: Hotel 11,014,903 34,485,554 46,281,773 Franchising and management 2,191,659 2,459,801 2,419,700 Construction and development 25,691,829 12,571,160 9,825,958 Rent expense 581,900 10,332,830 13,530,020 General and administrative 5,927,641 5,018,981 6,342,439 Depreciation and amortization 4,660,937 5,785,790 7,100,525 ---------------------------------------------------------- Total expenses 50,068,869 70,654,116 85,500,415 ---------------------------------------------------------- Operating loss (1,136,422) (6,576,279) (3,083,466) Gain on sale of property and leasehold interests 3,761,890 4,901,523 15,001,716 Interest expense (8,453,777) (10,485,518) (12,136,415) Interest income 6,377,390 6,463,537 6,182,084 ---------------------------------------------------------- Earnings (loss) before income taxes, minority interests, and extraordinary items 549,081 (5,696,737) 5,963,919 Income tax (expense) benefit (145,000) 1,777,326 (1,909,000) Minority interests in earnings of consolidated subsidiaries and partnerships (58,255) (57,246) (1,909,605) ---------------------------------------------------------- Earnings (loss) before extraordinary items 345,826 (3,976,657) 2,145,314 Extraordinary gain on early extinguishments of debt, net of income taxes of $(347,000), $(2,752,326) and $(1,467,000) for 2001, 2000 and 1999, respectively 565,719 4,554,319 2,393,512 ---------------------------------------------------------- Net earnings $ 911,545 $ 577,662 $ 4,538,826 ==========================================================
F-4 ShoLodge, Inc. and Subsidiaries Consolidated Statements of Earnings (continued)
YEAR ENDED ------------------------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 26, 2001 2000 1999 ------------------------------------------------------------- Earnings per common share: Basic: Earnings (loss) before extraordinary items $ 0.06 $ (0.73) $ 0.33 Extraordinary gain 0.10 0.84 0.37 ------------------------------------------------------------- Net earnings $ 0.16 $ 0.11 $ 0.70 ============================================================= Diluted: Earnings (loss) before extraordinary items $ 0.06 $ (0.72) $ 0.32 Extraordinary gain 0.10 0.82 0.35 ------------------------------------------------------------- Net earnings $ 0.16 $ 0.10 $ 0.67 ============================================================= Weighted average common shares outstanding: Basic 5,464,533 5,471,962 6,517,717 ============================================================= Diluted 5,529,825 5,553,852 6,744,835 =============================================================
See accompanying notes. F-5 ShoLodge, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended December 30, 2001, December 31, 2000 and December 26, 1999
COMMON STOCK NOTES ADDITIONAL ------------------------------ RECEIVABLE FROM PAID-IN SHARES AMOUNT OFFICER CAPITAL -------------------------------------------------------------------------- Balance, December 27, 1998 7,472,310 $ 1,000 $ -- $ 37,056,834 Exercise of stock options, net 13,568 -- -- 50,880 Net earnings -- -- -- -- Change in unrealized gain on securities available-for-sale, net of income taxes -- -- -- -- Comprehensive earnings Common stock repurchased (2,113,300) -- -- (11,823,018) -------------------------------------------------------------------------- Balance, December 26, 1999 5,372,578 1,000 -- 25,284,696 Exercise of stock options, net 1,067 -- -- 4,001 Notes receivable from officer for exercise of options to purchase common stock 408,333 -- (1,247,750) 1,352,603 Net earnings -- -- -- -- Change in unrealized gain on securities available-for-sale, net of income taxes -- -- -- -- Comprehensive earnings Common stock repurchased (237,767) -- -- (1,216,125) -------------------------------------------------------------------------- Balance, December 31, 2000 5,544,211 1,000 (1,247,750) 25,425,175 EXERCISE OF STOCK OPTIONS, NET 1,067 -- -- 4,001 NET EARNINGS -- -- -- -- INTEREST ACCRETED ON NOTES RECEIVABLE FROM OFFICER FOR EXERCISE OF OPTIONS TO PURCHASE COMMON STOCK -- -- (102,055) -- CHANGE IN UNREALIZED GAIN ON SECURITIES AVAILABLE-FOR-SALE, NET OF INCOME TAXES -- -- -- -- COMPREHENSIVE EARNINGS COMMON STOCK REPURCHASED (457,000) -- -- (1,909,670) -------------------------------------------------------------------------- BALANCE, DECEMBER 30, 2001 5,088,278 $ 1,000 $(1,349,805) $ 23,519,506 ==========================================================================
F-6 ShoLodge, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (continued) Years ended December 30, 2001, December 31, 2000 and December 26, 1999
ACCUMULATED OTHER RETAINED COMPREHENSIVE EARNINGS INCOME TOTAL ---------------------------------------------------------- Balance, December 27, 1998 $ 60,973,496 $ 67,704 $ 98,099,034 Exercise of stock options, net -- -- 50,880 Net earnings 4,538,826 -- 4,538,826 Change in unrealized gain on securities available-for-sale, net of income taxes -- 12,617 12,617 ------------ Comprehensive earnings 4,551,443 ------------ Common stock repurchased -- -- (11,823,018) ---------------------------------------------------------- Balance, December 26, 1999 65,512,322 80,321 90,878,339 Exercise of stock options, net -- -- 4,001 Notes receivable from officer for exercise of options to purchase common stock -- -- 104,853 Net earnings 577,662 -- 577,662 Change in unrealized gain on securities available-for-sale, net of income taxes -- (27,090) (27,090) ------------ Comprehensive earnings 550,572 ------------ Common stock repurchased -- -- (1,216,125) ---------------------------------------------------------- Balance, December 31, 2000 66,089,984 53,231 90,321,640 EXERCISE OF STOCK OPTIONS, NET -- -- 4,001 INTEREST ACCRETED ON NOTES RECEIVABLE FROM OFFICER FOR EXERCISE OF OPTIONS TO PURCHASE COMMON STOCK -- -- (102,055) NET EARNINGS 911,545 -- 911,545 CHANGE IN UNREALIZED GAIN ON SECURITIES AVAILABLE-FOR-SALE, NET OF INCOME TAXES -- 47,076 47,076 ------------ COMPREHENSIVE EARNINGS 958,621 ------------ COMMON STOCK REPURCHASED -- -- (1,909,670) ---------------------------------------------------------- BALANCE, DECEMBER 30, 2001 $ 67,001,529 $ 100,307 $ 89,272,537 ==========================================================
See accompanying notes. F-7 ShoLodge, Inc. and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED ---------------------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 26, 2001 2000 1999 ---------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Earnings (loss) before extraordinary items $ 345,826 $ (3,976,657) $ 2,145,314 Adjustments to reconcile net earnings (loss) before extraordinary items to net cash provided by (used in) operating activities: Depreciation and amortization 4,660,937 5,785,790 7,100,525 Amortization of deferred charges recorded as interest expense 608,804 718,694 1,101,689 Recognition of previously deferred gains (305,391) (2,684,184) (5,140,869) Gain on sale of property and leasehold interests (3,761,890) (4,901,523) (15,001,716) Deferred income tax (benefit) provision (3,298,148) 2,201,126 2,216,332 Increase in minority interest in equity of consolidated subsidiaries and partnerships 58,255 57,246 1,909,605 Compensation expense related to equity -- 151,955 -- Changes in assets and liabilities: Trade receivables (926,097) 2,221,758 (1,602,148) Construction contracts receivable (1,610,873) 5,268,475 (7,674,104) Costs and estimated earnings in excess of billings on construction contracts (3,020,903) 3,545,227 (3,560,272) Income and other taxes receivable and payable 8,326,498 (5,215,229) (222,211) Prepaid expenses (54,336) 261,551 (53,530) Other assets 361,395 829,049 (1,996,951) Accounts payable and accrued expenses 6,653,310 (5,419,990) (1,843,337) ---------------------------------------------------------- Net cash provided by (used in) operating activities 8,037,387 (1,156,712) (22,621,673) CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in restricted cash 12,624,732 (12,788,021) (904,029) Payments from notes receivable 681,433 418,098 12,317,668 Capital expenditures (20,931,949) (8,830,699) (20,101,074) Proceeds from sale of equipment -- 538,725 -- Proceeds from sale of property and leasehold interests 2,907,258 39,680,623 70,915,913 Proceeds from sale of leasehold interests, net of expenses -- 13,832,482 -- Deposits on sale/leaseback of hotels -- (4,295,000) (7,280,000) ---------------------------------------------------------- Net cash (used in) provided by investing activities (4,718,526) 28,556,208 54,948,478
F-8 ShoLodge, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
YEAR ENDED --------------------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 26, 2001 2000 1999 --------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Payments for deferred loan costs (462,937) (188,438) (1,134,671) Proceeds from long-term debt 7,500,000 22,500,500 26,149,754 Payments on long-term debt (11,085,783) (46,095,258) (44,330,435) Payments on capitalized lease obligations -- (189,590) (233,362) Distributions to minority interests -- (261,834) (100,000) Exercise of stock options 4,001 4,001 50,880 Purchases of treasury stock (1,909,670) (1,216,125) (11,823,018) --------------------------------------------------------- Net cash used in financing activities (5,954,389) (25,446,744) (31,420,852) Net (decrease) increase in cash and cash equivalents (2,635,528) 1,952,752 905,953 Cash and cash equivalents - beginning of year 5,339,689 3,386,937 2,480,984 --------------------------------------------------------- Cash and cash equivalents - end of year $ 2,704,161 $ 5,339,689 $ 3,386,937 ==========================================================
See accompanying notes. F-9 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years ended December 30, 2001, December 31, 2000 and December 26, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Business activities of ShoLodge, Inc. and subsidiaries (the "Company") are composed primarily of owning, franchising, operating, leasing, and constructing lodging facilities. Presently, there are three brands, Shoney's Inns, Baymont Inns & Suites, and AmeriSuites. As of December 30, 2001, the Company derived its hotel revenues from fourteen owned properties located in eight states across the United States. Of these fourteen properties, five are located in Texas, two are located in Mississippi, and two are located in Alabama. No other state has more than one property. Twelve of the properties are Shoney's Inns, one is a Baymont Inn & Suites, and one is an AmeriSuites hotel. The Consolidated Financial Statements include the accounts of the Company and its majority-owned and controlled subsidiaries and partnerships. All significant intercompany items and transactions have been eliminated. The Company is the managing general partner in the partnership entities. The Fiscal Year of the Company consists of 52/53 weeks ending the last Sunday of the calendar year. Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents include highly liquid investments with original maturities of three months or less. F-10 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Restricted Cash represents approximately $1,782,000 escrowed to fund the completion of construction and furnishing of one hotel on a site presently owned by the Company. This construction project is presently in progress and is expected to be completed in the first quarter of 2002. Restricted cash also includes $200,000 at one of the Company's major banks. Accounts Receivable from Construction Contracts includes billed amounts earned on construction contracts open at the date of the balance sheet. Costs and estimated earnings in excess of billings on construction contracts were not billable to customers at the date of the balance sheet. As of December 30, 2001, $3,966,000 of the total construction amounts receivable were from three contracts with three third party customers. Property and Equipment is recorded at cost. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the related assets, generally forty years for buildings and improvements and seven years for furniture, fixtures and equipment. Equipment under capitalized leases is amortized over the shorter of the estimated useful lives of the related assets or the lease term using the straight-line method. Capital lease amortization is included in depreciation expense. Significant improvements are capitalized while maintenance and repairs are expensed as incurred. The Company capitalizes direct and indirect costs of construction and interest during the construction period. Interest costs capitalized during the years ended December 26, 1999, December 31, 2000 and December 30, 2001 were approximately $2,004,000, $349,000, and $858,000, respectively. Pre-opening costs are expensed as incurred. Land Under Development or Held For Sale consists of land adjacent to hotels developed by the Company and land adjoining the Company's corporate headquarters which is being developed for sale or is held for sale. Deferred Charges include loan costs incurred in obtaining financing and are amortized using the interest method over the respective terms of the related debt. In addition, deferred charges include costs incurred in amending the Company's franchise license agreement, which is being amortized on the straight-line method over twenty years. Accumulated amortization totaled $3,309,360 and $4,089,029 as of December 31, 2000 and December 30, 2001, respectively. F-11 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments. The Company's investment securities have been classified as available-for-sale and are included in other assets in the accompanying balance sheets. Available-for-sale securities are carried at fair value with unrealized holding gains and losses, net of tax effects, reported as a separate component of shareholders' equity. Intangible Assets include excess of cost over fair value of net assets acquired (goodwill) in the amount of $2,537,070 and $2,387,099 at December 31, 2000 and December 30, 2001, respectively, which is amortized on the straight-line method over a period of twenty-five years. The amounts reported are net of accumulated amortization of $1,212,254 and $1,362,225, as of December 31, 2000 and December 30, 2001, respectively. In addition, costs of trademark are included in the amount of $411,936 and $388,744 as of December 31, 2000 and December 30, 2001, respectively, and are amortized on the straight-line method over a period of twenty years. This amount is net of accumulated amortization of $80,004 and $103,196 as of December 31, 2000 and December 30, 2001, respectively. Other Assets include cash surrender value of life insurance, non-current portion of direct financing leases, securities available for sale, and base linens stock. Asset Impairment. The Company records impairment losses on long-lived assets used in operations and intangibles when indicators of impairment are present and the undiscounted cash flows related to those assets are less than their carrying amounts. The Company records impairment losses on long-lived assets under development or held for sale when indications of impairment are present and the estimated fair value less costs to sell is less than their carrying amount. Advertising. The Company charges the costs of advertising to expense as incurred. Advertising expense was approximately $1,920,000, $1,117,000 and $486,000 for the years ended December 26, 1999, December 31, 2000 and December 30, 2001, respectively. Income Taxes. The Company uses the liability method to account for income taxes. F-12 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues from hotel operations are recognized as services are rendered. Construction and development revenues from fixed-price construction contracts are recognized based on the percentage of completion method, measured by the percentage of cost incurred to total estimated cost for each contract. Franchising, reservation and management revenues are recognized as earned. Profit from the sale of land and hotel properties is recognized at the time the sale is consummated, the minimum down payment is received, and there is no significant continuing involvement. Earnings Per Common Share for all periods has been computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed by dividing earnings by the weighted average number of common shares outstanding during the year plus incremental shares that would have been outstanding upon the assumed exercise of dilutive options and the assumed conversion of dilutive debentures. See Note 5 for a reconciliation of basic and diluted earnings per share. Stock-Based Compensation. The Company uses the intrinsic value method for valuing its awards of stock options and recording the related compensation expense, if any. See Note 7 for pro forma disclosures using the fair value method as described in SFAS No. 123, Accounting for Stock-Based Compensation. Concentrations of Credit Risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments, trade receivables, construction contracts receivable, and notes receivable. The Company places its cash investments with high credit quality financial institutions who are members of the FDIC thus reducing any potential risk. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers and their dispersion across many geographic areas. Concentrations of credit risk with respect to construction contracts receivable and notes receivable are increased due to the smaller number of contracts and notes and their higher dollar amounts. The Company performs credit evaluations of its customers and generally does not require collateral or other security to support customer receivables. As of December 31, 2000, and December 30, 2001, $59,560,899 and $58,799,391, respectively, of notes receivable are from a group of companies affiliated with one another which acquired and operate the 16 hotels described in Note 13. Although notes receivable generally consist of first mortgages notes that are cross- collateralized and cross-defaulted, in the event the fair values of the underlying F-13 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets were to be less than balances of the first mortgage notes, the notes receivable could be under-collateralized. Recently Issued Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, ("SFAS No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 was effective July 1, 2001, and SFAS No. 142 is effective January 1, 2002. Under the new rules in SFAS No. 142, goodwill and indefinite lived intangible assets will no longer be amortized effective January 1, 2002, but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of SFAS No. 142 is expected to result in an increase in net income of approximately $263,000 ($0.05 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, ("SFAS No. 121"), and the accounting and reporting provisions of APB No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 removes goodwill from its scope and clarifies other implementation issues related to SFAS No. 121. SFAS No. 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of this statement were adopted at the beginning of fiscal 2002 and had no material effect on the Company's results of operations or financial position. Reclassifications. Certain reclassifications have been made in the 1999 and 2000 consolidated financial statements to conform to the classifications used in 2001. F-14 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 2. PROPERTY AND EQUIPMENT Property and equipment consists of:
DECEMBER 30, December 31, 2001 2000 ------------------------------------- Land and improvements $ 19,953,352 $ 20,209,885 Buildings and improvements 69,133,846 64,560,598 Furniture, fixtures, equipment and software 26,178,322 27,254,209 Construction in progress 7,846,670 2,336,957 ------------------------------------- 123,112,190 114,361,649 Less accumulated depreciation and amortization (21,944,927) (23,526,651) ------------------------------------- $ 101,167,263 $ 90,834,998 =====================================
3. LONG-TERM DEBT Long-term debt consists of:
2001 2000 ------------------------------------- Industrial revenue bonds, due in varying amounts through 2017 $ 2,905,000 $ 2,982,500 7.50% Convertible subordinated debentures 25,596,000 29,008,000 9.75% Series A senior subordinated notes 20,167,000 21,824,000 9.55% Series B senior subordinated notes 20,341,000 22,091,000 Bank credit facility 13,000,000 10,000,000 Notes payable - bank and other, bearing interest at 2.01% to 8.19%, due in varying amounts through 2010 8,343,081 9,134,149 ------------------------------------- 90,352,081 95,039,649 Less current portion (650,700) (870,636) ------------------------------------- $ 89,701,381 $ 94,169,013 =====================================
F-15 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 3. LONG-TERM DEBT (CONTINUED) The Industrial Revenue Bonds ("IRBs") and substantially all notes payable are collateralized by property and equipment with a net book value of approximately $9.9 million at December 30, 2001. Additionally, the IRBs, are collateralized by irrevocable letters of credit and are guaranteed by the Company. The interest rate on the IRBs is a variable rate reset weekly by the remarketing agent (2.01% at December 30, 2001). The Company's 7.50% convertible subordinated debentures mature in May 2004 with interest payable in semi-annual installments. The debentures are convertible at any time before maturity, unless previously redeemed, into common stock of the Company at a conversion price of $23.31 per share, subject to adjustment. The debentures are unsecured and subordinated in right of payment to the prior payment in full of all existing and future senior indebtedness, as defined in the debentures. The Company, at its option, can redeem the bonds beginning in May 1997 at 105.25% of par, declining .75% each year thereafter to par in May 2004. During November 1996, the Company issued $33,150,000 of 9.75% senior subordinated notes, Series A, under an aggregate $125,000,000 senior subordinated indenture agreement. The notes mature in November 2006, with interest payable quarterly. The notes are unsecured and subordinated in right of payment to the prior payment in full of all existing and future senior indebtedness of the Company. Additionally, in September 1997, the Company issued $35,000,000 of 9.55% senior subordinated notes, Series B, also under the aggregate $125,000,000 senior subordinated indenture agreement. The notes mature in September 2007, with interest payable quarterly. The notes are unsecured and subordinated in right of payment to the prior payment in full of all other senior indebtedness of the Company and will be senior in right of payment to, or pari passu with all other subordinated indebtedness of the Company, including the Series A notes. Both Series A and Series B of the senior subordinated notes are subject to annual redemptions at the option of the holder of the notes in the amount of 5% of the original aggregate amount issued under the indenture, which is $3,407,500 per year beginning December 1, 1999. The note holders exercised this option in each of the last three years. The Company established a three-year credit facility with a financial institution effective August 27, 1999. An amendment to the credit facility became effective October 3, 2001, which, among other changes, extended the maturity to September 30, 2004. The credit facility is for $30 million (a $10 million term loan and a $20 million revolving line of credit), secured by a pledge of certain promissory notes payable to the Company received F-16 ShoLodge, Inc. and Subsidiaries Notes to Consolidated Financial Statements 3. LONG-TERM DEBT (CONTINUED) in connection with the sale of 16 of the Company's lodging facilities in the third quarter of 1998 (Note 13). 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 million. Effective October 3, 2001, the interest rate on the term loan is at the lender's base rate plus 100 basis points, and the interest rate on the revolving line of credit is at the lender's base rate plus 250 basis points, with a floor of 7.00% on both portions of the facility. The Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The credit facility also contains covenants which limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company's ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company's minimum net worth. As of December 30, 2001, the Company had $13 million in borrowings outstanding under this credit facility, consisting of the $10 million term loan and $3 million on the revolving line 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, 2002. As of December 31, 2000, and December 30, 2001, the Company had no borrowings outstanding under this credit facility. In May 2000, the Company repaid approximately $7,458,000 of debt with a portion of the proceeds of the sale of four hotels (Note 11). In July 2000, the Company repaid approximately $1,638,000 of debt with the proceeds of the sale of its leasehold interests in 24 hotels (Note 12). In the years ended December 26, 1999, December 31, 2000, and December 30, 2001, the Company repurchased $12,598,000, $29,784,000, and $3,412,000, respectively, of the Company's previously issued subordinated debt at a discount from face value. These repurchases resulted in extraordinary pretax gains, net of the write-off of related unamortized deferred financing costs, of $3,861,000, $7,307,000, and $913,000 in 1999, 2000, and 2001, respectively. F-17 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 3. LONG-TERM DEBT (CONTINUED) Maturities of long-term debt are as follows: 2002 $ 650,700 2003 2,599,476 2004 39,273,902 2005 736,624 2006 20,966,491 Thereafter 26,124,888 ---------------- ---------------- $ 90,352,081 ================
4. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease certain property and equipment under noncancelable operating lease agreements. Total rental expense under operating leases for the years ended December 26, 1999, December 31, 2000 and December 30, 2001 was approximately $18,476,000, $12,987,000 and $582,000, respectively. Future minimum rental payments are as follows: 2002 $ 350,000 2003 350,000 2004 350,000 2005 291,667 Thereafter -- ----------------- $ 1,341,667 =================
The Company is self-insured for workers' compensation benefits up to $500,000 annually in the aggregate and $250,000 per occurrence and has recorded an accrual for all expected and outstanding claims at December 30, 2001. While the Company's ultimate liability may exceed or be less than the amount accrued, the Company believes that it is unlikely that it would experience losses that would be materially in excess of such estimated amounts. In addition to the recorded accruals, the Company had outstanding letters of credit in the amount of $-0- and $125,000 as of December 31, 2000 and December 30, 2001, respectively, to satisfy workers compensation self-insurance security deposit requirements. F-18 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 4. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is or has been a party to legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company. The construction of a hotel was completed for a third party during 2001 and a balance of approximately $2,000,000 remained uncollected as of December 30, 2001. The Company has a lien against the property and has filed an arbitration claim against the owner. The arbitration hearing has been scheduled for July 22, 2002. While the outcome of the proceeding cannot presently be determined, management does not believe it is probable that the carrying value of the receivable has been impaired. Accordingly, an allowance for doubtful collectibility was not necessary at December 30, 2001. Should the Company be unsuccessful in the arbitration hearing, the required write-off of the receivable would be charged to 2002 operations. As discussed in Note 12, the Company has filed an arbitration proceeding against Prime Hospitality Corp., seeking $20,000,000 in monetary damages related to the non-use of the Company's reservation center as agreed. The outcome of the arbitration proceeding cannot presently be determined. Any monetary damages awarded to the Company from the arbitration proceeding would be recorded as income upon receipt. F-19 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 5. EARNINGS PER SHARE The following tables reconcile earnings and weighted average shares used in the earnings per share ("EPS") calculations for fiscal years 2001, 2000 and 1999.
YEAR ENDED -------------------------------------------------------------- DECEMBER 30, DECEMBER 31, DECEMBER 26, 2001 2000 1999 --------------- --------------- --------------- NUMERATOR: Earnings (loss) before extraordinary items $ 345,826 $ (3,976,657) $ 2,145,314 Extraordinary gain 565,719 4,554,319 2,393,512 --------------- --------------- --------------- Numerator for basic earnings per share- earnings $ 911,545 $ 577,662 $ 4,538,826 available to shareholders =============== =============== =============== DENOMINATOR: Denominator for basic earnings per share - weighted-average shares 5,464,533 5,471,962 6,517,717 Effect of dilutive securities: Options 65,292 81,890 227,118 --------------- --------------- --------------- Denominator for diluted earnings per share - 5,529,825 5,553,852 6,744,835 adjusted weighted-average shares =============== =============== =============== BASIC EARNINGS (LOSS) PER SHARE: Earnings (loss) before extraordinary items $ 0.06 $ (0.73) $ 0.33 Extraordinary gain 0.10 0.84 0.37 --------------- --------------- --------------- Net earnings $ 0.16 $ 0.11 $ 0.70 =============== =============== =============== DILUTED EARNINGS (LOSS) PER SHARE: Earnings (loss) before extraordinary items $ 0.06 $ (0.72) $ 0.32 Extraordinary gain 0.10 0.82 0.35 --------------- --------------- --------------- Net earnings $ 0.16 $ 0.10 $ 0.67 =============== =============== ===============
The Company's 7.5% debentures were convertible into 2,283,252, 1,244,444, and 1,098,069 shares of common stock at December 26, 1999, December 31, 2000 and December 30, 2001, respectively, but were not included in the computation of diluted EPS, as such securities were anti-dilutive. F-20 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, accounts receivable, and borrowings under lines of credit approximate fair values due to the short-term maturities of these instruments. The carrying value of notes receivable approximate fair value due to the annual adjustment to market interest rates. Notes payable carrying value approximates fair value due to (1) a recent borrowing and (2) variable rates on earlier borrowings. The carrying value of industrial revenue bonds approximate fair value due to the variable interest rate of these instruments. The convertible subordinated debentures and senior subordinated notes have the following estimated fair values based upon quoted market prices as of December 30, 2001 and December 31, 2000:
2001 2000 --------------------------------- --------------------------------- FAIR VALUE CARRYING VALUE Fair Value Carrying Value ------------ -------------- ------------ -------------- Convertible subordinated debentures $ 16,253,460 $ 25,596,000 $ 17,840,000 $ 29,008,000 Senior subordinated notes 25,719,970 40,508,000 30,740,000 43,915,000 ------------ ------------ ------------ ------------ $ 41,973,430 $ 66,104,000 $ 48,580,000 $ 72,923,000 ============ ============ ============ ============
As of December 31, 2000 and December 30, 2001, the aggregate fair values of securities available-for-sale were $203,524 and $279,506, respectively. 7. STOCK OPTION PLAN The Company's 1991 Stock Option Plan, as amended, (the "Plan"), authorizes the grant to key employees of options to purchase up to an aggregate of 900,000 shares of common stock. The exercise price of options granted under the terms of the Plan must not be less than 100% of the fair market value of the shares as of the date of grant, or 110% of the fair market value for incentive stock options granted to option holders possessing more than 10% of the total combined voting power of all classes of stock of the Company. Under the Plan, the options are exercisable at various periods from one to five years after date of grant and expire ten years after date of grant. The plan has now expired, and no more options will be granted under this plan. F-21 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 7. STOCK OPTION PLAN (CONTINUED) A summary of the status of the Plan for the years ended December 26, 1999, December 31, 2000 and December 30, 2001, follows:
SHARES SUBJECT TO OPTION ------------------------------------------------- AVAILABLE FOR WEIGHTED AVERAGE GRANT OUTSTANDING EXERCISE PRICE ------------- ----------- ---------------- December 27, 1998 133,610 722,037 $3.75 Granted (5,000) 5,000 5.50 Exercised -- (13,568) 3.75 Canceled 18,134 (18,134) 3.75 ------- -------- ----- December 26, 1999 146,744 695,335 3.76 Granted -- -- -- Exercised -- (409,400) 3.75 Canceled 2,901 (2,901) 3.75 ------- -------- ----- December 31, 2000 149,645 283,034 3.78 GRANTED -- -- -- EXERCISED -- (1,067) 3.75 CANCELED -- -- -- PLAN EXPIRED FOR GRANTS (149,645) -- -- ------- -------- ----- DECEMBER 30, 2001 -- 281,967 3.78 ======= ======== =====
The weighted average fair value of options granted during the year was $2.96 for the year ended December 26, 1999. No options were granted in 2000 or 2001. F-22 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 7. STOCK OPTION PLAN (CONTINUED) The following table summarizes information relating to the stock options outstanding as of December 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------- --------------------------------------------------- -------------------------------- NUMBER WEIGHTED- NUMBER OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED- AT REMAINING AVERAGE AT AVERAGE EXERCISE DECEMBER 30, CONTRACTUAL EXERCISE DECEMBER 30, EXERCISE PRICE 2001 LIFE PRICE 2001 PRICE - ---------------- ----------------- ----------------- --------------- ---------------- --------------- $3.75 55,500 0.13 $3.75 55,500 $3.75 3.75 29,467 2.05 3.75 29,467 3.75 3.75 41,000 3.33 3.75 41,000 3.75 3.75 68,000 4.59 3.75 68,000 3.75 3.75 83,000 5.42 3.75 66,400 3.75 5.50 5,000 7.39 5.50 2,000 5.50 ----------------- ---------------- 281,967 262,367 ================= ================
Had the fair value of options granted under the plan beginning in 1997 been recognized as compensation expense on a straight-line basis over the vesting period of the options, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ------------ ------------ ------------ Net earnings As reported $ 911,545 $ 577,662 $ 4,538,826 Pro forma 815,860 (18,605) 3,898,931 Basic earnings As reported 0.16 0.11 0.70 per share Pro forma .15 .00 0.60 Diluted earnings As reported 0.16 0.10 0.67 per share Pro forma .15 .00 0.58
The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions used for grants in 1999: no dividend yield for all years; expected volatility of 32%; risk free interest rate of 6.10%; and expected life of 9 years. There were no grants in 2000 or 2001. F-23 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 8. SHAREHOLDERS' EQUITY In 2001 and prior years, the Company's Board of Directors authorized the repurchase of various amounts of its common stock, so that through December 30, 2001, the total authorized amount of the Company's common stock repurchases was $23,000,000. The cumulative number of shares repurchased as of December 30, 2001, was 3,592,067 shares at a cost of $20,325,374. 9. INCOME TAXES The provision for income taxes from continuing operations, before extraordinary items, consists of the following:
2001 2000 1999 ------------ ------------ ------------ Current expense (benefit): Federal $ 3,232,152 $ (3,978,451) $ (278,165) State 210,996 -- (29,168) ------------ ------------ ------------ 3,443,148 (3,978,451) (307,333) Deferred expense (benefit) (3,298,148) 2,201,125 2,216,333 ------------ ------------ ------------ $ 145,000 $ (1,777,326) $ 1,909,000 ============ ============ ============
The difference between income taxes using the effective income tax rate and the statutory federal income tax rate is as follows:
2001 2000 1999 ------------ ------------ ------------ Federal income tax based on the statutory rate $ 186,688 $ (2,176,994) $ 2,087,372 State income taxes, less federal income tax benefit 2,781 209,028 218,876 Minority interest (19,807) (20,036) (738,444) Interest on deferred gain 373,560 466,000 250,028 Previously accrued income taxes (451,465) -- -- Permanent differences & other 53,243 (255,324) 91,168 ------------ ------------ ------------ $ 145,000 $ (1,777,326) $ 1,909,000 ============ ============ ============
The Company reevaluated its tax exposure during the quarter ended December 30, 2001 and, as a result of the resolution of certain tax issues, reduced previously accrued income tax liabilities by $451,465. F-24 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 9. INCOME TAXES (CONTINUED) Deferred tax (liabilities) assets are comprised of the following:
2001 2000 ------------ ------------ Deferred tax liabilities: Differences between book and tax basis of property $ (2,151,000) $ -- Profits on installment sales (8,722,000) (9,432,000) Unrealized gain on securities available for sale (64,000) (34,000) Other (321,000) (270,000) ------------ ------------ (11,258,000) (9,668,000) Deferred tax assets: Difference between book and tax basis of property -- 454,000 Deferred profit on sales of hotels 6,154,000 3,724,000 Direct financing leases 88,000 83,000 Differences between book and tax losses recognized by minority interests 725,000 743,000 Allowance for doubtful accounts 70,000 147,000 Alternative minimum tax credits 281,000 -- Net operating losses 5,866,000 2,687,000 Other 168,000 261,000 ------------ ------------ Total deferred tax asset 13,352,000 8,099,000 Valuation allowance (3,086,000) (2,687,000) ------------ ------------ Deferred tax asset 10,266,000 5,412,000 ------------ ------------ Net deferred tax liability $ (992,000) $ (4,290,000) ============ ============
During September 2000, the Internal Revenue Service (the "Service") issued a Revenue Agent's Report to the Company asserting income tax deficiencies and additions to tax relating to the tax year ended December 28, 1997. The Company filed a protest to the Service's asserted deficiencies and additions to tax. The amounts of the income tax deficiencies and additions to tax asserted does not include interest which accrues from the dates the taxes were due until the date of the payment. The asserted deficiencies are related solely to the timing of taxable income between the four years from fiscal 1997 F-25 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 9. INCOME TAXES (CONTINUED) through fiscal 2000, in which year the Company provided taxes thereon. The Service submitted a proposed agreement on August 6, 2001, and the Company accepted the agreement on September 20, 2001. On March 22, 2002, the Company received a notice from the Service of tax due for fiscal 1997 in the amount of $2,493,807 plus statutory interest of $724,812 (no penalties). Both the income tax due and the statutory interest are provided for in the accompanying financial statements. The Company has a federal net operating loss carryforward of approximately $8,000,000 as of December 30, 2001. The Company expects to realize the benefit of this deferred tax asset and therefore no valuation allowance has been placed against it. In addition, the Company has state net operating loss carryforwards of approximately $85,000,000 and $73,000,000 at December 30, 2001 and December 31, 2000 respectively. These losses expire form tax years 2002 through 2021. Because of the uncertainty of the ultimate realization of this deferred tax asset, the Company has established a valuation allowance for the full amount. During 2001 the valuation allowance increased $399,000. The Company also has available alternative minimum tax credit carryforwards of $281,000 that can be used to offset future taxes in years in which the alternative minimum tax credit does not apply. The credit can be carried forward indefinitely. 10. RELATED PARTY TRANSACTIONS On July 5, 2000, the Board of Directors accelerated the vesting of certain options held by the Company's president and chief executive officer to purchase 40,000 shares of common stock. Immediately thereafter, the president and chief executive officer of the Company exercised vested employee stock options for 408,333 shares of the Company's common stock, at the exercise price of $3.75 per share. He executed non-interest bearing, unsecured, full-recourse promissory notes totaling $1,531,249 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 recorded the notes receivable of $1,531,249, net of unearned discount of $331,000, assuming a market interest rate of 8.50%. During 2000, compensation expense was recorded in the amount of $152,000 (the fair value of shares received less the present value of the notes receivable using an 8.50% discount rate). The fair value of shares issued of $1,352,603 has been recorded as paid-in capital and the notes receivable are recorded as a deduction from shareholders' equity. The Company has accreted $47,102 and $102,055 of discount on these notes as interest income in 2000 and 2001, respectively. F-26 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 11. SALE/LEASEBACK TRANSACTIONS In November 1997, the Company entered into a sale and leaseback agreement for 14 of its Sumner Suites hotels. In June 1999, the Company entered into a similar sale and leaseback agreement with the same party for an additional six of its Sumner Suites hotels. In May 2000, the Company entered into a third sale and leaseback agreement with the same party for an additional four of its Sumner Suites hotels. The assets of the hotels were sold to 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 12 below. The lease was classified as an operating lease The Company sold hotel assets in 1997 with a net book value of approximately $101.5 million for $140 million in cash. The gain of approximately $34.9 million was initially deferred and was being recognized on the straight-line method over the initial lease term, as amended in 1999, as a reduction of rent expense. The 1999 cash sale price of the six hotels was $65 million; these hotels had a net book value of approximately $54 million. The $11 million gain was deferred and was being recognized over the remainder of the 12-year lease term. The 2000 cash sale price of the four hotels was $38.4 million; these hotels had a net book value of approximately $34 million. The resulting $3.7 million gain was deferred and was being recognized over the remainder of the 12-year lease term. The minimum base rental was $25.6 million annually with contingent rent due of 8% of the excess of the leased hotels' base revenues (as defined in the lease agreement) beginning in 1999. Contingent rentals totaled $91,000 during 1999 and $56,000 during 2000 to the date of sale of leasehold interests on July 9, 2000. The Company was required to pay a deposit of $14 million (increased to $21.3 million in 1999 and to $25.6 million in 2000) to be retained by the purchaser in the event of default or nonobservance of the lease agreement. The deposit was to be refunded to the Company at the end of the lease term in the event no default had occurred. The Company was also required to provide an additional deposit of $14 million. This deposit earned interest at a rate of 11.11% annually. Interest earned was credited to the required rent payment due the lessor. The deposit was to be refunded to the Company upon the earlier of achievement of certain operating results of the leased hotels or expiration of the lease. On July 9, 2000, the Company sold its leasehold interests in the 24 hotels to Prime Hospitality Corp. ("Prime"), and as a part of the transaction, the Company assigned its interest to Prime in the two deposits related to the lease, the $14 million guaranty deposit and the $25.6 million in lease security deposits. F-27 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 12. 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 (Note 11). 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. One of these construction projects was completed in October 2001, and the hotel opened on October 3, 2001. The other project is presently in process and is expected to be completed in the first quarter of 2002. These projects were 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 Hospitality Properties Trust ("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. As of December 30, 2001, the completed hotel was being operated by the Company as an AmeriSuites hotel, subject to HPT's exchange option being exercised and consummated. The exchange subsequently occurred on March 14, 2002. The other hotel was completed and opened by the Company as an AmeriSuites hotel on February 7, 2002, and is being operated by the Company pending the exchange, which is expected to occur before the Company's first fiscal quarter ending April 21, 2002. 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. The Company has not earned any contingency rental income to date. Prime has converted all 27 of the Sumner Suites hotels to the AmeriSuites brand. The Company agreed to not operate any other all-suites hotels in competition with Prime within a defined geographic radius of each of the hotels being sold. This restriction will not prevent the Company from developing hotels for others in the restricted area or operating or franchising any Shoney's Inn brand hotel in the restricted area. F-28 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 12. SALE OF LEASEHOLD INTERESTS (CONTINUED) In 2000, the Company recognized a gain of $3.6 million, continued to defer gains of $4.1 million from previous sale/leaseback transactions on two of the hotels subject to possible exchange, and recognized extraordinary gains related to the early extinguishment of the debt securities received from Prime of $855,000, all before income tax. In addition, the Company agreed to construct one 124-room AmeriSuites hotel for Prime on a site presently owned by Prime at a construction and development price of $76,500 per room, less Prime's cost of the land. This construction was completed in 2001. The Company also agreed to provide reservation services to Prime for all of its existing hotels, for a fee based on a percentage of room revenue. Reservation service fees are now included in franchising and management revenues. The reservation system technology was enhanced in order to accommodate Prime's requirements, and was ready to add these additional hotel properties in early 2001. However, Prime failed to commence use of the Company's reservation services as agreed, and on June 25, 2001, the Company filed an arbitration proceeding against Prime, seeking $20 million in monetary damages. The parties have selected an arbitrator, and the arbitration hearing has been scheduled to begin on April 15, 2002. 13. SALE OF HOTELS During 1998, the Company sold 16 of its company-owned Shoney's Inn hotels for $90 million. The sales price consisted of $22.5 million in cash with the balance of $67.5 million in the form of interest-bearing promissory notes that are currently collateralized by 15 of the Shoney's Inn hotels that were sold. These notes contain cross-collateralization and cross-default provisions. The notes are currently being amortized on a 24-year amortization period at a 7.50% interest rate, and mature on July 30, 2003. Annually, on July 30, the then principal balance of the notes are amortized over one less year and at an interest rate adjusted based upon a formula tied to 5-year U. S. Treasury rates. Profit was recognized on twelve of the sales under the full accrual method of accounting. Profit of approximately $12 million on the other four hotels sold was accounted for under the installment method, $77,000 of which was recognized in 1998, with the remaining $11.9 million recognized in 1999 as the criteria for full accrual sales accounting were satisfied. F-29 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 14. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 1999 ------------ ------------ ------------ Cash paid during the year for interest $ 8,776,470 $ 11,114,856 $ 14,030,265 ============ ============ ============ Cash (received) paid during the year (from) for income taxes $ (3,994,184) $ 634,046 $ 277,890 ============ ============ ============ Significant non-cash activities: Investing: Proceeds from sale of property arising from notes receivable $ 6,507,500 $ 2,850,000 $ -- Proceeds from sale of leasehold interests arising from repurchase of long-term debt at a discount -- 1,617,625 -- Financing: Exercise of stock options financed by notes receivable $ -- $ 1,531,249 $ -- ------------ ------------ ------------ $ 6,507,500 $ 5,998,874 $ -- ============ ============ ============
15. OPERATING SEGMENT INFORMATION The Company's significant operating segments are hotel operations, franchising and management and construction and development. The hotel operating segment has represented approximately 80%, 72%, and 28% of total revenues for the years ending December 26, 1999, December 31, 2000, and December 30, 2001, respectively. The construction and development segment represented approximately 56% of total revenues in the year ended December 30, 2001, as compared with approximately 14% in 1999 and 19% in 2000. None of the Company's segments conduct foreign operations. Operating profit includes the operating revenues and expenses directly identifiable with the operating segment. Identifiable assets are those used directly in the operations of each segment. Revenues from the franchising and management segment include franchising revenues from one controlled group of franchisees of 16 Shoney's Inns which contributed approximately $1.0 million, or 24.8%, $920,000, or 25.5%, and $1.9 million, or 45.9%, of total franchising and management revenues, after elimination of intersegment amounts, in 1999, 2000 and 2001, respectively. Construction and development revenues earned in 1999 included two construction contracts with one customer comprising approximately F-30 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 15. OPERATING SEGMENT INFORMATION (CONTINUED) $11.0 million, or 97.7%, of total construction revenues. Construction and development revenues earned in 2000 included two construction contracts with two customers comprising approximately $10.5 million, or 87.5%, of total construction revenues. Construction and development revenues earned in 2001 included three construction contracts with three customers comprising approximately $21.6 million, or 78.6%, of total construction and development revenues. A summary of the Company's operations by segment follows (in thousands of dollars):
2001 2000 1999 ---------- ---------- ---------- Revenues: Hotel revenues from external customers $ 18,119 $ 49,150 $ 67,623 Franchising and management 5,319 6,975 8,687 Construction and development 41,650 15,094 26,413 Elimination of intersegment franchising and construction revenue (16,156) (7,141) (20,306) ---------- ---------- ---------- Total revenues $ 48,932 $ 64,078 $ 82,417 ========== ========== ========== Operating profit (loss): Hotel $ 2,909 $ (723) $ 1,640 Franchising and management (6,010) (5,526) (6,084) Construction and development 1,965 (327) 1,361 ---------- ---------- ---------- Total operating profit (loss) $ (1,136) $ (6,576) $ (3,083) ========== ========== ========== Total assets: Hotel $ 152,142 $ 138,421 $ 200,773 Franchising and management 44,500 63,351 57,986 Construction and development 9,945 2,859 11,555 ---------- ---------- ---------- Total assets $ 206,587 $ 204,631 $ 270,314 ========== ========== ========== Capital expenditures: Hotel $ 18,211 $ 3,595 $ 16,955 Franchising and management 2,555 5,129 3,126 Construction and development 166 107 20 ---------- ---------- ---------- Total capital expenditures $ 20,932 $ 8,831 $ 20,101 ========== ========== ========== Depreciation and amortization: Hotel $ 3,527 $ 4,609 $ 5,920 Franchising and management 1,068 1,130 1,143 Construction and development 66 47 38 ---------- ---------- ---------- Total depreciation and amortization $ 4,661 $ 5,786 $ 7,101 ========== ========== ==========
F-31 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 16. DEFINED CONTRIBUTION PLAN In 2000, the Company began sponsoring a 401(k) defined contribution plan for all employees. Eligible participants may contribute up to 15% of their annual compensation, subject to maximum amounts established by the United States Internal Revenue Service ("the IRS"). The Company makes matching contributions which equal 20% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the IRS. The Company's contributions under this plan amounted to $80,782 in 2000 and $51,985 in 2001. F-32 ShoLodge, Inc. and Subsidiaries Notes to consolidated Financial Statements 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the years ended December 30, 2001 and December 31, 2000:
QUARTERS ----------------------------------------------------------- FIRST SECOND THIRD FOURTH ---------- ---------- --------- --------- (IN (000'S) EXCEPT FOR PER SHARE DATA) 2001 REVENUES $ 11,063 $ 10,852 $ 12,941 $ 14,076 OPERATING EARNINGS (LOSS) (543) 213 (48) (758) EARNINGS (LOSS) BEFORE EXTRAORDINARY 1,532 (52) (275) (859) ITEMS EXTRAORDINARY GAIN 54 105 367 40 NET INCOME (LOSS) 1,586 53 92 (819) NET INCOME (LOSS) PER SHARE: BASIC: BEFORE EXTRAORDINARY ITEMS .28 (.01) (.05) (.16) EXTRAORDINARY GAIN .01 .02 .07 .00 NET INCOME (LOSS) .29 .01 .02 (.16) DILUTED: BEFORE EXTRAORDINARY ITEMS .28 (.01) (.05) (.16) EXTRAORDINARY GAIN .01 .02 .07 .00 NET INCOME (LOSS) .29 .01 .02 (.16) 2000 Revenues $ 27,390 $ 21,593 $ 7,508 $ 7,587 Operating loss (2,014) (2,610) (548) (1,404) Earnings (loss) before extraordinary (2,283) 350 (803) (1,241) items Extraordinary gain 251 2,287 1,919 98 Net income (loss) (2,032) 2,637 1,116 (1,143) Net income (loss) per share: Basic: Before extraordinary items (.43) .07 (.14) (.22) Extraordinary gain .05 .43 .34 .02 Net income (loss) (.38) .50 .20 (.20) Diluted: Before extraordinary items (.43) .07 (.14) (.22) Extraordinary gain .05 .43 .34 .02 Net income (loss) (.38) .50 .20 (.20)
F-33 EX-10.15 3 g75199ex10-15.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10(15) AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT This AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (the "Amendment") is entered into as of October 3, 2001, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Agent"), with a place of business located at 2450 Colorado Avenue, Suite 3000 West, Santa Monica, California 90404, as Agent for the Lenders (as defined herein), and as a Lender, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders", and together with Agent, as the "Lender Group"), and THE HOTEL GROUP, INC., a Kansas corporation ("Borrower"), and SHOLODGE, INC., a Tennessee corporation ("Holdings"), with its chief executive office located at 130 Maple Drive North, Hendersonville, TN 37075, with reference to the following: WHEREAS, Borrower and Holdings previously entered into that certain Loan and Security Agreement, dated as of August 27, 1999 (as amended, restated, supplemented, or otherwise modified from time to time, the "Loan Agreement"), with Agent and Lenders pursuant to which Lenders have made certain loans and financial accommodations available to Borrower and Holdings; WHEREAS, Borrower and Holdings have requested that Agent and the Lenders amend the Loan Agreement; WHEREAS, subject to the terms and conditions set forth herein, Agent and the Lenders are willing to so amend the Loan Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Defined Terms. All terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Loan Agreement. 2. Amendments To The Loan Agreement. (a) Section 1.1 of the Loan Agreement hereby is amended as follows: (i) The definition of "Additional Pledged Notes" hereby is amended and restated in its entirety to read as follows: "Additional Pledged Notes" means the notes, itemized on Schedule A-1, pledged by an Obligor in support of the increase in the Maximum Facility 5.20 - 1 Amount above $30,000,000 as a result of an increase in the Maximum Revolver Amount above $20,000,000, and such term shall also include notes pledged by an Obligor pursuant to Section 4.5. (ii) The definition of "Applicable NOI Multiple" is hereby amended and restated in its entirety to read as follows: "Applicable NOI Multiple" means the following stated NOI numbers set forth below under the heading "NOI Multiple" with respect to the specified levels of Subordinated Indebtedness set forth below:
- ---------------------------------------------------------------- Amount of Subordinated Indebtedness NOI Multiple - ---------------------------------------------------------------- >$50,000,000 5.0 - ---------------------------------------------------------------- >$30,000,000 and <$50,000,000 4.0 - - ---------------------------------------------------------------- <$30,000,000 3.0 - - - ----------------------------------------------------------------
(iii) The definition of "Applicable Prepayment Premium" hereby is deleted in its entirety. (iv) The definition of "Baseline NOI" hereby is amended and restated in its entirety to read as follows: "Baseline NOI" means (i) from the Closing Date to the Maximum Facility Amount Availability Date, the NOI attributable to the Underlying Real Property Collateral which secures the Pledged Notes, (ii) after the Maximum Facility Amount Availability Date, the NOI attributable to the Underlying Real Property Collateral which secures the Pledged Notes and the Additional Pledged Notes, all as set forth on Schedule A-1, and (iii) from time to time, the NOI attributable to additional parcels of Real Property Collateral added by amendment to Schedule A-1 as set forth in this Agreement. (v) The definition of "Jonesboro Property" hereby is deleted in its entirety. (vi) The definition of "Maximum Revolver Amount" hereby is amended and restated in its entirety to read as follows: "Maximum Revolver Amount" means $20,000,000 or such larger amount as may be approved from time to time by the Lender Group (it being understood that there is currently no present agreement to approve or consider any such larger amount). 5.20 - 2 (vii) The definition of "Maximum Facility Amount Availability Date" hereby is amended and restated in its entirety to read as follows: "Maximum Facility Amount Availability Date" means that date upon which all of the conditions precedent as set forth in Section 3.2 to the Lenders' commitment to increase the Maximum Facility Amount above $30,000,000 as a result of an increase in the Maximum Revolver Amount above $20,000,000 have been either satisfied or waived by the Lender Group. (viii) The definition of "Real Property Collateral" hereby is amended and restated in its entirety to read as follows: "Real Property Collateral" means the Real Property owned in fee by an Obligor identified on Schedule A-1, as the same may be amended or modified from time to time to reflect the provision of additional Real Property Collateral to secure the Obligations as set forth in Section 2.1(c), 3.9 or 4.5." (ix) The definition of "Total Maximum Commitment Amount" hereby is amended and restated in its entirety to read as follows: "Total Maximum Commitment Amount" means, for each Lender, the Dollar amount of the obligation of such Lender to make Advances and to make its portion of the Term Loan, as such amount is set forth opposite the name of such Lender under the caption Total Maximum Commitment on Schedule C-1, in an aggregate amount of $30,000,000. (x) The definition of "Unencumbered Asset Value" hereby is amended by deleting from the parenthetical appearing in subsection (v) of such definition the language ", such as Murfreesboro and Jackson, which until they are directly secured by real property". (xi) The following definitions hereby are added in alphabetical order: "Aggregate NOI" shall have the meaning set forth in the definition "Go-forward Reserve". "Average Quarterly NOI Decline" shall mean the quotient obtained by dividing (a) the result of (i) the quotient obtained by dividing (A) the result of (x) the Aggregate NOI for the immediately preceding four quarters (the "Most Recent NOI") subtracted from (y) the Aggregate NOI for the equivalent four quarter period for the immediately preceding year (the "Previous NOI") by (B) the Previous NOI multiplied by (ii) the Most Recent NOI by (b) 4. 5.20 - 3 "Go-forward Reserve" shall mean the reserve against the Borrowing Base to be established at such time as the Interim Reserve is terminated following the delivery to the Agent of the collateral reporting set forth in Section 6.2(e) for the period ending December 31, 2001. Such reserve shall be in an amount equal to the greater of (a) the product of 5 times the result of (i) the actual total NOI generated by the Real Property Collateral and the Underlying Real Property Collateral securing repayment of Eligible Notes (the "Aggregate NOI") for the immediately preceding four quarters subtracted from (ii) the Aggregate NOI for the four quarters ended the immediately preceding quarter prior to the last quarter in the period set forth in (a)(i) above or (b) the product of 5 times the Average Quarterly NOI Decline. Schedule 1.1 sets forth an example of the calculation of the Go-forward Reserve. "Interim Reserve" shall mean the reserve against the Borrowing Base established pursuant to Section 2.1(b) by the Agent for the period commencing on October 3, 2001 and ending on the date that the collateral reporting set forth in Section 6.2(e) for the period ending December 31, 2001 has been delivered to the Agent. Such reserve shall be in an amount equal to the Aggregate NOI for the twelve months ending August 31, 2001. Section 1.1 sets forth an example of the calculation of the Interim Reserve. (b) Section 2.1(b) hereby is amended and restated in its entirety to read as follows: "Anything to the contrary in this Section 2.1 notwithstanding, Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including without limitation, the Go-Forward Reserve, the Interim Reserve, and reserves with respect to (i) sums that the Obligors are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and have failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by the Obligors to any Person to the extent secured by a Lien on, or trust over, any of the Collateral, which Lien or trust, in the reasonable determination of Lender (from the perspective of an asset-based lender), would be likely to have a priority superior to the Liens of Agent, for the benefit of the Lender Group (such as landlord liens, ad valorem taxes, or sales taxes where given priority under applicable law) in and to such item of the Collateral. Agent shall notify Borrower in writing as soon as is practicable following the establishment of any such reserve or any change in the amount thereof, which notice shall set forth in reasonable detail the amount of such reserve and the reason for the establishment thereof (provided that no such notification shall be required for the Go-forward Reserve or the Interim Reserve)." (c) Section 2.6(a) hereby is amended by: (i) deleting from clause (i) thereof the number "0.50" and inserting "2.50" in lieu thereof; and 5.20 - 4 (ii) deleting from clause (ii) thereof the number "0.50" and inserting "1.00" in lieu thereof. (d) Section 2.11(d) hereby is amended by deleting the dollar amount "$1,500" and inserting "$3,500" in lieu therof. (e) Section 3.2 hereby is amended and restated in its entirety to read as follows: "3.2 Conditions Precedent to inclusion of the Additional Pledged Notes in the Borrowing Base and the Making of Loans on or after the Maximum Facility Amount Availability Date. The following shall be conditions precedent to the inclusion of the Additional Pledged Notes as set forth on Schedule A-1 in the calculation of the Borrowing Base and the making of Advances on or after the Maximum Facility Amount Availability Date: (a) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Additional Pledged Notes; (ii) the Additional Pledged Deeds of Trust; (iii) the Additional Pledged Note Endorsements; (iv) the Additional Pledged Deed of Trust Assignments; (v) the Additional Pledged Title Policies; (vi) the Additional Pledged Title Policy Assignment Endorsements; (vii) the Additional Pledged Note Obligor Notifications; (viii) the FF&E Bank Notification Letters; and (ix) the Additional Pledged Note Estoppels; (b) Agent shall have received real estate appraisals, in form and substance, and from real estate appraisers, satisfactory to Agent in its Permitted Discretion with respect to each parcel of Underlying Real Property Collateral encumbered by an Additional Pledged Deed of Trust; (c) Agent shall have received title reports and title insurance policies, in form and substance, and from title companies, satisfactory to 5.20 - 5 Agent in its Permitted Discretion with respect to each additional parcel of Underlying Real Property Collateral; (d) Agent shall have received an opinion of Obligors' counsel in form and substance satisfactory to Agent in its Permitted Discretion; (e) Agent shall have received a Phase I environmental report with respect to each parcel of Underlying Real Property Collateral encumbered by an Additional Pledged Deed of Trust, the environmental consultants retained for such reports, the scope of the reports, and the results of the reports shall be satisfactory to Agent, in its Permitted Discretion; (f) Agent shall have received, to its satisfaction, in its Permitted Discretion, an assignment for the benefit of the Lenders of the FF&E Reserves maintained by each Mortgagor of each parcel of Underlying Real Property Collateral which is subject to an Additional Pledged Deed of Trust; (g) Agent shall have completed its business, legal, and collateral due diligence, including, but not limited to, (i) a collateral audit and review of each Obligor's books and records and verification of each Obligor's representations and warranties to the Lender Group, the results of which shall be satisfactory to each Lender in each Lender's Permitted Discretion, and (ii) a review of the financial and business performance of each Shoney's Inn operated on the Underlying Real Property Collateral securing the Additional Pledged Notes and the determination of the Baseline NOI, the results of which shall be reasonably satisfactory to each Lender in each Lender's Permitted Discretion; (h) Agent shall have syndicated to its satisfaction the increase in Commitments from the Interim Facility Amount to the Maximum Facility Amount and, to the extent necessary to reach the Total Maximum Commitment, Joining Lenders, as defined in the Joinder Agreement, shall have been admitted to the credit facility as provided in Section 14.3; (i) Agent shall have determined, to its satisfaction in its Permitted Discretion, the right of Agent, on behalf of the Lender Group, to change the flag under which the lodging operations are conducted on the Real Estate Collateral in the event Agent enters into possession and control thereof as a result of the exercise of remedies with respect to a Mortgage upon default by an Obligor, or the Additional Pledged Notes or the Additional Pledged Deeds of Trust upon default by a Mortgagor; (j) Agent shall have received such estoppel letters from the purchasers of the Underlying Real Property Collateral securing repayment of the Additional Pledged Notes, with respect to the status of the 5.20 - 6 Additional Pledged Notes as of the Maximum Facility Amount Availability Date as Agent shall require in its Permitted Discretion; and (k) Agent shall have determined, to Agent's satisfaction in its Permitted Discretion, that the Additional Pledged Notes are cross-collateralized and cross-defaulted each to each other and to each Pledged Note; (l) Obligors shall have utilized their best efforts to obtain for the benefit of the Lender Group estoppel letters, in form and substance satisfactory to the Agent in its Permitted Discretion, from each ground lessor with respect to the Underlying Real Property Collateral securing repayment of the Additional Pledged Notes, if any, stating that the ground lease is in full force and effect, that the ground lessor agrees to send copies of any notices of default sent to the ground lessee also to Agent, and that the Agent has the right to cure any such default applicable to a mortgagee under the applicable ground lease; (m) Agent and ShoLodge Franchise shall have entered into an agreement, in form and substance acceptable to Agent in its Permitted Discretion, whereby ShoLodge Franchise agrees to (i) provide to Agent, at such time as any notice is sent to the Mortgagor/licensee, a copy of any notices sent to the Mortgagor/licensee under the applicable license agreement for the use of the Shoney's Inn marks with respect to lodging operations on the Underlying Real Property Collateral securing repayment of the Additional Pledged Notes, and to permit Agent to cure any default by the Mortgagor/licensee under the applicable license agreement within the time periods provided in the license agreement, and (ii) to license to Agent the use of the Shoney's Inn marks, upon the same terms and conditions set forth in the applicable license agreement, in the event that the Agent comes into possession of any such Underlying Real Property Collateral; and (n) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent in its Permitted Discretion." (f) Section 3.6 hereby is amended by deleting the first sentence thereof and inserting the following in lieu thereof: "This Agreement shall become effective upon the execution and delivery hereof by Obligors and the Lender Group and shall continue in full force and effect for a term ending on September 30, 2004 (the "Maturity Date"). (g) Section 3.8 hereby is amended by: (i) deleting from the initial sentence thereof the words "together with the Applicable Prepayment Premium" and 5.20 - 7 inserting the words "without premium or penalty" in lieu thereof; (ii) deleting the second sentence thereof in its entirety; and (iii) deleting the last three sentences thereof in their entirety. . (h) Section 3.9 hereby is amended and restated in its entirety to read as follows: "3.9 Note Default and Remedies. (a) Upon the occurrence of a default under one or more of the Notes and/or the instruments securing the indebtedness evidenced thereby, the Obligors shall have the right, in their discretion, to take such action as is deemed appropriate to collect the Indebtedness evidenced by such Notes, including, without limitation, the exercise of all remedies under the instruments securing the indebtedness evidenced by such Notes. All proceeds received from the exercise of such remedies shall be Collections governed by the provisions of Section 2.7. Notwithstanding anything to the contrary contained in this Agreement, the Obligors shall have 5 days to cure any Overadvance created by such a default, in accordance with Section 2.5. (b) If an Obligor, directly or indirectly, acquires the Underlying Real Property Collateral securing repayment of a Note following the exercise of its remedies as set forth in subsection 3.9(a), or by reason of a deed in lieu of such exercise of remedies, Obligors may, for a period of 10 days following such acquisition, pledge the Underlying Real Property Collateral which previously secured repayment of such Note (which shall then be Real Property Collateral hereunder). Such additional Real Property Collateral may be added to the Collateral securing the Obligations through an amendment to this Agreement and as set forth in Section 4.5. Thereafter, such Real Property Collateral shall be included in the determintion of the Borrowing Base and the NOI from such Real Property Collateral shall be included in the NOI for Real Estate Collateral." (i) Section 4.4 hereby is amended by: (i) deleting from the next to last sentence thereof the language "(iii) the Obligors shall maintain the released Note free and clear of all Liens or other encumbrances, and (iv)" and inserting the language "and (iii)" in lieu thereof; and (ii) deleting the last sentence thereof in its entirety and inserting in lieu thereof the following: "Any Note so released from being considered Collateral shall, however, be included in the calculation of Unencumbered Asset 5.20 - 8 Value provided such Note is free and clear of Liens or other encumbrances." (j) Section 4.5 hereby is amended by inserting between the words "any time" and "and from time to time" the words "in accordance with Section 2.1(c) or Section 3.9". (k) Section 6.2(e) hereby is amended and restated in its entirety as follows: "(e) on a monthly basis and within 50 days of the end of the month, (i) a calculation of the NOI, on the basis of the immediately preceding twelve months, derived by the respective Mortgagor from the hotel operations for each parcel of Underlying Real Property Collateral, and by Holdings or Borrower, as the case may be, with respect to any parcel of Real Property Collateral; and (ii) an analysis, accompanied by appropriate calculations and discussion, as required by Agent in its Permitted Discretion, of the occupancy rate, average daily room rate, and revenue per available room derived by the respective Mortgagor from the hotel operations for each parcel of Underlying Real Property Collateral, and by Holdings or Borrower, as the case may be, with respect to any parcel of Real Property Collateral." (l) Section 7.20 hereby is amended by: (i) deleting from the first sentence of subparagraph (b) thereof the dollar amount "$100,000,000" and inserting "$90,000,000" in lieu thereof; and (ii) deleting the second sentence of subparagraph (b) thereof in its entirety. (m) Section 14.3(a) hereby is amended by deleting the last sentence thereof in its entirety. (n) Schedule A-1 of the Loan Agreement hereby is deleted in its entirety and the new Schedule A-1 attached hereto shall be inserted in lieu thereof. (o) Schedule C-1 of the Loan Agreement hereby is deleted in its entirety and the new Schedule C-1 attached hereto shall be inserted in lieu thereof. (p) Schedule 1.1 hereby is added to the Loan Agreement. 5.20 - 9 (q) Schedule 5.20 of the Loan Agreement hereby is amended by adding thereto the addendum to Schedule 5.20 attached hereto. (r) Exhibit B-1 of the Loan Agreement hereby is amended by deleting from paragraph R thereof the language "[$46.5 MILLION]" and inserting "[$30 MILLION]" in lieu thereof. (p) Exhibit C-2 of the Loan Agreement hereby is amended by deleting from paragraph 2(b) of Schedule 3 thereto the dollar amount "$100,000,000" and inserting "$90,000,000" in lieu thereof. 3. Conditions Precedent to Amendment. The satisfaction of each of the following, unless waived or deferred by Agent in its sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment and each and every provision hereof: (a) Agent shall have received this Amendment, duly executed by the parties hereto, and the same shall be in full force and effect. (b) Agent shall have received a reaffirmation and consent substantially in the form attached hereto as Exhibit A (the "Consent"), duly executed and delivered by each Guarantor. (c) The representations and warranties in this Amendment, the Loan Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date). (d) After giving effect to this Amendment, no Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein. (e) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority against Borrower, Holdings, Agent or any Lender, or any of their respective Affiliates. (f) Agent shall have received an amendment fee in the amount of $300,000, which amount Borrower and Holdings authorize Agent, for the benefit of the Lender Group, to charge to the Loan Account. (g) Borrower shall have complied with the following with respect to each Pledged Note or Real Estate Collateral added to Schedule A-1 of the Loan Agreement pursuant to this Amendment: 5.20 - 10 (1) Agent shall have received each of the following documents, as applicable, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Pledged Notes; (ii) the Pledged Deeds of Trust; (iii) the Pledged Note Endorsements; (iv) the Pledged Deed of Trust Assignments; (v) the Pledged Title Policies; (vi) the Pledged Title Policy Assignment Endorsements; (vii) the Pledged Note Obligor Notifications; and (viii) the Pledged Note Estoppels. (2) Agent shall have received real estate appraisals, in form and substance, and from real estate appraisers, satisfactory to Agent with respect to each additional parcel of Real Estate Collateral. (3) Agent shall have received title reports and title insurance policies, in form and substance, and from title companies, satisfactory to Agent with respect to each additional parcel of Underlying Real Property Collateral. (4) Agent shall have received an opinion of Obligor's counsel in form and substance satisfactory to Agent in its Permitted Discretion. (5) Agent shall have received such environmental reports with respect to the additional Real Estate Collateral, the environmental consultants retained for such reports, the scope of the reports, and the results of the reports shall be satisfactory to Agent, in its Permitted Discretion. (6) Agent shall have received, to its satisfaction, an assignment for the benefit of Lenders of the FF&E Reserves, if any, maintained by each Mortgagor of each additional parcel of Underlying Real Property Collateral which is subject to a Pledged Deed of Trust. (7) Agent shall have determined, to its satisfaction in its Permitted Discretion, the right of Agent, on behalf of the Lender Group, to change the flag under which the lodging operations are conducted on the Real Estate Collateral in the event Agent enters into possession and control thereof as a result of the exercise of remedies with respect to a Mortgage upon default by an Obligor, or the Pledged Notes or the Pledged Deeds of Trust upon default by a Mortgagor. 5.20 - 11 (8) Agent shall have received such estoppel letters from the purchasers under the Motel Purchase Agreement, with respect to the status of any Pledged Notes as of the date of the inclusion thereof in the calculation of the Borrowing Base as Agent shall require in its Permitted Discretion. (9) Agent and ShoLodge Franchise shall have entered into an agreement, in form and substance acceptable to Agent in its Permitted Discretion, whereby ShoLodge Franchise agrees to (i) provide to Agent, at such time as any notice is sent to the Mortgagor/licensee, a copy of any notices sent to the Mortgagor/licensee under the applicable license agreement for the use of the Shoney's Inn marks with respect to lodging operations on the Underlying Real Property, and to permit Agent to cure any default by the Mortgagor/licensee under the applicable license agreement within the time periods provided in the license agreement, and (ii) to license to Agent the use of the Shoney's Inn marks, upon the same terms and conditions set forth in the applicable license agreement, in the event that the Agent comes into possession of any Underlying Real Property Collateral. 4. Representations and Warranties. Each of the Borrower and Holdings hereby represents and warrants to the Agent that (a) the execution, delivery, and performance of this Amendment and of the Loan Agreement, as amended hereby, are within its powers, have been duly authorized by all necessary action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or Governmental Authority, or of the terms of its Governing Documents, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, (b) this Amendment and the Loan Agreement, as amended hereby, constitute its legal, valid, and binding obligation, enforceable against it in accordance with its terms, and (c) this Amendment has been duly executed and delivered by it. 5. Choice of Law. The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the laws of the State of California. 6. Counterparts; Telefacsimile Execution. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment or Consent by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment or such Consent. Any party delivering an executed counterpart of this Amendment or the Consent by telefacsimile also shall deliver a manually executed counterpart of this Amendment or Consent, as applicable, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment or the Consent. 7. Effect on Loan Documents. 5.20 - 12 (a) The Loan Agreement, as amended hereby, and each of the other Loan Documents shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not, except as expressly set forth herein, operate as a waiver of or, except as expressly set forth herein, as an amendment of, any right, power, or remedy of Agent or any Lender under the Loan Agreement, as in effect prior to the date hereof. The waivers, consents, and modifications herein are limited to the specifics hereof, shall not apply with respect to any facts or occurrences other than those on which the same are based, shall not excuse future non-compliance with the Loan Agreement, and shall not operate as a consent to any further or other matter, under the Loan Documents. (b) Upon and after the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to "the Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as modified and amended hereby. (c) To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Loan Agreement as modified or amended hereby. 8. Further Assurances. Each of Borrower and Holdings shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Agent, and take all actions as Agent may reasonably request from time to time, to perfect and maintain the perfection and priority of Agent's security interests in the Collateral (for the benefit of the Lender Group) and to fully consummate the transactions contemplated under this Amendment and the Loan Agreement. 9. Entire Agreement. This Amendment, together with all other instruments, agreements, and certificates executed by the parties in connection herewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings, and inducements, whether express or implied, oral or written. [Remainder of page intentionally left blank] 5.20 - 13 IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written. SHOLODGE, INC., a Tennessee corporation By /s/ James M. Grout ------------------------------------------------- Title: Executive Vice President THE HOTEL GROUP, INC., a Kansas corporation By /s/ James M. Gout ------------------------------------------------- Title: Executive Vice President FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By /s/ Davies Gannon ------------------------------------------------- Title: ---------------------------------------------- 5.20 - 14 EX-21 4 g75199ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF PERCENTAGE OF VOTING INCORPORATION STOCK OWNED BY SHOLODGE, NAME OF ENTITY OR FORMATION INC. MOBAT, Inc. Tennessee 100% Shoney's Inn of Lebanon, Inc. Tennessee 100% Nashville Air Associates, Inc. Tennessee 100% Moore and Associates, Inc. Tennessee 100% Virginia Inns, Inc. Tennessee 100% Sumner Ventures, Inc. Tennessee 100% ShoLodge Franchise Systems, LLC Tennessee 100% Sunshine Inns, Inc. Tennessee 100% SLI Enterprises, Inc. Tennessee 100% Midwest Inns, Inc. Tennessee 100% Southeast Texas Inns, Inc. Tennessee 100% The Hotel Group, Inc. Kansas 100%(1) Delaware Inns, Inc. Tennessee 100% Carolina Inns, Inc. Tennessee 100% Alabama Lodging Corporation Tennessee 100% ShoLodge Beverage Corporation Texas 100%(2) Suite Tenant, Inc. Tennessee 100% InnLink, LLC Tennessee 100%
- -------------- (1) Through Midwest Inns, Inc. (2) Through Southeast Texas Inns,Inc. EX-23.1 5 g75199ex23-1.txt CONSENT OF ERNST & YOUNG EXHIBIT 23 (1) Consent of Ernst & Young LLP We consent to the incorporation by reference in: (1) the Registration Statement (Form S-3 No. 333-14463) of ShoLodge, Inc. and in the related Prospectus; (2) the Registration Statement (Form S-8 No. 33-52092) pertaining to the 1991 Stock Option Plan of ShoLodge, Inc.; (3) the Registration Statement (Form S-8 No. 333-29881) pertaining to the 1991 Stock Option Plan, as amended, of ShoLodge, Inc.; and (4) the Registration Statement (Form S-3 No. 33-77910) of ShoLodge, Inc. and in the related Prospectus, of our report dated March 22, 2002, with respect to the consolidated financial statements and schedule of ShoLodge, Inc. and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 30, 2001. /s/ Ernst & Young LLP Nashville, Tennessee April 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----