-----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, AWNOd4otJPND3LvU0r+D6DjhrMfhzmlKABbD3DGMNy8+nlaNiOSfEv0f2NKd+Pgo LieDOgATNgLQyA2lkwR8sQ== 0000950144-99-013433.txt : 19991118 0000950144-99-013433.hdr.sgml : 19991118 ACCESSION NUMBER: 0000950144-99-013433 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991117 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-Q SEC ACT: SEC FILE NUMBER: 000-19840 FILM NUMBER: 99759852 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-Q 1 SHOLODGE INC 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------------------------------- For the Third Quarter Ended October 3, 1999 Commission File No. 0-19840 --------------------------------------------- SHOLODGE, INC. (Exact name of registrant as specified in its charter) --------------------------------------------- TENNESSEE 62-1015641 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 130 MAPLE DRIVE NORTH, HENDERSONVILLE, TENNESSEE 37075 (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615) 264-8000 --------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. As of November 16, 1999, there were 5,466,578 shares of ShoLodge, Inc. common stock outstanding. 2 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 3, DECEMBER 27, 1999 1998(1) (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 23,180,642 $ 2,480,984 Restricted cash 1,597,629 701,484 Accounts receivable-net 4,973,288 3,251,104 Costs and estimated earnings in excess of billings on construction contracts 5,226,238 27,799 Income taxes receivable 2,140,104 4,775,686 Prepaid expenses 881,768 519,534 Notes receivable-net 162,500 3,363,394 Other current assets 435,374 443,967 ------------------------------------- Total current assets 38,597,543 15,563,952 NOTES RECEIVABLE, NET 61,218,524 58,390,170 PROPERTY AND EQUIPMENT 145,761,389 187,360,706 Less accumulated depreciation and amortization (23,570,996) (20,335,047) ------------------------------------- 122,190,393 167,025,659 LAND UNDER DEVELOPMENT OR HELD FOR SALE 11,435,063 9,556,720 DEFERRED CHARGES,NET 8,855,509 9,201,837 DEPOSITS ON SALE/LEASEBACK 35,280,000 28,000,000 DEFERRED TAX ASSET 127,035 127,035 INTANGIBLE ASSETS 3,163,041 3,290,162 OTHER ASSETS 3,130,937 3,845,824 ------------------------------------- TOTAL ASSETS $ 283,998,045 $ 295,001,359 =====================================
(1) Derived from fiscal year ended December 27, 1998 audited financial statements. See notes to consolidated financial statements. 3 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
OCTOBER 3, DECEMBER 27, 1999 1998(1) (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 13,570,073 $ 11,438,292 Taxes other than on income 1,198,351 1,636,220 Income taxes payable 0 0 Current portion of long-term debt and capitalized lease obligations 1,441,045 21,597,951 ------------------------------------- Total current liabilities 16,209,469 34,672,463 OTHER LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT PORTION 135,368,177 128,945,784 DEFERRED GAIN ON SALE/LEASEBACK 37,178,435 30,158,244 DEFERRED CREDITS 1,425,527 2,368,523 MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 1,013,168 757,311 ------------------------------------- TOTAL LIABILITIES 191,194,776 196,902,325 ------------------------------------- SHAREHOLDERS' EQUITY: Series A redeemable nonparticipating stock (no par value; 1,000 shares authorized, no shares outstanding) -- -- Common stock (no par value; 20,000,000 shares authorized 5,691,378 shares issued and outstanding as of October 3, 1999 and 7,472,310 shares issued and outstanding as of December 27, 1998) 1,000 1,000 Additional paid-in capital 42,474,900 42,433,395 Retained earnings 65,550,258 60,973,496 Unrealized gain on securities available for sale (net of tax) 91,535 67,704 Treasury Stock (15,314,424) (5,376,561) ------------------------------------- TOTAL SHAREHOLDERS' EQUITY 92,803,269 98,099,034 ------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 283,998,045 $ 295,001,359 =====================================
(1) Derived from fiscal year ended December 27, 1998 audited financial statements. See notes to consolidated financial statements. 4 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE FORTY WEEKS ENDED OCTOBER 3, 1999 AND OCTOBER 4, 1998
12 WEEKS ENDED 40 WEEKS ENDED OCTOBER 3, OCTOBER 4, OCTOBER 3, OCTOBER 4, 1999 1998 1999 1998 (As adjusted) (As adjusted) -------------------------------------------------------------- REVENUES: Hotel $ 17,051,354 $ 14,789,533 $ 51,712,387 $ 56,749,614 Franchising and management 1,893,824 881,255 3,561,087 2,441,717 Construction and development 4,494,888 0 5,198,439 0 -------------------------------------------------------------- Total revenues 23,440,066 15,670,788 60,471,913 59,191,331 COSTS AND EXPENSES: Operating expenses: Hotel 11,673,969 10,071,050 34,422,023 35,152,370 Franchising and management 518,924 563,710 1,683,103 1,840,414 Construction and development 3,774,840 0 4,419,688 0 -------------------------------------------------------------- Total operating expenses 15,967,733 10,634,760 40,524,814 36,992,784 General and administrative 1,079,329 1,056,207 4,542,478 4,342,610 Rent expense, net 3,936,794 2,277,540 9,506,432 7,626,940 Depreciation and amortization 1,458,094 1,496,028 5,562,389 6,157,559 -------------------------------------------------------------- Income from operations 998,116 206,253 335,800 4,071,438 OTHER INCOME AND (EXPENSES): Interest expense (2,515,378) (2,003,335) (9,515,166) (8,061,736) Interest income 1,628,706 1,399,025 4,726,646 3,532,139 Gain on sale of property 49,444 20,164,681 12,029,525 20,270,718 Other income (48,743) 222,138 406,252 720,176 -------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES AND MINORITY INTERESTS 112,145 19,988,762 7,983,057 20,532,735 INCOME TAXES (36,000) (7,677,000) (2,315,000) (7,857,000) MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED SUBSIDIARIES & PARTNERSHIPS (18,341) (385,945) (1,889,965) (459,653) -------------------------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 57,804 11,925,817 3,778,092 12,216,082 EXTRAORDINARY GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT (net of related tax effect of $490,000 in 1999 and $600,000 in 1998, respectively 798,670 (1,066,466) 798,670 (1,066,466) ============================================================== NET EARNINGS $ 856,474 $ 10,859,351 $ 4,576,762 $ 11,149,616 ============================================================== EARNINGS PER COMMON SHARE Basic: Earnings per share from continuing operations $ 0.01 $ 1.44 $ 0.55 $ 1.48 Extraordinary gain (loss), net of tax effect $ 0.14 $ (0.12) $ 0.12 $ (0.13) Net earnings $ 0.15 $ 1.32 $ 0.67 $ 1.35 ============================================================== Diluted: Earnings per share from continuing operations $ 0.01 $ 1.15 $ 0.54 $ 1.29 Extraordinary gain (loss), net of tax effect $ 0.13 $ (0.10) $ 0.11 $ (0.10) Net earnings $ 0.14 $ 1.05 $ 0.65 $ 1.19 ============================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 5,842,152 8,255,810 6,828,121 8,255,810 Diluted 6,067,252 10,870,565 7,054,246 11,006,802 --------------------------------------------------------------
See notes to consolidated financial statements. 5 SHOLODGE , INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FORTY WEEKS ENDED OCTOBER 3, 1999 AND OCTOBER 4, 1998 (UNAUDITED)
40 WEEKS ENDED OCTOBER 3, OCTOBER 4, 1999 1998 (AS ADJUSTED) ------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET EARNINGS $ 4,572,762 $ 12,216,082 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: EXTRAORDINARY GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT 1,288,670 (1,666,466) DEPRECIATION AND AMORTIZATION 5,562,389 6,157,559 ACCRETION OF DISCOUNT ON SECURITIES HELD TO MATURITY 0 (442,427) RECOGNITION OF PREVIOUSLY DEFERRED PROFIT (16,009,957) (173,748) GAIN ON CASUALTY LOSS (93,071) 0 GAIN ON SALE OF PROPERTY AND OTHER ASSETS (112,253) (20,270,718) DEFERRED INCOME TAX PROVISION 0 1,456,638 INCREASE IN MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 1,889,965 459,653 CHANGES IN ASSETS AND LIABILITIES: (INCREASE) DECREASE IN RESTRICTED CASH (896,145) 292,559 (INCREASE) DECREASE IN ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONSTRUCTION CONTRACTS (6,920,623) 4,972,747 DECREASE IN INCOME TAXES RECEIVABLE 2,635,582 0 (INCREASE) IN PREPAID EXPENSES (362,234) (47,074) (INCREASE) DECREASE IN OTHER ASSETS (286,627) 82,630 INCREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,131,781 4,110,047 (DECREASE) INCREASE IN INCOME AND OTHER TAXES (1,805,835) 649,633 ------------------------------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (8,405,596) 7,797,115 CASH FLOWS FROM INVESTING ACTIVITIES: PAYMENTS RECEIVED ON NOTES RECEIVABLE 12,292,668 176,936 CAPITAL EXPENDITURES (17,663,069) (63,759,958) PROCEEDS FROM SALE OF PROPERTY AND OTHER ASSETS 65,312,470 23,350,948 DEPOSITS ON SALE/LEASEBACK OF HOTELS (7,280,000) 0 ------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 52,662,069 (40,232,074) CASH FLOWS FROM FINANCING ACTIVITIES: DECREASE IN DEFERRED CHARGES 74,057 1,273,488 PROCEEDS FROM LONG-TERM DEBT 23,399,754 0 PAYMENTS ON LONG-TERM DEBT (36,952,036) (15,663,838) PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (182,232) (496,923) DISTRIBUTIONS TO MINORITY INTERESTS 0 (1,809,580) EXERCISE OF STOCK OPTIONS 41,505 0 PURCHASE OF TREASURY STOCK (9,937,863) 0 ------------------------------------ NET CASH (USED IN) FINANCING ACTIVITIES (23,556,815) (16,696,853) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,699,658 (49,131,812) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,480,984 58,103,004 ------------------------------------ CASH AND CASH EQUIVALENTS - END OF PERIOD $ 23,180,642 $ 8,971,192 ====================================
See notes to consolidated financial statements. 6 SHOLODGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In Management's opinion, the information and amounts furnished in this report reflect all adjustments which are necessary for the fair presentation of the financial position and results of operations for the periods presented. All adjustments are of a normal and recurring nature. The condensed consolidated balance sheet at December 27, 1998 has been derived from the audited consolidated financial statements at that date. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1998. The fiscal year consists of a 52/53 week year ending the last Sunday of the year. The four quarters have 16, 12, 12, and 12 weeks in first, second, third and fourth quarters, respectively, in each fiscal year. When the 53rd week occurs in a fiscal year, it is added to the fourth fiscal quarter, making it 13 weeks in length. The Company has historically reported lower earnings in the first and fourth quarters of the year due to the seasonality of the Company's business. The results of operations for the quarters and year-to-date periods ended October 3, 1999 and October 4, 1998 are not necessarily indicative of the operating results for the entire year. 7 B. EARNINGS PER SHARE Earnings per share was computed by dividing net income by the weighted average number of common shares outstanding. The following table reconciles earnings and weighted average shares used in the earnings per share calculations for the fiscal quarters and fiscal year-to-date periods ended October 3, 1999, and October 4, 1998:
12 WEEKS ENDED 40 WEEKS ENDED October 3, October 4, October 3, October 4, 1999 1998 1999 1998 Basic: Earnings Before Extraordinary Items $ 57,804 $ 11,925,817 $3,778,092 $ 12,216,082 Extraordinary Gain (Loss) 798,670 (1,066,466) 798,670 (1,066,466) ---------- ------------ ---------- ------------ Net Earnings Applicable To Common Stock $ 856,474 $ 10,859,351 $4,576,762 $ 11,149,616 ========== ============ ========== ============ Shares: Weighted Average Common Shares Outstanding 5,842,152 8,255,810 6,828,121 8,255,810 ========== ============ ========== ============ Basic Earnings Per Share: Before Extraordinary Items $ 0.01 $ 1.44 $ 0.55 $ 1.48 Extraordinary Gain (Loss) 0.14 (0.12) 0.12 (0.13) ---------- ------------ ---------- ------------ Net Earnings $ 0.15 $ 1.32 $ 0.67 $ 1.35 ========== ============ ========== ============ Diluted: Earnings Before Extraordinary Items (Basic) $ 57,804 $ 11,925,817 $3,778,092 $ 12,216,082 Extraordinary Gain (Loss) 798,670 (1,066,466) 798,670 (1,066,466) Dilutive Effect Of 7.5% Convertible Debentures -- 598,154 -- 1,993,846 ---------- ------------ ---------- ------------ Numerator For Diluted Earnings Per Share $ 856,474 $ 11,457,505 $4,576,762 $ 13,143,462 ========== ============ ========== ============ Shares: Weighted Average Common Shares Outstanding 5,842,152 8,255,810 6,828,121 8,255,810 Effect of Dilutive Securities (Options) 225,100 298,153 226,125 434,390 Effect Of Dilutive Securities (7.5% Convertible Debentures) -- 2,316,602 -- 2,316,602 ---------- ------------ ---------- ------------ Weighted Average Common And Common Equivalent Shares Outstanding 6,067,252 10,870,565 7,054,246 11,006,802 ========== ============ ========== ============ Diluted Earnings Per Share: Before Extraordinary Items $ 0.01 $ 1.15 $ 0.54 $ 1.29 Extraordinary Gain (Loss) 0.13 (0.10) 0.11 (0.10) ---------- ------------ ---------- ------------ Net Earnings $ 0.14 $ 1.05 $ 0.65 $ 1.19 ========== ============ ========== ============
8 C. OPERATING SEGMENT INFORMATION The Company's significant operating segments are hotel operations, franchising and management, and construction and development. In 1999, the Company is reporting a new segment due to its renewed construction and development activity for third parties. None of the Company's segments conduct foreign operations. Operating profit includes the operating revenues and expenses directly identifiable with the operating segment. Identifiable assets are those used directly in the operations of each segment. A summary of the Company's operations by segment follows (in thousands of dollars):
12 Weeks Ended 40 Weeks Ended October 3, October 4, October 3, October 4, 1999 1998 1999 1998 (As adjusted) (As adjusted) Revenues: Hotel revenues from external customers $ 17,051 $ 14,789 $ 51,712 $ 56,750 Franchising and management 6,243 16,835 20,611 54,937 Construction and development 4,495 0 5,198 0 Elimination of intersegment revenue franchising and management (4,349) (15,953) (17,049) (52,496) --------- --------- -------- -------- Total revenues $ 23,440 $ 15,671 $ 60,472 $ 59,191 ========= ========= ======== ======== Operating profit (loss): Hotel $ 170 $ 1,097 $ 2,942 $ 8,200 Franchising and management 108 (891) (3,385) (4,129) Construction and development 720 0 779 0 --------- --------- -------- -------- Total operating profit (loss) $ 998 $ 206 $ 336 $ 4,071 ========= ========= ======== ======== Capital expenditures: Hotel $ 3,866 $ 17,472 $ 16,104 $ 60,483 Franchising and management 541 2,753 1,559 3,277 Construction and development 0 0 0 0 --------- --------- -------- -------- Total capital expenditures $ 4,407 $ 20,225 $ 17,663 $ 63,760 ========= ========= ======== ======== Depreciation and amortization: Hotel $ 1,190 $ 1,250 $ 4,643 $ 5,312 Franchising and management 268 246 919 846 Construction and development 0 0 0 0 --------- --------- -------- -------- Total depreciation and amortization $ 1,458 $ 1,496 $ 5,562 $ 6,158 ========= ========= ======== ========
As of As of October 3, December 27, 1999 1998 Total assets: Hotel $218,369 $245,893 Franchising and management 60,403 49,080 Construction and development 5,226 28 -------- -------- Total assets $283,998 $295,001 ======== ========
9 D. ADJUSTED PRIOR YEAR'S EARNINGS As reported in the Company's Form 10-K for the fiscal year ended December 27, 1998, the following is a summary of the unaudited financial information for the third fiscal quarter and year-to-date period ended October 4, 1998 (in thousands, except per share data):
Third Quarter Year-to-date ------------- ------------ As Originally As As Originally As Reported Adjusted Reported Adjusted ----------------------------------------------------- Total Revenue $15,671 $15,671 $59,191 $59,191 Gross Operating Profit 5,036 5,036 22,199 22,199 Net Income (a) 11,629 10,859 12,310 11,150 Net Income Per Share - Basic 1.41 1.32 1.49 1.35 Net Income Per Share - Diluted 1.12 1.05 1.30 1.19
(a) Decrease in net income relates to interest expense and general and administrative expense, most of which had previously been capitalized as hotel properties under development, and additional franchise taxes (classified as general and administrative expense) and interest due to the IRS (classified as income tax expense) related to installment sales of 16 hotels. E. CONTINGENCIES The Company is a party to legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company. The following is a summary of legal action pending against the Company and action recently concluded. In 1997, Tri-State Inns, Inc. and Motels of America, Inc. filed a suit against ShoLodge Franchise Systems, Inc., a subsidiary of the Company, seeking to be discharged, relieved and excused of any future performance under the License Agreement relating to 14 Shoney's Inns, or in the alternative, compensatory damages, based on theories of alleged breach of contractual obligations and implied warranties of good faith and fair dealing, alleged fraudulent inducement based on alleged misrepresentations and alleged failure to make material disclosures of fact, alleged promissory estoppel and alleged breach of fiduciary duty. In addition, the plaintiffs originally sought a declaratory judgment concerning the provision of the License Agreement which specifies the damages due upon termination of the License Agreement. On March 18, 1998, the plaintiffs filed a motion for summary judgment seeking to invalidate the non-competition and stipulated damages provisions set forth in the License Agreements. On August 6, 1998, the court denied the plaintiff's motion. The Company also had filed counter claims against the plaintiffs. The case was dismissed on July 16, 1999, in accordance with a settlement agreement entered into by the parties, pursuant to which the parties exchanged mutual releases and Tri-State and its affiliates agreed to pay the Company a total of $1,175,000 in cash ($575,000 at the settlement date and $200,000 each year for the next three years). The case is now concluded. The total of $1,175,000 was recognized as franchising revenues in the third quarter ended October 3, 1999. 10 In 1998, two purported class action lawsuits were filed against the Company and certain officers of the Company, by plaintiffs who claim to be shareholders and debt security holders of the Company, respectively, both alleging that the Company violated certain anti-fraud provisions of the Tennessee Securities Act of 1980, as amended, by issuing allegedly false and misleading statements and financial information to the investing public. The complaints seek an unspecified amount of damages and unspecified injunctive relief. The Company filed motions to dismiss both suits on the basis that the plaintiff's allegations failed to state a cause of action under the applicable state statute. The trial court denied both motions. The court's denial of the Company's motions on these suits are currently before the Court of Appeals. One case was argued before the Court of Appeals on May 7, 1999, but the court has not rendered an opinion. Both cases have been set for trial on April 24, 2000. The Company believes both suits are without merit and will defend itself vigorously. Neither management nor legal counsel can predict the outcome at this time. In 1998, a former chief financial officer of the Company, filed a lawsuit against the Company and its chief executive officer alleging that his employment by the Company was wrongfully terminated, claiming breach of contract, fraud, retaliatory discharge and related claims. The plaintiff seeks $3 million in compensatory damages and punitive and treble damages. On December 31, 1998 the Company filed a motion to dismiss this lawsuit on the basis that the plaintiff has intentionally destroyed relevant evidence during the pendency of the case. The court granted this motion on January 28, 1999 and dismissed the case with prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or Amend the Judgment dismissing the case. The court denied the motion on April 23, 1999. The plaintiff has filed an appeal. The Company believes the suit is without merit and will defend itself vigorously. Neither management nor legal counsel can predict the outcome at this time. F. LONG-TERM DEBT The Company's $25.2 million revolving credit facility with a group of five banks matured on June 30, 1999. It was repaid in full on June 29, 1999, from a portion of the $65.0 million gross proceeds from a sale-leaseback transaction involving six of the Company's Sumner Suites hotels. The Company has established a new three year credit facility with a new bank group effective August 27, 1999. The new credit facility is for an initial amount of $30 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. The interest rate is at the lender's base rate plus 50 basis points and the Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The Company incurred certain fees and expenses in association with closing and administering the credit facility. The credit facility also contains covenants which, inter alia, limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company's ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company's minimum net worth. As of October 3, 11 1999, the Company had $10 million in borrowings outstanding under this credit facility, consisting of the three year term loan. 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 $668,000 of this debt for $411,000 in the third fiscal quarter of 1999. Since the end of the third quarter (through November 3) an additional $3.0 million of this debt has been purchased at a cost of $1.8 million. In the third quarter of 1999 the Company announced its plan to use up to $15 million of its Company funds to repurchase a portion of its outstanding $67.7 million senior subordinated notes. As of the end of the third fiscal quarter the Company has repurchased $3.6 million of these debt securities at a cost of $2.5 million. Since the end of the third quarter (through November 3), an additional $1.7 million of these debt securities has been repurchased at a cost of $1.2 million. G. STOCKHOLDERS' EQUITY In the first three quarters of 1999, the Company repurchased 1.8 million shares of its common stock for $9.9 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 1998, 784,000 shares were repurchased for $5.4 million. Since the end of the third quarter 1999 (through November 3), the Company has repurchased an additional 205,000 shares for $1.2 million. H. COMMITMENTS The Company sold and leased back 14 Sumner Suites hotels in November, 1997. The 1997 lease agreement was amended in June 1999 to add six Sumner Suites hotels to the lease effective June 29, 1999. The amendment added $7.3 million per year to the base rent. The base rent on these six hotels for the third quarter of 1999 was $1.7 million, and for the third quarter 1999 year-to-date period was $1.9 million. 12 ShoLodge, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. The Company develops, owns and operates all-suites hotels under the Sumner Suites brand name and is an operator and the exclusive franchisor of Shoney's Inns. The Company's 26 Sumner Suites hotels (3,163 suites) operated as of October 3, 1999 are mid-scale, all-suites hotels located in Arizona, Colorado, Florida, Georgia, Indiana, Kansas, New Mexico, North Carolina, Ohio, Tennessee, Texas and Virginia. As of October 3, 1999, the Company owns and operates 6 of these and now operates the other 20 as a result of two sale-leaseback transactions in 1997 and 1999. As of October 3, 1999, the Shoney's Inn lodging system consists of 74 Shoney's Inns containing approximately 7,200 rooms of which 17 containing approximately 1,900 rooms are owned or managed by the Company. Shoney's Inns are currently located in 21 states with a concentration in the Southeast. Sumner Suites hotels are marketed primarily to business travelers and, to a lesser extent, leisure travelers by offering an all-suite setting in a convenient location at an attractive price/value relationship. Sumner Suites offer mid-scale accommodations at rates between $75 and $100 per night and are usually located in or near business or leisure travel destinations in mid-sized and larger metropolitan markets. A typical Sumner Suites contains from 110 to 135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room, and offers a deluxe continental breakfast. The Sumner Suites concept was launched in 1995 with three hotels. From 1990 until 1995, the Company developed and managed 12 mid-scale, all-suites hotels under another brand name before selling its interests in those hotels in March 1995. The Company believes that its experience in developing, constructing and managing mid-scale, all-suites hotels has enabled it to expand effectively its development and ownership of the Sumner Suites system. In addition, as Sumner Suites has a limited presence in the marketplace, the Company is utilizing its proprietary reservation system, INNLINK, to further expand awareness of Sumner Suites. 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 to or in close proximity to Shoney's restaurants. Management believes that its strategy of 13 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. RESULTS OF OPERATIONS For the Fiscal Quarters and Fiscal Year-to-date Periods Ended October 3, 1999 and October 4, 1998 Total operating revenues for the third fiscal quarter ended October 3, 1999, were $23.4 million, or 49.6% more than the total operating revenues of $15.7 million reported for the third quarter of 1998. For the fiscal year-to-date period ended October 3, 1999, total operating revenues were $60.5 million, or 2.2% more than the total operating revenues of $59.2 million for the comparable period in 1998. Revenues from hotel operations in the third fiscal quarter of 1999 increased by $2.3 million, or 15.3% from the $14.8 million for the same period in 1998. For the 33 same hotels opened for all of both quarterly periods, an increase of 2.6% in average daily room rates, from $65.11 in third quarter 1998 to $66.79 in third quarter 1999, partially offset by a decrease in average occupancy rates on these hotels from 59.3% to 58.9% this year, resulted in an increase in same hotel revenues of 1.7% from $12.9 million in third quarter 1998 to $13.1 million in third quarter 1999. The eight hotels opened since the end of second quarter 1998 contributed $4.0 million to hotel operating revenues in third quarter this year versus $292,000 in third quarter last year. Sixteen hotels were sold in third quarter 1998; these hotels contributed $1.6 million to hotel operating revenues in third quarter 1998 versus none in third quarter 1999. Revenues from hotel operations in the first three quarters of 1999 decreased by $5.0 million, or 8.9%, from the $56.7 million for the same period in 1998. For the 32 same hotels opened for all of both year-to-date periods, an increase of 2.3% in average daily room rates, from $64.94 in the first three quarters of 1998 to $66.46 in the first three quarters of 1999, partially offset by a decrease in average occupancy rates on these hotels from 59.2% to 56.8% this year, resulted in an increase in same hotel revenues of 0.2% from $40.3 million in the first three quarters of 1998 to $40.4 million in the first three quarters of 1999. The nine hotels opened since the end of 1997 contributed $11.3 million to hotel operating revenues in the first three quarters of this year versus $1.0 million in the first three quarters of last year. The sixteen hotels sold in third quarter 1998 contributed $15.4 million to hotel operating revenues in the first three quarters of 1998 versus none in 1999. The Company owns and operates two hotel brands - Sumner Suites hotels and Shoney's Inns. The 26 Sumner Suites hotels' RevPAR (revenue per available room) increased by 11.5%, from $43.05 in the third quarter of 1998 to $48.02 in the third 14 quarter of 1999. The 18 Sumner Suites same hotels' RevPAR increased by 7.2%, from $46.17 in third quarter 1998 to $49.48 in third quarter this year. All future Company-owned hotels currently planned will be of the Sumner Suites brand. RevPAR for all Company-owned Shoney's Inns decreased from $31.66 in third quarter 1998 (including the 16 hotels sold in third quarter 1998) to $26.95 in third quarter 1999. The 15 Shoney's Inns same-hotels, which are also the only ones currently owned by the Company, reflected a decrease in RevPAR from $29.35 in third quarter 1998 to $26.95 in third quarter 1999, due primarily to increased competition from new hotels. All Sumner Suites hotels' RevPAR decreased from $44.74 in the first three quarters of 1998 to $44.68 in the first three quarters of 1999, due to the nine hotels opened since January of 1998 which had not reached stabilization. However, the 17 Sumner Suites same-hotels' RevPAR increased by 4.3%, from $46.46 in the first three quarters of 1998 to $48.45 in the first three quarters of 1999. For the first three quarters of this year, RevPAR for all Company-owned Shoney's Inns decreased from $30.97 for the first three quarters of 1998 to $25.46 for the same period this year. The 15 same-hotel Shoney's Inns reflected a decrease for this same period from $27.88 in 1998 to $25.46 in 1999, due primarily to increased competition from new hotels. Franchising and management revenues increased by $1.0 million, or 114.9%, in the third quarter 1999 from third quarter 1998. Franchise fees increased by $1.1 million from third quarter last year, while royalty and reservation fees decreased by $27,000, from $712,000 in third quarter 1998 to $685,000 in third quarter 1999. In the third quarter of 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 this quarter and is included in the $1.1 million increase in franchise fees; other franchise fees decreased by $82,000. For the first three quarters of 1999, franchising and management revenues increased by $1.1 million, or 45.8%, from the same period last year. Franchise fees increased by $861,000 from the first three quarters of last year (including the $1.2 million settlement discussed above), but royalty and reservation revenues increased by $332,000, from $1.9 million in the first three quarters of 1998 to $2.2 million in the first three quarters of 1999. These increases in 1999 over 1998 are due primarily to the franchise revenues earned on the 16 Shoney's Inns sold to a new franchisee in early third quarter 1998. Franchise fee revenue (initial fees and termination fees) can vary materially from quarter to quarter depending on the level of the Company's new franchise sales activities and terminations of franchises. Revenues from construction and development activities were $4.5 million in third quarter 1999 and $5.2 million in the first three quarters of 1999, versus none year-to-date in the comparable periods of 1998. The 1999 revenues earned to date are on three hotel construction contracts being performed for third parties. Operating expenses from hotel operations for the third quarter of 1999 increased by $1.6 million, or 15.9%, from $10.1 million in third quarter 1998, due partially to the 15 $2.3 million increase in hotel operating revenues. The sale of the 16 Shoney's Inns in third quarter 1998 accounted for a decrease of $1.2 million in hotel operating expenses from third quarter 1998 to third quarter 1999. The nine Sumner Suites hotels opened in 1998 and first quarter 1999 caused hotel operating expenses to increase by $2.0 million over third quarter last year. Hotel operating expenses on the 32 hotels opened prior to 1998 increased by $839,000, or 11.0%, in third quarter 1999 over third quarter 1998. The operating expenses as a percentage of operating revenues for this activity increased from 68.1% in third quarter 1998 to 68.5% in third quarter 1999; however, operating expenses as a percentage of operating revenues on the 32 hotels opened prior to 1998 increased from 61.2% in third quarter 1998 to 67.8% in third quarter 1999, due primarily to an 8.9% decrease in hotel revenues from the 15 Shoney's Inns still owned. The nine hotels which opened in 1998 and first quarter 1999 impacted hotel operating expenses significantly due to the related pre-opening and startup expenses incurred during their first year or two after opening, before the hotels reach stabilization. Operating expenses from hotel operations for the first three quarters of 1999 decreased by $730,000, or 2.1%, from $35.2 million in the first three quarters of 1998, due partially to the $5.0 million decrease in hotel operating revenues. The sale of the 16 Shoney's Inns in third quarter 1998 accounted for a decrease of $8.7 million in hotel operating expenses from the first three quarters of 1998 to the first three quarters of 1999. The nine Sumner Suites hotels opened in 1998 and first quarter of 1999 caused hotel operating expenses to increase by $6.8 million over the first three quarters of last year. Hotel operating expenses on the 32 same-hotels increased by $1.2 million, or 4.8%, in the first three quarters 1999 over the first three quarters of 1998. The operating expenses as a percentage of operating revenues for this activity increased from 61.9% in the first three quarters of 1998 to 66.6% in the first three quarters of 1999; however, operating expenses as a percentage of operating revenues on the 32 same-hotels only increased from 61.0% in the first three quarters of 1998 to 63.8% in the first three quarters of 1999. Increases in hotel operating expenses on same-hotels were primarily in the areas of payroll related costs, repairs and maintenance, security, and property taxes. Franchising and management operating expenses decreased by $45,000, or 7.9%, from third quarter 1998 to third quarter 1999, and by $157,000, or 8.5%, from the first three quarters of 1998 to the first three quarters of 1999. The decreases were primarily in the central reservation center operating costs. Construction and development costs in third quarter 1999 were $3.8 million, and for the first three quarters of 1999 were $4.4 million, versus none in the first three quarters of 1998. The 1999 costs were incurred in earning the revenues from the three third party construction contracts, two of which are still in progress at October 3, 1999. General and administrative expenses increased by $23,000, or 2.2%, in the third quarter of 1999 from the third quarter of 1998. For the first three quarters of 1999 general and administrative expenses increased by $200,000, or 4.6%, from the comparable period last year. Excluding year-to-date charge-offs of pre-development costs for sites no longer deemed probable of development in the amounts of $620,000 in 1999 and $180,000 in 16 1998, general and administrative expenses for this period declined by $240,000, or 5.8%, from the same period last year. Rent expense increased by $1.7 million, or 72.9%, in third quarter 1999 from third quarter 1998. For the first three quarters of 1999, rent expense increased by $1.9 million, or 24.6%, from the same period last year. The increases were due to the increase in base rent due to additional hotels sold and leased back in 1999 as compared to 1998. The 1997 lease agreement was amended in June 1999 to add six Sumner Suites hotels to the lease effective June 29, 1999. The base rent on these six hotels for the third quarter of 1999 was $1.7 million, and for the third quarter 1999 year-to-date period was $1.9 million. Depreciation and amortization expense decreased by $38,000, or 2.5%, from third quarter 1998 to third quarter 1999. The sale of the 16 Shoney's Inns in third quarter 1998 reduced depreciation expense in third quarter 1999 by $170,000 from third quarter 1998. However, depreciation and amortization expense increased in third quarter 1999 over third quarter 1998 by $132,000, due to the nine additional hotels opened in 1998 and first quarter 1999, net of the effect of the cessation of depreciation in June 1999 on the six hotels sold and leased back. Depreciation and amortization expense decreased by $595,000, or 9.7%, from the first three quarters of 1998 to the first three quarters of 1999. The sale of the 16 Shoney's Inns in third quarter 1998 reduced depreciation expense in the first three quarters of 1999 by $2.1 million from the first three quarters of 1998. However, depreciation and amortization expense increased in the first three quarters of 1999 over the first three quarters of 1998 by $1.5 million due to the nine additional hotels opened in 1998 and first quarter 1999, net of the effect of the cessation of depreciation in June 1999 on the six hotels sold and leased back. Interest expense increased by $512,000, while interest income increased by $230,000 from third quarter 1998, for a net increase of $282,000 in net interest expense. The increase in interest expense for the first three quarters of 1999 was $1.5 million over the first three quarters of 1998, while interest income during that period increased by $1.2 million, for an increase in net interest expense of $259,000. The increase in interest expense resulted from additional borrowings incurred in 1998 and first three quarters of 1999 for capital expenditures for new hotels, partially offset by interest expense reductions from the extinguishment of debt in third quarter 1998 associated with the hotels sold. The 1999 increase in interest income was due primarily to interest earned on mortgage notes receivable from the sale of the hotels in third quarter 1998, which exceeded interest earned in the first three quarters of 1998 from cash temporarily invested from the proceeds of the sale-leaseback transaction which occurred in the fourth quarter of 1997. The gain recognized on sale of property in third quarter 1999 was $49,000 compared with $20.2 million in third quarter 1998. The gain on sale of property in third quarter 1999 was from the sale of land held for sale. The gain on sale of property in third quarter 1998 represented a portion of the gain on the sale of 16 Shoney's Inns effective 17 August 1, 1998. A portion of the gain on the sale of four of these 16 hotels was deferred and recognized on the installment method through the second quarter of 1999. The gain recognized on sale of property in the first three quarters of 1999 was $12.0 million compared with $20.3 million for the same period in 1998. Of the $12.0 million in first three quarters of 1999, $11.9 million relates to the recognition of previously deferred gain related to four of the 16 hotels sold in third quarter 1998, which was being recognized on the installment method. The balance of the gain on sale of property in the first three quarters of both 1999 and 1998 was from the sale of land held for sale. Other income decreased by $271,000 from third quarter 1998 to third quarter 1999, and by $314,000 from the first three quarters of 1998 to the first three quarters of 1999. Other income can vary widely from quarter to quarter due to the nature of this income and its varied sources. Minority interests in earnings of consolidated subsidiaries and partnerships decreased by $368,000 from third quarter 1998 to third quarter 1999, and increased by $1.4 million from the first three quarters of 1998 to the first three quarters of 1999. The 1999 year-to-date net increase of $1.4 million consisted of a $1.8 million year-to-date increase due to the 40% minority interest in $4.6 million of the gain on sale of property recognized in first quarter 1999 discussed above, partially offset by a $399,000 decrease due to other operating activities in which minority ownership was involved. The extraordinary gain from early extinguishment of debt in the third quarter of 1999 was the result of the repurchase of $4.3 million of the Company's previously issued subordinated debt at a discount from face value, net of the write-off of related unamortized deferred financing costs. The extraordinary loss from early extinguishment of debt in the third quarter of 1998 was a result of debt paid off in conjunction with the sale of 16 Shoney's Inns in August of 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows used in operating activities were $ 8.4 million in first three quarters of 1999, compared with $7.8 million provided by operating activities in the first three quarters of 1998. Accounts receivable increased by $6.9 million in the first three quarters of 1999, compared with a decrease of $5.0 million in the first three quarters of 1998, due primarily to the opening of three new hotels in first quarter 1999 and to substantially larger construction contracts receivable, including unbilled amounts due from third parties for construction activities on their behalf, in the first three quarters of 1999. The increase in accounts payable in the first three quarters of 1999 was $2.1 million, compared with an increase of $4.1 million in the first three quarters of 1998; however, the decrease in income and other taxes payable in the first three quarters of 1999 was $1.8 million, compared with an increase of $650,000 in the first three quarters of 1998. Income taxes receivable also decreased by $2.6 million in the first three quarters of 1999. 18 The Company's cash flows provided by investing activities were $52.7 million in the first three quarters of 1999, compared with cash flows used in investing activities of $40.2 million for the comparable period in 1998. The Company collected $12.3 million from notes receivable in the first three quarters of 1999, of which $12.2 million related to two hotel properties sold in 1997 and 1998; only $177,000 was received in the first three quarters of 1998 from the collection of notes receivable. The Company requires capital principally for the construction and acquisition of new lodging facilities and the purchase of equipment and leasehold improvements. Capital expenditures for such purposes were $17.7 million in the first three quarters of 1999 and $63.8 million in the first three quarters of 1998. The Company sold and leased back six hotels in June of 1999, for which the gross proceeds were $65.0 million and proceeds net of the required $7.3 million security deposit were $57.7 million. Proceeds from the sale of other property were $312,000 in the first three quarters of 1999, compared with $23.4 million in the comparable period in 1998, which included approximately $22.5 million from the sale of 16 hotels in third quarter of 1998. Net cash used in financing activities was $23.6 million in the first three quarters of 1999 compared with net cash used in financing activities of $16.7 million in the first three quarters of 1998. Repayments, net of borrowings, on the bank revolving credit facility which matured on June 30, 1999, were $20.3 million in the first three quarters of 1999 versus no activity in the first three quarters of 1998. The facility was repaid in full on June 29, 1999. Payments on long-term debt, other than on the bank revolving credit facility, were $16.7 million in the first three quarters of 1999 compared with $15.7 million in the first three quarters of 1998. Additionally, $4.6 million was borrowed in the first three quarters of 1999 to finance the purchase of hotel furniture, fixtures, and equipment (of which $2.3 million was repaid in connection with the sale-leaseback transaction); no furniture, fixtures, and equipment financing occurred in the first three quarters of 1998. In the first three quarters of 1999, the Company repurchased 1.8 million shares of its common stock for $9.9 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 1998, 784,000 shares were repurchased for $5.4 million. Since the end of the third quarter 1999 (through November 3), the Company has repurchased an additional 205,000 shares for $1.2 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 $668,000 of this debt for $411,000 in the third fiscal quarter of 1999. Since the end of the third quarter (through November 3) an additional $3.0 million of this debt has been purchased at a cost of $1.8 million. In the third quarter of 1999 the Company announced its plan to use up to $15 million of its Company funds to repurchase a portion of its outstanding $67.7 million senior subordinated notes. As of the end of the third fiscal quarter the Company has repurchased $3.6 million of these debt securities at a cost of $2.5 million. Since the end of the third quarter (through November 3), an additional $1.7 million of these debt securities has been repurchased at a cost of $1.2 million. 19 The Company's $25.2 million revolving credit facility with a group of five banks matured on June 30, 1999. It was repaid in full on June 29, 1999, from a portion of the $65.0 million gross proceeds from a sale-leaseback transaction involving six of the Company's Sumner Suites hotels. The Company has established a new three year credit facility with a new bank group effective August 27, 1999. The new credit facility is for an initial amount of $30 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. The interest rate is at the lender's base rate plus 50 basis points and the Company is to pay commitment fees on the unused portion of the facility at .50% per annum. The Company incurred certain fees and expenses in association with closing and administering the credit facility. The credit facility also contains covenants which, inter alia, limit or prohibit the incurring of certain additional indebtedness in excess of a specified debt to total capital ratio, prohibit additional liens on the collateral, restrict mergers and the payment of dividends and restrict the Company's ability to place liens on unencumbered assets. The credit facility contains financial covenants as to the Company's minimum net worth. As of October 3, 1999, the Company had $10 million in borrowings outstanding under this credit facility, consisting of the three year term loan. The Company also maintains a $1 million unsecured line of credit with another bank, bearing interest at the lender's prime rate, maturing May 31, 2000. As of October 3, 1999, the Company had no borrowings outstanding under this credit facility. The Company opened six new Sumner Suites hotels in 1998 (including four in the first three quarters of 1998) and three in first quarter 1999. As of the end of the third fiscal quarter of 1999, one Sumner Suites hotel was under construction in Orlando, Florida, which opened in the fourth quarter of 1999. Additionally, the Company has acquired four sites for future development and estimates that approximately $28.0 million in capital funds will be required to complete their development, none of which are expected to be complete by the end of 1999. In 1998 the Company decided to slow its aggressive development schedule of new Sumner Suites hotels in the near term. This decision was based on current market conditions, rooms supply in certain areas, and capital availability. Under the terms of the trust indenture governing the senior subordinated notes issued in 1996 and 1997, the Company is obligated to redeem at par up to 5% annually of the notes issued under the indenture beginning in 1999. Approximately $3.0 million of these notes are expected to be redeemed under this provision on December 1, 1999. 20 The Company is investigating various alternatives to maximize shareholder value. These alternatives could include, without limitation, a continuation of the development and operation of Sumner Suites hotels and the franchising and operation of Shoney's Inns, a sale of the remaining Shoney's Inns, the sale-leaseback of some or all of the Company's Sumner Suites hotels, 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, net proceeds from possible future sale-leaseback transactions, the collection of notes receivable, net cash provided by operations, borrowings under existing and new revolving credit facilities or mortgage debt, and available furniture, fixture and equipment financing packages will be sufficient to fund its scheduled hotel development, stock repurchase plan, debt repayments and operations for the next twelve months. YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing a possible disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company determined that it would be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications or replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has divided the Year 2000 Issue into what it considers being critical and non-critical issues. The Company believes that in its line of business the critical issues involve the ability to process hotel sales transactions beginning with hotel reservations through settlement and collection. Additionally, critical importance has been placed on the Company's ability to process and maintain accurate accounting, financial and corporate records. The systems that the Company has identified as being critical are the core business software applications including, but not limited to, the following: the IBM AS400 operating system, the accounting and financial reporting system, the front desk 21 and credit card payment system, the room door key system, the central reservations system, and the cash management software. In addition, the computer systems maintained by the Company's banks and the telecommunications systems maintained by the Company's telecommunications vendor have been identified as critical systems. The Company has also identified non-critical issues relating to peripheral business software including, but not limited to: stand alone personal computers, in-house development applications, Windows NT and the 98 operating system, spreadsheet software, word processing software, network server back-up software, development tools software and computer systems maintained by other third party vendors. The Company has recently completed its process of making the required modifications to its existing software systems and scheduling the required replacements of software and hardware. The Company utilized both internal and external resources to program, replace, implement and test these changes. The Company's cost of the Year 2000 project did not exceed $100,000; however, the Company's internal staff has spent substantial time on the issue. These costs have been expensed as incurred. The Company's contingency plans in place consist of (1) backing up electronic data each night and storing the backup off site, (2) storing a backup server off site, and (3) an agreement with a vendor to replace the IBM AS400 system within 24 hours if needed. Management believes that its level of preparedness has minimized its risk of systems failures related to the Year 2000 issue. FORWARD-LOOKING STATEMENT DISCLAIMER The statements appearing in this report which are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including delays in concluding or the inability to conclude transactions, the establishment of competing facilities and services, cancellation of leases or contracts, changes in applicable laws and regulation, in margins, demand fluctuations, access to debt or equity financing, adverse uninsured determinations in existing or future litigation or regulatory proceedings and other risks. MARKET RISK There have been no material changes in the Company's exposure to market risk in the first three fiscal quarters ended October 3, 1999. 22 PART II - OTHER INFORMATION Item 1. Paul Senior v. ShoLodge, Inc., Leon Moore and Bob Marlowe, Case No. 98C-136, Chancery Court for Sumner County, Tennessee at Gallatin, filed April 29, 1998 (the "Senior Case"). This case names the Company and two of its officers, Leon Moore and Bob Marlowe, as defendants in a class action lawsuit by plaintiffs who claim to be shareholders of the Company. The case originally named Michael A. Corbett, former chief financial officer of the Company, as a defendant, but the plaintiffs subsequently deleted Mr. Corbett as a named defendant. The Senior Case alleges that the Company violated certain anti-fraud provisions of the Tennessee Securities Act of 1980, as amended, by issuing allegedly false and misleading statements and financial information to the investing public during the first three quarters of 1997. The Company moved to dismiss the complaint on the basis that the plaintiff's allegations failed to state a cause of action under the Tennessee Securities Act of 1980. The court denied the motion but granted the Company's request that the Tennessee Court of Appeals review the court's decision on an interlocutory basis. The court's denial of the Company's motion is now before the Court of Appeals. On January 29, 1999, the Company filed its appellate brief. The case was argued before the Court of Appeals on May 7, 1999, but the court has not rendered an opinion as of the date of this filing. The case has now been scheduled for trial on April 24, 2000. Stanley Gale v. ShoLodge, Inc., Leon Moore and Bob Marlowe, Case No. 98C-208, Chancery Court for Sumner County, Tennessee at Gallatin, filed July 2, 1998. This case names the Company and two of its officers, Leon Moore and Bob Marlowe, as defendants in a purported class action lawsuit by plaintiffs who claim to be holders of the Company's debt securities. The case alleges that the Company violated certain anti-fraud provisions of the Tennessee Securities Act of 1980, as amended, based on essentially the same factual allegations as the Senior Case. The complaint seeks an unspecified amount of damages and unspecified injunctive relief. The Company filed a motion to dismiss the case for failure to state a cause of action under the applicable state statute. The trial court denied the motion. The case has now been scheduled for trial on April 24, 2000. Michael A. Corbett v. ShoLodge, Inc. and Leon Moore, Case No. 98C-184, Chancery Court for Sumner County, Tennessee at Gallatin, filed June 12, 1998. This case was filed by Michael A. Corbett, the former chief financial officer of the Company, and alleges that his employment by the Company was wrongfully terminated. The plaintiff alleges breach of contract, fraud, retaliatory discharge and related claims. The plaintiff seeks $3 million in compensatory damages and punitive and treble damages. On December 31, 1998 the Company filed a motion to dismiss this lawsuit on the basis that the plaintiff has intentionally destroyed relevant evidence during the pendency of the case. The court granted this motion on January 28, 1999 and dismissed the case with prejudice. On March 8, 1999 the plaintiff filed a Motion to Alter or Amend the Judgment dismissing the case. The court denied the motion on April 23, 1999. The plaintiff has filed an appeal. Tri-State Inns, Inc. and Motels of America, Inc. v. ShoLodge Franchise Systems, Inc., Superior Court of Liberty County, Georgia, Civil Action File No. 97-V-00591. In this action, Tri-State Inns, Inc., the franchisee of the Shoney's Inn located in Hinesville, Georgia, originally sought to be discharged, relieved and excused of any future performance under the License Agreement relating to such Shoney's Inn, and Motels of America, Inc. sought to be discharged, relieved and excused of any further performance under a Guaranty Agreement whereby the obligations of Tri-State Inns, Inc. under such License Agreement were guaranteed by Motels of America, Inc., or in the alternative compensatory damages, based on theories of alleged breach of contractual obligations and implied warranties of good faith and fair dealing, alleged fraudulent inducement based on alleged misrepresentation and alleged failure to make material disclosures of fact, alleged promissory estoppel and alleged breach of fiduciary duty. In addition, the plaintiffs originally sought a declaratory judgment concerning the provision of the License Agreement which specifies the damages due upon termination of the License Agreement. This action was removed to the U.S. District Court for the Southern District of Georgia, Case No. CV-497-129. Subsequent to removal, the action was thereafter transferred to the U.S. District Court for the Middle District of Tennessee as Civil Action No. 3-98-0028. On December 19, 1997, the plaintiffs filed a Second Amended Complaint in which they sought to be relieved of obligations not simply as to the Hinesville Shoney's Inn but also with regard to 13 other license agreements between plaintiffs and the Company. In the alternative, the plaintiffs sought an undisclosed amount in compensatory 23 damages. On March 18, 1998, the plaintiffs filed a motion for summary judgment seeking to invalidate the non-competition and stipulated damages provisions set forth in the License Agreements. On August 6, 1998, the court denied the plaintiffs' motion. On July 16, 1999, the plaintiffs' claims were dismissed with prejudice in accordance with a settlement agreement entered into by the parties, pursuant to which the parties exchanged mutual releases and Tri-State and its affiliates agreed to pay the Company $575,000 in cash, and $200,000 each year for the next three years. The case is now concluded. No material developments occurred during the first three fiscal quarters ended October 3, 1999, with respect to any other pending litigation. Item 4. Submission of Matters to a vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K 6 (a) Exhibits - 10.1 Loan and Security Agreement by and among The Hotel Group, Inc., as Borrower, ShoLodge, Inc., as Holdings, and The Financials Institutions that are Signatories hereto, the Lenders, and Foothill Capital Corporation, as Agent, dated as of August 27, 1999, incorporated by reference from the Registrant's Report on Form 8-K dated September 15, 1999, filed with the Commission 27 Financial Data Schedule for Quarter Ended October 3, 1999 27.1 Financial Data Schedule (Restated) for Quarter Ended October 4, 1998 6 (b) Reports on Form 8-K A Form 8-K dated September 15, 1999, relating to the closing on a three-year credit facility with Foothill Capital Corporation on September 15, 1999. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, The Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ShoLodge, Inc. Date: November 16, 1999 S/ Leon Moore ------------------------------------------- Leon Moore President, Chief Executive Officer, Principal Executive Officer, Director Date: November 16, 1999 S/ Bob Marlowe ------------------------------------------- Bob Marlowe Secretary, Treasurer, Chief Accounting Officer, Principal Accounting Officer, Chief Financial Officer, Director EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY FINANCIAL STATEMENTS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-26-1999 DEC-28-1998 OCT-03-1999 23,180,642 0 10,534,090 334,564 0 38,597,543 145,761,389 23,570,996 283,998,045 16,209,469 135,368,177 0 0 1,000 92,802,269 283,998,045 51,712,387 60,471,913 0 60,136,113 0 0 9,515,166 6,093,092 2,315,000 3,778,092 0 798,670 0 4,576,762 0.67 0.65
EX-27.1 3 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY FINANCIAL STATEMENTS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 4, 1998 (AS ADJUSTED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-27-1998 DEC-29-1997 OCT-04-1998 9,681,134 221,615 3,864,615 281,785 0 17,896,613 177,348,232 20,027,075 289,896,624 18,682,658 129,435,493 0 0 1,000 106,473,090 289,896,624 56,749,614 59,191,331 0 55,119,893 0 0 8,061,736 20,073,082 7,857,000 12,216,082 0 (1,066,466) 0 12,216,082 1.35 1.19
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