Back to GetFilings.com
1
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 29, 1996 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)
217 West Main Street, Gallatin, Tennessee 37066
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 452-7200
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant on March 24, 1997, was approximately $80,000,000. The market value
calculation was determined using the last sale price of registrant's common
stock on March 24, 1997, 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 27, 1997, were
8,233,985.
2
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 1997.
Part IV Registration Statement on Form S-1,
Commission File No. 33-44504.
Part IV Annual Report on
Form 10-K, filed with
the Commission on
March 29, 1993.
Part IV Annual Report on
Form 10-K filed with
the Commission on
March 28, 1994.
Part IV Registration Statement on Form S-3,
Commission File No. 33-77910.
Part IV Annual Report on Form 10-K filed with the
Commission on April 11, 1995
Part IV Annual Report of Form 10-K filed with the
Commission on April 1, 1996
Part IV Quarterly Report on Form 10-Q filed with
the Commission on November 20, 1996
Part IV Quarterly Report on Form 10-Q filed with
the Commission on August 28, 1996
Part IV Quarterly Report on Form 10-Q filed with
the Commission on May 24, 1996
3
PART I
ITEM 1. BUSINESS.
GENERAL
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 14 Sumner Suites are mid-scale, all-suites hotels
located in Florida, Georgia, Indiana, New Mexico, Ohio, Tennessee and Texas. As
of March 24, 1997, the Shoney's Inn lodging system consists of 86 Shoney's Inns
containing 8,737 rooms of which 34 containing 4,164 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. Usually located
in or near business or leisure travel destinations in mid-sized and larger
metropolitan markets, Sumner Suites offer mid-scale accommodations at rates
between $65 and $85 per night. A typical Sumner Suites contains from 110 to 125
rooms, lounge facilities, meeting rooms and an exercise 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 will enable it to expand effectively
its development and ownership of the Sumner Suites system. As Sumner Suites has
a limited presence in the marketplace, the Company seeks to capitalize on 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 $39 and $58 per night. The typical Shoney's Inn includes
100 to 125 rooms and, in most cases, meeting rooms. Although Shoney's Inns do
not offer full food service, many offer continental breakfast and 78 of the 86
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 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.
In 1991, the Company became the exclusive franchisor of Shoney's Inns,
including the then existing Shoney's Inns. Management believes that Shoney's
Inns benefit from the association with the Shoney's national brand restaurant
system's reputation for consistency and value which provides an opportunity for
expansion in both existing and new markets. Shoney's Inns benefit directly from
cross-marketing efforts with Shoney's restaurants as well as indirectly from
Shoney's restaurant advertising.
4
GROWTH STRATEGY
The Company's strategy is to increase cash flow and earnings by (i)
increasing REVPAR (revenue per available room) while maintaining the Company's
attractive suite and room price/value relationships and controlling operating
costs, (ii) developing additional Sumner Suites and (iii) expanding the
Shoney's Inn system through the addition of new franchised units and
selectively developing Company-owned hotels.
Internal Growth. The Company intends 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 dally 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.
Development of Additional Sumner Suites. In addition to the two Sumner
Suites that were opened in December 1995 and a property that was converted to a
Sumner Suites in July 1995, the Company has developed and opened eleven Sumner
Suites as of March 24, 1997. The Company intends to continue expanding the
Sumner Suites chain in 1997 by opening approximately eight to ten additional
Sumner Suites hotels, three of which are currently under construction.
Expansion of Shoney's Inn System. The Company is expanding the Shoney's
Inn system through the addition of new franchises and by selectively opening new
Company-owned hotels. In 1996, the Company added two Company-owned Shoney Inns
and a net total of six franchised units to the system. The Company targets
existing Shoney's Inn franchisees, existing Shoney's restaurant franchisees and
contacts within the industry as potential franchisees for additional Shoney's
Inns.
SUMNER SUITES CONCEPT
Sumner Suites are all-suites hotels positioned in the mid-scale segment
to appeal primarily to business travelers and, to a lesser extent, leisure
travelers. The Sumner Suites hotels are generally located in mid-sized to larger
metropolitan markets near business and leisure travel destinations such as
business parks, office buildings, local attractions and restaurants. Although
daily room rates typically range from $65 to $85, room rates at Sumner Suites
vary depending upon a number of factors, including location and competition. For
1996, the average daily room rate for the Sumner Suites hotels was $74.55.
The Sumner Suites prototype hotel is a five story, interior corridor,
stucco building containing 110 to 125 rooms. The bedroom in each suite is
furnished with either a king size bed or two double beds, a night stand, vanity,
and closet area, and the sitting area contains a sleeper
- 2 -
5
sofa, a desk, chairs and reading lamps. A kitchenette area includes a sink,
refrigerator, microwave oven and cabinets that contain kitchen and cooking
utensils.
The lobby area of each Sumner Suites hotel features marble floors and
seating areas with numerous couches, tables and chairs allowing for informal
meeting and lounge space. Adjacent to the seating area is a combination buffet
and beverage service area. Each Sumner Suites is equipped with large meeting
rooms that can be sectioned to meet individual guests' or groups' needs. An
exercise facility and swimming pool are additional features. The amenities
provided by the hotels include voice mail and facsimile machine services, deluxe
continental breakfast and lounge services in the evening. The Company believes
that Sumner Suites provides its guests with quality accommodations at an
attractive price/value relationship within the all-suites segment.
SHONEY'S INNS CONCEPT
Shoney's Inns are limited-service hotels positioned in the upper
economy segment to appeal to both business and leisure travelers and are located
in 21 states in markets ranging from small towns to larger metropolitan areas.
Shoney's Inns are generally located in proximity to interstate highways, major
streets and highways providing convenient access to business establishments.
Seventy-eight of the 86 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 other limited-service lodging chains. Daily room
rates at Shoney's Inns range from $39 to $58 and vary depending upon a number of
factors, including location, competition and type of room. For 1996, the average
daily room rate for Company-owned Shoney's Inns was $51.39.
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. 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 (some
indoors or heated), meeting rooms, facsimile machine service and continental
breakfast. The Company believes that Shoney's Inns provide their 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 core staff of
approximately 20 people who manage, supervise and control the construction of
the Company's hotels. Local subcontractors are employed by the Company for most
of the major construction components of a new hotel, including plumbing,
electrical, and mechanical subcontracts. The Company intends to continue to
build its own hotels because it believes that its in-house capabilities
- 3 -
6
provide advantages in controlling costs, quality, and development schedule as
compared to using independent contractors. The Company believes that its
construction experience and its relationship with many subcontractors will
facilitate the effective development of additional hotels.
The Company devotes significant resources to the identification and
evaluation of potential sites for its hotels. The Company generally targets
mid-sized to larger metropolitan markets for locating its Sumner Suites. In
identifying cities for possible expansion, the Company typically targets 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 for
Sumner Suites focuses on the competitive environment, including room and
occupancy rates and proximity to business parks, office buildings, and high
traffic retail and restaurant areas. The Company focuses on sites for its
Shoney's Inns in proximity to interstate highway access roads and major streets
and highways providing convenient access to local business establishments.
The Company anticipates developing Sumner Suites hotels averaging from
110 to 125 suites. Management believes that the development cost of a new Sumner
Suites hotel will be approximately $50,000 to $55,000 per suite, depending on
the location of the hotel, size of the hotel (number of suites), cost of land,
local zoning and permitting costs, construction period and local building costs
which are affected by the cost of building materials and construction labor.
Based on the Company's experience to date, the capital investment (including
land and pre-opening expenses) for a typical 125 suite Sumner Suites is
approximately $6.5 million (approximately $52,000 per suite). The Company's
Shoney's Inns typically range in cost from approximately $32,000 to $38,000 per
room.
The construction phase of a hotel generally requires six months after
the site and all approvals and permits have been obtained. The Company's
experience in selection and acquisition of sites has varied and generally
averages six months. The approval and permitting phase can occur simultaneously
with site acquisition and generally requires three months. The entire
development process generally ranges from 10 to 12 months but may take longer.
SALES AND MARKETING
The Company directs marketing efforts on behalf of both Sumner Suites
and Shoney's Inns primarily to business travelers, whom management believes have
represented the largest segment of its customers in recent years.
Sumner Suites. Marketing of the Sumner Suites brand is targeted
primarily towards the business traveler through a variety of efforts. Initially,
pre-opening sales calls are made by the general manager and director of sales of
each property in the local market area during the 90 days prior to opening. In
addition, advertisements are placed in the Hotel Travel Index, a comprehensive
listing of hotels worldwide used by travel agents for booking clients into
destination cities. The Sumner Suites toll-free reservation number,
1-800-74-SUITE, is promoted to the travel agents through advertising and direct
mailings. The Company believes that approximately one quarter of all Sumner
Suites room sales are booked through the reservation center. Finally, Sumner
Suites has joined TAC-Lite, an automatic, guaranteed
- 4 -
7
payment system for travel agents, in an effort to continue to expand Sumner
Suites brand awareness.
Shoney's Inns. All Shoney's Inns participate in the "Sho Business"
frequent traveler program, entitling members to receive the lowest available
rate, car rental discounts, restaurant coupons, complimentary coffee and
newspaper, free room upgrades, express check-in and other privileges upon
presentation of a membership card. Approximately 12% of the rooms booked through
INNLINK for Shoney's Inns in 1996 were reserved by guests who were members of
the Sho Business program. Historically, the Company has also marketed its hotels
directly to businesses whose employees travel in the southeastern United States.
The Company's marketing department gathers information on business prospects,
secures accounts and makes referrals to individual hotels for follow up.
Additionally, the Company attempts to take advantage of the positive
reputation attached to the Shoney's name in the over-50 age group and in the
package tour market through advertisement in publications targeting such readers
and by encouraging franchisee participation in promotional discounts for
frequent customers over 50 and for tour operators. The Company's program for the
over-50 age group entitles its members to receive special room rate discounts,
complimentary coffee and newspaper and other benefits. The Shoney's Inn system
also advertises in the approximately 967 Shoney's restaurants, and individual
Shoney's Inns are encouraged to participate in joint mailings and other
promotions with local Shoney's restaurants.
The Company periodically publishes a Shoney's Inn system directory
showing, for each Inn, its address and telephone number, location as indicated
on a locator map, a brief description of the facilities, the services and
amenities provided and other relevant information. These directories are
distributed in each Shoney's Inn and Shoney's restaurant and are provided
directly to travel agents, sponsors of group tours, corporate travel departments
and other selected potential customers.
Most properties have a full-time director of sales whose
responsibilities include local marketing and direct and group sales. At the
corporate level, a Director of Marketing oversees national marketing plans and
provides marketing support for each corporate and franchised property, including
smaller corporate properties which may not have a full-time sales person. The
Director of Marketing also oversees management of the Shoney's Inn national
advertising fund, into which all Shoney's Inns pay 1% of revenue to support
national marketing efforts such as the annual system directory.
LODGING OPERATIONS
Hotel Management. Overall hotel operations are the responsibility of
the Vice President of Operations for Shoney's Inns and the Director of
Operations for Sumner Suites. Shoney's Inns are further managed by regional
managers, who directly supervise the general managers of each property. The
Company expects to add regional managers for its Sumner Suites system as it
grows its hotel base with each regional manager supervising between four and six
hotels on a geographic basis. The general manager of each Shoney's Inn or
Sumner Suites hotel is fully responsible for day-to-day operations and is
compensated by salary and bonus systems which
- 5 -
8
reward revenue and operating margin performance. Each general manager, in
conjunction with senior management, develops the property's operating budget and
is held accountable for meeting the goals and objectives of the hotel.
Reservation System. The Company's proprietary central reservation
system, INNLINK, provides important support for the room reservation process for
both Sumner Suites and Shoney's Inns and is marketed to other chains as well.
Other chains that contract with the Company for the service include: Country
Hearth Inns, Key West Inns and Wilson Inns & Hotels. INNLINK operates 24 hours a
day, 7 days a week. The INNLINK system may be accessed by individual travelers
as well as by travel agents, tour and group booking agents at 1-800-222-2222 for
Shoney's Inns and 1-800-74-SUITE for Sumner Suites. Electronically, INNLINK is
accessed through numerous global distribution systems (e.g., SABRE Travel
Information Network, Galileo International, System One 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 one quarter and one fifth of room sales
for Sumner Suites and Shoney's Inns, respectively, are made through INNLINK.
Quality Control. To ensure quality and consistency, the Company
regularly inspects each of its hotels and each Shoney's Inn in the Shoney's Inn
system for compliance with facility and service standards. The Company also
conducts unannounced visits by unidentified "guests" who report on the quality
of services at individual hotels. Generally, in addition to its ongoing
refurbishment activities, the Company fully renovates each of the Company-owned
Shoney's Inns after approximately seven years of operation and expects a similar
renovation schedule for Sumner Suites. As of December 29, 1996, the Company had
renovated 12 of the 21 Company-owned Shoney's Inns opened prior to 1994 and
plans to renovate eight Shoney's Inns during 1997.
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 Marketing. The Company markets the Shoney's Inn franchise
principally to existing Shoney's Inn franchisees, Shoney's restaurant
franchisees and other prospects known through management's contacts in the
lodging industry. The Company also markets franchises through advertisements in
trade publications and participation in trade shows and franchising conventions.
- 6 -
9
Management believes that the Company attracts potential new franchisees
by offering a high 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 many cases, lower than such other franchisors.
Fees. Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, a 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 pays a license fee equal to the greater of
$250 per room or $25,000. 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 fundamental ingredient 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 offers the franchisee,
for an additional fee, training and "opening teams" similar to those used by the
Company when opening one of its own hotels. The Company also makes available
some of the most successful Company-owned Shoney's Inns as training centers.
The Company inspects every Shoney's Inn at least three times a year, at
least two of which are unannounced, through its Quality Standards and Compliance
program, using trained field representatives. The Company encourages franchisees
to renovate each of the Shoney's Inns after approximately seven years of
operations, in the same manner that the Company renovates its own hotels.
The Company offers to provide management services to Shoney's Inn
franchisees pursuant to contractual arrangements. The Company's fee for these
services is a percentage of the managed hotel's gross revenues. Currently, the
Company manages two hotels under contract arrangement.
SHONEY'S TRANSACTION
On October 25, 1996 the Company repurchased for $2.0 million in cash a
warrant held by Shoney's Investments, Inc., an affiliate of Shoney's, Inc.
("Shoney's"), to acquire 5% of the Company's common stock (the "Common Stock")
outstanding on the date of exercise of the warrant, exercisable through
February 20, 1997. As of October 25, 1996, the warrant entitled Shoney's to
acquire 559,589 shares of Common Stock, of which 437,703 warrants were in the
money at an average price of $9.49. In addition, the Company paid to Shoney's
$5.3 million in cash in exchange for (i) the cancellation of Shoney's right to
receive a portion of the franchise fees collected by the Company equal, in
substantially all cases, to 1.5% of 52 Shoney's Inns' gross revenues through
October 1999 and 0.5% of the remaining and all future Shoney's Inns' gross
revenues for the first ten years of their operations; (ii) the repurchase of
all of the Company's Series A Redeemable Nonparticipating Stock and all of the
Series A Redeemable Nonparticipating Stock of the Company's franchising
subsidiary; (iii) the termination of Shoney's right of first refusal with
respect to shares of Common Stock owned by Leon Moore, the Company's Chief
Executive Officer, if he received an offer which would result in his owning
less than 20% of the Company's outstanding Common Stock; and (iv) the amendment
of the Company's License Agreement with Shoney's (the "License Agreement") to
terminate certain of Shoney's approval rights over various aspects of the
Company's franchise operations, including the selection of franchisees, the
location and design of franchised facilities, the termination of individual
franchisees, and the maximum fees which the Company may charge franchisees.
The Company continues as the exclusive franchisor of Shoney's Inns and
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 and the terms of the franchise agreements (other
than the maximum fees and other financial terms thereof). 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. As a result of the
repurchase of the Company's Series A Redeemable Nonparticipating Stock,
Shoney's no longer has the right to designate two members of the Company's
board of directors. The transactions described above are sometimes collectively
referred to herein as the "Shoney's Transaction."
LICENSE AGREEMENT WITH SHONEY'S
Under the License Agreement, the Company 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
- 7 -
10
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).
Prior to October 25, 1996, the License Agreement entitled Shoney's to
receive a portion of the franchise fees collected by the Company equal, in
substantially all cases, to 1.5% of 52 Shoney's Inns' gross revenues through
October 1999 and 0.5% of the remaining and all future Shoney's Inns' gross
revenues for the first ten years of their operation. Shoney's right to receive
such fees was terminated on October 25, 1996.
The rights in the "Shoney's Inn" and "Shoney's Inn & Suites" marks
granted to the Company under the License Agreement may be terminated upon
certain occurrences, including the bankruptcy of the Company, the failure to
comply with the terms of the License Agreement, and the failure to desist from
any conduct likely to impair Shoney's goodwill or reputation.
LODGING INDUSTRY
Smith Travel Research divides lodging chains into five segments based
on price. These segments are: upper and lower upscale, mid-scale, and upper and
lower economy. Smith Travel Research does not have a specific all-suites
segment, but the Company's Sumner Suites hotels would be included in the
mid-scale segment based on average daily room rates.
- 8 -
11
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)
---------------------- ------------------------ ------------------------
1994 1995 1996 1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Industry-wide ............. $40.70 $42.82 $45.60 64.7% 65.1% 65.2% $62.86 $65.82 $69.97
Upper economy segment ..... 27.55 28.99 30.55 61.3 61.7 62.7 44.94 46.96 49.64
Mid-scale segment ......... 37.42 39.70 42.15 65.1 65.8 65.7 57.52 60.33 64.14
All Shoney's Inns ......... 26.43 28.17 28.47 63.9 64.9 61.5 41.33 43.28 45.86
Company-owned Shoney's
Inns ................... 30.20 30.97 31.38 62.1 64.3 61.1 44.98 48.17 51.39
Sumner Suites (2) ......... N/A N/A 36.15 N/A N/A 48.5 N/A N/A 74.55
(1) Room revenues divided by the number of rented rooms.
(2) Information with respect to Sumner Suites is unavailable or not
meaningful prior to 1996, as two of the first three Sumner Suites
hotels did not open until late 1995.
Source: Smith Travel Accommodation Reports. December year-to-date 1996, for
industry- wide, upper economy and mid-scale, and the Company's internal
data for all Shoney's Inns statistics.
The Company believes that the key elements underlying the improvements
in the industry's operating performance and profitability are favorable economic
conditions and a rate of room demand growth which exceeds the growth rate of
room supply. The rate of room demand growth exceeded the rate of room supply
growth in each of 1994, 1995 and 1996. While the growth in room supply has
increased and will continue to increase with the development of new hotels,
according to Coopers & Lybrand's "Hospitality Directions," October, 1996,
industry-wide room supply is projected to exceed room demand beginning in 1998,
but industry-wide average daily room rate ("ADR") is expected to continue to
increase through 1999 while occupancy is expected to decrease. Occupancy and ADR
have increased throughout the lodging industry from 1993 through 1996.
COMPETITION
The lodging industry is highly competitive. In franchising the Shoney's
Inn system and managing its own lodging facilities, the Company encounters
competition from numerous lodging companies, many of which have greater industry
experience, name recognition, and financial and marketing resources than the
Company. While the actual competition for individual lodging facilities varies
by location, the primary competition for Shoney's Inns includes lodging chains
such as Holiday Inn Express, La Quinta, Comfort Inns, Drury Inns, Fairfield Inns
and Travelodges. The Company's Sumner Suites hotels experience competition from
chains such
- 9 -
12
as AmeriSuites, Hampton Inns, Residence Inn, Courtyard by Marriott, Quality
Suites, Embassy Suites and Comfort Suites. Each of the Company's hotels is
located in a developed area that includes competing lodging facilities, and the
Company expects that 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.
The Americans With Disabilities Act (the "ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. The ADA became effective as to public accommodations in January 1992
and as to employment in July 1992. The Company currently designs its lodging
facilities to be accessible to the disabled and believes that it is in
substantial compliance with all current applicable regulations relating to
accommodations for the disabled. The Company intends to comply with future
regulations relating to accommodating the needs of the disabled, and the Company
does not currently anticipate that such compliance will require the Company to
expend substantial funds.
SERVICE MARKS
The Company has the right to use the "Shoney's Inn" and "Shoney's Inns
and 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 Inns and 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
- 10 -
13
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 applied to register the service mark "Sumner Suites" with the United
States Patent and Trademark Office.
INSURANCE
The Company maintains general liability insurance and property
insurance for all its locations and operations, as well as specialized coverage,
including guest property and liquor liability insurance, in connection with its
lodging business. Generally, the costs of insurance coverage and the
availability of liability insurance coverage have varied widely in recent years.
While the Company believes that its present insurance coverage is adequate for
its current operations, there can be no assurance that the coverage is
sufficient for all future claims or will continue to be available in adequate
amounts or at a reasonable cost.
EMPLOYEES
As of December 29, 1996 the Company had approximately 1,585 employees,
including approximately 150 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 Gallatin, Tennessee and contains approximately 10,000 square feet of office
space. Another 5,000 square feet of office space is leased by the Company in
close proximity to the headquarters. The Company has purchased a site in
Hendersonville, Tennessee and has begun the process of building a new
headquarters building that will contain approximately 42,000 square feet of
space including storage and food services. Management believes that the new
building will contain sufficient space to accommodate the Company's currently
anticipated needs.
Approximately 40 of the 46 Company-owned hotels are located on sites
owned by the Company or a partnership in which the Company holds a majority
interest. The remaining hotels are located on sites that are leased pursuant to
long-term ground leases.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to litigation from time to time in the ordinary
course of its business. The Company is not aware of any material legal action
pending or threatened against it, except for the following:
- 11 -
14
Frank Rudy Heirs Associates, et al. v. Moore and Associates, Inc., Leon
Moore and Gulf Coast Development, Inc. was filed in the Chancery Court for
Davidson County, Tennessee (93- 2957-II) on October 8, 1994. The plaintiff is
the limited partner in Shoney's Inn of Music Valley, Ltd., a Tennessee limited
partnership in which the Company, previously operating under the name Gulf Coast
Development, Inc., is the general partner. The plaintiff alleges that the
Company breached its fiduciary duty as general partner by failing to keep
plaintiff advised on the cost of constructing the Shoney's Inn owned by the
partnership, by paying itself unauthorized and excessive fees relating to such
construction and by allowing the costs of the hotel to exceed earlier estimates.
Plaintiff further claims the Company and Leon Moore breached their fiduciary
duty of full disclosure to plaintiff with regard to the projected costs of the
hotel, the financing of the same and the actual cost of the same. Plaintiff
further claims that the Company and Leon Moore made negligent representations
with regard to the costs and financing of the hotel. Plaintiff further claims
that Moore and Associates, Inc. and the Company converted partnership property
to their own use, that Leon Moore conspired with other officers to gain money
from the partnership and tortiously interfered with plaintiff's contractual
relationships, and that the Company violated the Tennessee Consumer Protection
Act.
The plaintiff sought to have a note in the amount of approximately $1
million issued by the partnership to the Company representing the amount
necessary to complete the hotel project, cancelled or reduced. Plaintiff also
originally sought damages in the amount of $7 million, plus trebled damages for
any unauthorized payment to the Company or its affiliates and for any damages
sustained because of the alleged wrongdoing of the defendants. The plaintiff
further sought punitive damages in the amount of $15 million.
On February 3, 1995, the Chancery Court entered partial summary
judgements on some of the claims raised by the plaintiff. The court entered
summary judgement in favor of the defendants dismissing plaintiff's claim that
the defendants had fraudulently procured the formation of the limited
partnership by misrepresenting the cost of constructing and developing the hotel
and dismissing the plaintiff's claim that the defendants diverted money from the
hotel construction loan and exceeded the cost of construction under the
construction contract. The court also entered summary judgement in favor of the
plaintiff on its claim that the Company breached the partnership agreement by
not offering the partnership the right to participate in the profits from the
management of a neighboring hotel and on its claim that the Company violated the
partnership agreement by withholding the distribution of cash flow.
The February 3, 1995 order with regard to the distribution of cash flow
generally required the Company to cause the partnership to distribute to its
partners, including the
- 12 -
15
Company, 75% of taxable income of the partnership for 1992 and 1993. The order
was deemed final by the Court and was appealed by the defendants to the
Tennessee Court of Appeals. On November 29, 1995, the Tennessee Court of Appeals
affirmed the trial court's judgment. On January 29, 1996, an application was
filed with the Tennessee Supreme Court requesting that the Tennessee Supreme
Court accept an appeal of the decision of the Tennessee Court of Appeals. The
Supreme Court has denied the application.
The Court referred to a Special Master the issue of damages with regard
to the summary judgment granted on the claim that the Company breached the
partnership agreement by not offering the partnership the right to participate
in the profits from the management of a neighboring hotel. On November 8, 1995,
the Special Master issued her Report finding damages on this claim payable to
the partnership (of which the Company is a 60% partner) in the amount of
$3,045,031. A hearing was held on December 19, 1995, at which time the
Chancellor confirmed the Report of the Special Master. On February 27, 1996, the
Court made the judgment final. On March 26, 1996, the Company appealed the
judgment to the Court of Appeals. On March 12, 1997, the Court of Appeals
reversed the trial court's ruling in favor of the plaintiff, vacated the
$3,045,031 judgment rendered against the Company and remanded the case to the
trial court with instructions to enter summary judgment as to this claim in
favor of the Company. The plaintiff now has until May 12, 1997 within which to
seek review of the Court of Appeals ruling in the Supreme Court of Tennessee.
The remaining claims in the case have been set for trial on June 16,
1997. The Company has filed a motion for summary judgment seeking the dismissal
of most of the remaining claims. The motion is scheduled to be heard April 1,
1997.
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 1996.
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 1995 HIGH LOW
----------- ---- ---
First Quarter.................................... $21 1/2 $ 12
Second Quarter................................... 16 5/8 13 1/4
Third Quarter.................................... 15 1/2 12 3/4
Fourth Quarter................................... 14 1/4 7 3/4
FISCAL 1996 HIGH LOW
----------- ---- ---
First Quarter ................................... 13 1/4 9 1/2
Second Quarter................................... 15 1/2 10
Third Quarter ................................... 14 1/4 10 1/2
Fourth Quarter................................... 15 1/2 12 1/4
- 13 -
16
FISCAL 1997 HIGH LOW
----------- ---- ---
First Quarter (through March 24, 14 11 1/2
1997)............................................
On March 24, 1997, the last reported sale price for the Company's
Common Stock as reported by NASDAQ was $13 3/4 per share. As of March 24, 1997,
there were approximately 84 holders of record of the Company's Common Stock and
approximately 1,475 beneficial owners.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings to finance future
development of its business, and does not therefore anticipate paying any cash
dividends in the foreseeable future. The Company's primary revolving credit
agreements prohibit the payment of dividends without the lender's consent.
The Company declared a five-for-four stock split of its Common Stock to
be effected as a 25% stock dividend which was payable on May 14, 1993 to those
shareholders of record on April 30, 1993. The Company more recently declared a
four-for-three stock split of its Common Stock to be effected as a 33 1/3% stock
dividend payable on March 28, 1994 to the shareholders of record on March 14,
1994.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth on the following page as of and
for each of the five fiscal years in the period ended December 29, 1996 have
been derived from the Company's audited Consolidated Financial Statements. The
Consolidated Financial Statements for each of the two fiscal years ended
December 31, 1995 and December 29, 1996, which have been audited by Deloitte &
Touche LLP, 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.
- 14 -
17
SHOLODGE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1995 1996
----------------------------------------------------------
REVENUES:
Hotel $ 25,598 $ 29,890 $ 36,440 $ 44,144 $ 57,528
Construction and development 6,178 0 6,213 9,214 890
Construction and development - other 0 0 0 14,827 775
Franchising 1,760 2,079 2,623 2,917 4,105
Management 660 979 916 438 185
Management - previously deferred 0 0 0 2,862 0
Sale of Hotels 0 9,080 17,366 6,174 0
Profits not Recognized on Installment Sales 0 -1,295 -2,782 -1,956 0
----------------------------------------------------------
Total operating revenues 34,196 40,733 60,776 78,620 63,483
COSTS AND EXPENSES:
Operating Expenses:
Hotel 15,354 17,042 20,938 25,962 31,859
Construction and development 4,549 0 5,242 10,096 1,200
Franshising 1,841 2,153 2,475 2,861 3,255
Cost of Hotels Sold 0 7,785 14,584 4,218 0
----------------------------------------------------------
Total Operating Expenses 21,744 26,980 43,239 43,137 36,314
----------------------------------------------------------
Gross Operating Profit 12,452 13,753 17,537 35,483 27,169
General and administrative 894 1,349 1,378 1,929 2,158
----------------------------------------------------------
Earnings before Interest, Taxes, Depreciation and Amortization 11,558 12,404 16,159 33,554 25,011
Depreciation and amortization 2,944 3,290 4,083 5,638 8,249
----------------------------------------------------------
Net operating profit (Before Interest and Taxes) 8,614 9,114 12,076 27,916 16,762
OTHER INCOME AND EXPENSES:
Interest expense 4,939 4,642 5,525 5,856 4,219
Interest Income 2,425 3,345 5,311 5,815 1,391
----------------------------------------------------------
Net interest (income) expense 2,514 1,297 214 41 2,828
Other income 911 1,012 1,263 765 1,599
----------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, DISCONTINUED OPERA-
TIONS, MINORITY INTEREST AND EXTRAORDINARY ITEMS 7,011 8,829 13,125 28,640 15,533
INCOME TAXES 2,533 3,077 4,838 10,529 5,613
MINORITY INTEREST IN EARNINGS OF CONSOL-
IDATED SUBSIDIARIES & PARTNERSHIPS 309 513 294 351 423
----------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS 4,169 5,239 7,993 17,760 9,497
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS OF RESTAURANT
SUBSIDIARY DISPOSED OF, net of applicable
income taxes & minority interest (9) (41) 18 (75) 0
EXTRAORDINARY LOSSES,
net of income tax benefit 0 0 215 708 0
----------------------------------------------------------
NET EARNINGS $ 4,160 $ 5,198 $ 7,796 $ 16,977 $ 9,497
==========================================================
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary:
Earnings from continuing operations before extraordinary items $ 0.68 $ 0.67 $ 0.92 $ 2.08 $ 1.13
==========================================================
Net Earnings $ 0.68 $ 0.66 $ 0.90 $ 1.99 $ 1.13
==========================================================
Fully Diluted:
Earnings from continuing operations before extraordinary items $ 0.68 $ 0.67 $ 0.92 $ 1.87 $ 1.12
==========================================================
Net earnings $ 0.68 $ 0.66 $ 0.90 $ 1.80 $ 1.12
==========================================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 6,103 7,872 8,654 8,526 8,441
==========================================================
Fully Diluted 6,103 7,872 9,946 10,842 10,764
==========================================================
BALANCE SHEET DATA:
WORKING CAPITAL $ 1,223 (370) $ 714 $ 4,786 ($ 21,745)
TOTAL ASSETS 97,395 120,486 180,391 220,790 263,709
LONG-TERM DEBT AND CAPITALIZED LEASES 57,323 52,020 87,739 89,343 138,794
SHAREHOLDERS' EQUITY 29,177 54,883 65,158 82,737 89,736
- 15 -
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company derives revenues primarily from hotel room sales at its
Sumner Suites and Company-owned Shoney's Inn hotels. Through March 1995, the
Company managed AmeriSuites hotels and earned management fees for such services.
The Company also receives management fees for services it performs for two
franchised Shoney's Inns. The Company derives additional revenue from franchise
fees it receives as the exclusive franchisor of Shoney's Inns.
The Company's hotel operations have been supplemented by contract
revenues from construction and development of franchised Shoney's Inns and,
until March 1995, AmeriSuites 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. The Company has generally undertaken
construction and development projects for third parties only when its capacity
has been underutilized in constructing its own facilities. Construction revenues
are recognized on the percentage of completion basis. Because the Company
expects to concentrate on the development of Sumner Suites, management does not
anticipate generating further significant contract revenues from construction
and development.
From 1990 through the first quarter of fiscal 1995, the Company
developed and owned or managed hotels in the AmeriSuites hotel chain. In March
1995, the Company terminated its relationship with AmeriSuites by (i) selling
its option to purchase 50% of the voting stock of Suites of America, Inc.
("Suites of America") to Prime Hospitality Corp. ("Prime Hospitality") for $27.3
million and (ii) conveying to Suites of America its interest in one additional
AmeriSuites hotel for $6.2 million. Five million dollars of the aggregate
purchase price was paid in cash on closing, while the remaining $28.5 million
was paid pursuant to a note that was repaid in January 1996. In connection with
the sale of its option in Suites of America to the Company, the Company canceled
$14.9 million in existing indebtedness of Suites of America to the Company.
These transactions, together with the sale of five AmeriSuites hotels in 1993
and 1994 (collectively, the "AmeriSuites Transaction"), have been accounted for
as installment sales of real estate in the Company's Consolidated Financial
Statements, and a pre-tax gain of $15.6 million was recognized through 1996 in
connection therewith. The transactions also resulted in the recognition in
fiscal 1995 of $2.9 million of previously deferred management fee revenue.
During first quarter of fiscal 1996, the Company sold its 60% ownership
in five restaurants to the 40% owner. The income or loss from restaurant
operations for each of the reported periods is reported as discontinued
operations net of applicable income taxes and minority interests.
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. This resulted in fiscal 1995 consisting of 53 weeks
as compared with 52 weeks in fiscal 1994 and 1996.
- 16 -
19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship of certain items of revenue and expense to the total
revenues of the Company.
FISCAL YEAR ENDED
--------------------------------------------------------------
DECEMBER 25, December 31, December 29,
--------------------------------------------------------------
1994 1995 1996
--------------------------------------------------------------
Revenues:
Hotel 60.0% 56.1% 90.6%
Construction and development 10.2% 11.7% 1.4%
Construction and development - other 0.0% 18.9% 1.2%
Franchising 4.3% 3.7% 6.5%
Management 1.5% 0.6% 0.3%
Management - previously deferred 0.0% 3.6% 0.0%
Sale of Hotels 28.6% 7.9% 0.0%
Profits not recognized on installment
sales (4.6)% (2.5)% 0.0%
--------------------------------------------------------------
Total operating revenues 100.0% 100.0% 100.0%
Costs and Expenses:
Operating expenses:
Hotel 34.5% 33.0% 50.2%
Construction and development 8.6% 12.8% 1.9%
Franchising 4.1% 3.6% 5.1%
Cost of hotels sold 24.0% 5.4% 0.0%
--------------------------------------------------------------
Total operating expenses 71.1% 54.9% 57.2%
--------------------------------------------------------------
Gross operating profit 28.9% 45.1% 42.8%
General and administrative 2.3% 2.5% 3.4%
--------------------------------------------------------------
Earnings before interest, taxes, depreciation
and amortization 26.6% 42.7% 39.4%
Depreciation and amortization 6.7% 7.2% 13.0%
--------------------------------------------------------------
Net operating profit (before interest
and taxes) 19.9% 35.5% 26.4%
Other Income and Expenses
Interest expense 9.1% 7.4% 6.6%
Interest income 8.7% 7.4% 2.2%
--------------------------------------------------------------
Net interest (income) expense 0.4% 0.1% 4.5%
Other income 2.1% 1.0% 2.5%
--------------------------------------------------------------
Earnings before income taxes, discontinued
operations, minority interest
and extraordinary items 21.6% 36.4% 24.5%
Income taxes 8.0% 13.4% 8.8%
Minority interest in earnings
of consolidated subsidiaries
and partnerships 0.5% 0.4% 0.7%
--------------------------------------------------------------
Earnings from continuing operations before
extraordinary items 13.2% 22.6% 15.0%
Discontinued operations:
Income (loss) from operations
of restaurant subsidiary
disposed of, net of applicable
income taxes and minority
interest 0.0% (0.1)% 0.0%
Extraordinary losses, net of
income tax benefit 0.4% 0.9% 0.0%
--------------------------------------------------------------
Net earnings 12.8% 21.6% 15.0%
==============================================================
- 17 -
20
For the Fiscal Years Ended December 29, 1996 and December 31, 1995
For the fiscal year ended December 29, 1996, total operating revenues
declined 19.3% to $63.5 million from $78.6 million for the fiscal year ended
December 31, 1995. However, 1995's revenues included $21.9 million from the
AmeriSuites Transaction discussed in the overview above, in contrast to only
$775,000 from this source in fiscal 1996. Exclusive of the AmeriSuites
Transaction, total operating revenues increased by $6.0 million, or 10.6%, from
$56.7 million in 1995 to $62.7 million in fiscal 1996.
Revenues from hotel operations in fiscal 1996 increased 30.3% to $57.5
million from $44.1 million for fiscal 1995. This increase resulted primarily
from more hotels being operated in fiscal 1996 as compared to fiscal 1995.
Sixteen hotels which opened during fiscal 1995 and fiscal 1996 contributed $14.3
million more to revenues in fiscal 1996 than in fiscal 1995. One hotel which was
sold during 1995, contributed $549,000 to hotel revenues in that year. Revenues
from the 29 same store hotels declined slightly to $42.0 million in fiscal 1996
from $42.4 million in fiscal 1995. Average daily room rates from same store
hotels increased 5.1% to $50.66 in fiscal 1996 from $48.18 in fiscal 1995, and
average occupancy rates on these hotels decreased to 61.7% in fiscal 1996 from
64.5% in fiscal 1995. For all 45 hotels owned at the end of fiscal 1996, total
revenues increased 32.0% to $57.5 million in fiscal 1996 from $43.6 million in
fiscal 1995. These hotels reflected an increase of 12.8% in average daily room
rates to $54.69 in fiscal 1996 from $48.49 in fiscal 1995, and average occupancy
rates on these hotels declined to 58.9% in fiscal 1996 from 64.1% in fiscal
1995.
Revenues from regular construction and development activities for 1996
were $889,000 in contrast to $9.2 million for the prior year. 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. Three
outside construction projects were in progress during 1995 compared with only
one during 1996. No outside construction contracts are currently in progress.
Revenues from Construction and development-other and
Management-previously deferred, which together totaled $17.7 million in fiscal
1995, resulted from recognizing, in connection with the consummation of the
AmeriSuites Transaction, profits deferred from fiscal 1993 and fiscal 1994
relating to the development and management of hotels for Suites of America. The
Company's relationship with Suites of America ended on March 31, 1995, allowing
the previously deferred management revenues and a portion of the previously
deferred construction profit to be recognized in the first fiscal quarter of
1995. Additional previously deferred construction profit was recognized
throughout fiscal 1995, with the final $775,000 recognized in 1996, when the
balance of the note receivable from Suites of America was collected.
Revenue from the sale of hotels in 1995 was $4.2 million, net of
profits not recognized on installment sales of $2.0 million, representing the
sale of one hotel in 1995 in conjunction with the AmeriSuites Transaction. These
net revenues were offset by the cost of hotels sold, resulting in no gross
operating profit from these transactions.
Franchise revenues in fiscal 1996 increased 40.7% to $4.1 million from
$2.9 million in fiscal 1995, as a result of an increase in the number of
Shoney's Inn franchises sold, combined with franchisees' increased hotel
revenues upon which royalty and reservation fees are based. At the end of fiscal
1996 there were 56 franchised Shoney's Inns in operation compared with 50 at the
end of fiscal 1995. Management fee revenue in fiscal 1996 decreased 57.7% to
$185,000 from $438,000 in fiscal 1995, due to the cancellation of management
contracts on 11 hotels on
- 18 -
21
March 31, 1995 as a part of the AmeriSuites Transaction, and to the cancellation
of a management contract on one franchised Shoney's Inn in 1996.
Hotel operating expenses for fiscal 1996 increased by 22.7% to $31.9
million from $26.0 million in fiscal 1995. The 16 hotels opened during fiscal
1995 and fiscal 1996, which were not in operation during the full year in either
fiscal 1995 or fiscal 1996, accounted for $7.6 million of the total increase.
Additionally, operating expenses for the 29 hotels operating for all of both
years declined by $1.3 million, and operating expenses on the hotel sold during
the first fiscal quarter of 1995 declined by $400,000. These increases and
decreases in operating costs and expenses are related to the corresponding
increases and decreases in operating revenues on these hotels. The resulting
gross profit margin on the hotels operating for all of both years increased from
40.9% in fiscal 1995 to 43.6% in fiscal 1996.
Costs and expenses of construction and development for 1996 decreased
to $1.2 million from $10.1 million for 1995. There were three outside
construction contracts in 1995 compared to one during 1996.
Franchising operating expenses for 1996 increased 13.8% to $3.3 million
from $2.9 million for the prior year, primarily due to additional expenses
incurred by the reservation center in meeting the added demand from additional
properties served by that department. As a result of the Shoney's Transaction,
the Company will no longer be required to pay a portion of its franchise fee
revenues to Shoney's in the form of royalty fees. During 1996, franchising
operating expenses included $758,000 of royalty fees to Shoney's, compared to
$980,000 in 1995.
General and administrative expense increased 11.9% to $2.2 million in
fiscal 1996 from $1.9 million in fiscal 1995, due primarily to additional
staffing levels for present and future growth of the Company, and to increased
professional fees and expenses incurred.
Depreciation and amortization expense increased by 46.3% to $8.2
million in fiscal 1996 from $5.6 million in fiscal 1995, due primarily to the 16
hotels opened during fiscal 1995 and fiscal 1996.
For 1996, interest expense and interest income decreased $1.7 million
and $4.5 million, respectively, from 1995, resulting in an increase in net
interest expense of $2.8 million. The decrease in interest income resulted
primarily from the collection of the balance of first mortgage notes receivable
of approximately $44 million from Suites of America in the first quarter of
1996, which resulted in a reduction of interest income for 1996 of $4.2 million.
The proceeds were used to reduce outstanding debt, significantly reducing
interest expense for 1996 as compared to 1995. Additional borrowings to fund new
hotels opened in 1996, however, offset a portion of this reduced interest
expense.
Other income in fiscal 1996 increased to $1.6 million from $765,000 in
fiscal 1995. The $834,000 increase was due to gains on the sale of securities
available for sale and to a gain on the sale of excess land acquired for the
development of a Company owned hotel.
The loss from discontinued operations, net of applicable income taxes
and minority interest, in 1995 resulted from the Company's sale of its 60%
interest in a restaurant subsidiary
- 19 -
22
to the 40% owner in the first quarter of 1996. The extraordinary loss, net of
income tax benefit, in 1995 represents the extraordinary non-cash write-off of
unamortized deferred financing costs, and early redemption premiums paid,
associated with the refinancing of certain indebtedness during 1995.
For the Fiscal Years Ended December 31, 1995 and December 25, 1994
For the fiscal year ended December 31, 1995, total operating revenues
increased 29.4% to $78.6 million from $60.8 million for the fiscal year ended
December 25, 1994.
Revenues from hotel operations in fiscal 1995 increased 21.1% to $44.1
million from $36.4 million for fiscal 1994. This increase resulted primarily
from more hotels being operated in fiscal 1995 as compared to fiscal 1994.
Eleven hotels which opened during fiscal 1994 and fiscal 1995 contributed $7.9
million more to revenues in fiscal 1995 than in fiscal 1994. One hotel was sold
during the first quarter of 1995, contributing only $549,000 to hotel revenues
in that year compared with $2.3 million in fiscal 1994 when it was owned and
operated for the entire fiscal year. Revenues from the 22 same store hotels
increased 5.0% to $32.8 million in fiscal 1995 from $31.2 million in fiscal
1994. Average daily room rates from same store hotels increased 6.3% to $47.85
in fiscal 1995 from $45.01 in fiscal 1994, and average occupancy rates on these
hotels decreased to 66.6% in fiscal 1995 from 69.1% in fiscal 1994. For all 33
hotels owned at the end of fiscal 1995, total revenues increased 27.8% to $43.6
million in fiscal 1995 from $34.1 million in fiscal 1994. These hotels reflected
an increase of 7.0% in average daily room rates to $48.49 in fiscal 1995 from
$45.31 in fiscal 1994, and average occupancy rates on these hotels declined to
64.1% in fiscal 1995 from 67.0% in fiscal 1994.
Construction and development revenues of $9.2 million in fiscal 1995
and $6.2 million in fiscal 1994 were due to construction activities for third
parties. In each year construction work was performed on three outside
contracts, but revenues from these activities increased by $3.0 million in
fiscal 1995 over fiscal 1994 due to variances in percentages completed each
year.
Revenues from Construction and development-other and
Management-previously deferred, which together totaled $17.7 million in fiscal
1995, resulted from recognizing, in connection with the consummation of the
AmeriSuites Transaction, profits deferred from fiscal 1993 and fiscal 1994
relating to the development and management of hotels for Suites of America. The
Company's relationship with Suites of America ended on March 31, 1995, allowing
the previously deferred management revenues and a portion of the previously
deferred construction profit to be recognized in the first fiscal quarter of
1995. Additional previously deferred construction profit was recognized
throughout fiscal 1995, with the final portion recognized in 1996, when the
balance of the note receivable from Suites of America was collected. The
Company's 100% financing of five hotels developed and managed for Suites of
America resulted in the deferral of recognition of these profits from 1993 and
1994 to 1995 and 1996. The revenues from sale of hotels, net of profits not
recognized on installment sales, which amounted to $4.2 million in fiscal 1995
and $14.6 million in fiscal 1994, were also part of this arrangement for
developing hotels for Suites of America. In fiscal 1994, there were three hotels
developed and sold under this arrangement, whereas in fiscal 1995 there was only
one hotel which was sold on March 31, 1995. The cost of hotels sold in both
years is equal to the net revenues, resulting
- 20 -
23
in no profit to the Company. All the profit on these hotels is recognized in
revenues from construction and development-other.
Franchise revenues in fiscal 1995 increased 11.2% to $2.9 million from
$2.6 million in fiscal 1994, as a result of an increase in the number of
Shoney's Inn franchises sold, combined with franchisees' increased hotel
revenues upon which royalty and reservation fees are based. At the end of fiscal
1995 there were 50 franchised Shoney's Inns in operation compared with 45 at the
end of fiscal 1994. Management fee revenue in fiscal 1995 decreased 52.2% to
$438,000 from $916,000 in fiscal 1994, due to the cancellation of management
contracts on 11 hotels during the first fiscal quarter of 1995 as a part of the
AmeriSuites Transaction.
Hotel operating expenses for fiscal 1995 increased by 24.0% to $26.0
million from $20.9 million in fiscal 1994. The 11 hotels opened during fiscal
1994 and fiscal 1995, which were not in operation during the full year in either
fiscal 1994 or fiscal 1995, accounted for 95.3% of the total increase.
Additionally, operating expenses for the 22 hotels operated for all of both
years increased by $1.1 million, and operating expenses on the hotel sold during
the first fiscal quarter of 1995 declined by $904,000. These increases and
decreases in operating costs and expenses are related to the corresponding
increases and decreases in operating revenues on these hotels. The resulting
gross profit margin from hotel operations in fiscal 1995 declined to 41.2%
versus 42.5% in fiscal 1994. The gross operating profit margin on the 11 hotels
opened during fiscal 1994 and fiscal 1995 improved from 20.5% in fiscal 1994 to
34.3% in fiscal 1995, while the gross profit margin on the 22 hotels operating
for all of both years declined from 44.5% in fiscal 1994 to 43.7% in fiscal
1995.
Construction and development expenses increased by $4.9 million in
fiscal 1995 due to the higher level of construction contract work performed in
such year and to cost overruns on certain third party contracts. Cost of hotels
sold declined by $10.4 million in fiscal 1995 from fiscal 1994.
Franchising expenses in fiscal 1995 increased 15.6% from fiscal 1994,
while franchising revenues only increased by 11.2%, due primarily to the decline
of initial franchise fee income in fiscal 1995 for which there was no
corresponding decrease in operating expenses.
General and administrative expense increased 39.9% to $1.9 million in
fiscal 1995 from 1.4 million in fiscal 1994, due primarily to additional
staffing levels for present and future growth of the Company, and to increased
professional fees and expenses incurred.
Depreciation and amortization expense increased by 38.1% to $5.6
million in fiscal 1995 from $4.1 million in fiscal 1994, due primarily to the 11
hotels opened during fiscal 1994 and fiscal 1995.
Net interest expense in fiscal 1995 declined to $41,000 from $214,000
in fiscal 1994, due to a significant reduction in interest rates on five
industrial revenue bond issues in early fiscal 1995 and to increased first
mortgage lending in the first fiscal quarter of 1995 in connection with the
AmeriSuites Transaction. Other income decreased by $498,000 in fiscal 1995
compared to fiscal 1994 primarily due to a reclassification of certain
miscellaneous hotel revenues from other
- 21 -
24
income to hotel operating revenues in fiscal 1995, and to a decline of $81,000
in gains on the sale of property and equipment.
The increase in extraordinary charges of $708,000 net of income taxes
in fiscal 1995 from $215,000 in fiscal 1994 is due primarily to the write-off of
unamortized deferred financing costs associated with the refinancing of five
industrial revenue bond issues to substantially lower interest rates in fiscal
1995, compared with similar write-offs of lesser amounts in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations was $15.8 million in fiscal 1996 and
$31.6 million in fiscal 1995 and $5.8 million in fiscal 1994. Fiscal 1995 was
an unusual year due to the AmeriSuites Transaction discussed above. The Company
currently has a total of $54.0 million in unsecured revolving credit facilities
with five banks, of which $42.5 million expires in April 1997, $1.5 million
expires in May 1997, and $10.0 million expires in January 1998. Interest rates
on these lines of credit are (i) $42.5 million at the lender's prime rate, or
two hundred basis points over the 30, 60 or 90 day LIBOR rates, at the
Company's option; (ii) $10.0 million at the lender's prime rate, or one hundred
ninety basis points over the 30, 60 or 90 days LIBOR rates, at the Company's
option; and (iii) $1.5 million at the lender's prime rate. As of December 29,
1996, the Company had $22.1 million outstanding under these credit facilities.
On November 15, 1996, the Company issued $33.2 million in 9.75% Senior
Subordinated Notes due 2006, Series A, and used the net proceeds to reduce the
outstanding balances under the revolving credit facilities. This offering was
the first series of notes issued under a $125 million shelf registration. The
Company anticipates obtaining a new $75.0 million senior revolving credit
facility within the next 30 days to replace its existing bank credit
facilities.
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 $86.6
million in 1996 and $56.2 million in fiscal 1995.
The Company opened two Shoney's Inns and ten Sumner Suites hotels in
1996 and one Sumner Suites hotel thus far in 1997. Additionally, renovations of
several existing properties were completed in 1996 and several others are
scheduled for completion in fiscal 1997. The Company also plans to develop and
open an additional eight to ten Sumner Suites hotels by the end of fiscal 1997.
A new corporate headquarters building is also under construction and is
scheduled for completion during the first half of 1997. The Company expects that
approximately $80.0 million in additional capital funds will be necessary
through fiscal 1997 to fulfill these plans.
The Company has principal payments totaling $3.7 million due under
existing debt instruments, in addition to the repayment of the Company's
revolving credit facilities, through 1997. The Company believes that a
combination of net proceeds from future offerings under the $125 million
registration, net cash provided from operations, borrowings under existing or
new credit facilities, proceeds from the sale of excess land and available
furniture, fixtures and equipment financing packages will be sufficient to fund
its scheduled development and debt repayments through fiscal 1997.
- 22 -
25
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" and the information concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934 under the
heading "Delinquent Filings of Ownership Reports" to be contained in the
Company's Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" and the
information under the heading "Performance Graph" to be contained in the
Company's Proxy Statement with respect to the next Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain
Beneficial Owners and Management" to be contained in the Company's Proxy
Statement with respect to the next Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the heading "Certain Transactions" to be
contained in the Company's Proxy Statement with respect to the next Annual
Meeting of Shareholders is incorporated herein by reference.
- 23 -
26
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 31, 1995
and December 29, 1996 F-2 - F-3
Consolidated Statements of Earnings for each of the three years
in the period ended December 29, 1996 F-4 - F-5
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 29, 1996 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 29, 1996 F-7
Notes to consolidated financial statements F-8 - F-20
2. Financial Statement Schedules:
Independent Auditor's Report S-1
Schedule II - Valuation and Qualifying Accounts S-2
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:
Employment Contract between Registrant and Richard
L. Johnson, dated June 15, 1987, as amended December 11, 1991
(incorporated by reference to Registration Statement on Form
S-1, No. 33-44504, Exhibit 10(24)).
- 24 -
27
1991 Stock Option Plan (incorporated by reference to
Registration Statement on Form S-1, No. 33-44504, Exhibit
10(25)) as amended by First Amendment to 1991 Stock Option
Plan, filed as Exhibit 10(14.1) hereto.
Key Employee Supplemental Income Plan (incorporated
by reference to Registration Statement on Form S-1, No.
33-44504, Exhibit 10(26)).
Employment Contract between the Registrant and Michael A.
Corbett, dated September 11, 1995 (incorporated by
reference to Form 10-Q, Exhibit 10.1, filed May 24, 1996).
- 25 -
28
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3(1) -- Amended and Restated Charter.(1)
3(2) -- Amended and Restated Bylaws.(1)
4(1) -- Amended and Restated Charter. Section 6 of the Amended and Restated Charter
is included in Exhibit 3(1).(1)
4(2) -- Indenture, dated March 1, 1985, between Shoney's Inns Group III, Inc. and Third
National Bank in Nashville, Trustee, relating to $10,000,000 in Revenue
Participation Bonds due March 1, 1995.(1)
4(3) -- First Supplement to Indenture, dated July 31, 1986, by and between Shoney's
Inns Group III, Inc. and Third National Bank in Nashville, Trustee.(1)
4(4) -- Indenture, dated April 15, 1986, by and between Shoney's Inns Group IV, Inc.
and Third National Bank in Nashville, Trustee, relating to $11,500,000 Revenue
Appreciation Payment and Principal Repayment Bonds due April 15, 2001.(1)
4(5) -- Stock Purchase and Warrant Agreement, dated October 25, 1991, between the
Registrant and Shoney's Investments, Inc.(1)
4(6) -- Modification Agreement No. 1 to Stock Purchase and Warrant Agreement dated
February 11, 1994 between Registrant and Shoney's Investments, Inc.(3)
4(7) -- Stock Restriction Agreement, dated October 25, 1991, by and among Leon
Moore, the Registrant and Shoney's Investments, Inc.(1)
4(8) -- Registration Rights Agreement, dated December 11, 1991 between the Registrant
and Richard L. Johnson.(1)
4(8.1) -- First Amendment to Registration Rights Agreement between the Registrant
and Richard L. Johnson dated as of October 10, 1996(7)
4(9) -- Asset Sale and Purchase Agreement, dated January 28, 1994, by and among the
Registrant, Shoney's Funding Corp. and Shoney's, Inc.(3)
4(10) -- Indenture dated as of June 6, 1994, by and between the
Registrant and Third National Bank in Nashville, Tennessee,
Trustee, relating to $54,000,000 in 7 1/2 Convertible
Subordinated Debentures due 2004(4)
4(11) -- Indenture dated as of November 15, 1996, by and between the Registrant and
Bankers Trust Company, Trustee, relating to Senior Subordinated Notes(7)
4(12) -- 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(7)
- 26 -
29
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.
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10(1) -- Second Amended and Restated Partnership Agreement of Shoney's Inn of Baton
Rouge dated February 16, 1994.(3)
10(2) -- Second Amended and Restated Partnership Agreement of Shoney's Inn of
Independence dated February 16, 1994.(3)
10(3) -- Amended and Restated Partnership Agreement of Demonbreun Hotel Associates,
Ltd., dated October 22, 1991.(1)
10(4) -- Agreement of Limited Partnership of Shoney's Inn North, Ltd., dated
December 31, 1987.(1)
10(5) -- Partnership Agreement of Shoney's Inn of Atlanta, N.E., dated December 26,
1988.(1)
10(6) -- Partnership Agreement of Shoney's Inn of Stockbridge, dated December 26,
1988.(1)
10(7) -- Joint Venture Agreement of Atlanta Shoney's Inns Joint Venture, dated May 4,
1988.(1)
10(8) -- Amended and Restated Limited Partnership Agreement of Shoney's Inns of
Gulfport, Ltd., dated January 1, 1987.(1)
10(9) -- Second Amended and Restated Limited Partnership Agreement of Shoney's Inn
of Bossier City, Ltd., dated January 1, 1987.(1)
10(10) -- Second Amended and Restated Limited Partnership Agreement of Shoney's Inn
of New Orleans, Ltd., dated January 1, 1987.(1)
10(11) -- Amended and Restated Limited Partnership Agreement of
Shoney's Inn of Opryland, Ltd., dated August 4, 1986, and
subsequent amendments.(1)
10(12) -- Employment Contract between Registrant and Richard L. Johnson, dated June 15,
1987.(1)
10(13) -- First Amendment to Employment Contract, dated December 11, 1991 between
the Registrant and Richard L. Johnson.(1)
- 27 -
30
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10(14) -- 1991 Stock Option Plan.(1)
10(14.1)-- First Amendment to 1991 Stock Option Plan
10(15) -- Key Employee Supplemental Income Plan.(1)
10(16) -- License Agreement, dated October 25, 1991, by and among the Registrant,
Shoney's Investments, Inc. and ShoLodge Franchise Systems, Inc.(1)
10(17) -- Amendment No. 1 to License Agreement, dated September 16, 1992 by and
among Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registrant.(2)
10(18) -- Amendment No. 2 to License Agreement, dated March 18, 1994 by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registrant.(3)
10(19) -- Amendment No. 3 to License Agreement, dated March 13, 1995 by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registrant.(5)
10(19.1) -- Amendment No. 4 to License Agreement, dated June 26, 1996, by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registramt.(8)
10(19.2) -- Amendment No. 5 to License Agreement, dated October 25, 1996, by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and the
Registrant.(7)
10(20) -- Agreement dated March 15, 1994 between Sholodge Franchise Systems, Inc. and
Shoney's of Knoxville, Inc.(3)
10(21) -- Loan Agreement, dated January 7, 1994, between the Registrant and First Union
National Bank of Tennessee.(3)
10(22) -- First Amendment to Loan Agreement dated March 21, 1994, between Registrant and
First Union National Bank of Tennessee.(3)
10(23) -- Second Amendment to Loan Agreement dated June 20, 1994,
between Registrant and First Union National Bank of
Tennessee.(6)
10(24) -- Third Amendment to Loan Agreement dated August 17, 1995,
between Registrant and First Union National Bank of
Tennessee.(6)
10(25) -- Fourth Amendment to Loan Agreement dated November 14, 1995,
between Registrant and First Union National Bank of
Tennessee.(6)
10(25.1) -- Fifth Amendment to Loan Agreement dated October 18, 1996,
between Registrant and First Union National Bank of
Tennessee.(7)
10(25.2) -- Sixth Amendment to Loan Agreement dated October 24, 1996,
between Registrant and First Union National Bank of
Tennessee.(7)
10(26) -- Agreement of Additional Co-Obligors dated December 27, 1995
among certain of Registrant's subsidiaries and First Union
National Bank of Tennessee.(6)
- 28 -
31
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10(27) -- Promissory Note dated November 14, 1995, made by the
Registrant and certain of its subsidiaries payable to First
Union National Bank of Tennessee.(6)
10(28) -- Addendum to Promissory Note dated December 27, 1995 made by
certain of Registrant's subsidiaries payable to First Union
National Bank of Tennessee.(6)
10(29) -- Loan Agreement, dated March 25, 1994, between the Registrant and First
American National Bank.(3)
10(30) -- First Amendment to Loan Agreement, dated April 21, 1994, between the
Registrant and First American National Bank.(6)
10(31) -- Second Amendment to Loan Agreement, dated August 23, 1995, between the
Registrant and First American National Bank.(6)
10(32) -- Third Amendment to Loan Agreement, dated September 8, 1995, between the
Registrant and First American National Bank.(6)
10(33) -- Fourth Amendment to Loan Agreement, dated December 27, 1995, between the
Registrant and First American National Bank.(6)
10(34) -- Amended and Restated Master Promissory Note dated December
27, 1995 made by the Registrant payable to First American
National Bank.(6)
10(35) -- Loan Agreement dated September 26, 1995 between Registrant and First
Tennessee Bank National Association.(6)
10(36) -- First Amendment to Loan Agreement dated December 27, 1995 among
Registrant, certain of Registrant's subsidiaries and First Tennessee Bank National
Association.(6)
10(37) -- Amended and Restated Promissory Note dated December 27, 1995 made by
Registrant and certain of Registrant's subsidiaries payable to First National Bank
National Association.(6)
10(38) -- Cancellation Agreement among Suites of America, Inc., Prime Hospitality Corp.
and the Registrant, as of February 6, 1995 (the "Cancellation Agreement") (5)
10(39) -- Reimbursement Agreement between Suites of America, Inc. and the Registrant
dated as of December 31, 1994 (5)
- 29 -
32
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10(40) -- Termination Agreement among Suites of America, Inc., Prime Hospitality Corp.
and the Registrant dated as of December 31, 1994, terminating the Development
Agreement, as defined in the Cancellation Agreement (5)
10(41) -- Termination Agreement among Suites of America, Inc., Prime Hospitality Corp.
and the Registrant dated as of December 31, 1994 terminating the Stock Option
Agreement, as defined in the Cancellation Agreement (5)
10(42) -- Promissory Note in the principal amount of $54,371,399 from Suites of America,
Inc. to the Registrant dated March 31, 1995 (5)
10(43) -- Letter Agreement between the Registrant and Don Knight regarding sale of stock
of Knight Enterprises, Inc., dated December 29, 1995.(6)
10(44) -- Stock Purchase Agreement between the Registrant and Don
Knight regarding sale of stock of Knight Enterprises, Inc.,
dated as of December 31, 1995.(6)
10(45) -- Promissory Note from Don Knight to the Registrant dated December 31, 1995 in
the amount of $1,022,092.80.(6)
10(46) -- First Amendment to Stock Pledge Agreement between Don Knight and the
Registrant dated December 31, 1995 and Stock Pledge Agreement dated
October 7, 1991.(6)
10(47) -- Loan Agreement between Knight Enterprises, Inc. and the Registrant dated
December 31, 1995.(6)
10(48) -- Promissory Note from Knight Enterprises, Inc. to the Registrant, dated
December 31, 1995 in the amount of $1,076,023.(6)
10(49) -- Security Agreement between Knight Enterprises, Inc. and the Registrant dated
December 31, 1995.(6)
10(50) -- Collateral Assignment of Leases from Knight Enterprises, Inc. to the Registrant
dated December 31, 1995.(6)
10(51) -- Guaranty Agreement from Don Knight in favor of the Registrant dated
December 31, 1995.(6)
10(52) -- Cancellation of Shareholder Agreement between Don Knight and the Registrant
dated December 31, 1995.(6)
- 30 -
33
10(53) -- Accounting Services Agreement between the Registrant and Knight Enterprises,
Inc. dated December 31, 1995.(6)
10(54) -- Warrant Purchase Agreement between the Registrant and
Shoney's Investments, Inc. dated October 25, 1996(7)
10(55) -- Loan Agreement between the Registrant and NationsBank of
Tennessee, N.A. dated November 6, 1996(7)
10(56) -- First Amendment to Amended and Rstated Stock Option Agreement
dated as of October 10, 1996, between Leon Moore and Richard
L. Johnson(7)
10(57) -- Employment Contract between the Registrant and Michael A.
Corbett, dated September 11, 1995(9)
11 -- Computation of Earnings per Common Share Primary and Assuming Full Dilution
21 -- Subsidiaries of the Registrant.
23 -- Consent of Deloitte & Touche LLP.
27 -- Financial Data Schedule.
(b) No reports on Form 8-K were filed during the fourth quarter ended December 29,
1996.
(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.
- --------------
(1) 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.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed with the Commission on March 29, 1993.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed with the Commission on March 28, 1994.
(4) 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.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed with the Commission on April 11, 1995.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed with the Commission on April 1, 1996.
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on November 20, 1996.
(8) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on August 28, 1996.
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on May 24, 1996.
- 31 -
34
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.
By: /s/ Leon Moore
----------------------------
Leon Moore, President and
Chief Executive Officer
March 27, 1997
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
- --------------------------------------- March 27, 1997
Leon Moore President, Chief Executive
Officer, Director
/s/ Bob Marlowe
- --------------------------------------- March 27, 1997
Bob Marlowe Secretary, Treasurer, Chief
Accounting Officer, Director
/s/ Michael A. Corbett
- --------------------------------------- March 27, 1997
Michael A. Corbett Chief Financial Officer
/s/ Richard L. Johnson
- --------------------------------------- March 27, 1997
Richard L. Johnson Executive Vice President,
Director
/s/ Earl H. Sadler
- --------------------------------------- March 27, 1997
Earl H. Sadler Director
/s/ Helen L. Moskovitz
- --------------------------------------- March 27, 1997
Helen L. Moskovitz Director
- 32 -
35
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShoLodge, Inc.
Gallatin, Tennessee
We have audited the accompanying consolidated balance sheets of ShoLodge, Inc.
and subsidiaries as of December 31, 1995 and December 29, 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 29, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ShoLodge, Inc. and subsidiaries as
of December 31, 1995 and December 29, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
29, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 7, 1997
F-1
36
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND DECEMBER 29, 1996
- ------------------------------------------------------------------------------------------------------------------------
ASSETS 1995 1996
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 2,444,990 $ 4,259,768
Accounts receivable -
Trade, net of allowance for doubtful accounts of $14,728 and $150,000 as of
December 31, 1995 and December 29, 1996,
respectively 2,545,108 2,676,083
Construction contracts, no allowance
considered necessary 1,726,844 259,785
Note receivable (Note 4) 44,100,071 --
Less profits not recognized on installment sales (1,681,312) --
------------- -------------
42,418,759 --
Prepaid expenses 385,615 471,823
Other current assets 287,871 559,982
------------- -------------
Total current assets 49,809,187 8,227,441
DIRECT FINANCING LEASES,
less current portion (Note 3) 661,631 611,492
PROPERTY AND EQUIPMENT (Notes 1, 5 and 7) 176,701,146 262,264,264
Less accumulated depreciation
and amortization (27,021,202) (33,888,495)
------------- -------------
149,679,944 228,375,769
DEFERRED CHARGES (Note 1) 3,437,887 9,899,544
SECURITIES HELD TO MATURITY - RESTRICTED (Note 2) 7,618,031 8,255,810
SECURITIES AVAILABLE-FOR-SALE (Note 2) 2,090,943 212,062
EXCESS OF COST OVER FAIR VALUE
OF NET ASSETS ACQUIRED (Note 1) 3,286,938 3,136,965
OTHER ASSETS (Notes 1 and 6) 4,205,151 4,990,095
------------- -------------
$ 220,789,712 $ 263,709,178
============= =============
See notes to consolidated financial statements.
F-2
37
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996
------------- -------------
CURRENT LIABILITIES:
Accounts payable and accrued
expenses $ 7,750,468 $ 12,045,715
Taxes other than on income 689,564 984,855
Income taxes payable (Notes 1 and 13) 2,274,693 1,116,972
Current portion of long-term
debt and capitalized lease
obligations (Notes 7 and 8) 34,308,402 15,824,914
------------- -------------
Total current liabilities 45,023,127 29,972,456
LONG-TERM DEBT ASSOCIATED WITH
LODGING FACILITIES (Note 7) 33,125,280 40,104,802
OTHER LONG-TERM DEBT (Note 7) 54,112,647 97,227,576
CAPITALIZED LEASE OBLIGATIONS (Note 8) 2,104,765 1,462,044
DEFERRED INCOME TAXES (Notes 1 and 13) 3,153,751 4,702,144
MINORITY INTERESTS IN EQUITY OF
CONSOLIDATED SUBSIDIARIES AND
PARTNERSHIPS 533,642 504,028
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 12):
Series A redeemable nonparticipating stock (no par value; 1,000 shares
authorized; 1,000 shares and no shares issued and outstanding as of
December 31,
1995 and December 29, 1996, respectively) -- --
Common stock (no par value; 20,000,000
shares authorized, 8,228,502 and 8,233,318 shares
issued and outstanding as of December 31, 1995
and December 29, 1996, respectively) (Notes 10 and 11) 1,000 1,000
Additional paid-in capital 44,235,396 42,212,042
Retained earnings 37,966,623 47,463,347
Unrealized gain on securities available-for-sale, net
of income taxes (Note 2) 533,481 59,739
------------- -------------
Total shareholders' equity 82,736,500 89,736,128
------------- -------------
$ 220,789,712 $ 263,709,178
============= =============
F-3
38
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 25, 1994, DECEMBER 31, 1995 AND DECEMBER 29, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
REVENUES: (Note 1)
Hotel (Note 7) $ 36,440,350 $ 44,144,440 $57,528,105
Construction and development 6,213,414 9,213,609 889,365
Construction and development - other (Note 4) -- 14,826,675 775,000
Franchising 2,623,085 2,917,174 4,105,060
Management (Note 4) 916,249 438,363 185,329
Management - previously deferred (Note 4) -- 2,862,000 --
Sales of hotels (Note 4) 17,366,000 6,173,500 --
Profits not recognized on installment sales (Note 4) (2,782,538) (1,955,791) --
------------ ----------- -----------
Total revenues 60,776,560 78,619,970 63,482,859
COSTS AND EXPENSES:
Operating expenses:
Hotel (Note 8) 20,938,554 25,961,631 31,859,306
Construction and development 5,242,174 10,096,179 1,199,413
Franchising (Note 14) 2,475,216 2,861,452 3,255,372
Cost of hotels sold (Note 4) 14,583,462 4,217,709 --
------------ ------------ -----------
Total operating expenses 43,239,406 43,136,971 36,314,091
------------ ------------ -----------
Gross operating profit 17,537,154 35,482,999 27,168,768
General and administrative 1,378,447 1,928,863 2,157,549
------------ ------------ -----------
Earnings before interest, taxes, depreciation and amortization 16,158,707 33,554,136 25,011,219
Depreciation and amortization (Notes 1 and 5) 4,082,273 5,637,862 8,249,666
------------ ------------ -----------
Net operating profit 12,076,434 27,916,274 16,761,553
OTHER INCOME AND EXPENSES:
Interest expense (Notes 5, 7 and 8) 5,525,220 5,856,383 4,219,164
Interest income (Notes 2 and 4) 5,311,643 5,815,373 1,391,066
------------ ------------ -----------
Net interest expense 213,577 41,010 2,828,098
Other income (Note 14) 1,262,699 764,869 1,599,127
------------ ------------ -----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, MINORITY INTERESTS AND EXTRAORDINARY LOSS 13,125,556 28,640,133 15,532,582
INCOME TAXES (Notes 1 and 13) 4,838,000 10,529,000 5,613,000
MINORITY INTERESTS IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES AND
PARTNERSHIPS 294,175 350,973 422,858
------------ ------------ -----------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY LOSS 7,993,381 17,760,160 9,496,724
DISCONTINUED OPERATIONS -
INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESS SEGMENT, net of income
tax (liability) benefit of $(12,000) and $45,000 for the years ended December
25, 1994 and
December 31, 1995, respectively and minority interests (Note 14) 17,748 (75,033) --
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of income tax benefit of $129,000 and $420,000 for the years
ended December 25, 1994 and December 31, 1995,
respectively (Note 7) (215,357) (708,195) --
------------ ------------ -----------
NET EARNINGS $ 7,795,772 $ 16,976,932 $ 9,496,724
============ ============ ===========
F-4
39
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
YEARS ENDED DECEMBER 25, 1994, DECEMBER 31, 1995 AND DECEMBER 29, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE (Note 1):
Primary:
Continuing operations $ 0.92 $ 2.08 $ 1.13
Discontinued operations 0.00 (0.01) --
Extraordinary item (0.02) (0.08) --
------------ ------------ -----------
Net earnings $ 0.90 $ 1.99 $ 1.13
============ ============ ===========
Fully diluted:
Continuing operations $ 0.92 $ 1.87 $ 1.12
Discontinued operations 0.00 (0.01) --
Extraordinary item (0.02) (0.06) --
------------ ------------ -----------
Net earnings $ 0.90 $ 1.80 $ 1.12
============ ============ ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Notes 10 and
11):
Primary 8,653,952 8,525,742 8,440,890
============ ============ ===========
Fully diluted 9,945,903 10,842,344 10,764,473
============ ============ ===========
See notes to consolidated financial statements. (Concluded)
F-5
40
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 25, 1994, DECEMBER 31, 1995 AND DECEMBER 29, 1996
- -------------------------------------------------------------------------------------------------------------------
Series A Redeemable Additional
Nonparticipating Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
BALANCE, DECEMBER 26, 1993 1,000 $ - 8,094,411 $1,000 $ 41,688,393
Issuance of common stock (Note 14) - - 121,212 - 2,409,089
Exercise of stock options, net (Note 11) - - 6,001 - 49,076
Net earnings - - - - -
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 2) - - - - -
----- ----- --------- ------ ------------
BALANCE, DECEMBER 25, 1994 1,000 - 8,221,624 1,000 44,146,558
Exercise of stock options, net (Note 11) - - 6,878 - 88,838
Net earnings - - - - -
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 2) - - - - -
----- ----- --------- ------ ------------
BALANCE, DECEMBER 31, 1995 1,000 - 8,228,502 1,000 44,235,396
Repurchase of stock warrant (Note 10) - - - - (2,063,809)
Repurchse of Series A redeemable nonparticipating
stock (Note 14) (1,000) - - - -
Exercise of stock options, net (Note 11) - - 4,816 - 40,455
Net earnings - - - - -
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 2) - - - - -
----- ----- --------- ------ ------------
BALANCE, DECEMBER 29, 1996 - $ - 8,233,318 $1,000 $ 42,212,042
===== ===== ========= ====== ============
Unrealized Gain
on Securities
Available-for-
Retained Sale, Net of
Earnings Income Taxes Total
BALANCE, DECEMBER 26, 1993 $13,193,919 $ - $ 54,883,312
Issuance of common stock (Note 14) - - 2,409,089
Exercise of stock options, net (Note 11) - - 49,076
Net earnings 7,795,772 - 7,795,772
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 2) - 20,405 20,405
----------- -------- ------------
BALANCE, DECEMBER 25, 1994 20,989,691 20,405 65,157,654
Exercise of stock options, net (Note 11) - - 88,838
Net earnings 16,976,932 - 16,976,932
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 2) - 513,076 513,076
----------- -------- -----------
BALANCE, DECEMBER 31, 1995 37,966,623 533,481 82,736,500
Repurchase of stock warrant (Note 10) - - (2,063,809)
Repurchse of Series A redeemable nonparticipating
stock (Note 14) - - -
Exercise of stock options, net (Note 11) - - 40,455
Net earnings 9,496,724 - 9,496,724
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 2) - (473,742) (473,742)
----------- --------- ------------
BALANCE, DECEMBER 29, 1996 $47,463,347 $ 59,739 $ 89,736,128
=========== ========= ============
F-6
41
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 25, 1994, DECEMBER 31, 1995 AND DECEMBER 29, 1996
- ---------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,795,772 $ 16,976,932 $ 9,496,724
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 4,082,273 5,637,862 8,249,666
Accretion of discount on securities held to maturity (1,654,528) (780,779) (637,779)
Gain on sale of property and other assets (293,142) (211,992) (340,289)
Gain on sale of securities available-for-sale -- -- (732,339)
Deferred income taxes (1,058,243) 6,446,376 (1,695,228)
Minority interests in earnings of consolidated
subsidiaries and partnerships 294,175 350,973 422,858
Extraordinary loss on early extinguishment of debt 344,357 1,128,195 --
(Increase) decrease in accounts receivable (3,823,892) 1,986,604 1,327,498
Decrease (increase) in prepaid expenses 711,898 (71,786) (86,208)
Increase in deferred charges from franchising -- -- (5,394,848)
Increase in other assets (1,575,131) (709,522) (1,727,868)
(Decrease) increase in accounts payable and accrued expenses (479,604) 3,170,630 4,295,247
Increase in income and other taxes 157,334 508,549 2,671,549
Increase (decrease) in deferred revenue 1,300,000 (2,862,000) --
------------ ------------ -------------
Net cash provided by operating activities 5,801,269 31,570,042 15,848,983
CASH FLOWS FROM INVESTING ACTIVITIES:
(Advances on) payments from notes receivable (5,657,620) (3,292,095) 44,100,071
Recognition of previously deferred profit -- -- (1,681,312)
Proceeds from maturity of securities held to maturity -- 10,000,000 --
Capital expenditures (44,781,978) (55,139,418) (86,583,428)
Proceeds from sale of property and other assets 670,292 573,348 1,282,070
(Purchase of) proceeds from sale of securities available-for-sale (909,762) -- 1,847,120
Acquisition (21,635) -- --
------------ ------------ -------------
Net cash used in investing activities (50,700,703) (47,858,165) (41,035,479)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from direct financing leases 54,053 51,134 58,725
Increase in deferred loan financing charges (1,679,883) (1,106,216) (1,549,867)
Proceeds from long-term debt 82,680,385 78,373,185 131,212,249
Payments on long-term debt (36,642,004) (60,015,029) (99,655,062)
Payments on capitalized lease obligations (252,609) (592,977) (588,945)
Distributions to minority interests (28,620) (254,007) (452,472)
Exercise of stock options 49,076 88,838 40,455
Repurchase of stock warrant -- -- (2,063,809)
------------ ------------ -------------
Net cash provided by financing activities 44,180,398 16,544,928 27,001,274
------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (719,036) 256,805 1,814,778
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,907,221 2,188,185 2,444,990
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,188,185 $ 2,444,990 $ 4,259,768
============ ============ =============
See notes to consolidated financial statements.
F-7
42
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 25, 1994, DECEMBER 31, 1995 AND DECEMBER 29, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The business activities of ShoLodge, Inc. and subsidiaries (the
"Company") are composed primarily of owning, franchising, managing and
constructing lodging facilities. A summary of the significant
accounting policies used in the preparation of the accompanying
consolidated financial statements follows.
The consolidated financial statements include the accounts of the
Company and its majority-owned and controlled subsidiaries and
partnerships. The Company is the managing general partner in the
partnership entities. All significant intercompany items and
transactions have been eliminated.
The fiscal year of the Company consists of 52/53 weeks ending the last
Sunday of the calendar year.
Accounting estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Estimates also
effect 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.
Property and equipment is recorded at cost. Depreciation is computed
primarily on the straight-line method over the estimated useful lives
of the related assets, generally forty years for buildings and
improvements and seven years for furniture, fixtures and equipment.
Equipment under capitalized leases is amortized over the shorter of the
estimated useful lives of the related assets or the lease term using
the straight-line method. Significant improvements are capitalized
while maintenance and repairs are expensed as incurred.
Deferred charges include loan costs incurred in obtaining financing and
are amortized using the interest method over the respective lives of
the related debt. In addition, deferred charges include cost incurred
in amending the Company's franchise license agreement (see Note 14).
This charge is being amortized on the straight-line method over twenty
years. The amounts reported are net of accumulated amortization of
$4,251,508 and $4,734,566 as of December 31, 1995 and December 29,
1996, respectively.
Investments. The Company records investment securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The
Company's investment securities have been classified as either
available-for-sale or held to maturity. The available-for-sale
securities are carried at fair value with unrealized holding gains and
losses, net of tax effects, reported as a separate component of
shareholders' equity. The held to maturity securities are carried at
amortized cost.
F-8
43
Excess of cost over fair value of net assets acquired is being
amortized on the straight-line method over a period of twenty-five
years. The amounts reported are net of accumulated amortization of
$462,388 and $612,361 as of December 31, 1995 and December 29, 1996,
respectively.
Other assets include preopening costs and base linens stock. Preopening
costs incurred in connection with the opening of new lodging facilities
are amortized on the straight-line method over a thirty-six month
period commencing with the opening of the related facility. Base linens
stock is amortized to fifty percent of its initial cost on a
straight-line basis over a thirty-six month period.
Asset impairment. The Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of, effective December 26, 1994. The Company assesses the
recoverability of property and equipment and other long-lived assets
using undiscounted cash flows and, if impairment is present,
discounted cash flows to determine the amount of impairment. The
adoption of SFAS No. 121 had no effect on the Company's 1995
consolidated financial statements.
Advertising. The Company charges the costs of advertising to expense at
the time the costs are incurred. Advertising expense was approximately
$1,443,000, $1,620,000 and $2,012,000 for the years ended December 25,
1994, December 31, 1995 and December 29, 1996, respectively.
Income taxes. The Company reports income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under SFAS No. 109 the asset and
liability method is used for computing future income tax consequences
of events which have been recognized in the Company's financial
statements or income tax returns.
Revenues from hotel operations are recognized as services are rendered,
while construction and development revenues, which relate to
construction and development of hotel properties for others, are
recognized based on the percentage of completion method. Franchising
and management revenues are recognized under the accrual basis of
accounting.
Net earnings per common and common equivalent share is computed by
dividing net earnings by the weighted average number of common and
common equivalent shares outstanding. Fully diluted net earnings per
share is computed assuming the conversion of the convertible
subordinated debentures and adjusting earnings for interest that would
not be paid if the debentures were converted. For 1994, fully diluted
earnings per share is considered to be the same as primary earnings per
share, since the effect of certain potentially dilutive securities
would be antidilutive.
Stock-based compensation. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to adopt the
fair value method of accounting for stock-based compensation. The
Company has chosen to continue to account for stock-based employee
compensation in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations.
2. INVESTMENT SECURITIES
The cost, unrealized gain and fair value of the equity securities
available-for-sale are as follows:
1995 1996
Cost $1,235,262 $113,431
Unrealized gain 855,681 98,631
---------- --------
Fair value $2,090,943 $212,062
========== ========
F-9
44
The Company is required to maintain certain restricted investments in
U.S. Treasury securities (see Note 7). The securities are classified as
held to maturity and are carried at cost adjusted on the interest
method for accretion of discounts which is recognized as interest
income.
3. DIRECT FINANCING LEASES
Direct financing leases consist of:
1995 1996
Aggregate future lease payments
(due in monthly installments) $ 796,049 $628,454
Estimated residual values 452,659 443,770
Unearned income to be included
in future revenues (529,367) (411,608)
---------- --------
719,341 660,616
Current portion (57,710) (49,124)
---------- --------
$ 661,631 $611,492
========== ========
Expected collections under direct financing leases are as follows:
1997 $ 176,484
1998 176,484
1999 176,484
2000 158,753
2001 106,069
Thereafter 277,950
----------
$1,072,224
==========
The lease terms are primarily twenty years with renewal options for
various periods. The property leased consists primarily of retail
restaurant properties. Contingent rentals received during the years
ended December 25, 1994, December 31, 1995 and December 29, 1996 were
approximately $147,000, $164,000 and $144,000, respectively.
4. NOTE RECEIVABLE
The note receivable as of December 31, 1995 represented an amount due
from Suites of America, Inc. ("Suites"); a wholly-owned subsidiary of
Prime Hospitality Corp. ("Prime"). The note was collateralized by first
mortgages on various AmeriSuites hotels and bore interest at 10.25%,
and was to mature in March 1997. During January 1996, Suites paid off
the entire note receivable balance of $44,100,071. Interest income
associated with the note, and other previous Suites indebtedness, was
approximately $2,432,000, $4,448,000 and $239,000 for the years ended
December 25, 1994, December 31, 1995 and December 29, 1996.
On March 31, 1995, the Company, Suites and Prime entered into an
agreement (the "Cancellation Agreement") under which the Company sold
its option to acquire 50% of the voting stock of Suites for
approximately $27,327,000. In addition, the Company conveyed one
AmeriSuites hotel to Suites for approximately $6,174,000. Approximately
$4,997,000 of the aggregate purchase price of $33,501,000 was paid upon
closing with the remaining $28,504,000, along with approximately
$25,015,000 of existing indebtedness from Suites, consolidated into one
note. Approximately $14,880,000 of existing
F-10
45
indebtedness from Suites was canceled by the Company in connection with
the sale of the option. The transactions, along with the Company's
development, construction and subsequent sale of five AmeriSuites
hotels during the years ended December 26, 1993 and December 25, 1994
have been accounted for as installment sales of real estate in the
accompanying consolidated financial statements. Concurrent with the
execution of the Cancellation Agreement, management of the Company
resigned from all offices and a directorship held with Suites.
Prior to March 31, 1995, the Company operated all AmeriSuites hotels
for Suites under formal management agreements in return for management
fees based upon a percentage of the annual gross revenues of each
hotel. The Company also received a profit participation fee on certain
of the hotels managed based upon a percentage of the cash flows of each
hotel. Revenues of approximately $711,000 and $183,000 were recognized
under these management agreements and are included in management
revenues for the years ended December 25, 1994 and December 31, 1995,
respectively. During January 1993, the Company entered into an
agreement with Suites whereby the Company had the right, exercisable in
whole or in part, to relinquish its profit participation in all or any
of four hotels owned by Suites and managed by the Company in exchange
for payments aggregating up to $2,862,000. During the year ended
December 26, 1993, the Company elected to exercise its right to
relinquish its profit participation in three of the hotels in exchange
for payments aggregating $1,562,000. During the year ended December 25,
1994, the Company elected to exercise its right to relinquish its
profit participation in the last of the four hotels in exchange for a
payment of $1,300,000. The entire $2,862,000, which was originally
deferred, was recognized during the year ended December 31, 1995 upon
the sale of the option. Concurrent with the execution of the
Cancellation Agreement, all of the management agreements were
terminated.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
1995 1996
Land and improvements $ 34,529,905 $ 42,653,979
Buildings and improvements 84,576,383 154,494,621
Furniture, fixtures and equipment 24,417,493 46,247,304
Equipment under capitalized leases 3,742,949 3,566,345
Construction in progress 29,434,416 15,302,015
--------------- ---------------
176,701,146 262,264,264
Less accumulated depreciation
and amortization (27,021,202) (33,888,495)
--------------- ---------------
$ 149,679,944 $ 228,375,769
=============== ===============
Interest costs capitalized during the years ended December 25, 1994,
December 31, 1995 and December 29, 1996 were approximately $1,892,000,
$1,930,000, and $4,657,000, respectively.
F-11
46
6. OTHER ASSETS
Other assets consist of:
1995 1996
Net assets - discountinued operations (Note 14) $ 1,224,514 $ --
Preopening costs, net 1,141,339 1,855,115
Base linens stock 638,366 1,078,010
Amounts due from related parties and other
notes receivable 621,361 1,347,395
Cash value of life insurance policies 371,528 373,323
Restricted cash and other 208,043 336,252
--------------- ---------------
$ 4,205,151 $ 4,990,095
=============== ===============
7. LONG-TERM DEBT
Long-term debt associated with lodging facilities consists of:
1995 1996
Industrial Revenue Bonds, bearing interest at 3.98%
to 6.80% due in varying amounts through 2017 $ 17,821,040 $ 16,943,540
Notes payable - bank and other, bearing interest at 7.50%
to 9.03% due in varying amounts through 2003 5,186,671 14,855,040
Revenue Participation Bonds, due April 2001 11,355,000 11,355,000
--------------- ---------------
34,362,711 43,153,580
Less current portion (1,237,431) (3,048,778)
--------------- ---------------
$ 33,125,280 $ 40,104,802
=============== ===============
Other long-term debt consists of:
1995 1996
7.50% Convertible subordinated debentures $ 54,000,000 $ 54,000,000
9.75% Senior subordinates notes -- 33,150,000
Lines of credit 32,452,629 22,100,000
Note payable - other, bearing interest at
7.00 % due in varying amounts through 2000 142,045 110,992
--------------- ---------------
86,594,674 109,360,992
Less current portion (32,482,027) (12,133,416)
--------------- ---------------
$ 54,112,647 $ 97,227,576
=============== ===============
All Industrial Revenue Bonds ("IRB's")and substantially all notes
payable are collateralized by property and equipment. Additionally, all
IRB's as of December 29, 1996 are collateralized by irrevocable letters
of credit, approximately $4,208,000 of which is guaranteed by a related
party and approximately $12,738,000 is guaranteed by the Company. The
Revenue Participation Bonds ("RPB's") are secured by U.S. Treasury
securities having a book value of approximately $8,256,000 as of
December 29, 1996 (see Note 2). These securities, upon maturity, will
fund the complete obligation under the RPB's. In addition, all
obligations under the RPB's are collateralized by an assignment of
gross room revenues.
F-12
47
Throughout the year ended December 31, 1995, the Company repaid
approximately $15,070,000 of fixed rate IRB's with proceeds from the
issuance of variable rate industrial revenue refunding bonds. The
refunding bonds bear interest at a rate determined weekly by the bond's
remarketing agent whereas the original bonds bore interest at fixed
rates ranging from 6.5% to 10%. The early retirement of the
indebtedness resulted in an extraordinary pretax charge of
approximately $1,128,000 during the year ended December 31, 1995.
The $11,355,000 RPB's require a 40% participation in the gross room
revenues of Shoney's Inns Group IV, Inc. payable to the bondholders in
semiannual installments through April 15, 2001. The effective interest
rate on these bonds was 8.9%, 9.3%, and 9.4%, respectively, for the
years ended December 25, 1994, December 31, 1995 and December 29, 1996.
During June 1994, the Company issued $54,000,000 of 7.50% convertible
subordinated debentures maturing 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. A portion of the proceeds
from the offering was used to repay certain indebtedness which resulted
in an extraordinary pretax charge of approximately $344,000 during the
year ended December 25, 1994.
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. These notes mature in November 2006,
with interest payable quarterly beginning February 1, 1997. 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
and will be senior in right of payment to all other subordinated
indebtedness of the Company.
As of December 29, 1996, the Company had approximately $22,100,000 of
borrowings outstanding under unsecured lines of credit aggregating
$54,000,000. The borrowings bear interest at the banks' prime rate
(8.25% as of December 29, 1996) or the LIBOR (London Interbank Offered
Rate) rate plus 2% (7.69% as of December 29, 1996) at the option of the
Company. Of the amount outstanding, $12,100,000 matures in April 1997
and is therefore classified as current in the accompanying consolidated
balance sheet; the remaining $10,000,000 matures in January 1998.
The loan agreements contain certain financial covenants of which the
most restrictive includes maintenance of certain operating ratios,
minimum liquidity ratios and minimum tangible net worth. As of December
29, 1996, the Company was not in compliance with certain operating
ratios and accordingly, received a waiver from its bank lenders.
Maturities of long-term debt are as follows:
1997 $ 15,182,194
1998 13,307,706
1999 3,541,975
2000 3,694,244
2001 14,945,820
Thereafter 101,842,633
------------
$152,514,572
============
F-13
48
8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease certain property and equipment
under noncancelable operating and capitalized lease agreements. Total
rental expense under operating leases for the years ended December 25,
1994, December 31, 1995 and December 29, 1996 was approximately
$1,647,000, $1,541,000 and $1,355,000, respectively.
Minimum rental commitments are as follows:
Operating Capitalized
Leases Leases
1997 $ 978,387 $ 804,004
1998 884,676 804,004
1999 809,920 644,408
2000 695,311 160,914
2001 648,104 -
Thereafter 5,940,273 -
---------- -----------
$9,956,671 2,413,330
==========
Less amount representing interest
at rates ranging from 7.25% to 9.5% (308,566)
Less current portion (642,720)
-----------
$ 1,462,044
===========
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.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
carrying value of cash and cash equivalents, notes receivable, amounts
due from related parties and borrowings under lines of credit
approximate fair values due to the short-term maturities of these
instruments. The carrying value of certain industrial revenue bonds
approximate fair values due to the recent refinancing of these
instruments, while the fair value of all other industrial revenue bonds
was estimated based upon current rates available to the Company upon
refinancing of similar properties. The fair value of convertible
subordinated debentures and senior subordinated notes was based upon
quoted market prices. In the opinion of management, the carrying value
of all instruments approximates market value as of December 31, 1995
and December 29, 1996.
As of December 31, 1995 and December 29, 1996, securities available-
for-sale are carried at fair value in accordance with SFAS No. 115.
It was not practicable to estimate the fair value of the restricted
securities held to maturity and the related revenue participation
bonds. As discussed in Note 7, the restricted securities, upon
maturity, will be used to fund the complete obligation under the bonds.
F-14
49
10. STOCK WARRANT
In connection with the Company's acquisition of Shoney's Lodging, Inc.,
in 1991, the Company issued a warrant to a wholly-owned subsidiary of
Shoney's, Inc. ("Shoney's") to purchase five percent of the Company's
common stock that is issued and outstanding on the date of exercise of
the warrant. During October 1996, the Company repurchased the warrant
for approximately $2,064,000. This transaction was recorded as a
reduction of shareholders' equity in the accompanying consolidated
financial statements for the year ended December 29, 1996.
11. STOCK OPTION PLAN
During December 1991, the Company adopted the 1991 Stock Option Plan
(the "Plan") that authorizes the grant to key employees of options to
purchase up to an aggregate of 616,667 shares of common stock. The
exercise price of options granted under the terms of the Plan must not
be less than 100% of the fair market value of the shares as of the date
of grant, or 110% of the fair market value for incentive stock options
granted to option holders possessing more than 10% of the total
combined voting power of all classes of stock of the Company. Under the
Plan, the options are exercisable at various periods from one to five
years after date of grant, and expire ten years after date of grant.
During the year ended December 29, 1996 an additional 283,333 shares
were authorized for future grants.
A summary of the status of the Plan for the years ended December 25,
1994, December 31, 1995 and December 29, 1996, follows:
Shares
---------------------------
Available Weighted Average
for Grant Outstanding Exercise Price
December 26, 1993 153,334 459,667 $10.37
Granted (20,000) 20,000 $22.00
Exercised -- (6,001) $ 8.40
Canceled 7,534 (7,534) $12.12
--------- --------- ------
December 25, 1994 140,868 466,132 $10.87
Granted (109,000) 109,000 $13.36
Exercised -- (6,878) $12.92
Canceled 30,937 (30,937) $19.36
--------- --------- ------
December 31, 1995 62,805 537,317 $10.86
Additional authorized 283,333 -- --
Granted (296,660) 296,660 $13.00
Exercised -- (4,816) $ 8.40
Canceled 187,303 (187,303) $15.71
--------- --------- ------
December 29, 1996 236,781 641,858 $10.45
========= ========= ======
On July 31, 1996, the Company repriced approximately 168,000 stock
options that had been granted in previous years. The options were
repriced to $13.00 per share, which was the market value of the
Company's stock on July 31, 1996. These repriced options are included
as cancellations and new grants in the table above for the year ended
December 29, 1996.
Shares exercisable as of December 29, 1996 were 336,019 with a
weighted-average exercise price of $9.29. The weighted average fair
value of options granted during the year was $7.83 and $8.75 for the
year ended December 31, 1995 and December 29, 1996, respectively.
F-15
50
The following table summarizes information relating to the stock
options outstanding as of December 29, 1996:
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Price at 12/29/96 Contractual Life Exercise Price at 12/29/96 Exercise Price
$8.40 - 8.88 358,520 5.28 $ 8.43 271,816 $ 8.41
$8.89 - 13.00 283,338 8.74 $ 13.00 64,203 $ 13.00
------- -------
$8.40 - 13.00 641,858 6.81 $ 10.45 336,019 $ 9.29
======= =======
Had the fair value of options granted under the plan beginning in 1995
been recognized as compensation expense on a straight-line basis over
the vesting period of the options, the Company's net earnings and net
earnings per share would have been reduced to the pro forma amounts
indicated below:
1995 1996
Net earnings As reported $ 16,976,932 $ 9,496,724
Pro forma $ 16,871,114 $ 9,250,941
Net earnings per share As reported $1.99 $1.13
Pro forma $1.98 $1.10
The pro forma effect on net earnings for 1996 and 1995 is not
representative of the pro forma effect on net earnings in future years
because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following
weighted average assumptions used for grants in 1995 and 1996: no
dividend yield for all years; expected volatility of 40% and 45%,
respectively; risk free interest rates of 6.09% to 7.16% and 6.79%,
respectively; and expected lives of 10 years.
12. SHAREHOLDERS' EQUITY
During October 1996, in conjunction with the amendment of the Company's
franchise license agreement with Shoney's, all Series A redeemable
nonparticipating stock was repurchased by the Company (see Note 14).
The Company's charter still authorizes the issuance of 1000 shares of
Series A stock, without par value, however as of December 29, 1996
none have been issued.
The Company's charter authorizes the issuance of 1,000,000 shares of
preferred stock without par value. As of December 29, 1996, none have
been issued.
F-16
51
13. INCOME TAXES
The provision for income taxes from continuing operations consists of
the following:
1994 1995 1996
Currently payable:
Federal $ 4,985,000 $ 3,508,000 $ 6,408,000
State 794,000 575,000 900,000
------------ ------------ -------------
5,779,000 4,083,000 7,308,000
Deferred (941,000) 6,446,000 (1,695,000)
------------ ------------ -------------
$ 4,838,000 $ 10,529,000 $ 5,613,000
============ ============ =============
The difference between income taxes using the effective income tax rate
and the statutory federal income tax rate is as follows:
1994 1995 1996
Federal income tax based on the statutory rate $ 4,463,000 $ 9,738,000 $ 5,436,000
State income taxes, less federal income tax
benefit 433,000 945,000 505,000
Other (58,000) (154,000) (328,000)
------------ ------------ -------------
$ 4,838,000 $ 10,529,000 $ 5,613,000
============ ============ =============
Deferred tax assets (liabilities) are comprised of the following:
1995 1996
Deferred tax liabilities:
Differences between book and tax basis of property $ (3,087,000) $ (5,257,000)
Profits recognized on sale of option (3,598,000) --
Other (308,000) (225,000)
--------------- ---------------
(6,993,000) (5,482,000)
Deferred tax assets:
Profits not recognized on installment sales 627,000 --
Differences between book and tax losses recognized
by minority interests 556,000 537,000
Allowance for doubtful accounts and other 5,000 56,000
--------------- ---------------
1,188,000 593,000
--------------- ---------------
Net deferred tax liability $ (5,805,000) $ (4,889,000)
=============== ===============
As of December 29, 1996, $217,000 of the deferred tax liability was
current due to the nature of the items that created the temporary
differences. This current deferred tax liability and a current income
tax payable of $900,000 is classified as current income taxes payable
in the accompanying balance sheet as of December 29, 1996.
Additionally, as of December 31, 1995 and December 29, 1996, the
Company has recorded a deferred tax liability resulting from the
unrealized gain on securities available-for-sale of $322,000 and
$30,000, respectively.
F-17
52
14. RELATED PARTY TRANSACTIONS
During February 1994, the Company acquired all of the minority common
stock and partnership interests of one consolidated subsidiary and two
consolidated partnerships and all but ten percent of the minority
partnership interest in a third consolidated partnership from one of
Shoney's wholly-owned subsidiaries in exchange for the issuance of
121,212 shares of the Company's common stock. The pro forma effect on
net earnings and net earnings per share, had these acquisitions
occurred at the beginning of 1994, is insignificant. Shoney's continues
to guarantee approximately $4,208,000 of irrevocable letters of credit
which collateralize a portion of the four entities' outstanding
indebtedness as of December 29, 1996.
The Company has had extensive working and contractual relationships
with Shoney's which previously held a stock warrant to purchase five
percent of the Company's common stock and all of the Company's Series A
redeemable nonparticipating stock. In addition, two officers of
Shoney's had previously served as directors of the Company. During
October 1996, the Company repurchased the stock warrant (see Note 10).
As of the same date, the Company amended the franchise license
agreement between the Company and Shoney's whereby the Company paid
approximately $5,395,000 in exchange for, among other items, 1) the
cancellation of Shoney's right to receive a portion of the franchise
fees collected by the Company equal to approximately 1.5% of certain
Shoney's Inns' gross room revenues through October 1999 and .5% of the
remaining and all future Shoney's Inns' gross room revenues for the
first ten years of their operations and 2) the repurchase of all of the
Company's Series A redeemable nonparticipating stock (see Note 12). As
a result of the Company's repurchase of the Series A redeemable
nonparticipating stock, Shoney's no longer has the right to designate
two members of the Company's board of directors.
The Company has paid approximately $1,245,000, $922,000 and $911,000 in
franchise and royalty fees to Shoney's during the years ended December
25, 1994, December 31, 1995 and December 29, 1996, respectively, under
the franchise license agreement. Additionally, the Company purchased
food products and supplies approximating $2,896,000 and $1,979,000
from a wholly-owned subsidiary of Shoney's during the years ended
December 25, 1994 and December 31, 1995, respectively.
Effective January 1, 1996, the Company sold its sixty percent interest
in Knight Enterprises, Inc. ("KEI") to the minority shareholder in
exchange for approximately $848,000. The entire purchase price, along
with approximately $1,250,000 of previously existing indebtedness of
KEI and the minority shareholder, was financed by the Company over a
seven year period with interest accruing annually at the prime rate as
defined in the note agreements. The Company has deferred recognition of
the approximate $813,000 gain on the sale of its restaurant business
segment until such time further principal payments on the note are
received. As a result of the transaction, the restaurant business
segment operations are reported as discontinued operations in the
accompanying consolidated financial statements for the periods ended
December 25, 1994 and December 31, 1995.
During 1996, the Company sold approximately 175,600 shares of its
available-for-sale investment securities to the Company's chairman and
chief executive officer. The average cost of these securities was
approximately $1,117,000 and the total cash proceeds received was
approximately $1,847,000 resulting in a realized gain of $730,000.
The total value received for these securities approximated fair
value based upon quoted market prices. The gain is recorded in other
income in the accompanying consolidated financial statements for the
year ended December 29, 1996.
F-18
53
15. SUPPLEMENTAL CASH FLOW INFORMATION
1994 1995 1996
Cash paid during the year for interest $ 6,352,217 $ 5,943,447 $ 8,484,298
============ ============ =============
Cash paid during the year for income taxes $ 3,834,397 $ 4,562,755 $ 4,389,928
============ ============ =============
Significant non-cash investing and financing activities:
Sales of hotels:
Notes receivable $(17,366,000) $ (6,173,500) $ --
Profits not recognized on installment
sales 2,782,538 1,654,228 --
Property and equipment 14,583,462 4,519,272 --
------------ ------------ -----------
$ -- $ -- $ --
============ ============ =============
Property and equipment acquired under capitalized lease obligations:
Property and equipment $ 2,344,303 $ 1,034,788 $ --
Capitalized lease obligations (2,344,303) (1,034,788) --
------------ ------------ -----------
$ -- $ -- $ --
============ ============ =============
Additional paid-in-capital resulting from issuance of common stock for
purchase of minority interest in joint ventures:
Excess of cost over fair value of
net assets acquired $ 1,736,398 $ -- $ --
Minority interests 672,691 -- --
Additional paid-in-capital (2,409,089) -- --
------------ ------------ -----------
$ -- $ -- $ --
============ ============ =============
F-19
54
16. BUSINESS SEGMENT INFORMATION
A description of the Company's business segments is included in Note 1
to the consolidated financial statements. None of the Company's
segments conduct foreign operations. Operating income includes the
operating revenues and expenses directly identifiable with the business
segment. Identifiable assets are those used directly in the operations
of each segment.
Net
Operating Depreciation
Total Profit Total Capital and
1994 Revenues (loss) Assets Expenditures Amortization
Hotel $36,440,350 $ 11,905,711 $131,338,530 $44,319,079 $3,590,741
Construction and
development 6,213,414 770,433 3,340,292 446,820 57,253
Sales of hotels 14,583,462 - - - -
Other 3,539,334 (599,710) 45,712,519 2,360,382 434,279
----------- ------------ ------------ ----------- ----------
Total $60,776,560 $ 12,076,434 $180,391,341 $47,126,281 $4,082,273
=========== ============ ============ =========== ==========
1995
Hotel $44,144,440 $ 13,119,343 $161,356,947 $54,645,591 $5,053,196
Construction and
development 9,213,609 (874,124) 1,955,297 19,878 15,358
Construction and
development - other 14,826,675 14,826,675 - - -
Sales of hotels 4,217,709 - - - -
Other 6,217,537 844,380 57,477,468 1,508,737 569,308
----------- ------------ ------------ ----------- ----------
Total $78,619,970 $ 27,916,274 $220,789,712 $56,174,206 $5,637,862
=========== ============ ============ =========== ==========
1996
Hotel $57,528,105 $ 18,019,094 $239,098,411 $83,275,738 $7,572,054
Construction and
development 889,365 (296,155) 450,866 17,324 19,079
Construction and
development - other 775,000 775,000 - - -
Other 4,290,389 (1,736,386) 24,159,901 3,290,366 658,533
----------- ------------ ------------ ----------- ----------
Total $63,482,859 $ 16,761,553 $263,709,178 $86,583,428 $8,249,666
=========== ============ ============ =========== ==========
F-20
55
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShoLodge, Inc.
Gallatin, Tennessee
We have audited the consolidated financial statements of ShoLodge, Inc. and
subsidiaries as of December 31, 1995 and December 29, 1996 and for each of the
three years in the period ended December 29, 1996 and have issued our report
thereon dated March 7, 1997; such report is included elsewhere in this Form
10-K. Our audits also included the consolidated financial statement schedule
listed in Item 14. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 7, 1997
S-1
56
SHOLODGE, INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------------
Additions Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Assets Deductions Year
YEAR ENDED DECEMBER 25, 1994:
Allowance for doubtful accounts receivable $106,241 $173,052 $ - $ - $279,293
-------- -------- --------- --------- --------
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts receivable $279,293 $ 91,598 $ - $(356,163) $ 14,728
-------- -------- --------- --------- --------
YEAR ENDED DECEMBER 29, 1996:
Allowance for doubtful accounts receivable $ 14,728 $157,264 $ - $(21,992) $150,000
-------- -------- --------- -------- --------
S-2