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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
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For the fiscal year ended December 28, 1997 Commission File Number 0-19840
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SHOLODGE, INC.
(Exact name of registrant as specified in its charter)
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Tennessee 62-1015641
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
130 Maple Drive, North, Hendersonville, Tennessee 37075
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 264-8000
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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 April 9, 1998, was approximately $59,000,000. The market value
calculation was determined using the last sale price of registrant's common
stock on April 9, 1998, 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 April 9, 1998, were
8,255,810.
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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 Registration Statement on Form S-3,
Commission File No. 33-77910.
Part IV Registration Statement on Form S-3,
Commission File No. 333-14463
Part IV Registration Statement on Form S-8,
filed with the Commission on June 24, 1997
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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 17 Sumner Suites are mid-scale, all-suites hotels
located in Arizona, Colorado, Florida, Georgia, Indiana, New Mexico, Ohio,
Tennessee and Texas. The Shoney's Inn lodging system consists of 88 Shoney's
Inns Containing approximately 8,800 rooms of which 33 containing approximately
4,000 rooms are owned or managed by the Company. Shoney's Inns are currently
located in 21 states with a concentration in the Southeast.
Sumner Suites hotels are marketed primarily to business travelers and,
to a lesser extent, leisure travelers by offering an all-suite setting in a
convenient location at an attractive price/value relationship. Sumner Suites
offer mid-scale accommodations at rates between $75 and $95 per night and are
usually located in or near business or leisure travel destinations in mid-sized
and larger metropolitan markets. A typical Sumner Suites contains from 110 to
135 rooms, lounge facilities, meeting rooms, swimming pool and a fitness room,
and offers a deluxe continental breakfast.
The Sumner Suites concept was launched in 1995 with three hotels. From
1990 until 1995, the Company developed and managed 12 mid-scale, all-suites
hotels under another brand name before selling its interests in those hotels in
March 1995. The Company believes that its experience in developing, constructing
and managing mid-scale, all-suites hotels will enable it to expand effectively
its development and ownership of the Sumner Suites system. In addition, as
Sumner Suites has a limited presence in the marketplace, the Company is
utilizing its proprietary reservation system, INNLINK, to further expand
awareness of Sumner Suites.
Shoney's Inns operate in the upper economy limited-service segment and
are designed to appeal to both business and leisure travelers, with rooms
usually priced between $40 and $65 per night. The typical Shoney's Inn includes
100 to 125 rooms and, in most cases, meeting rooms. Although Shoney's Inns do
not offer full food service, most offer continental breakfast and 77 of the 88
Shoney's Inns are located adjacent or in close proximity to Shoney's
restaurants. Management believes that its strategy of locating most of its
Shoney's Inns in close proximity to free-standing Shoney's restaurants has given
it a competitive advantage over many other limited-service lodging chains by
offering guest services approximating those of full-service facilities without
the additional capital expenditures, operating costs or higher room rates.
The Company was incorporated under the laws of the State of Tennessee
in 1976.
GROWTH STRATEGY
The Company's strategy is to increase cash flow and earnings by (i)
developing additional Sumner Suites, (ii) increasing REVPAR while maintaining
the Company's attractive suite and room
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price/value relationships and controlling operating costs, and (iii) expanding
the Shoney's Inn system through the addition of new franchised units.
Development of Additional Sumner Suites. The Company intends to
continue to develop Sumner Suites in mid-sized and larger metropolitan markets
across the United States. 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 developed and opened ten Sumner Suites in fiscal 1996 and four
Sumner Suites in fiscal 1997. Currently, ten additional Sumner Suites are
scheduled to be open by the end of fiscal 1998, six of which are currently under
construction. In addition, the Company has another eight sites under contract
for purchase. The Company expects to finance the construction and development of
additional Sumner Suites currently under development primarily through a
combination of available cash and available credit under the Company's revolving
credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."
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 daily room
rates and supporting or increasing occupancy rates through targeted marketing
and advertising strategies, employing promotional activities in local markets
and capitalizing on the Company's proprietary central reservation system. In
addition, the Company is committed to sustaining the quality of its properties
through an ongoing renovation and maintenance program in order to increase
REVPAR. The Company seeks to minimize costs throughout its operations primarily
through the use of an in-house development and construction team and increased
economies of scale in purchasing.
Expansion of Shoney's Inn System. The Company is expanding the Shoney's
Inn system principally through the addition of new franchises. Four franchised
Shoney's Inns were opened in fiscal 1997, four hotels left the Shoney's Inn
system and currently six franchised Shoney's Inns are under construction. As of
1997 fiscal year-end, there were 88 Shoney's Inns (of which 31 are Company
owned) with a total of 8,826 rooms. Through March 31, 1998, three additional
franchised Shoney's Inns have opened, three hotels have left the Shoney's Inn
system and the Company has received notice that five other hotels intend to
leave the system. The Company targets existing Shoney's Inn franchises, other
hotel brand developers 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. The current
daily room rates typically range from $75 to $95; however, room rates vary
depending upon a number of factors, including location and competition. For
fiscal 1997, the average daily room rate for the Sumner Suites hotels was
$71.94.
The Sumner Suites prototype hotel is a five story, interior corridor,
stucco building containing 110 to 135 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 sofa,
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a desk, chairs and reading lamps. A kitchenette area includes a sink,
refrigerator, microwave oven and cabinets that contain kitchen and cooking
utensils. Additional room amenities include new 26 inch remote control color
televisions with premium channel selections, in room coffee makers and dual line
telephones for computer connections.
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. Guests at the
Sumner Suites are offered a wide range of amenities and services, such as deluxe
continental breakfast, fitness center, free unlimited local telephone calls, on
premises coin operated laundry, same-day laundry and dry cleaning, fax services,
24-hour front desk message service and free parking. Typically, the Sumner
Suites are located near free standing restaurants such as Ruby Tuesday's,
Applebee's, Chili's, O'Charley's and Red Lobster. 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-seven of the 88 Shoney's Inns are located adjacent or in close proximity
to a Shoney's restaurant. Management believes that its strategy of locating its
Shoney's Inns in close proximity to free-standing Shoney's restaurants gives it
a competitive advantage over many other limited-service lodging chains. Daily
room rates at Shoney's Inns range from $40 to $65 and vary depending upon a
number of factors, including location, competition and type of room. For fiscal
1997, the average daily room rate for Company-owned Shoney's Inns was $52.07.
Historically, the typical Shoney's Inn has been a two story, exterior
corridor, brick veneer building with plate glass fronts, containing 100 to 125
rooms. New prototypes for Shoney's Inns include a four story, interior corridor,
brick or stucco building containing 100 to 120 rooms as well as smaller
prototype buildings containing 80 rooms. In some cases franchisees construct
smaller Shoney's Inns. Each room is professionally decorated and is generally
furnished with two double beds, a dresser, table and chairs and a color
television.
Amenities featured at most Shoney's Inns include swimming pools,
meeting rooms, facsimile machine service and continental breakfast. The Company
believes that Shoney's Inns provides its guests with quality accommodations at
an attractive price/value relationship within the upper economy segment.
HOTEL CONSTRUCTION AND DEVELOPMENT
The Company's construction subsidiary has a full time core staff of
approximately 145 people who manage, supervise, control and perform 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
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continue to build its own hotels because it believes that its in-house
capabilities 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 other
demand generators. 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 and tourist
attractions.
The Company anticipates developing Sumner Suites hotels averaging from
110 to 135 suites. Management believes that the development cost of a new Sumner
Suites hotel will be approximately $62,000 to $66,000 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 construction period interest) for a typical 135 suite Sumner Suites is
approximately $8.5 million (approximately $63,000 per suite).
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. Advertising is also placed in local business publications,
direct mail to targeted business travel and a comprehensive on-line directory on
the worldwide web at www.sumnersuites.com. 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.
Shoney's Inns. All Shoney's Inns participate in the "Sho Business"
frequent traveler program, entitling members to receive the lowest available
corporate rate, complimentary coffee and
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newspaper, free room upgrades, express check-in and other privileges upon
presentation of a membership card. Approximately 9% of the rooms booked through
INNLINK for Shoney's Inns during fiscal 1997 have been reserved by guests who
are 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.
Additionally, the Company attempts to take advantage of the Shoney's
brand name recognition 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 is tied
to AARP membership and entitles its members to receive special room rate
discounts, complimentary coffee and newspaper and other benefits. The Shoney's
Inn system also advertises in 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 annually publishes a Shoney's Inn system directory showing,
for each Inn, its address and telephone number, location as indicated on a
locator map, a brief description of the facilities, the services and amenities
provided and other relevant information. These directories are distributed in
each Shoney's Inn and state travel centers and are provided directly to travel
agents, sponsors of group tours, corporate travel departments and other selected
potential customers. The Company also provides a comprehensive on-line directory
on the worldwide web at www.shoneysinns.com.
Many 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. 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 and national
advertising (e.g. USA Today, Reader's Digest, Compass Travel Directory inserts).
Travel Agents. The Company has a policy of paying to travel agents a
commission, standard in the hotel industry, on all revenue booked by them. The
Company, with respect to all Sumner Suites and both owned and franchised
Shoney's Inns, has joined the TACS-Lite Program run by Citibank. TACS-Lite
(Travel Agent Commission Settlement) is a program where each hotel property
reports to the Company each week by fax (or by electronic transmission if
capable) all of its room sales generated through travel agents. The Company in
turn forwards this information to Citibank which automatically generates checks
each month to travel agents across the country for the total commissions earned.
The Company believes that travel agents are more likely to book guests into a
Shoney's Inn or Sumner Suite knowing that their commissions will be paid by
Citibank without the travel agent having to go to the trouble and expense of
billing each separate location.
LODGING OPERATIONS
Hotel Management. Overall hotel operations are the responsibility of
the Director of Operations for Shoney's Inns and the Vice President of
Operations for Sumner Suites. Shoney's Inns and Sumner Suites are further
managed by regional managers, who directly supervise the general managers of
each property. The general manager of each Shoney's Inns or Sumner Suites is
fully
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responsible for day-to-day operations and is compensated by salary and bonus
systems which reward revenue and operating margin performance. Each general
manager, in conjunction with senior management, develops the property's
operating budget and is held accountable for meeting the goals and objectives of
the hotel.
Reservation System. The Company's proprietary central reservation
system, INNLINK, provides important support for the room reservation process for
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, Amadeus and WorldSpan). The
reservation system includes specially designed hotel reservation software, with
adequate capacity, and state of the art hardware and telecommunications devices.
The Company believes that approximately 28% and 17% 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 company owned and/or operated 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. During
fiscal 1997 the Company completed full or partial renovations of eleven
Company-owned Shoney's Inns and is in the process of completing the renovations
of two additional Shoney's Inns that will be completed in fiscal 1998.
Training. The Company utilizes the services of an "opening team" to
assist with hiring and training new staff and opening new Company-owned hotels.
The opening team trains local hotel personnel in front desk operations,
operational policies, hotel accounting and cash handling procedures,
record-keeping, housekeeping and laundry, maintenance and repair, marketing,
personnel management, purchasing, quality assurance and sales. Sales training
includes a team of direct sales personnel that assists the local staff in the
actual pre-selling of rooms. An opening team generally remains on site for one
to four weeks depending on the prior experience of the local general manager.
FRANCHISE OPERATIONS
Franchise Sales. The Company markets the Shoney's Inn franchise
principally to existing Shoney's Inn franchisees, other hotel brand developers
and other prospects known through management's contacts in the lodging industry.
The Company also markets franchises through advertisements in trade publications
and participation in trade shows and franchising conventions.
Management believes that the Company attracts potential new franchisees
by offering a comparable level of franchisee support services at a lower price
than its competitors. Management periodically monitors the initial fee, royalty
fee, advertising fee, reservation fee and other charges
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imposed by other franchisors with whom the Company competes and believes that
the fees charged by the Company are competitive and, in most cases, lower than
such other franchisors.
Fees. Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, a potential franchisee pays a $2,500 application fee.
Upon approval of the application, the Company and the franchisee enter into a
20-year license agreement, and the franchisee generally pays a license fee equal
to the greater of $250 per room or $15,000. The application fee is applied
against the license fee.
Under the standard Shoney's Inn franchise arrangement offered to
prospective franchisees, the franchisee pays monthly royalties of 3.5% of the
licensed hotel's gross sales during the term of the license agreement.
Additionally, a marketing cooperative fee of 1% of gross sales and a fee for
participation in the Shoney's Inn central reservation system of 1% of gross
sales are charged.
Franchisee Services. Management believes that the support the Company
offers to franchisees is a significant factor in determining its success as a
franchisor and that the Company's successful record as a Shoney's Inn builder,
owner and operator evidences valuable experience and abilities which can enhance
the franchisee support function. As franchisor, the Company draws on its own
operational experience to assist franchisees.
Once a Shoney's Inn is constructed, the Company requires the franchisee
to send the site general manager to a management training class conducted by the
Company covering topics including human resources, sales and marketing, yield
management and cost controls. The Company also makes available some of the most
successful Company-owned Shoney's Inns as training centers. Currently the
Company does not charge for the training program but reserves the right to do so
in the future.
The Company inspects every Shoney's Inn at least three times a year, at
least two of which are unannounced, through its Quality Standards and Compliance
program, using trained field representatives. The Company encourages franchisees
to renovate each of the Shoney's Inns after approximately seven years of
operations, in the same manner that the Company renovates its own hotels.
The Company offers to provide management services to Shoney's Inn
franchisees pursuant to contractual arrangements. The Company's fee for these
services is a percentage of the managed hotel's gross revenues. Currently, the
Company manages two hotels under contract arrangement.
LICENSE AGREEMENT WITH SHONEY'S
Under the License Agreement with Shoney's, Inc., the Company acts as
exclusive franchisor of Shoney's Inns and has certain rights to use and to
license the use of the service marks "Shoney's Inn" and "Shoney's Inn & Suites"
in connection with lodging operations. Under the License Agreement, Shoney's
retains certain rights, including the right to approve the styles, shapes,
colors and forms in which the "Shoney's Inn" and "Shoney's Inn & Suites" marks
are displayed, the nature and extent of on-site food and beverage service and
the terms of franchise agreements (other than the maximum fees and other
financial terms). Further, Shoney's retains the right to terminate the License
Agreement under limited circumstances, including the bankruptcy of the Company,
the failure to
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comply with the terms of the License Agreement and the failure to desist from
conduct likely to impair Shoney's goodwill and reputation.
Prior to October 25, 1996, the License Agreement entitled Shoney's to
receive a portion of the franchise fees collected by the Company 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.
LODGING INDUSTRY
Smith Travel Research divides lodging chains into various segments
based on price. Shoney's Inns would be included in the economy segment. Sumner
Suites would be included in the mid-scale (without food and beverage) segment,
although because the average daily room rate at Sumner Suites exceeds $75.00,
the Sumner Suites could be included in the upscale segment.
The following tables illustrate certain comparative information
regarding REVPAR and its components for the years indicated:
AVERAGE AVERAGE DAILY
REVPAR OCCUPANCY RATE ROOM RATE (1)
--------------------------------- --------------------------------- -------------------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
---------- --------- ---------- ---------- --------- ---------- ---------- --------- --------
Industry-wide............. $43.48 $46.24 $48.68 65.2% 65.1% %64.6 $66.72 $71.00 $75.30
Economy segment........... 24.65 25.01 25.17 61.3 59.7 58.1 40.25 41.89 43.33
Mid-scale (w/o food and
beverage) segment..... 36.91 38.32 39.77 70.2 68.5 67.5 52.56 55.96 58.94
Upscale segment........... 56.44 60.70 63.97 72.3 72.4 71.9 78.06 83.80 88.94
All Shoney's Inns......... 28.09 28.18 28.00 64.9 61.5 59.2 43.28 45.86 47.30
Company-owned Shoney's
Inns................... 30.97 31.41 30.83 64.3 61.1 59.2 48.17 51.45 52.07
Same hotel Sumner
Suites (2)............. N/A 42.26 49.04 N/A 54.5 61.9 N/A 77.55 79.22
All Sumner Suites (2)..... N/A 36.05 41.66 N/A 48.4 57.9 N/A 74.55 71.94
(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 Research, Standard Historical Trend Report for
years ended 1995, 1996 and 1997, for industry wide, economy,
mid-scale (w/o food and beverage) and upscale lodging chains,
and the Company's internal data for all Shoney's Inns and
Sumner Suites statistics.
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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 as Embassy Suites, Hampton Inns, Residence Inn, Courtyard by
Marriott, Quality Suites, AmeriSuites 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 most of its future hotels which it
constructs will be located in similar areas. Management believes that the
principal competitive factors in its lodging operations are room rates, quality
of accommodations, name recognition, supply and availability of alternative
lodging facilities, service levels, reputation, reservation systems and
convenience of location. In its franchising operations, the principal
competitive factors are fee structure and support services. Management further
believes that the Company is presently competitive in all these respects.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws,
regulations and administrative practices affecting its business. The Company's
lodging operations must comply with provisions relating to health, sanitation
and safety standards, equal employment, minimum wages, building codes and zoning
ordinances, and licenses to operate lodging facilities. The sale of franchises
is regulated by various state laws as well as by the Federal Trade Commission
("FTC") Rules on Franchising. The FTC requires that franchisors make extensive
disclosure to prospective franchisees but does not require registration. A
number of states require registration or disclosure in connection with franchise
offers and sales. In addition, several states have "franchise relationship laws"
that limit the ability of franchisors to terminate franchise agreements or to
withhold consent to the renewal or transfer of these agreements.
Federal and state environmental regulations are not expected to have a
material effect on the Company's operations, but more stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could delay construction of lodging facilities and add to
their cost. A significant portion of the Company's personnel are paid at rates
related to federal minimum wages and, accordingly, increases in the minimum wage
could adversely affect the Company's operating results.
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.
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SERVICE MARKS
The Company has the right to use the "Shoney's Inn" and "Shoney's Inns
& 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 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 28, 1997 the Company had approximately 1,785 employees,
including approximately 113 in the Company's corporate headquarters. The
company's employees are not represented by a labor union. The Company considers
its relationships with employees to be good.
ITEM 2. PROPERTIES.
The Company's corporate headquarters, owned by the Company, is located
in Hendersonville, Tennessee and contains approximately 42,000 square feet of
space including storage and food services. Management believes that its
corporate headquarters building contains sufficient space to accommodate the
Company's currently anticipated needs.
Approximately 28 of the 48 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 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:
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, a
limited partner in one of the Company's partnerships, claims, among other
things, that the Company breached the partnership agreement by not offering
- 10 -
13
the partnership the right to participate in the profits from the management of a
neighboring AmeriSuites hotel. In February 1995, the court entered summary
judgment in favor of the plaintiff on this claim and referred the issue of
damages to a special master of the court. In November 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 approximately $3.0 million.
The report of the special master was confirmed by the court in December 1995 and
the Company subsequently appealed the judgment in March 1996. In March 1997, the
Court of Appeals reversed the trial court's ruling in favor of the plaintiff,
vacated the judgment against the Company and remanded the case to the trial
court to enter summary judgment on this claim in favor of the Company. The
plaintiff filed an application for permission to appeal to the Supreme Court of
Tennessee but the court has refused to grant such permission. In May 1997, the
trial court granted summary judgment in favor of the Company on five additional
claims that were made by the plaintiff. The trial of the remaining issues was
held in December 1997. On March 4, 1998, the trial court found in favor of the
Company as to each of the issues for which a trial was held. It is likely that
the plaintiff will appeal. The Company currently does not anticipate that the
pending litigation will have any material adverse effect on the Company.
Tri-State Inns, Inc. and Motels of America, Inc. v. ShoLodge Franchise
Systems, Inc., Superior Court of Liberty County, Georgia, Civil Action File No.
97-V-00591. In this action, Tri-State Inns, Inc., the franchisee of the Shoney's
Inn located in Hinesville, Georgia, originally sought to be discharged, relieved
and excused of any future performance under the License Agreement relating to
such Shoney's Inn, and Motels of America, Inc. sought to be discharged, relieved
and excused of any further performance under a Guaranty Agreement whereby the
obligations of Tri-State Inns, Inc. under such License Agreement were guaranteed
by Motels of America, Inc., or in the alternative compensatory damages, based on
theories of alleged breach of contractual obligations and implied warranties of
good faith and fair dealing, alleged fraudulent inducement based on alleged
misrepresentations and alleged failure to make material disclosures of fact,
alleged promissory estoppel and alleged breach of fiduciary duty. In addition,
the plaintiffs originally sought a declaratory judgment concerning the provision
of the License Agreement which specifies the damages due upon termination of the
License Agreement. This action was removed to the U.S. District Court for the
Southern District of Georgia, Case No. CV- 497-129. Subsequent to removal, the
action was thereafter transferred to the U.S. District Court for the Middle
District of Tennessee, where it is now pending as Civil Action No. 3-98-0028. On
December 19, 1997, the plaintiffs filed a Second Amended Complaint in which they
sought to be relieved of obligations not simply as to the Hinesville Shoney's
Inn but also with regard to 13 other license agreements between plaintiffs and
the Company. In the alternative, the plaintiffs seek an as yet undisclosed
amount in compensatory damages. The case is currently in the discovery stage.
The Company intends to continue to defend the case vigorously.
Lorraine Donergue v. ShoLodge, Inc., et al., Case No. 3-98-0295, United
States District Court for the Middle District of Tennessee. On March 31, 1998,
the Company was named as a defendant in a purported class action lawsuit filed
by Lorraine Donergue, who claims to be a shareholder of the Company. The lawsuit
alleges that the Company violated Section 10(b) of the Securities Exchange Act
of 1934 by issuing allegedly false and misleading statements and financial
information to the investing public during 1997. The lawsuit also names as
defendants three of the Company's officers, Leon Moore, Bob Marlowe, and Michael
A. Corbett. The plaintiff seeks
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14
an unspecified amount of damages. The Company has not yet filed a response to
the lawsuit but intends to defend the case vigorously.
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 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
FISCAL 1997 HIGH LOW
----------- ---- ---
First Quarter ................................... 14 11 1/2
Second Quarter................................... 15 11
Third Quarter ................................... 16 7/8 13
Fourth Quarter................................... 18 14 1/2
FISCAL 1998 HIGH LOW
----------- ---- ---
First Quarter (through April 9, 1998)............ 16 1/2 7 7/8
On April 9, 1998, the last reported sale price for the Company's Common
Stock as reported by NASDAQ was $10.00 per share. As of April 9, 1998, there
were approximately 63 holders of record of the Company's Common Stock and
approximately 1,300 beneficial owners.
- 12 -
15
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-to-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-to-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 28, 1997
have been derived from the Company's audited Consolidated Financial Statements.
The Consolidated Financial Statements for each of the two fiscal years ended
December 29, 1996 and December 28, 1997, 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.
16
SHOLODGE, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
--------------------------------------------------------
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
26, 25, 31, 29, 28,
1993 1994 1995 1996 1997
--------------------------------------------------------
REVENUES:
HOTEL $ 29,890 $ 36,440 $ 44,144 $ 57,528 $ 71,945
CONSTRUCTION AND DEVELOPMENT 0 6,213 9,214 890 0
CONSTRUCTION AND DEVELOPMENT - OTHER 0 0 14,827 775 0
FRANCHISING 2,079 2,623 2,917 4,105 3,025
MANAGEMENT 979 916 3,300 185 139
SALE OF HOTELS 9,080 17,366 6,174 0 0
PROFITS NOT RECOGNIZED ON INSTALLMENT SALES (1,295) (2,782) (1,956) 0 0
--------------------------------------------------------
TOTAL OPERATING REVENUES 40,733 60,776 78,620 63,483 75,109
COSTS AND EXPENSES:
OPERATING EXPENSES:
HOTEL 16,364 20,211 25,178 30,998 42,988
CONSTRUCTION AND DEVELOPMENT 0 5,242 10,096 1,200 0
FRANCHISING 2,153 2,475 2,861 3,255 2,301
COST OF HOTELS SOLD 7,785 14,584 4,218 0 0
--------------------------------------------------------
TOTAL OPERATING EXPENSES 26,302 42,512 42,353 35,453 45,289
--------------------------------------------------------
GROSS OPERATING PROFIT 14,431 18,264 36,267 28,030 29,820
GENERAL AND ADMINISTRATIVE 1,349 1,378 1,929 2,158 3,953
RENT EXPENSE 678 727 784 861 1,991
DEPRECIATION AND AMORTIZATION 3,129 3,831 5,272 7,863 10,376
--------------------------------------------------------
OPERATING PROFIT 9,275 12,328 28,282 17,148 13,500
OTHER INCOME AND EXPENSES:
INTEREST EXPENSE 4,803 5,777 6,222 4,605 11,298
INTEREST INCOME 3,345 5,311 5,815 1,391 1,762
--------------------------------------------------------
NET INTEREST EXPENSE 1,458 466 407 3,214 9,536
OTHER INCOME 1,012 1,263 765 1,559 4,656
--------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
MINORITY INTEREST, EXTRAORDINARY ITEMS, AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 8,829 13,125 28,640 15,493 8,620
INCOME TAXES 3,077 4,838 10,529 5,598 2,259
MINORITY INTEREST IN EARNINGS OF CONSOL-
IDATED SUBSIDIARIES & PARTNERSHIPS 513 294 351 423 173
--------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING POLICY 5,239 7,993 17,760 9,472 6,188
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS OF RESTAURANT
SUBSIDIARY DISPOSED OF, NET OF APPLICABLE
INCOME TAXES & MINORITY INTEREST (41) 18 (75) 0 0
GAIN ON DISPOSAL OF DISCONTINUED BUSINESS
SEGMENT, NET OF INCOME TAX EFFECT 25 526
EXTRAORDINARY LOSSES, NET OF INCOME TAX BENEFIT 0 215 708 0 186
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
POLICY, NET OF INCOME TAX EFFECT (1,164)
--------------------------------------------------------
NET EARNINGS $ 5,198 $ 7,796 $ 16,977 $ 9,497 $ 5,364
========================================================
EARNINGS PER COMMON SHARE
BASIC:
EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY $ 0.70 $ 0.97 $ 2.16 $ 1.15 $ 0.75
========================================================
NET EARNINGS $ 0.69 $ 0.95 $ 2.06 $ 1.15 $ 0.65
========================================================
DILUTED:
EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY $ 0.67 $ 0.80 $ 1.87 $ 1.12 $ 0.74
========================================================
NET EARNINGS $ 0.66 $ 0.78 $ 1.80 $ 1.12 $ 0.64
========================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 7,534 8,203 8,227 8,232 8,245
========================================================
DILUTED 7,872 9,946 10,842 10,757 8,415
========================================================
BALANCE SHEET DATA:
WORKING CAPITAL (370) $ 714 $ 4,786 $(21,745) $ 54,120
TOTAL ASSETS 120,486 180,391 220,790 263,709 299,877
LONG-TERM DEBT AND CAPITALIZED LEASES 52,020 87,739 89,343 138,794 154,638
SHAREHOLDERS' EQUITY 54,883 65,158 82,737 89,736 95,352
14
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company derives revenue primarily from hotel room sales at its
Sumner Suites 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 for a note receivable. 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 interest.
The Company initially deferred recognition of the gain from the sale of this
segment until further principal payments on the note were received. In fiscal
1996 $40,000 of this gain was recognized and in fiscal 1997, the remaining
$813,000 was recognized as gain on disposal of discontinued business segment.
15
18
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 1996 and 1997.
The Company has elected to make a change in accounting for pre-opening
costs effective with the beginning of its 1997 fiscal year to reflect the
preferable method of expensing pre-opening costs as incurred, rather than
capitalizing those expenditures and amortizing them over a three-year period.
The cumulative effect of this accounting change for periods prior to 1997
recognized in 1997, net of income tax effect, is a reduction in net earnings of
$1,164,000, or $0.14 per share. The pro forma effect of this change in
accounting for pre-opening costs on 1995 and 1996 would be to increase hotel
operating expenses by $462,000 and $1,265,000, respectively, for expensing
these costs as incurred, and to reduce depreciation and amortization expense
for 1995 and 1996 by $356,000 and $550,000, respectively.
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 DECEMBER DECEMBER
31, 29, 28,
---------------------------------
1995 1996 1997
---------------------------------
Revenues:
Hotel 56.1% 90.6% 95.8%
Construction and development 11.7% 1.4% 0.0%
Construction and development - other 18.9% 1.2% 0.0%
Franchising 3.7% 6.5% 4.0%
Management 4.2% 0.3% 0.2%
Sale of Hotels 7.9% 0.0% 0.0%
Profits not recognized on installment sales (2.5)% 0.0% 0.0%
------------------------------
Total operating revenues 100.0% 100.0% 100.0%
Costs and Expenses:
Operating expenses:
Hotel 32.0% 48.8% 57.2%
Construction and development 12.8% 1.9% 0.0%
Franchising 3.6% 5.1% 3.1%
Cost of hotels sold 5.4% 0.0% 0.0%
------------------------------
Total operating expenses 53.9% 55.8% 60.3%
------------------------------
Gross operating profit 46.1% 44.2% 39.7%
General and administrative 2.5% 3.4% 5.3%
Depreciation and amortization 6.7% 12.4% 13.8%
Rent expense 1.0% 1.4% 2.7%
------------------------------
Operating profit 36.0% 27.0% 18.0%
Other Income and Expenses:
Interest expense 7.9% 7.3% 15.0%
Interest income 7.4% 2.2% 2.3%
------------------------------
Net interest expense 0.5% 5.1% 12.7%
Other income 1.0% 2.5% 6.2%
------------------------------
Earnings from Continuing Operations Before Income Taxes,
Minority Interest, Extraordinary Items and Cumulative
Effect of Change in Accounting Policy 36.4% 24.4% 11.5%
Income Taxes 13.4% 8.8% 3.0%
Minority Interest in Earnings of Consolidated Subsidiaries
and Partnerships 0.4% 0.7% 0.2%
------------------------------
Earnings from Continuing Operations Before Extraordinary Items
and Cumulative Effect of Change in Accounting Policy 22.6% 14.9% 8.2%
Discontinued Operations:
Income (Loss) From Operations of Restaurant Subsidiary
Disposed of, net of applicable income taxes and minority interest (0.1)% 0.0% 0.0%
Gain on disposal of discontinued business segment, net of income tax effect 0.0% 0.0% 0.7%
Extraordinary Losses, net of income tax benefit 0.9% 0.0% 0.2%
Cumulative Effect of Change in Accounting Policy, net of
income tax effect (1.5)%
==============================
Net earnings 21.6% 15.0% 7.1%
==============================
17
20
For the Fiscal Years Ended December 28, 1997 and December 29, 1996
For the fiscal year ended December 28, 1997, total operating revenues
increased 18.3% to $75.1 million from $63.5 million for the fiscal year ended
December 29, 1996.
Revenues from hotel operations in fiscal 1997 increased 25.1% to $71.9
million from $57.5 million for fiscal 1996. This increase resulted primarily
from more available hotel rooms in 1997 as compared to fiscal 1996. Sixteen
hotels which opened during fiscal 1996 and fiscal 1997 contributed $15.4 million
more to room revenues in fiscal 1997 than in fiscal 1996. Two Shoney's Inns were
opened in the first quarter of 1996; the remaining 14 hotels opened during 1996
and 1997 were Sumner Suites hotels. All-Hotels RevPAR (revenue per available
room) from the 17 Sumner Suites hotels increased by $5.61, or 15.6%, from $36.05
in 1996 to $41.66 in 1997. Same-Hotels RevPAR from the Sumner Suites hotels
increased by $6.78, or 16.1%, from $42.24 in 1996 to $49.02 in 1997. RevPAR for
the Company-owned Shoney's Inns declined slightly from $31.41 in 1996 to $30.83
in 1997.
There were no revenues from construction and development activities
during 1997 compared with $1.7 million in 1996. 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. Only one outside
construction project was finished in early 1996 and the balance of construction
and development-other related to the AmeriSuites Transaction (discussed in the
overview) was earned in 1996. No outside construction contracts are currently in
progress nor planned at present.
Franchise revenues in fiscal 1997 declined 26.3% to $3.0 million from
$4.1 million in fiscal 1996. The decrease was due primarily to the cancellation
of reservation services by two hotel chains in the first quarter of 1997 and to
a decrease of $315,000 in initial franchise fee revenue from 1996 to 1997.
Initial franchise fees may vary widely from year to year. At the end of fiscal
1997 there were 57 franchised Shoney's Inns in operation. One franchisee has
given the Company notice of cancellation of license agreements on 14 Shoney's
Inns; therefore, future franchise revenues could be negatively impacted by the
potential loss of these franchises. Management Fee revenue in fiscal 1997
decreased 25.2% to $139,000 from $185,000 in fiscal 1996, due to the
cancellation of one management contract on one hotel in the third quarter of
1996.
Hotel operating expenses for fiscal 1997 increased by 38.7% to $43.0
million from $31.0 million in fiscal 1996. Operating expenses of the 32 Shoney's
Inns increased by $1.9 million in 1997 over 1996 even though revenues from these
Inns declined by $1.3 million. The gross operating profit margin on these 32
Inns declined from 46.6% in 1996 to 40.7% in 1997. The increases in operating
expenses which accounted for the negative impact on profit margin were primarily
in the areas of real estate taxes, insurance, advertising, complimentary food
and beverage, and payroll related expenses. Operating expenses of the same-hotel
Sumner Suites increased by $277,000 due primarily to the $557,000 increase in
hotel revenues. The gross profit margin on these same-hotels
18
21
increased from 46.0% in 1996 to 46.4% in 1997. All 17 Sumner Suites hotels
reflected an increase in hotel operating expenses of $10.1 million from $6.3
million in 1996 to $16.4 million in 1997, due primarily to the $15.8 million
increase in revenues from these properties. The 14 non-same Sumner Suites hotels
(those not open for the full year in both 1996 and 1997) reduced the gross
operating profit margin on all Sumner Suites hotels from 44.4% in 1996 to 39.5%
in 1997. The change in accounting for pre-opening costs effective with the 1997
fiscal year to expense these costs as incurred versus the capitalization of such
costs in 1996 and prior years, accounted for $664,000 of the increase in hotel
operating expenses in 1997 over 1996. This negatively impacted the gross profit
margin on all-hotel Sumner Suites by 2.4 percentage points, or approximately 50%
of the total decline in gross profit margin from 1996 to 1997.
There were no costs and expenses of construction and development in
1997 as there were no outside construction contracts, compared with $1.2 million
in 1996 as one outside construction contract was completed early in the year.
Franchising operating expenses for 1997 decreased 29.3% to $2.3 million
from $3.3 million in 1996. The primary reason for this decrease was the
cancellation in the fourth quarter of 1996 of the Company's obligation to pay a
portion of franchise fees collected to Shoney's, Inc. The reduction of this
royalty fee expense from 1996 to 1997 was $758,000. The balance of the reduction
in franchise operating expenses from 1996 to 1997 was due primarily to reduced
expenses associated with loss of revenues from the cancellation of reservation
services by two hotel chains in the first quarter of 1997.
General and administrative expense increased 83.2% to $4.0 million in
fiscal 1997 from $2.2 million in 1996. This increase was due primarily to an
increase in professional fees, payroll costs, insurance, internal development
expenses, and taxes other than income taxes.
Depreciation and amortization expense increased by 32.0% to $10.4
million in fiscal 1997 from $7.9 million in fiscal 1996, due primarily to the 16
hotels opened during fiscal 1996 and fiscal 1997. This increase was partially
offset by the effect of the change in accounting for pre-opening costs in 1997
to expense these costs as incurred. Consequently there was no pre-opening cost
amortization in 1997 versus $550,000 reported for 1996.
Rent expense increased from $861,000 in 1996 to $2.0 million in 1997.
The $1.1 million increase was due entirely to a sale/leaseback transaction on 14
of the Company's Sumner Suites hotels in the fourth quarter of 1997. Net rent
expense on these 14 hotels is currently at a rate of approximately $9.0 million
per year.
For 1997, interest expense and interest income increased $6.7 million
and $371,000, respectively, from 1996, resulting in an increase in net interest
expense of $6.3 million. The increase in interest expense resulted primarily
from the additional borrowings incurred for the 16 hotels opened in 1996 and
1997.
19
22
Other income in fiscal 1997 increased by $3.1 million over fiscal 1996,
from $1.6 million to $4.7 million. The increase was due primarily to gains of
$1.6 million relating to the sale of excess land and $2.2 million relating to
the sale of one hotel in 1997, compared with only $340,000 from the sale of
excess land in 1996. Minority interests in earnings and losses of consolidated
subsidiaries and partnerships decreased $250,000 in 1997 compared with 1996, due
to less profitable consolidated entities which include minority ownership, the
write-off of a $72,000 minority interest receivable in 1997, and the recovery of
fees and expenses from a subsidiary partnership in 1997.
The lower effective income tax rate in 1997 is due primarily to refunds
of prior years' state taxes.
The gain on disposal of a discontinued business segment in 1997 was the
result of the recognition of previously deferred profit from the sale of the
Company's 60% interest in a restaurant subsidiary to the then 40% owner.
The extraordinary loss on early extinguishment of debt in 1997 was due
to approximately $10.5 million of equipment loans being paid off in connection
with the sale/leaseback transaction with a real estate investment trust. The
cumulative effect of a change in accounting principle represents the write-off
of the unamortized balance of previously capitalized pre-opening costs as of the
beginning of the 1997 fiscal year. Beginning with 1997, these costs are expensed
as incurred.
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, revenues in fiscal 1995 included $21.9 million from
the AmeriSuites Transaction, in contrast to only $775,000 from this source in
fiscal 1996. Exclusive of the AmeriSuites Transaction, total revenues increased
by $6.0 million, or 10.6%, from $56.7 million in fiscal 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-hotels declined slightly to $42.0 million in fiscal 1996 from
$42.4 million in fiscal 1995. Average daily room rates from same-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.
20
23
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 of $14.8 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
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 to $185,000
from $3.3 million in fiscal 1995, due to the cancellation of management
contracts on 11 hotels on 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. $2.9 million of the management revenue in 1995 had been
previously deferred to 1995 when it was recognized in connection with the
consummation of the AmeriSuite Transaction on March 31, 1995.
Hotel operating expenses for fiscal 1996 increased by 23.1% to $31.0
million from $25.2 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 $1.4 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
42.8% in fiscal 1995 to 45.7% in fiscal 1996.
24
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 49.1% to $7.9
million in fiscal 1996 from $5.3 million in fiscal 1995, due primarily to the 16
hotels opened during fiscal 1995 and fiscal 1996. Rent expense increased 9.9% in
1996 over 1995 due primarily to rent paid based upon the financial performance
of certain hotels.
For 1996, interest expense and interest income decreased $1.6 million
and $4.4 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 in the first quarter of 1996 to Mr. Don
Knight, previously the 40% owner. Also, during fiscal 1996, a gain of $40,000
was recognized on the disposal of discontinued business segment. 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.
22
25
Liquidity and Capital Resources
The Company's cash flows used in operating activities were $2.4 million
in 1997, compared with $15.8 million provided by operating activities in 1996
and $31.6 million provided in 1995. Fiscal 1995 was unusually high due to the
AmeriSuites Transaction discussed above. A large payment of estimated income
taxes in the fourth quarter of 1997 on taxable income on the sale/leaseback
transaction, most of which does not constitute earnings in 1997 for financial
statement purposes, resulted in a use of cash from operating activities.
Deferred income taxes positively impacted cash flow by $6.9 million in fiscal
1995, due to the AmeriSuites Transaction. The $6.1 million in income taxes
receivable in fiscal 1997 was due primarily to the overpayment of state and
federal taxes totaling $6.1 million at fiscal year-end 1997, for which refunds
are expected to be received in 1998. The decrease in accounts payable and
accrued expenses in fiscal 1997 of $1.1 million contrasted to an increase in
fiscal 1996 of $4.3 million, accounting for a total reduction in operating cash
flows of $5.4 million from this source from fiscal 1996 to fiscal 1997.
The Company's cash flows provided by investing activities were $56.9
million in fiscal 1997, in contrast to cash flows used in investing activities
of $41.0 million in fiscal 1996 and $47.9 million in fiscal 1995. The increase
of $97.9 million in cash provided by investing activities in fiscal 1997 over
fiscal 1996 was due primarily to the sale/leaseback of 14 hotels in 1997, of
which net proceeds approximated $137.0 million. An additional $4.9 million in
1997 was provided from the sale of one other hotel and excess land. 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 $55.9 million in 1997, $86.6 million in
1996, and $56.2 million in 1995. The $44.1 million repayment from related
parties in 1996 represented the collection by the Company of the balance of
notes receivable from Suites of America, Inc. related to the AmeriSuites
Transaction previously discussed.
Net cash provided by financing activities was $393,000 in 1997, $27.0
million in 1996 and $16.5 million in 1995. In November of 1996 the Company
issued $33.2 million in 9.75% Senior Subordinated Notes, due 2006, Series A in
the first series of notes issued under a $125 million shelf registration. In
September of 1997 the Company issued $35.0 million of 9.55% Senior Subordinated
Notes, due 2007, Series B under the Company's shelf registration. Net proceeds
of both of these issues were used to reduce the outstanding balances under the
Company's revolving credit facilities. A portion of the net proceeds from the
sale/leaseback of 14 hotels in 1997 was also used to pay off the balance of the
revolving credit facilities, a bank line of credit loan, and approximately $10.5
million of furniture, fixture and equipment loans. Proceeds from the financing
of new furniture, fixtures and equipment were approximately $4.0 million in 1997
and $5.6 million in 1996. In fiscal 1996 the Company paid approximately $2.1
million to Shoney's Inc. to repurchase a stock warrant in conjunction with the
Shoney's Transaction.
23
26
At December 28, 1997 the company had a $75.0 million unsecured
three-year revolving credit facility with a group of five banks, which became
effective April 30, 1997. The interest rate on this credit facility at December
28, 1997 was at the lender's base rate, or one hundred seventy-five basis points
over the 30, 60, 90, or 180 day LIBOR rate, at the Company's option. Thereafter,
the interest rate is based on the ratio of senior debt to EBITDA, as defined in
the credit facility (the "Senior Leverage Ratio") and ranges from base rate to
base rate plus 0.50% or 175 to 250 basis points over the 30, 60, 90, or 180 day
LIBOR rate, at the Company's option. The Company pays commitment fees on the
unused portion of the facility ranging from 0.20% to 0.50% based on the Senior
Leverage Ratio and certain other fees under the credit facility. The credit
facility contains covenants which, inter alia, limit or prohibit incurrences of
certain additional indebtedness, liens on assets, investments, asset sales,
mergers, dividends and amendments to indebtedness subordinated to the credit
facility. It also contains financial covenants by the Company, including
covenants with respect to net worth, indebtedness to total capitalization,
interest coverage and the Senior Leverage Ratio. As of December 28, 1997, the
Company had no borrowings outstanding under this credit facility.
Effective January 16, 1998, the company amended its $75.0 million
unsecured three-year revolving credit facility with the same group of five
banks. The interest rate on this amended credit facility is at the lender's base
rate or one hundred seventy-five basis points over the 30, 60, 90, or 180 day
LIBOR rate, at the Company's option. Thereafter, the interest rate is based on
the ratio of senior debt to EBITDAR, as defined in the credit facility (the
"Senior Leverage Ratio") and ranges from base rate minus .25% to base rate plus
.50% or 150 to 250 basis points over the 30, 60, 90 or 180 day LIBOR rate, at
the Company's option. The Company pays commitment fees on the unused portion of
the facility ranging from .15% to .40% based on the Senior Leverage Ratio and
certain other fees under the credit facility. The credit facility contains
covenants which, inter alia, limit or prohibit incurrences of certain additional
indebtedness, liens on assets, investments, asset sales, mergers, dividends and
amendments to indebtedness subordinated to the credit facility. It also contains
financial covenants by the Company, including covenants with respect to net
worth, indebtedness to total capitalization, interest coverage and the Senior
Leverage Ratio. Currently the Company has no borrowings outstanding under this
credit facility.
The Company also has a $1.0 million unsecured line of credit with
another bank, bearing interest at the lender's prime rate, maturing May 31,
1998. As of December 28, 1997, the Company had no borrowings outstanding under
this credit facility.
The Company sold and leased back 14 Sumner Suites hotels for a total
price of $140.0 million. The transaction was consummated in November 1997. The
Company used the net proceeds to pay off its bank credit facilities and
approximately $10.5 million of furniture, fixtures, and equipment loans on the
hotels being sold and leased back. The balance of net proceeds was invested in
short-term securities until needed to fund capital expenditures. The holders of
the Company's Credit Facility consented to the sale/leaseback transaction
provided that any outstanding balance under the Credit Facility
24
27
was paid off and no new balance was drawn under the Credit Facility prior to
amendment of the terms of the Credit Facility, which occurred January 16, 1998.
The Company opened two Shoney's Inns and ten Sumner Suites hotels in
1996 and four Sumner Suites hotels in 1997. Additionally, renovations of several
existing properties were completed in 1996 and 1997, and several others are
scheduled for completion in fiscal 1998. Furthermore, the Company's new
corporate headquarters building was completed in 1997. The Company currently has
six Sumner Suites hotels under construction. In addition, the Company has
another eight Sumner Suites hotels under contract which are scheduled to open in
1998. The Company expects that approximately $100 million in additional capital
funds will be necessary through 1998 to fulfill these plans.
The Company has principal payments totaling approximately $2.6 million
due under existing debt instruments through 1998. The Company believes that a
combination of the balance of net proceeds from the sale/leaseback transaction,
net cash provided from operations, borrowings under existing or new credit
facilities, proceeds from sale of excess land and available furniture, fixtures,
and equipment financing packages will be sufficient to fund its scheduled
development and debt repayments for the next twelve months.
Year 2000 Compliance
The Company has commenced a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issues
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
two-digit time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations. The Company has designated its Information Systems Director to
coordinate its Year 2000 compliance program. Preliminary analysis has been
conducted and areas have been identified where the Company might be most
vulnerable. A sample of hardware and software has been tested and has operated
satisfactorily. Vendors of all the major third party applications have been
contacted and the Company is obtaining assurances of Year 2000 compliance from
those vendors. The Company currently believes that it will be Year 2000
compliant on a timely basis to avoid any material operations disruptions. To
date the Company has not identified any material expenditures which will be
required to become Year 2000 compliant. However, there can be no assurance that
such operations difficulties or expenditures will not be identified or
experienced in the future.
25
28
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.
26
29
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.
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 29, 1996
and December 28, 1997 F-2 - F-3
- 27 -
30
Consolidated Statements of Earnings for each of the three years
in the period ended December 28, 1997 F-4 - F-5
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 28, 1997 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 28, 1997 F-7
Notes to consolidated financial statements F-8 - F-22
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:
10(14) -- 1991 Stock Option Plan
10(15) -- First Amendment to 1991 Stock Option Plan
10(16) -- Second Amendment to 1991 Stock Option Plan
10(17) -- Key Employee Supplemental Income Plan
- 28 -
31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShoLodge, Inc.
Hendersonville, Tennessee
We have audited the accompanying consolidated balance sheets of ShoLodge, Inc.
and subsidiaries as of December 29, 1996 and December 28, 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 28, 1997. 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 29, 1996, and December 28, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
28, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements the Company
changed its method of accounting for pre-opening costs for the year ended
December 28, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 1, 1998
F-1
32
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1996 AND DECEMBER 28, 1997
- --------------------------------------------------------------------------------
ASSETS 1996 1997
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 4,259,768 $ 59,105,505
Accounts receivable -
Trade, net of allowance for doubtful accounts of $150,000 and
$352,500 for 1996 and 1997, respectively 2,676,083 3,053,422
Construction contracts, no allowance necessary 259,785 125,001
Income taxes receivable (Note 15) -- 6,132,154
Prepaid expenses 471,823 532,698
Other current assets 559,982 205,891
------------ ------------
Total current assets 8,227,441 69,154,671
DIRECT FINANCING LEASES, less current portion (Note 4) 611,492 297,037
PROPERTY AND EQUIPMENT (Notes 1, 5, 7 and 17) 255,569,665 197,129,415
Less accumulated depreciation
and amortization (33,888,495) (39,790,321)
------------ ------------
221,681,170 157,339,094
LAND UNDER DEVELOPMENT OR HELD FOR SALE (Note 1) 6,694,599 9,404,966
DEFERRED CHARGES (Note 1) 9,899,544 10,787,233
SECURITIES HELD TO MATURITY RESTRICTED (Notes 1, 3 and 7) 8,255,810 8,946,985
SECURITIES AVAILABLE-FOR-SALE (Notes 1 and 3) 212,062 264,581
DEPOSITS ON SALE/LEASEBACK (Note 17) -- 28,000,000
DEFERRED TAX ASSET (Notes 1 and 15) -- 4,416,887
INTANGIBLE ASSETS (Note 1) 3,136,965 3,435,725
OTHER ASSETS (Notes 1 and 6) 4,990,095 7,829,813
------------ ------------
$263,709,178 $299,876,992
============ ============
See notes to consolidated financial statements.
F-2
33
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1997
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 12,045,715 $ 10,919,712
Taxes payable other than on income 984,855 1,040,956
Income taxes payable (Notes 1 and 15) 1,116,972 473,962
Current portion of long-term debt and capitalized
lease obligations (Notes 7 and 8) 15,824,914 2,599,740
------------ ------------
Total current liabilities 29,972,456 15,034,370
LONG-TERM DEBT ASSOCIATED WITH
LODGING FACILITIES (Note 7) 40,104,802 31,710,579
OTHER LONG-TERM DEBT (Note 7) 97,227,576 122,166,745
CAPITALIZED LEASE OBLIGATIONS (Note 8) 1,462,044 760,605
DEFERRED INCOME TAXES (Notes 1 and 15) 4,702,144 --
DEFERRED GAIN ON SALE/LEASEBACK (Note 17) -- 34,377,131
MINORITY INTERESTS IN EQUITY OF CONSOLIDATED
SUBSIDIARIES AND PARTNERSHIPS 504,028 475,590
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 14):
Series A redeemable nonparticipating stock (no par
value; 1,000 shares authorized; no shares
issued as of December 29, 1996 and
December 28, 1997) -- --
Common stock (no par value; 20,000,000
shares authorized, 8,233,318 and 8,255,810 shares
issued and outstanding as of December 29, 1996 and
December 28, 1997, respectively) (Notes 12 and 13) 1,000 1,000
Additional paid-in capital 42,212,042 42,431,520
Retained earnings 47,463,347 52,827,145
Unrealized gain on securities available-for-sale, net
of income taxes (Note 3) 59,739 92,307
------------ ------------
Total shareholders' equity 89,736,128 95,351,972
------------ ------------
$263,709,178 $299,876,992
============ ============
F-3
34
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
- --------------------------------------------------------------------------------
1995 1996 1997
REVENUES: (Note 1)
Hotel $ 44,144,440 $57,528,105 $71,944,716
Construction and development 9,213,609 889,365 --
Construction and development - other (Note 9) 14,826,675 775,000 --
Franchising 2,917,174 4,105,060 3,025,310
Management (Note 9) 3,300,363 185,329 138,628
Sales of hotels (Note 9) 6,173,500 -- --
Profits not recognized on installment sales (Note 9) (1,955,791) -- --
------------ ----------- -----------
Total revenues 78,619,970 63,482,859 75,108,654
COSTS AND EXPENSES:
Operating expenses:
Hotel (Note 8) 25,178,055 30,998,166 42,987,647
Construction and development 10,096,179 1,199,413 --
Franchising (Note 16) 2,861,452 3,255,372 2,301,401
Cost of hotels sold (Note 9) 4,217,709 -- --
------------ ----------- -----------
Total operating expenses 42,353,395 35,452,951 45,289,048
------------ ----------- -----------
Gross operating profit 36,266,575 28,029,908 29,819,606
General and administrative 1,928,863 2,157,549 3,952,603
Rent expense, net (Note 8 and 17) 783,576 861,140 1,991,400
Depreciation and amortization (Notes 1 and 5) 5,272,157 7,863,381 10,376,484
------------ ----------- -----------
Operating profit 28,281,979 17,147,838 13,499,119
OTHER INCOME AND EXPENSES:
Interest expense (Notes 5, 7 and 8) 6,222,088 4,605,449 11,298,126
Interest income (Notes 3 and 4) 5,815,373 1,391,066 1,762,450
------------ ----------- -----------
Net interest expense 406,715 3,214,383 9,535,676
Other income (Notes 1 and 16) 764,869 1,559,127 4,656,303
------------ ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, MINORITY INTERESTS, EXTRAORDINARY LOSS, AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 28,640,133 15,492,582 8,619,746
INCOME TAXES (Notes 1 and 15) 10,529,000 5,598,200 2,259,000
MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED
SUBSIDIARIES AND PARTNERSHIPS 350,973 422,858 172,710
------------ ----------- -----------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING POLICY 17,760,160 9,471,524 6,188,036
DISCONTINUED OPERATIONS: (Note 16)
Loss from operations of discontinued business segment, net of
income tax benefit of $45,000 (75,033) -- --
Gain on disposal of discontinued business segment, net of income tax
provision of $14,800 and $287,000 for 1996 and 1997, respectively -- 25,200 526,000
F-4
35
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
- --------------------------------------------------------------------------------
1995 1996 1997
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of income tax benefit of $420,000 and $101,000 for
1995 and 1997, respectively (Note 7) (708,195) -- (186,124)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY,
net of income tax benefit of $691,000 (Note 2) -- -- (1,164,114)
----------- ----------- -----------
NET EARNINGS $16,976,932 $ 9,496,724 $ 5,363,798
=========== =========== ===========
NET EARNINGS PER COMMON SHARE (Notes 1 and 10):
Basic:
Continuing operations before extraordinary loss and cumulative effect $ 2.16 $ 1.15 $ 0.75
Discontinued operations (0.01) -- 0.06
Extraordinary loss (0.09) -- (0.02)
Cumulative effect of change in accounting policy -- -- (0.14)
----------- ----------- -----------
Net earnings $ 2.06 $ 1.15 $ 0.65
=========== =========== ===========
Diluted:
Continuing operations before extraordinary loss and cumulative effect $ 1.87 $ 1.12 $ 0.74
Discontinued operations (0.01) -- 0.06
Extraordinary loss (0.06) -- (0.02)
Cumulative effect of change in accounting policy -- -- (0.14)
----------- ----------- -----------
Net earnings $ 1.80 $ 1.12 $ 0.64
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Notes 10 and 13):
Basic 8,227,334 8,231,548 8,244,572
=========== =========== ===========
Diluted 10,842,344 10,757,492 8,414,955
=========== =========== ===========
PRO FORMA AMOUNTS ASSUMING THE CHANGE IN ACCOUNTING
POLICY IS APPLIED RETROACTIVELY:
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM $17,693,815 $ 9,022,115 $ 6,188,036
EARNINGS PER SHARE:
Basic $ 2.15 $ 1.10 $ 0.75
Diluted $ 1.87 $ 1.08 $ 0.74
NET EARNINGS $16,910,587 $ 8,996,915 $ 6,527,912
Basic $ 2.06 $ 1.09 $ 0.79
Diluted $ 1.79 $ 1.07 $ 0.78
(Concluded)
See notes to consolidated financial statements.
F-5
36
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
- --------------------------------------------------------------------------------
SERIES A REDEEMABLE ADDITIONAL
NONPARTICIPATING STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
BALANCE, DECEMBER 25, 1994 1,000 $-- 8,221,624 $1,000 $44,146,558
Exercise of stock options, net (Note 13) -- -- 6,878 -- 88,838
Net earnings -- -- -- -- --
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 3) -- -- -- -- --
------ --- --------- ------ -----------
BALANCE, DECEMBER 31, 1995 1,000 -- 8,228,502 1,000 44,235,396
Repurchase of stock warrant (Note 12) -- -- -- -- (2,063,809)
Repurchase of Series A redeemable nonparticipating
stock (Note 14) (1,000) -- -- -- --
Exercise of stock options, net (Note 13) -- -- 4,816 -- 40,455
Net earnings -- -- -- -- --
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 3) -- -- -- -- --
------ --- --------- ------ -----------
BALANCE, DECEMBER 29, 1996 -- -- 8,233,318 1,000 42,212,042
Exercise of stock options, net (Note 13) -- -- 22,492 -- 219,478
Net earnings -- -- -- -- --
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 3) -- -- -- -- --
------ --- --------- ------ -----------
BALANCE, DECEMBER 28, 1997 -- $-- 8,255,810 $1,000 $42,431,520
====== === ========= ====== ===========
UNREALIZED GAIN
ON SECURITIES
AVAILABLE-FOR-
RETAINED SALE, NET OF
EARNINGS INCOME TAXES TOTAL
BALANCE, DECEMBER 25, 1994 $20,989,691 $ 20,405 $65,157,654
Exercise of stock options, net (Note 13) -- -- 88,838
Net earnings 16,976,932 -- 16,976,932
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 3) -- 513,076 513,076
----------- --------- -----------
BALANCE, DECEMBER 31, 1995 37,966,623 533,481 82,736,500
Repurchase of stock warrant (Note 12) -- -- (2,063,809)
Repurchase of Series A redeemable nonparticipating
stock (Note 14) -- -- --
Exercise of stock options, net (Note 13) -- -- 40,455
Net earnings 9,496,724 -- 9,496,724
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 3) -- (473,742) (473,742)
----------- --------- -----------
BALANCE, DECEMBER 29, 1996 47,463,347 59,739 89,736,128
Exercise of stock options, net (Note 13) -- -- 219,478
Net earnings 5,363,798 -- 5,363,798
Change in unrealized gain on securities available-
for-sale, net of income taxes (Note 3) -- 32,568 32,568
----------- --------- -----------
BALANCE, DECEMBER 28, 1997 $52,827,145 $ 92,307 $95,351,972
=========== ========= ===========
See notes to consolidated financial statements.
F-6
37
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
- --------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations before extraordinary loss
and cumulative effect of change in accounting policy $ 17,760,160 $ 9,471,524 $ 6,188,036
Adjustments to reconcile net earnings to net cash provided by operating
activities:
(Loss) gain from discontinued operations (120,033) 40,000 813,000
Extraordinary loss on early extingushment of debt -- -- (287,124)
Depreciation and amortization 5,637,862 8,249,666 11,034,031
Accretion of discount on securities held to maturity (780,779) (637,779) (691,175)
Gain on sale of property and other assets (211,992) (340,289) (3,818,692)
Gain on sale of securities available-for-sale -- (732,339) --
Deferred income tax provision 6,911,376 (1,710,028) (8,831,039)
Minority interests in earnings of consolidated
subsidiaries and partnerships 350,973 422,858 172,710
Decrease (increase) in accounts receivable 1,986,604 1,327,498 (272,466)
Increase in income taxes receivable -- -- (6,132,154)
Increase in prepaid expenses (71,786) (86,208) (60,875)
Increase in deferred charges from franchising -- (5,394,848) --
Increase in other assets (709,522) (1,727,868) 957,413
Increase (decrease) in accounts payable and accrued expenses 3,170,630 4,295,247 (1,126,003)
Increase (decrease) in income and other taxes 508,549 2,671,549 (349,950)
Decrease in deferred revenue (2,862,000) -- --
------------ ------------ -------------
Net cash provided by (used in) operating activities 31,570,042 15,848,983 (2,404,288)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Advances on) payments from notes receivable (3,292,095) 44,100,071 --
Recognition of previously deferred profit -- (1,681,312) (1,194,555)
Proceeds from maturity of securities held to maturity 10,000,000 -- --
Capital expenditures (55,139,418) (86,583,428) (55,907,485)
Proceeds from sale of property and other assets 573,348 1,282,070 141,959,540
Proceeds from sale of securities available-for-sale -- 1,847,120 --
Deposits on sale/leaseback of hotels -- -- (28,000,000)
------------ ------------ -------------
Net cash (used in) provided by investing activities (47,858,165) (41,035,479) 56,857,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from direct financing leases 51,134 58,725 108,947
Increase in deferred loan financing charges (1,106,216) (1,549,867) (2,353,085)
Proceeds from long-term debt 78,373,185 131,212,249 124,207,614
Payments on long-term debt (60,015,029) (99,655,062) (120,946,562)
Payments on capitalized lease obligations (592,977) (588,945) (642,719)
Distributions to minority interests (254,007) (452,472) (201,148)
Exercise of stock options 88,838 40,455 219,478
Repurchase of stock warrant -- (2,063,809) --
------------ ------------ -------------
Net cash provided by (used in) financing activities 16,544,928 27,001,274 392,525
------------ ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 256,805 1,814,778 54,845,737
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,188,185 2,444,990 4,259,768
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,444,990 $ 4,259,768 $ 59,105,505
============ ============ =============
See notes to consolidated financial statements.
F-7
38
SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
- --------------------------------------------------------------------------------
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 affect the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS include highly liquid investments with original
maturities of three months or less. At December 28, 1997, remaining
proceeds from the sale transaction described in Note 17 are invested in
cash equivalents.
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. The Company capitalizes interest on
construction and development costs using the effective interest rate on
outstanding debt.
LAND UNDER DEVELOPMENT OR HELD FOR SALE consists of excess land adjacent to
Company owned hotels. The Company actively develops these sites to enhance
the profitability of the hotels. The profit on sales of these sites is
included in other income.
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 16). This
charge is being amortized on the straight-line method over twenty years.
The amounts reported are net of accumulated amortization of $4,734,566 and
$5,703,264 as of December 29, 1996 and December 28, 1997, respectively.
INVESTMENTS. 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
F-8
39
and losses, net of tax effects, reported as a separate component of
shareholders' equity. The held to maturity securities are carried at
amortized cost.
INTANGIBLE ASSETS include excess of cost over fair value of net assets
acquired (goodwill) in the amount of $3,136,965 at December 29, 1996 and
$2,986,992 at December 28, 1997, which is amortized on the straight-line
method over a period of twenty-five years. The amounts reported are net of
accumulated amortization of $612,361 and $762,334 as of 1996 and 1997,
respectively. In addition, costs of trademark is included in the amount of
$448,733 as of 1997 and is amortized on the straight-line method over a
period of twenty years. This amount is net of accumulated amortization of
$10,600.
OTHER ASSETS include long-term portion of notes receivables, cash surrender
value of life insurance, and base linens stock. 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 accounts for asset impairment according to
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. 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.
ADVERTISING. The Company charges the costs of advertising to expense at the
time the costs are incurred. Advertising expense was approximately
$1,620,000, $2,012,000 and $2,988,000 for the years ended December 31,
1995, December 29, 1996 and December 28, 1997, 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 consolidated 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.
EARNINGS PER COMMON SHARE for all periods has been computed in accordance
with SFAS No. 128, Earnings per Share. Basic earnings per share is computed
by dividing earnings by the weighted average number of common shares
outstanding during the year. Diluted earnings per common share is computed
by dividing earnings by weighted average number of common shares
outstanding during the year plus incremental shares that would have been
outstanding upon the assumed exercise of dilutive options and the assumed
conversion of dilutive debentures. See Note 10 for a reconciliation of
basic and diluted earnings per share.
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.
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash investments and trade receivables. The Company places its cash
investments with high credit quality financial institutions who are members
of the FDIC thus reducing any potential risk. Concentrations of credit risk
with respect to trade
F-9
40
receivables are limited due to the Company's large number of customers and
their dispersion across many geographic areas.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, SFAS No. 130, Reporting
Comprehensive Income, was issued and will become effective for the Company
in 1998. Management does not expect the adoption of this standard to have a
material impact on its consolidated financial statements, except to the
extent that unrealized gains and losses on available-for-sale securities
are included in comprehensive income.
Also in June 1997, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, was issued. This standard will become
effective for the Company in 1998; however, management does not expect the
adoption of this standard to have a material impact on the consolidated
financial statements.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1995 and
1996 consolidated financial statements to conform to the classifications
used in 1997.
2. ACCOUNTING CHANGE
In the fourth quarter of fiscal 1997, the Company changed its method of
accounting for pre-opening costs, effective December 30, 1996, whereby
pre-opening costs are expensed as incurred rather than the previous method
of capitalizing such costs and amortizing them over a three-year period.
The Company believes the new method is preferable in the circumstances and
conforms to the predominant practice in the industry.
The cumulative effect of the change for periods prior to fiscal 1997, net
of income tax effect, is a reduction in net earnings of $1,164,114 or $0.14
per share and was recognized in the first quarter of 1997. The pro forma
effect on fiscal 1996, as if the change in accounting for pre-opening costs
had been adopted prior to fiscal 1996, would be to increase hotel operating
expenses by $1,264,558 and to reduce depreciation and amortization expense
by $549,982, resulting in a reduction of earnings before income taxes of
$714,576 ($449,409 after income taxes) to $9,047,315, or $1.08 per diluted
share for the year ended 1996, from $9,496,724 or $1.12 per diluted share
as previously reported. The pro forma effect on fiscal 1995, as if the
change in accounting for pre-opening costs had been adopted prior to fiscal
1995, would be to increase hotel operating expenses by $462,159 and to
reduce depreciation and amortization expense by $355,667, resulting in a
reduction of earnings before income taxes of $106,492 ($66,345 after income
taxes) to $16,910,587, or $1.79 per diluted share for the year ended 1995,
from $16,976,932 or $1.80 per diluted share as previously reported.
3. INVESTMENT SECURITIES
The cost, unrealized gain and fair value of the equity securities
available-for-sale are as follows:
1996 1997
Cost $113,431 $113,431
Unrealized gain 98,631 151,150
-------- --------
Fair value $212,062 $264,581
======== ========
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.
F-10
41
4. DIRECT FINANCING LEASES
Direct financing leases consist of:
1996 1997
Aggregate future lease payments
(due in monthly installments) $ 628,454 $ 473,797
Estimated residual values 443,770 217,240
Unearned income to be included
in future revenues (411,608) (314,965)
--------- ---------
660,616 376,072
Current portion (49,124) (79,035)
--------- ---------
$ 611,492 $ 297,037
========= =========
Minimum lease payments to be received from direct financing leases are as
follows:
1998 $ 91,320
1999 91,320
2000 70,200
2001 70,200
2002 70,200
Thereafter 80,557
--------
$473,797
========
The lease terms are primarily twenty years with renewal options for various
periods. The property leased consists primarily of retail restaurant
properties. Future minimum lease payments do not include amounts for
contingent rentals. Minimum rental income recorded under these leases was
$106,450 for each of the three years in the period ended December 28, 1997
and contingent rentals received were approximately $164,000, $144,000 and
$116,090, during the years ended December 31, 1995, December 29, 1996 and
December 28, 1997, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
1996 1997
Land and improvements $ 35,959,380 $ 20,838,391
Buildings and improvements 154,494,621 113,621,999
Furniture, fixtures and equipment 46,247,304 43,778,242
Equipment under capitalized leases 3,566,345 3,408,888
Construction in progress 15,302,015 15,481,895
------------- -------------
255,569,665 197,129,415
Less accumulated depreciation
and amortization (33,888,495) (39,790,321)
------------- -------------
$ 221,681,170 $ 157,339,094
============= =============
Interest costs capitalized during the years ended December 31, 1995,
December 29, 1996 and December 28, 1997 were approximately $1,930,000,
$4,657,000, and $3,485,000, respectively.
F-11
42
6. OTHER ASSETS
Other assets consist of:
1996 1997
Preopening costs, net $1,855,115 $ --
Base linens stock 1,078,010 615,056
Other notes receivable 1,347,395 6,506,706
Cash value of life insurance policies 373,323 425,670
Other 336,252 282,381
---------- ----------
$4,990,095 $7,829,813
========== ==========
7. LONG-TERM DEBT
Long-term debt associated with lodging facilities consists of:
1996 1997
Industrial Revenue Bonds, bearing interest at 3.72%
to 4.06% due in varying amounts through 2017 $ 16,943,540 $ 16,015,000
Notes payable - bank and other, bearing interest at 7.50%
to 9.03% due in varying amounts through 2003 14,855,040 6,203,049
Revenue Participation Bonds, due April 2001 11,355,000 11,355,000
------------ ------------
43,153,580 33,573,049
Less current portion (3,048,778) (1,862,470)
------------ ------------
$ 40,104,802 $ 31,710,579
============ ============
Other long-term debt consists of:
1996 1997
7.50% Convertible subordinated debentures $ 54,000,000 $ 54,000,000
9.75% Series A senior subordinated notes 33,150,000 33,125,000
Lines of credit 22,100,000 --
9.55% Series B senior subordinated notes -- 35,000,000
Note payable - other, bearing interest at
7.00% due in varying amounts through 2000 110,992 77,576
------------ ------------
109,360,992 122,202,576
Less current portion (12,133,416) (35,831)
------------ ------------
$ 97,227,576 $122,166,745
============ ============
All Industrial Revenue Bonds ("IRB's") and substantially all notes payable
are collateralized by property and equipment. Additionally, all IRB's as of
December 28, 1997 are collateralized by irrevocable letters of credit,
approximately $3,788,240 of which is guaranteed by a related party and
approximately $12,230,300 is guaranteed by the Company. The Revenue
Participation Bonds ("RPB's") are secured by U.S. Treasury securities
having a book value of approximately $8,947,000 as of December 28, 1997
(see Note 3). 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
43
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 9.3%, 9.4%, and 9.5%, respectively, for the years ended
December 31, 1995, December 29, 1996 and December 28, 1997.
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.
During November 1996, the Company issued $33,150,000 of 9.75% Senior
subordinated notes, Series A, under an aggregate $125,000,000 Senior
subordinated indenture agreement. The notes mature in November 2006, with
interest payable quarterly. The notes are unsecured and subordinated in
right of payment to the prior payment in full of all existing and future
senior indebtedness of the Company. Additionally, in September 1997, the
Company issued $35,000,000 of 9.55% senior subordinated notes, Series B,
also under the aggregate $125,000,000 senior subordinated indenture
agreement. The notes mature in September 2007, with interest payable
quarterly. The notes are unsecured and subordinated in right of payment in
full of all other senior indebtedness of the Company and will be senior in
right of payment to, or pari passu with, all other subordinated
indebtedness of the Company, including the Series A notes.
At December 29, 1996, the Company had approximately $22,100,000 of
borrowings outstanding under unsecured lines of credit aggregating
$54,000,000. Effective April 30, 1997, the Company consolidated certain
unsecured lines of credit into an unsecured $75 million, three-year
revolving credit facility with a group of five banks. The interest rate on
this credit facility at December 28, 1997 was at the lender's base rate, or
one hundred seventy-five basis points over the 30, 60, 90 or 180 day LIBOR
rate, at the Company's option. There were no amounts outstanding under this
credit facility at December 28, 1997. In January 1998, the Company amended
its revolving credit facility for changes in certain financial covenants.
The Company also has a $1,000,000 unsecured line of credit with another
bank, of which no amounts are outstanding at December 28, 1997.
The loan agreements contain certain financial covenants of which the most
restrictive includes maintenance of certain operating ratios, minimum
liquidity ratios, interest coverage and minimum tangible net worth. The
Company was in compliance with all financial covenants.
In November 1997, the Company repaid approximately $10,500,000 of equipment
loans with the proceeds of the sale/leaseback transaction (Note 17). This
early retirement of loans resulted in an extraordinary pretax charge of
approximately $287,000 for the year ended December 28, 1997.
F-13
44
Maturities of long-term debt are as follows:
1998 $ 1,898,301
1999 2,072,387
2000 2,183,631
2001 13,494,561
2002 1,423,425
Thereafter 134,703,320
------------
$155,775,625
============
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 31, 1995,
December 29, 1996 and December 28, 1997 was approximately $1,541,000,
$1,355,000 and $1,177,000, respectively.
Minimum rental commitments are as follows:
OPERATING CAPITALIZED
LEASES LEASES
1998 $ 884,676 $ 804,003
1999 809,920 644,408
2000 695,311 160,914
2001 648,104 --
2002 648,104 --
Thereafter 5,292,169 --
---------- ----------
$8,978,284 1,609,325
==========
Less amount representing interest
at rates ranging from 7.25% to 9.5% (147,281)
Less current portion (701,439)
----------
$ 760,605
==========
In addition to the operating leases above, the Company is also committed to
minimum annual lease payments of $14,000,000 through November 2007, related
to the sale/leaseback transaction entered into in the current year (see
Note 17).
The Company is self-insured for workers' compensation benefits up to
$500,000 annually in aggregate and $250,000 per occurrence and has recorded
a reserve for all outstanding claims at December 28, 1997. While the
Company's ultimate liability may exceed or be less than the amount accrued,
the Company believes that it is unlikely that it would experience losses
that would be materially in excess of such estimated amounts. In addition
to the reserves recorded, the Company had outstanding letters of credit in
the amount of $610,000 and $667,000, as of December 29, 1996 and December
28, 1997, respectively, to satisfy workers compensation self insurance
security deposit requirements.
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.
F-14
45
On March 31, 1998, the Company was named as a defendant in a purported
class action lawsuit filed by a shareholder of the Company. The lawsuit
alleges that the Company violated Section 10(b) of the Securities Exchange
Act of 1934 by issuing allegedly false and misleading statements and
financial information. The lawsuit also names three officers of the
Company. The Company intends to defend the case vigorously.
9. SUITES OF AMERICA TRANSACTIONS
On March 31, 1995, the Company, and Suites of America, Inc. ("Suites"), a
wholly-owned subsidiary of Prime Hospitality Corp. ("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 indebtedness from Suites was canceled by the
Company in connection with the sale of the option. The transactions have
been accounted for as installment sales of real estate in the accompanying
1995 and 1996 consolidated financial statements. As of January 1996, the
note was fully repaid and the Company recorded gains of $14,826,675 and
$775,000 for the years ended December 31, 1995 and December 29, 1996,
respectively.
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. 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 fiscal 1993 and 1994, the Company elected to exercise
its right to relinquish its profit participation in all of the hotels, and
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.
10. EARNINGS PER SHARE
The following tables reconcile earnings and weighted average shares used in
the earnings per share ("EPS") calculations for fiscal years 1997, 1996 and
1995:
FOR THE YEAR ENDED DECEMBER 31, 1995:
Income from continuing operations before
extraordinary loss and cumulative effect
change in accounting policy $17,760,160
-----------
Basic EPS:
Income available to common shareholders $17,760,160 8,227,334 $2.16
=====
Effect of dilutive securities:
Warrants -- 152,789 --
Options -- 145,619 --
Convertible debentures 2,541,375 2,316,602 --
----------- ----------
Diluted EPS $20,301,535 10,842,344 $1.87
=========== ========== =====
F-15
46
FOR THE YEAR ENDED DECEMBER 29, 1996: EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Income from continuing operations before
extraordinary loss and cumulative effect
change in accounting policy $ 9,471,524
-----------
Basic EPS:
Income available to common shareholders $ 9,471,524 8,231,548 $1.15
=====
Effect of dilutive securities:
Warrants -- 91,864 --
Options -- 117,478 --
Convertible debentures 2,541,375 2,316,602 --
----------- ----------
Diluted EPS $12,012,899 10,757,492 $1.12
=========== ========== =====
FOR THE YEAR ENDED DECEMBER 28, 1997: EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Earnings from continuing operations before
extraordinary loss and cumulative effect
change in accounting policy $6,188,036
----------
Basic EPS:
Income available to common shareholders $6,188,036 8,244,572 $0.75
=====
Effect of dilutive securities:
Options -- 170,383 --
---------- ---------
Diluted EPS $6,188,036 8,414,955 $0.74
========== ========= =====
Bonds convertible into 2,316,602 shares of stock were outstanding at
December 28, 1997, but were not included in the computation of diluted EPS
as such securities were anti-dilutive.
11. 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, 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 29, 1996 and December 28, 1997.
As of December 29, 1996 and December 28, 1997, 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.
12. 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
F-16
47
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.
13. 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 31, 1995,
December 29, 1996 and December 28, 1997, follows:
SHARES
------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
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
Granted (194,000) 194,000 13.25
Exercised -- (22,492) 9.76
Canceled 12,494 (12,494) 12.88
----------------------
December 28, 1997 55,275 800,872 $11.11
==========================================
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.
The weighted average fair value of options granted during the year was
$8.75 and $9.09 for the year ended December 29, 1996 and December 28, 1997,
respectively.
F-17
48
The following table summarizes information relating to the stock options
outstanding as of December 28, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT 12/28/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/28/97 EXERCISE PRICE
$8.40 - $ 8.88 342,335 4.29 $ 8.43 327,335 $ 8.41
$8.89 - $13.25 458,537 8.51 $13.11 110,830 $13.00
------- -------
$8.40 - $13.25 800,872 6.71 $11.11 438,165 $ 9.57
======= =======
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 earnings per
share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997
Net earnings As reported $16,976,932 $9,496,724 $5,363,798
Pro forma $16,871,114 $9,250,941 $4,889,823
Basic earnings per share As reported $ 2.06 $ 1.15 $ 0.65
Pro forma $ 2.05 $ 1.12 $ 0.59
Diluted earnings per share As reported $ 1.80 $ 1.12 $ 0.64
Pro forma $ 1.56 $ .86 0.58
The pro forma effect on net earnings for 1995, 1996 and 1997 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, 1996 and 1997: no dividend
yield for all years; expected volatility of 40%, 45% and 52%,
respectively; risk free interest rates of 6.09%, 6.79% and 6.67%,
respectively; and expected lives of 10, 10 and 9 years, respectively.
14. 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 16). The
Company's charter authorizes the issuance of 1,000 shares of Series A
stock, without par value, however as of December 28, 1997 none has been
issued.
The Company's charter authorizes the issuance of 1,000,000 shares of
preferred stock without par value. As of December 28, 1997, none has been
issued.
F-18
49
15. INCOME TAXES
The provision for income taxes from continuing operations consists of the
following:
1995 1996 1997
Current expense (benefit):
Federal $ 3,508,000 $ 6,393,200 $ 11,785,000
State 575,000 900,000 (207,000)
------------ ------------ ------------
4,083,000 7,293,200 11,578,000
Deferred 6,446,000 (1,695,000) (9,319,000)
------------ ------------ ------------
$ 10,529,000 $ 5,598,200 $ 2,259,000
============ ============ ============
The difference between income taxes using the effective income tax rate and
the statutory federal income tax rate is as follows:
1995 1996 1997
Federal income tax based on the statutory rate $ 9,738,000 $ 5,436,000 $ 3,017,000
State income taxes, less federal income tax
Benefit 945,000 505,000 317,000
State income tax refund received, less
Federal provision -- -- (1,115,000)
Other
(154,000) (328,000) 40,000
------------ ------------ ------------
$ 10,529,000 $ 5,613,000 $ 2,259,000
============ ============ ============
Deferred tax (liabilities) assets are comprised of the following:
1996 1997
Deferred tax liabilities:
Differences between book and tax basis of property $ (5,257,000) $ (7,218,000)
Profits not recognized on installment sales -- (640,000)
Direct financing leases (326,000) (281,000)
Other -- (319,000)
------------ ------------
(5,583,000) (8,458,000)
Deferred tax assets:
Deferred profit on sales of hotels -- 12,000,000
Differences between book and tax losses recognized
by minority interests 537,000 740,000
Allowance for doubtful accounts and other
157,000 135,000
------------ ------------
694,000 12,875,000
------------ ------------
Net deferred tax (liability) asset $ (4,889,000) $ 4,417,000
============ ============
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
consolidated balance sheet as of December 29, 1996.
Additionally, as of December 29, 1996 and December 28, 1997, the Company
has recorded a deferred tax liability resulting from the unrealized gain on
securities available-for-sale of $30,000 and $59,000, respectively.
F-19
50
In December 1997, the Company recorded state income tax refunds
attributable to certain restructuring changes. The effect of these refunds
has been included as a reduction to the state income tax provision, net of
the federal taxes due on such amount.
In accordance with SFAS No. 109, the Company has determined that no
valuation allowance is required as management believes it is more likely
than not that the benefits of these deferred tax assets will be realized.
16. RELATED PARTY TRANSACTIONS
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 12). 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 14). 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 $922,000 and $911,000 in franchise and
royalty fees to Shoney's during the years ended December 31, 1995 and
December 29, 1996, respectively, under the franchise license agreement.
Additionally, the Company purchased food products and supplies
approximating $1,979,000 from a wholly-owned subsidiary of Shoney's during
the year ended December 31, 1995.
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. As a result of the transaction, the restaurant business segment
operations are reported as discontinued operations in the accompanying
consolidated financial statements for the period ended December 31, 1995.
The Company initially deferred recognition of the approximate $853,000 gain
from the sale of this segment until such time further principal payments on
the note were received which would support full collectibility of the note.
For the year ended December 29, 1996, approximately $40,000 was recorded as
a gain on disposal of discontinued business segment. In December 1997,
management determined the amount to be fully collectible based on positive
cash flows of the restaurants and past collection experience, therefore the
remaining $813,000 was recorded as a gain on disposal of discontinued
business segment for the year ended December 28, 1997.
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-20
51
17. SALE/LEASEBACK TRANSACTION
In November 1997, the Company entered into a sale and leaseback agreement
for certain of its Sumner Suites hotels. The assets of the hotels were sold
to a real estate investment trust and the hotels continue to be operated by
the Company. The lease is classified as an operating lease in accordance
with SFAS No. 13, Accounting for Leases. The original lease term is for ten
years with five renewal periods of ten years each.
The Company sold assets with a net book value of approximately $101.5
million in exchange for $140 million in cash. The gain of approximately
$34.9 million has been deferred and will be recognized on the straight-line
method over the 10 year lease term as adjustments to rent expense. The
minimum base rental is $14 million annually with contingent rent due of 8%
of the excess of the leased hotels base revenues (as defined in the lease
agreement) beginning in 1999.
The Company was required to pay a deposit of $14 million to be retained by
the purchaser in the event of default or nonobservance of the lease
agreement. The deposit will be refunded to the Company at the end of the
lease term in the event no default has occurred. This non-interest bearing
deposit is included in long-term deposits on sale/leaseback.
The Company was also required to provide an additional deposit of $14
million. This deposit, included in long-term deposits on sale/leaseback,
earns interest at a rate of 11.11% annually. Interest earned is credited to
the required rent payment due the lessor. The Company will have the deposit
refunded upon the earlier of achievement of certain operating results of
the leased hotels or expiration of the lease.
18. SUPPLEMENTAL CASH FLOW INFORMATION
1995 1996 1997
Cash paid during the year for interest $ 5,943,447 $ 8,484,298 $ 11,800,125
=========== =========== ============
Cash paid during the year for income taxes $ 4,562,755 $ 4,389,928 $ 18,604,588
=========== =========== ============
Significant non-cash investing and
inancing activities:
Sales of hotels:
Notes receivable $(6,173,500) $ -- $ 4,500,000
Profits not recognized on installment
sales 1,654,228 -- --
Property and equipment 4,519,272 $ -- (4,500,000)
----------- ----------- ------------
$ -- $ -- $ --
=========== =========== ============
Property and equipment acquired
under capitalized lease obligations:
Property and equipment $ 1,034,788 $ -- $ --
Capitalized lease obligations (1,034,788) -- --
----------- ----------- ------------
$ -- $ -- $ --
=========== =========== ============
19. BUSINESS SEGMENT INFORMATION
The Company's significant business segments include hotel operations and
construction and development. In fiscal 1997, the Company did not recognize
any revenues from construction and development as all such activities were
for internal projects and, therefore, revenues and expenses were
F-21
52
eliminated in consolidation. None of the Company's segments conduct foreign
operations. Operating profit includes the operating revenues and expenses
directly identifiable with the business segment. Identifiable assets are
those used directly in the operations of each segment.
OPERATING DEPRECIATION
TOTAL PROFIT TOTAL CAPITAL AND
1995 REVENUES (LOSS) ASSETS EXPENDITURES AMORTIZATION
Hotel $44,144,440 $ 13,266,207 $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 -- -- --
Corporate and other 10,435,246 1,063,221 57,477,468 1,508,737 203,603
----------- ------------ ------------ ----------- -----------
Total $78,619,970 $ 28,281,979 $220,789,712 $56,174,206 $ 5,272,157
=========== ============ ============ =========== ===========
1996
Hotel $57,528,105 $ 18,188,198 $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 -- -- --
Corporate and other 4,290,389 (1,519,205) 24,159,901 3,290,366 272,248
----------- ------------ ------------ ----------- -----------
Total $63,482,859 $ 17,147,838 $263,709,178 $86,583,428 7,863,381
=========== ============ ============ =========== ===========
1997
Hotel 71,944,716 16,780,341 201,301,900 47,463,937 9,765,363
Construction and
development -- (13,219) 364,455 -- 13,219
Corporate and other 3,163,938 (3,268,003) 98,210,637 8,443,548 597,902
----------- ------------ ------------ ----------- -----------
Total $75,108,654 $ 13,499,119 $299,876,992 55,907,485 $10,376,484
=========== ============ ============ =========== ===========
20. Subsequent Events (unaudited)
On April 10, 1998, the Company terminated its chief financial officer.
There may be certain claims arising out of that termination.
In the opinion of management, any potential losses arising out of such
claims will not have a material adverse effect on the financial condition
of the Company. Losses, if any, cannot be determined at this time.
* * * * * *
F-22
53
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShoLodge, Inc.
Hendersonville, Tennessee
We have audited the consolidated financial statements of ShoLodge, Inc. and
subsidiaries as of December 29, 1996 and December 28, 1997, and for each of the
three years in the period ended December 28, 1997 and have issued our report
thereon dated April 1, 1998, such report is included elsewhere in this Form
10-K. Our audits also included the consolidated financial statement schedule of
ShoLodge, Inc. listed in Item 14. This consolidated financial statements
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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Nashville, Tennessee
April 1, 1998
S-1
54
SHOLODGE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
- -------------------------------------------------------------------------------
BALANCE AT ADDITIONS ADDITIONS
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF YEAR COSTS AND OTHER END OF
EXPENSES ASSETS DEDUCTIONS YEAR
YEAR ENDED
DECEMBER 31, 1995:
Allowance for doubtful
account 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
=========== =========== =========== =========== ===========
YEAR ENDED
DECEMBER 28, 1997:
Allowance for doubtful
accounts receivable $ 150,000 $ 202,500 $ -- $ -- $ 352,500
=========== =========== =========== =========== ===========
S-2
55
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3(1) -- Amended and Restated Charter. Incorporated by reference to the Company's
Registration statement on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991.
3(2) -- Articles of Amendment to Charter creating Series A Subordinated Preferred Stock.
Incorporated by reference to the Company's Registration Statement on Form 8-A
filed with the Commission on July 3, 1997.
3(3) -- Articles of Amendment to Amended and Restated Charter dated September 8, 1997*
3(4) -- Amended and Restated Bylaws. Incorporated by reference to the Company's
Registration statement on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991
3(5) -- Amendment to the Amended and Restated Bylaws adopted on July 31, 1996*
4(1) -- Amended and Restated Charter. Section 6 of the Amended and Restated Charter
is included in Exhibit 3(1).
4(2) -- Registration Rights Agreement, dated December 11, 1991 between the Registrant
and Richard L. Johnson. 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
4(3) -- First Amendment to Registration Rights Agreement between Registrant and
Richard L. Johnson, dated as of October 10, 1986. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q, filed with the Commission on
November 20, 1996
4(4) -- Second Amendment to Registration Rights Agreement between Registrant and
Richard L. Johnson, dated as of June 20, 1997. Incorporated by reference to the
Company's Quarterly Report on Form 10-Q, filed with the Commission on August
27, 1997
4(5) -- 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. Incorporated by reference to
the Company's Registration Statement on Form S-3, Commission File No. 33-77910,
filed with the Commission on April 19, 1994
4(6) -- Indenture dated as of November 15, 1996, by and between the Registrant and Bankers
Trust Company, Trustee, relating to Senior Subordinated Notes.
- 29 -
56
Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on November 20, 1996
4(7) -- First Supplemental Indenture dated as of November 15, 1996
by and between the Registrant and Bankers Trust Company,
Trustee, relating to 9 3/4% Senior Subordinated Notes due
2006, Series A. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q, filed with the Commission on
November 20, 1996
4(8) -- Second Supplemental Indenture dated as of September 25,
1997 by and between the Registrant and Bankers Trust Company,
Trustee, relating to 9.55% Senior Subordinated Notes due 2007,
Series B. Incorporated by reference to the Company's Current
Report on Form 8-K, filed with the Commission on September
30, 1997
The Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, any and all instruments defining the rights
of holders of long-term debt of the Registrant and its subsidiaries,
the total amount of which does not exceed 10% of the total assets of
the Registrant and its subsidiaries on a consolidated basis.
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10(1) -- Second Amended and Restated Partnership Agreement of Shoney's Inn of Baton
Rouge dated February 16, 1994. Incorporated by reference to the Company's
Annual Report on Form 10-K, filed with the Commission on March 28, 1994
10(2) -- Second Amended and Restated Partnership Agreement of Shoney's Inn of
Independence dated February 16, 1994. Incorporated by reference to the
Company's Annual Report on Form 10-K, filed with the Commission on March 28,
1994
10(3) -- Amended and Restated Partnership Agreement of Demonbreun Hotel Associates,
Ltd., dated October 22, 1991. Incorporated by reference to the Company's
Registration statement on Form S-1, Commission File No. 33-44504, filed with the
Commission on December 12, 1991
10(4) -- Agreement of Limited Partnership of Shoney's Inn North, Ltd., dated
December 31, 1987. Incorporated by reference to the Company's Registration
statement on Form S-1, Commission File No. 33-44504, filed with the Commission
on December 12, 1991
10(5) -- Partnership Agreement of Shoney's Inn of Atlanta, N.E., dated December 26,
1988. Incorporated by reference to the Company's Registration statement on Form
S-1, Commission File No. 33-44504, filed with the Commission on December 12,
1991
- 30 -
57
10(6) -- Partnership Agreement of Shoney's Inn of Stockbridge, dated December 26, 1988.
Incorporated by reference to the Company's Registration statement on Form S-1,
Commission File No. 33-44504, filed with the Commission on December 12, 1991
10(7) -- Joint Venture Agreement of Atlanta Shoney's Inns Joint Venture, dated May 4,
1988. Incorporated by reference to the Company's Registration statement on Form
S-1, Commission File No. 33-44504, filed with the Commission on December 12,
1991
10(8) -- Amended and Restated Limited Partnership Agreement of Shoney's Inns of
Gulfport, Ltd., dated January 1, 1987. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No. 33-44504,
filed with the Commission on December 12, 1991
10(9) -- Second Amended and Restated Limited Partnership Agreement of Shoney's Inn of
Bossier City, Ltd., dated January 1, 1987. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No. 33-44504,
filed with the Commission on December 12, 1991
10(10) -- Second Amended and Restated Limited Partnership Agreement of Shoney's Inn of
New Orleans, Ltd., dated January 1, 1987. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No. 33-44504,
filed with the Commission on December 12, 1991
10(11) -- Amended and Restated Limited Partnership Agreement of Shoney's Inn of
Opryland, Ltd., dated August 4, 1986, and subsequent amendments. Incorporated
by reference to the Company's Registration statement on Form S-1, Commission
File No. 33-44504, filed with the Commission on December 12, 1991
10(12) -- 1991 Stock Option Plan. Incorporated by reference to the Company's Registration
statement on Form S-8, filed with the Commission on June 24, 1997
10(13) -- First Amendment to 1991 Stock Option Plan. Incorporated by reference to the
Company's Registration statement on Form S-8, filed with the Commission on June
24, 1997
10(14) -- Second Amendment to 1991 Stock Option Plan. Incorporated by reference to the
Company's Registration statement on Form S-8, filed with the Commission on June
24, 1997
10(15) -- Key Employee Supplemental Income Plan. Incorporated by reference to the
Company's Registration statement on Form S-1, Commission File No. 33-44504,
filed with the Commission on December 12, 1991
- 31 -
58
10(16) -- License Agreement, dated October 25, 1991, by and among the Registrant,
Shoney's Investments, Inc. and ShoLodge Franchise Systems, Inc. Incorporated
by reference to the Company's Registration statement on Form S-1, Commission
File No. 33-44504, filed with the Commission on December 12, 1991
10(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.
Incorporated by reference to the Company's Annual Report on Form 10-K, filed
with the Commission on March 29, 1993
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.
Incorporated by reference to the Company's Annual Report on Form 10-K, filed
with the Commission on March 28, 1994
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.
Incorporated by reference to the Company's Annual Report on Form 10-K, filed
with the Commission on April 11, 1995
10(20) -- Amendment No. 4 to License Agreement, dated June 26, 1996, by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and Registrant.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on August 28, 1996
10(21) -- Amendment No. 5 to License Agreement, dated October 25, 1996, by and among
Shoney's Investments, Inc., ShoLodge Franchise Systems, Inc. and Registrant.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on November 20, 1996
10(22) -- Agreement dated March 15, 1994 between ShoLodge Franchise Systems, Inc. and
Shoney's of Knoxville, Inc. Incorporated by reference to the Company's Annual
Report on Form 10-K, filed with the Commission on March 28, 1994.
10(23) -- Warrant Purchase Agreement between the Registrant and Shoney's Investments,
Inc. dated October 25, 1996. Incorporated by reference to the Company's
Quarterly Report on For 10-Q, filed with the Commission on November 20, 1996
10(24) -- First Amendment to Amended and Restated Stock Option Agreement dated as of
October 10, 1996 between Leon Moore and Richard L. Johnson. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q, filed with the
Commission on November 20, 1996
- 32 -
59
10(25) -- Second Amendment to Amended and Restated Stock Option Agreement dated as
of June 20, 1997 between Leon Moore and Richard L. Johnson. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q, filed with the
Commission on August 27, 1997
10(26) -- Intentionally Omitted
10(27) -- Credit Agreement dated as of April 30, 1997 by and among the Registrant and
certain Subsidiaries of the Registrant, as Borrowers, and the Lenders referred to
therein, First Union National Bank of Tennessee, as Administrative Agent, and
NationsBank of Tennessee, as Co-Agent. Incorporated by reference to the
Company's Quarterly Report on Form 10-Q, filed with the Commission on August
27, 1997
10(28) -- Joinder Agreement Number 1 to the Credit Agreement, dated as of June 11, 1997.
Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on August 27, 1997
10(29) -- First Amendment to Credit Agreement, dated as of January 16, 1998, by and
among the Registrant and certain subsidiaries of the Registrant, as Borrower, the
Lenders referred to therein, First Union National Bank of Tennessee, as
Administrative Agent, and NationsBank of Tennessee, as Co-Agent.*
10(30) -- Rights Agreement between the Registrant and SunTrust, Atlanta, as Rights Agent,
dated as of June 27, 1997. Incorporated by reference to the Company's
Registration Statement on Form 8-A filed with the Commission on July 3, 1997
10(31) -- Purchase and Sale Agreement by and between the Registrant and certain of its
Affiliates, as Sellers, and Hospitality Properties Trust, as Purchaser, dated October
24, 1997. Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on November 13, 1997
10(32) -- Agreement to Lease between Hospitality Properties Trust and the Registrant dated
October 24, 1997. Incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on November 13, 1997
10(33) -- Form of Lease Agreement to be entered into between certain Affiliates of the
Registrant, as Tenant, and Hospitality Properties Trust, as Landlord. Incorporated
by reference to the Company's Current Report on Form 8-K, filed with the
Commission on November 13, 1997
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10(34) -- Form of Security Agreement to be entered into between certain Affiliates of the
Registrant, as Tenant, and Hospitality Properties Trust, as Secured Party.
Incorporated by reference to the Company's Current Report on Form 8-K, filed
with the Commission on November 13, 1997
10(35) -- Form of Assignment and Security Agreement to be entered into between certain
Affiliates of the Registrant, as Assignor, and Hospitality Properties Trust, as
Assignee. Incorporated by reference to the Company's Current Report on Form
8-K, filed with the Commission on November 13, 1997
10(36) -- Form of Stock Pledge Agreement to be entered into between the Registrant, as
Pledgor, and Hospitality Properties Trust, as Secured Party. Incorporated by
reference to the Company's Current Report on Form 8-K, filed with the
Commission on November 13, 1997
10(37) -- Form of Limited Guaranty Agreement to be entered into by the Registrant, as
Guarantor, for the benefit of Hospitality Properties Trust. Incorporated by
reference to the Company's Current Report on Form 8-K, filed with the
Commission on November 13, 1997
10(38) -- Letter between Hospitality Properties Trust and the Registrant dated November 19,
1997. Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 3, 1997
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*
- -----------
* Filed herewith
(b) No reports on Form 8-K were filed during the fourth quarter
ended December 28, 1997 except the following:
Form 8-K dated October 24, 1997 relating to the sale and
leaseback of certain Sumner Suites to Hospitality Properties
Trust.
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61
Form 8-K dated November 19, 1997 relating to the sale and
leaseback of certain Sumner Suites to Hospitality Properties
Trust.
(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.
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62
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
April 9, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Leon Moore President, Chief Executive April 9, 1998
- ----------------------------------- Officer, Principal Executive
Leon Moore Officer, Director
/s/ Bob Marlowe Secretary, Treasurer, Chief April 9, 1998
- ----------------------------------- Accounting Officer, Principal
Bob Marlowe Accounting Officer, Chief Financial
Officer, Director
/s/ Richard L. Johnson Executive Vice President, April 9, 1998
- ----------------------------------- Director
Richard L. Johnson
/s/ Earl H. Sadler Director April 9, 1998
- -----------------------------------
Earl H. Sadler
/s/ Helen L. Moskovitz Director April 9, 1998
- -----------------------------------
Helen L. Moskovitz
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