Sholodge conducting exchange offer to cure note covenant violation

By Peter Heap

New York, April 14 - Sholodge, Inc. is conducting an exchange offer intended to cure a covenant violation on its $26 million series A senior subordinated notes due November 2006 and $19.3 million series B senior subordinated notes due September 2007.

But the Hendersonville, Tenn. operator and franchisor of Shoney's Inns and GuestHouse Inns & Suites said that even if the exchange offer is not successful it expects asset sales will be sufficient to pay its debt in full during 2003.

The covenant violation occurred because Sholodge's consolidated net worth was below the minimum required level of $75 million on Dec. 29, 2002.

Because of the violation, holders of 25% or more of the outstanding principal amount can declare a default. On receipt of notice the company would then have 60 days to cure the default. Holders of a minimum of 51% of the outstanding principal amount of the notes can also waive a default.

Sholodge said in a filing with the Securities and Exchange Commission that it is currently conducting an exchange offer and consent solicitation that it expects to complete within the 60-day cure period.

The exchange offer will modify the covenants to reduce the minimum consolidated net worth, which would cure the default, if it is declared.

Sholodge noted that there is a cross-default provision to its $16.5 million 7.5% convertible subordinated debentures due May 2004 and a loan secured by its aircraft.

These problems affected a total of $67.5 million of debt as of Dec. 29, 2002, Sholodge said in the SEC filing. By April 4 it had reduced the total by $2.2 million including $838,000 of the senior subordinated notes.

Sholodge added that it currently has $11.0 million in cash and expects to collect cash proceeds of approximately $40 million within the next 60 days from the collection of two notes receivable, the sale of the properties serving as collateral under 10 notes receivable, and the sale of three unencumbered properties.

Negotiations are currently under way for the sale of an additional 12 hotels, five of which collateralize notes receivable, with net proceeds of approximately $53 million expected.

Sholodge also anticipates refunds of approximately $8.5 million of previously paid income taxes by mid-2003, and at least three parcels of undeveloped land are expected to be sold in 2003 for approximately $5.6 million.

As a result, it expects to have sufficient cash to pay its debt in full in 2003.

Sholodge also said it is evaluating alternatives to maximize shareholder value. These could include the franchising and operation of additional GuestHouse Inns & Suites, sale of the remaining company-owned hotels, negotiating new credit arrangements, developing hotels for other owners, the repurchase of additional stock or debt securities, or, as announced on Jan. 16 the possible spin-off of its reservation services subsidiary InnLink to shareholders.

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