-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Km8gM1zBnll9x31z2OeSL0Lz3f7DGXMY/LfxN/9i0oQdnLgi8BNAxqA9szNYdBdo u6EDWVIyjAho4B8p6k2uaQ== 0000950144-98-013174.txt : 19981120 0000950144-98-013174.hdr.sgml : 19981120 ACCESSION NUMBER: 0000950144-98-013174 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981004 FILED AS OF DATE: 19981119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOLODGE INC CENTRAL INDEX KEY: 0000881924 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 621015641 STATE OF INCORPORATION: TN FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19840 FILM NUMBER: 98755366 BUSINESS ADDRESS: STREET 1: 130 MAPLE DR N CITY: HENDERSONVILLE STATE: TN ZIP: 37075 BUSINESS PHONE: 6152648000 MAIL ADDRESS: STREET 1: 130 MAPLE DRIVE NORTH CITY: HENDERSONVILLE STATE: TN ZIP: 37075 10-Q 1 SHOLODGE INC 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------- For the Third Quarter Ended October 4, 1998 Commission File No. 0-19840 ------------------------- SHOLODGE, INC. (Exact name of registrant as specified in its charter) ------------------------- TENNESSEE 62-1015641 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 130 MAPLE DRIVE NORTH, HENDERSONVILLE, TENNESSEE 37075 (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615) 264-8000 ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. As of November 16, 1998, there were 8,095,810 shares of ShoLodge, Inc. common stock outstanding. 2 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 4, DECEMBER 28, 1998 1997(1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,681,134 $ 59,105,505 Accounts receivable, net 3,582,830 2,903,422 Construction contracts 0 125,001 Income taxes receivable 605,000 6,132,154 Prepaid expenses 579,772 532,698 Notes receivable-net (Note D) 3,281,841 191,253 Other current assets 166,036 164,638 ------------- ------------- Total current assets 17,896,613 69,154,671 NOTES RECEIVABLE, net (Note D) 58,910,461 6,156,863 DIRECT FINANCING LEASES, less current portion 282,474 297,037 PROPERTY AND EQUIPMENT 177,978,337 197,129,415 Less accumulated depreciation and amortization (20,027,075) (39,790,321) ------------- ------------- 157,951,262 157,339,094 LAND UNDER DEVELOPMENT OR HELD FOR SALE 9,242,286 9,404,966 DEFERRED CHARGES 9,296,800 10,787,233 SECURITIES HELD TO MATURITY - RESTRICTED 0 8,946,985 SECURITIES AVAILABLE FOR SALE 221,615 264,581 DEPOSITS ON SALE/LEASEBACK 28,000,000 28,000,000 DEFERRED TAX ASSET 2,960,249 4,416,887 INTANGIBLE ASSETS 3,304,848 3,435,725 OTHER ASSETS 2,460,121 1,672,950 ------------- ------------- TOTAL ASSETS $ 290,526,729 $ 299,876,992 ============= =============
(1) Derived from fiscal year ended December 28, 1997 audited financial statements. See notes to consolidated financial statements. 3 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
OCTOBER 4, DECEMBER 28, 1998 1997(1) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 14,834,578 $ 10,919,712 Taxes other than on income 1,105,897 1,040,956 Income taxes payable 1,339,121 473,962 Current portion of long-term debt and capitalized lease obligations 1,207,881 2,599,739 ------------ ------------ Total current liabilities 18,487,477 15,034,369 LONG-TERM DEBT ASSOCIATED WITH LODGING FACILITIES 7,041,912 31,710,579 OTHER LONG-TERM DEBT 122,129,898 122,166,745 CAPITALIZED LEASE OBLIGATIONS 263,683 760,606 DEFERRED GAIN ON SALE/LEASEBACK 31,703,383 34,377,131 DEFERRED CREDITS (Note D) 3,266,000 0 MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 0 475,590 SHAREHOLDERS' EQUITY: Series A redeemable nonparticipating stock (no par value; 1,000 shares authorized, no shares outstanding) -- -- Common stock (no par value; 20,000,000 shares authorized, 8,255,810 shares issued and outstanding as of October 4, 1998 and December 28, 1997) 1,000 1,000 Additional paid-in capital 42,431,520 42,431,520 Retained earnings 65,137,047 52,827,145 Unrealized gain on securities available for sale (net of tax) 64,809 92,307 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 107,634,376 95,351,972 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $290,526,729 $299,876,992 ============ ============
(1) Derived from fiscal year ended December 28, 1997 audited financial statements. See notes to consolidated financial statements. 4 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE FORTY WEEKS ENDED OCTOBER 4, 1998 AND OCTOBER 5, 1997
12 WEEKS ENDED 40 WEEKS ENDED OCTOBER 4, OCTOBER 5, OCTOBER 4, OCTOBER 5, 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES: Hotel $ 14,789,533 $ 17,695,080 $ 56,749,614 $ 56,340,114 Franchising 847,168 691,306 2,336,665 2,580,851 Management 34,087 26,165 105,052 98,703 ------------ ------------ ------------ ------------ Total operating revenues 15,670,788 18,412,551 59,191,331 59,019,668 COSTS AND EXPENSES: Operating expenses: Hotel 10,071,050 10,015,702 35,152,370 30,857,238 Franchising 563,710 436,379 1,840,414 1,652,380 ------------ ------------ ------------ ------------ Total operating expenses 10,634,760 10,452,081 36,992,784 32,509,618 ------------ ------------ ------------ ------------ Gross operating profit 5,036,028 7,960,470 22,198,547 26,510,050 General and administrative 924,963 845,175 4,015,284 2,413,427 Rent expense 2,277,540 229,343 7,626,940 689,778 Depreciation and amortization 1,496,028 2,615,558 6,157,559 8,018,598 OTHER INCOME AND EXPENSES: Interest expense 1,902,415 2,569,796 7,563,776 8,114,076 Interest income 1,399,025 241,404 3,532,139 906,695 ------------ ------------ ------------ ------------ Net interest expense 503,390 2,328,392 4,031,637 7,207,381 Gain on sale of property (Note D) 20,164,681 20,270,718 1,346,939 Other income 222,138 154,773 720,176 496,789 ------------ ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES, MINORITY INTERESTS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 20,220,926 2,096,775 21,358,021 10,024,594 INCOME TAXES 7,140,000 778,000 7,522,000 3,539,000 MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED SUBSIDIARIES & PARTNERSHIPS 385,945 (107,983) 459,653 178,288 ------------ ------------ ------------ ------------ EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 12,694,981 1,426,758 13,376,368 6,307,306 ------------ ------------ ------------ ------------ CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY (net of tax effect of 691,000) (1,164,114) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT (net of tax effect of 600,000) (1,066,466) (1,066,466) ------------ ------------ ------------ ------------ NET EARNINGS $ 11,628,515 $ 1,426,758 $ 12,309,902 $ 5,143,192 ============ ============ ============ ============ EARNINGS PER COMMON SHARE Basic: Earnings per share from continuing operations $ 1.54 $ 0.17 $ 1.62 $ 0.75 Extraordinary loss, net of tax effect $ (0.13) $ (0.13) Cumulative effect of change of accounting policy, net of tax effect $ (0.14) Net earnings $ 1.41 $ 0.17 $ 1.49 $ 0.61 ============ ============ ============ ============ Diluted: Earnings per share from continuing operations $ 1.22 $ 0.17 $ 1.40 $ 0.74 Extraordinary loss, net of tax effect $ (0.10) $ (0.10) Cumulative effect of change of accounting policy, net of tax effect $ (0.14) Net earnings $ 1.12 $ 0.17 $ 1.30 $ 0.60 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 8,255,810 8,476,605 8,255,810 8,389,769 Diluted 10,870,565 8,553,284 11,006,802 8,524,148 ============ ============ ============ ============
See notes to consolidated financial statements. 5 SHOLODGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE FORTY WEEKS ENDED OCTOBER 4, 1998 AND OCTOBER 5, 1997 (UNAUDITED)
40 WEEKS ENDED OCTOBER 4, OCTOBER 5, 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 13,376,368 $ 6,307,306 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT (1,666,466) 0 DEPRECIATION AND AMORTIZATION 6,157,559 8,018,598 DECREASE IN DEFERRED INCOME TAXES 0 (676,000) INCREASE IN MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS 459,653 178,288 GAIN ON SALE OF PROPERTY & EQUIPMENT (20,270,718) (1,190,687) DEFERRED INCOME TAX PROVISION 1,456,638 0 ACCRETION OF DISCOUNT ON SECURITIES HELD TO MATURITY (442,427) (558,257) CHANGES IN ASSETS AND LIABILITIES: DECREASE (INCREASE) IN ACCOUNTS RECEIVABLE 4,972,747 (507,120) (INCREASE) IN PREPAID EXPENSES (47,074) (911,256) DECREASE IN OTHER ASSETS 68,067 153,685 INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,914,866 (3,427,493) INCREASE IN INCOME AND OTHER TAXES 314,633 781,874 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 8,293,846 8,168,938 CASH FLOWS FROM INVESTING ACTIVITIES: CHANGE IN DEFERRED GAINS AND CREDITS (173,748) 0 CAPITAL EXPENDITURES (64,390,063) (39,320,479) PROCEEDS FROM SALE OF PROPERTY & EQUIPMENT 23,350,948 1,743,364 ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES (41,212,863) (37,577,115) CASH FLOWS FROM FINANCING ACTIVITIES: DECREASE (INCREASE) IN DEFERRED CHARGES 1,273,488 (1,729,922) PROCEEDS FROM DIRECT FINANCING LEASES 14,563 164,620 PAYMENTS RECEIVED ON NOTES RECEIVABLE 176,936 0 PROCEEDS FROM LONG-TERM DEBT 0 73,577,000 PAYMENTS ON LONG-TERM DEBT (15,663,838) (41,743,835) PAYMENTS ON CAPITALIZED LEASE OBLIGATIONS (496,923) (392,979) DISTRIBUTIONS TO MINORITY INTERESTS (1,809,580) (201,151) EXERCISE OF STOCK OPTIONS 0 201,133 ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (16,505,354) 29,874,866 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ($49,424,371) $ 466,689 ============ ============ CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD $ 59,105,505 $ 4,259,768 ============ ============ CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,681,134 $ 4,726,457 ============ ============
See notes to consolidated financial statements. 6 SHOLODGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. The consolidated financial statements have been prepared by the Company without audit. In Management's opinion, the information and amounts furnished in this report reflect all adjustments which are necessary for the fair presentation of the financial position and results of operations for the periods presented. All adjustments are of a normal and recurring nature. It is suggested that these financial statements be read in conjunction with the Company's Annual Report or Form 10-K for the fiscal year ended December 28, 1997 and the Company's Quarterly Report on Form 10-Q for the forty weeks ended October 4, 1998. There have been no changes in accounting policies nor has the composition of accounts substantially changed since the year ended December 28, 1997. The fiscal year consists of a 52/53 week year ending the last Sunday of the year. The results of operations for the quarters ended October 4, 1998 and October 5, 1997 are not necessarily indicative of the operating results for the entire year. The Company has historically reported lower earnings in the first and fourth quarters of the year due to the seasonality of the Company's business. B. On December 29, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". Comprehensive income includes net income and other comprehensive income which is defined as non-owner transactions in equity. The following table sets forth (in thousands) the amounts of other comprehensive income included in equity for the three quarters ended October 4, 1998 and October 5, 1997.
10/4/98 10/5/97 ------- ------- Net unrealized gain (loss) on securities available for sale for the three quarters ($27) $10
C. On December 29, 1997, the Company adopted the practice of capitalizing only directly identifiable internal costs of identifying and acquiring commercial properties to be developed in accordance with Emerging Issues Task Force ("EITF") Issue No. 97-11. The implementation of this EITF resulted in increased operating costs of approximately $170,000 and $730,000 in the third quarter of 1998 and in the first three quarters of 1998, respectively. D. During the third quarter of 1998, the Company sold 16 of its company-owned hotels for $90.0 million. The sales price consisted of $22.5 million in cash with the balance of $67.5 million in the form of interest-bearing promissory notes. Profit was recognized on 12 of the sales under the full accrual method of accounting. Profit recognition on the other 4 hotels sold is being accounted for 7 under the installment method. The net sales price of these 4 hotels was $27.4 million and the cost of these hotels was $15.8 million. Of the $11.6 million profit on the sale of these 4 hotels, $54,000 was recognized in the third quarter of 1998, with the remaining $11.5 million deferred, to be recognized on the installment method of accounting. $4.6 million and $6.9 million of the $11.5 million deferred profits are netted against current notes receivable and non-current notes receivable, respectively, as of October 4, 1998. Deferred credits totalling $3.3 million related to the 12 hotels on which profit was recognized under the full accrual method were recorded as of the transaction date, of which $766,000 will be recorded as revenues upon the completion of renovation and replacement expenditures. The remaining $2.5 million deferred credit will be used to satisfy the Company's commitment to reimburse the buyer for future interest obligations on debt assumed by the buyer. E. The net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding. 8 ShoLodge, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations For the Fiscal Quarters and Fiscal Year-to-date Periods Ended October 4, 1998 Total operating revenues for the fiscal quarter ended October 4, 1998, declined by 14.9% to $15.7 million from $18.4 million for the same period in 1997. For the three fiscal quarters ended October 4, 1998, total operating revenues increased 0.3% to $59.2 million from $59.0 million for the same period in 1997. Revenues from hotel operations in the third fiscal quarter of 1998 decreased by 16.4% to $14.8 million from $17.7 million for the same period in 1997. For the 29 same hotels opened for all of both quarterly periods (same hotels), average daily room rates in the third fiscal quarter of 1998 increased 3.0% to $62.26 from $60.47 in the third quarter of 1997, while average occupancy rates decreased to 62.1% from 62.3%, resulting in a net increase in same hotel revenues per available room (RevPAR) of 2.6%, from $37.68 in the third quarter of 1997 to $38.65 in the third quarter of 1998. The remaining (non-same) hotels contributed $3.9 million to hotel revenues in the third quarter of 1998 compared with $7.1 million for the same period in 1997. The $7.1 million from these hotels in third quarter of 1997 included $231,000 from two new hotels and $6.9 million from 17 hotels, which were sold (one in fourth quarter of 1997 and 16 early in third quarter 1998). Revenues from hotel operations in the first three quarters of 1998 increased 0.7% to $56.7 million from $56.3 million for the same period in 1997. For the 28 same hotels, average daily room rates in the first three quarters of 1998 increased 2.0% to $60.25 from $59.06 in the first three quarters of 1997 and average occupancy rates increased to 60.2% from 59.8%, resulting in a net increase in same hotel RevPAR of 2.6%, from $35.34 in the first three quarters of 1997 to $36.25 in the first three quarters of 1998. The eight hotels opened during 1997 and the first three quarters of 1998 contributed $6.9 million to hotel revenues in the first three quarters of 1998 compared to $1.2 million for the same period in 1997. The 17 hotels which were sold in the fourth quarter of 1997 and early third quarter 1998 contributed $15.4 million to hotel revenues in the first three quarters of 1998, compared with $22.0 million for the same period in 1997. The Company owns and operates two hotel brands -- Shoney's Inns and Sumner Suites hotels. RevPAR for all Company-owned Shoney's Inns declined by 3.8% in the third quarter of 1998 from the same period last year, from $32.91 to $31.66; however, for this same period, RevPAR for the 15 same Shoney's Inns which the Company currently owns, increased by 3.6%, from $28.33 in third quarter 1997 to $29.35 in third quarter this year. For the first three quarters, the RevPAR decrease for all Company-owned Shoney's Inns was 2.7%, from $31.84 in 1997 to $30.97 in 1998; the 15 same Shoney's Inns' 9 RevPAR, however, reflected a year-to-date decrease of only 0.7%, from $28.08 last year to $27.88 this year. The 21 Sumner Suites hotels' RevPAR increased in the third quarter by 1.1% from the same period last year, from $42.66 to $43.12, and increased for the three quarters by 6.9%, from $41.91 to $44.82. The 14 Sumner Suites same hotels' RevPAR increased by 5.2% from $45.75 in the third quarter of 1997 to $48.13 in the third quarter of 1998. The 13 Sumner Suites same hotels on a year-to-date basis increased RevPAR by 10.5%, from $43.18 in the first three quarters of 1997 to $47.71 in the first three quarters of 1998. All future Company-owned hotels currently planned are the Sumner Suites brand. Effective August 1, 1998, the Company sold 16 of its Company-owned Shoney's Inns. Franchising revenues increased by $156,000, or 22.5%, in the third quarter of 1998 from the third quarter of 1997. The primary causes of the increase were (1) an increase in reservation and royalty fees because these fees from new franchisees (including the 16 Shoney's Inns sold to a franchisee on August 1, 1998) exceeded the loss of these fees from the termination of 14 Shoney's Inns owned by one franchisee effective June 1, 1998, (2) an increase of $37,000 in initial franchise fees over the third quarter last year, and (3) an increase in franchise termination fees over the third quarter of 1997. Franchising revenues declined by $244,000, or 9.5%, in the first three quarters of 1998 from the first three quarters of 1997. The primary causes of the decrease were as discussed above for the third quarter, except that reservation and royalty fees reflected a $642,000 decrease, due primarily to the cancellation of reservation services from two hotel chains in the first half of 1997. This decrease in reservation fee income was partially offset by an increase of $196,000 in initial franchise fees over the first three quarters of 1997. Initial franchise fees can vary materially from quarter to quarter. Management revenues were not material in either comparative quarter or year-to-date period, but increased by $8,000 over last year's third quarter and $6,000 over the first three quarters of 1997. Operating expenses from hotel operations for the third quarter of 1998 were $10.1 million, approximately the same as for the third quarter of 1997. Operating expenses as a percentage of operating revenues for this activity, however, increased from 56.6% in third quarter 1997 to 68.1% in third quarter 1998. Operating expenses from hotel operations for the first three quarters of 1998 increased by $4.3 million, or 13.9%, from $30.9 million in the first three quarters of 1997 to $35.2 million in the first three quarters of 1998. Operating expenses as a percentage of operating revenues for this activity increased from 54.8% in the first three quarters of 1997 to 61.9% in the first three quarters of 1998. The negative impact on hotel profit margin for both the third quarter and first three quarters of 1998 was due primarily to increases in expenses in the areas of payroll related costs, real estate taxes, repairs and maintenance, travel agents commissions, various supplies costs, complimentary food and beverage cost, and startup expenses. 10 Franchise operating expenses increased by $127,000, or 29.2%, from third quarter 1997 due primarily to increased payroll related expenses. This increase for the first three quarters of 1998 over the first three quarters of 1997 was $188,000, or 11.4%, due to the same factor. General and administrative expenses increased by $80,000 in the third quarter of 1998 over the third quarter of 1997. The increase for the first three quarters of 1998 over the comparable period of 1997 was $1.6 million. These substantial increases in general and administrative expenses were due primarily to increased professional fees, increased expenses related to the occupancy of the new corporate headquarters building, increased land acquisition costs as a result of implementing Emerging Issues Task Force ("EITF") No. 97-11, provisions to a workers' compensation self insurance reserve, and increased franchise taxes. Rent expense increased by $2.0 million in the third quarter over last year's third quarter, and by $6.9 million in the first three quarters of 1998 over the first three quarters of 1997. These increases were due to the sale-leaseback of 14 hotels in fourth quarter 1997, for which net rent expense incurred in the third quarter of 1998 was $2.1 million and in the first three quarters of 1998 was $6.9 million. Depreciation and amortization expense decreased by $1.1 million, or 42.8%, from third quarter 1997, and for the first three quarters of 1998 decreased by $1.9 million, or 23.2%, from the first three quarters of 1997. The sale-leaseback of 14 hotels in November of 1997 caused depreciation expense to be eliminated on those hotels subsequent to the fourth quarter of 1997. Depreciation expense on those 14 hotels in the third quarter of 1997 was $719,000, and for the first three quarters of 1997 was $2.2 million. Depreciation expense on the 17 Shoney's Inns sold (one in fourth quarter 1997 and 16 in early third quarter 1998) was only $170,000 in third quarter 1998 compared with $731,000 in third quarter 1997. For the three quarters 1998 compared with three quarters 1997, depreciation on these hotels was $2.1 million and $2.4 million respectively. These reductions were partially offset, however, with increases in depreciation and amortization on additions to depreciable and amortizable assets beginning with first quarter 1997. Interest expense for the third quarter of 1998 decreased by $667,000, while interest income increased by $1.2 million from the third quarter of 1997, for a decrease of $1.8 million in net interest expense. For the first three quarters of 1998, interest expense decreased by $550,000 from the first three quarters of 1997, while interest income increased during this period by $2.6 million, for a total decrease of $3.2 million in net interest expense. These reductions in net interest expense in 1998 from 1997 are primarily the result of (1) the sale-leaseback of 14 hotels in fourth quarter of 1997 which was used to reduce indebtedness and invested in interest-earning funds until needed for capital expenditures for new hotels and (2) interest earned on the promissory notes from the sale of the 17 Shoney's Inns which was $1.1 million in third quarter 1998 and $1.3 million for the three quarters compared with none for 1997. 11 The gain on sale of property in the third quarter of 1998 represents a portion of the gain on the sale of 16 Shoney's Inns in early third quarter for $90.0 million, consisting of $22.5 million in cash with the balance of $67.5 million in the form of interest-bearing promissory notes. Profit was recognized on 12 of the sales under the full accrual method of accounting. Profit recognition on the other 4 hotels sold is being accounted for under the installment method. Of the $11.6 million profit on these 4 hotels, $54,000 was recognized in the third quarter of 1998, with the balance to be recognized in future quarters on the installment method of accounting. For the first three quarters of 1998 an additional $106,000 was earned from the sale of land held for resale. In the first three quarters of 1997 (second quarter), land held for resale was sold at a profit of $1.3 million. Other income in the third quarter of 1998 increased by $67,000 from the third quarter of 1997. Other income for the first three quarters of 1998 increased by $223,000 from the same period last year. Minority interests in earnings and losses of subsidiaries and partnerships increased by $494,000 in the third quarter of 1998 from third quarter 1997, and increased by $281,000 for the first three quarters of 1998 as compared with the first three quarters of 1997, due primarily to minority ownership interest in the gain on sale of property in the third quarter of 1998, which increased minority interest in earnings by $587,000. The extraordinary loss from early extinguishment of debt in the third quarter of 1998 was a result of debt paid off in conjunction with the sale of the 16 Shoney's Inns previously discussed. The Company 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 fiscal 1997 recognized in the first quarter of 1997, net of income tax effect, was a reduction in net earnings of $1,164,000. This is a one-time non-recurring charge. Liquidity and Capital Resources The Company's cash flows provided by operating activities were $8.3 million in the first three quarters of 1998, compared with $8.2 million provided by operating activities in the first three quarters of 1997. The Company recognized $20.3 million from gains on sale of property during the first three quarters of 1998, the largest of which was recorded in the third quarter from the sale of 16 lodging facilities. An increase in accounts payable and accrued expenses in the first three quarter of 1998 of $3.9 million contrasted to a decrease in the first three quarters of 1997 of $3.4 million, provided an increase in operating cash flows of $7.3 million from this source when comparing the first three quarters of 1998 to the first three quarter of 1997. A reduction in accounts receivable of $5.0 million in the first three quarters of 1998 versus an increase in accounts 12 receivable of $507,000 during the comparable period in 1997 resulted in an increase in operating cash flows of $5.5 million. The Company's cash flows used in investing activities were $41.2 million in the first three quarters of 1998 compared with $37.6 million for the comparable period in 1997. The Company requires capital principally for the acquisition and construction of new lodging facilities and for the purchase of fixtures and equipment. Capital expenditures for such purposes were $64.4 million in the first three quarters of 1998 and $39.3 million in the first three quarters of 1997. The Company received proceeds of $23.4 million from the sale of property and equipment during the first three quarters of 1998 including approximately $22.5 million from the sale of 16 lodging facilities in the third quarter of 1998. In the first three quarters of 1998, the Company recognized $2.7 million of deferred profit from the sale-leaseback transaction, which occurred in the fourth quarter of 1997. Net cash used in financing activities was $16.5 million in the first three quarters of 1998 compared with net cash provided by financing activities of $29.9 million in the first three quarters of 1997. The Company reduced its long-term debt by $15.7 million in the first three quarters in 1998, including the significant reduction as a result of the sale of 16 lodging facilities in the third quarter. The Company maintains a revolving credit facility with a group of five banks. Effective October 20, 1998, the Company amended the terms of this revolving credit agreement. The availability under the amended credit agreement totals $30 million and is secured by a pledge of certain promissory notes payable to the Company, received in connection with the sale of 16 of the Company's lodging facilities in the third quarter of 1998. The amended credit facility terminates June 30, 1999. Other terms and conditions of the amended credit agreement, including interest rates and covenant requirements, are similar to the previous credit agreement. As of October 4, 1998, the Company had no borrowings outstanding under this credit facility. The Company also maintains a $1 million unsecured line of credit with another bank, bearing interest at the lender's prime rate, maturing May 31, 1999. As of October 4, 1998, the Company had no borrowings outstanding under this credit facility. The Company opened three new Sumner Suites hotels in the third quarter of 1998 and, as of the end of the third quarter, had six Sumner Suites hotels under construction. The Company estimates that approximately $24 million in capital funds will be necessary to complete the construction of the six hotels under construction. The Company has recently decided to slow its aggressive development schedule of new Sumner Suites hotels in the near term. This decision was based on current market conditions, rooms supply in certain areas, and capital availability. 13 On September 23, 1998, the Company's Board of Directors authorized the use of up to $12.5 million for the repurchase of shares of the Company's common stock. The purchases, including block purchases, are to be made from time to time in the open market at prevailing market prices, or in privately negotiated transactions at the Company's discretion. No time limit has been placed on the duration of the stock repurchase plan, and the Company may discontinue the plan at any time. No shares had been repurchased by the end of the third quarter. The Company believes that a combination of net proceeds from possible future sale-leaseback transactions, net proceeds from the sale of the 16 lodging facilities, net cash provided by operations, borrowings under existing and new revolving credit facilities, and available furniture, fixture and equipment financing packages will be sufficient to fund its scheduled hotel development, stock repurchase plan, and debt repayments for the next twelve months. YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing a possible disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications or replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has divided the Year 2000 Issue into what it considers being critical and non-critical issues. The Company believes that in its line of business the critical issues involve the ability to process hotel sales transactions beginning with hotel reservations through settlement and collection. Additionally, critical importance has been placed on the Company's ability to process and maintain accurate accounting, financial and corporate records. The systems that the Company has identified as being critical are the core business software applications including, but not limited to, the following: the IBM AS400 operating system, the accounting and financial reporting system, the front desk and credit card payment system, the room door key system, the central reservations 14 system, and the cash management software. In addition, the computer systems maintained by the Company's banks and the telecommunications systems maintained by the Company's telecommunications vendor have been identified as critical systems. The Company has also identified non-critical issues relating to peripheral business software including, but not limited to: stand alone personal computers, in-house development applications, Windows NT and the 98 operating system, spreadsheet software, word processing software, network server back-up software, development tools software and computer systems maintained by other third party vendors. The Company is currently in the process of making the required modifications to its existing software systems and scheduling the required replacements of software and hardware. The Company will utilize both internal and external resources to program, replace, implement and test these changes. The Company has not determined the total cost of the Year 2000 project; however, these costs are not expected to exceed $100,000 nor have a material effect on its financial statements. The Company has spent less than $10,000 on external costs on the Year 2000 project through the end of the third quarter; however, the Company's internal staff has spent substantial time on the issue. These costs have been expensed as incurred. The Company plans to complete the Year 2000 project not later than April, 1999 and is currently on schedule to meet this target. The Company believes it has an effective program in place to resolve the Year 2000 Issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 project. In the event that the Company does not timely complete the project, the Company could be unable to take reservations, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company's operations. The amount of potential liability or lost revenue cannot be reasonably estimated at this time. The Company currently has no contingency plans in place in the event it does not complete the Year 2000 project. The Company plans to evaluate the status of completion in June 1999 and determine whether a contingency plan may be necessary. The statements appearing in this report which are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including delays in concluding or the inability to conclude transactions, the establishment of competing facilities and services, cancellation of leases or contracts, changes in applicable laws and regulation, in margins, demand fluctuations, access to debt or equity financing, adverse uninsured determinations in existing or future litigation or regulatory proceedings and other risks. 15 PART II - OTHER INFORMATION Item 1. Lorraine Donergue v. ShoLodge, Inc., Leon Moore, Michael A. Corbett and Bob Marlowe, Case No. 3-98-0295, United States District Court for the Middle District of Tennessee, filed March 31, 1998. This case was dismissed with respect to all named defendants in August 1998. Paul Senior v. ShoLodge, Inc., Leon Moore, and Bob Marlowe, Case No. 98C-136, Chancery Court for Sumner County, Tennessee at Gallatin, filed April 29, 1998 ("Senior Case"). This case names the Company and two of its officers, Leon Moore and Bob Marlowe, as defendants in a purported class action lawsuit by plaintiffs who claim to be shareholders of the Company. The case originally named Michael A. Corbett, former chief financial officer of the Company, as a defendant, but Mr. Corbett was recently deleted as a named defendant. The Senior Case alleges that the Company violated certain anti-fraud provisions of the Tennessee Securities Act of 1980, as amended, by issuing allegedly false and misleading statements and financial information to the investing public during 1997. The Company moved to dismiss the complaint on the basis that the plaintiff's allegations failed to state a cause of action under the Tennessee Securities Act of 1980. The court denied the motion but granted the Company's request that the Tennessee Court of Appeals review the court's decision on an interlocutory basis. The court's denial of the Company's motion is now before the Court of Appeals. No date for argument has been set. The trial court has set the case for trial April 19, 1999; however, the disposition of the interlocutory appeal may affect the trial date. The trial court has also certified the action as a class action. Stanley Gale v. ShoLodge, Inc., Leon Moore and Bob Marlowe, Case No. 98C-208, Chancery Court for Sumner County, Tennessee at Gallatin, filed July 2, 1998 ("Gale Case"). This case names the Company and two of its officers, Leon Moore and Bob Marlowe, as defendants in a purported class action lawsuit by plaintiffs who claim to be holders of the Company's debt securities. The Gale Case alleges that the Company violated certain anti-fraud provisions of the Tennessee Securities Act of 1980, as amended, based on essentially the same factual allegations as the Senior Case. The Company filed a motion to dismiss the case for failure to state a cause of action under the applicable state statute. The trial court denied the motion. The case has not been set for trial. Michael A. Corbett v. ShoLodge, Inc., and Leon Moore, Case No. 98C-184, Chancery Court for Sumner County, Tennessee at Gallatin, filed June 12, 1998. This case was filed by Michael A. Corbett, the former chief financial officer, of the Company and alleges that his employment by the Company was wrongfully terminated. The plaintiff alleges breach of contract, fraud, retaliatory discharge and related claims. The plaintiff seeks $3 million in compensatory damages and punitive and treble damages. The defendants filed an answer to the complaint on July 8, 1998, denying the allegations. The case has been set for trial beginning March 15, 1999. Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 6. Exhibits and Reports on Form 8-K 6 (a) Exhibits - 16 4.1 Third Amendment to Registration Rights Agreement between Registrant and Richard L. Johnson, dated as of July 21, 1998. 10.1 Motel Purchase Agreement made as of July 22, 1998 (filed with Form 8-K on September 18, 1998). 10.2 First Amendment to Motel Purchase Agreement made as of July 30, 1998 (filed with Form 8-K on September 18, 1998). 10.3 Third Amendment to Amended and Restated Stock Option Agreement dated as of July 21, 1998 between Leon Moore and Richard L. Johnson. 10.4 Second Amendment and Waiver Agreement to Credit Agreement dated as of October 21, 1998, by and among the Registrant and certain subsidiaries, as Borrower, the Lenders referred to therein, First Union National Bank of Tennessee, as Administrative Agent, and NationsBank of Tennessee, as Co-Agent. 10.5 Pledge and Security Agreement dated as of October 21, 1998, by the Registrant and certain subsidiaries, as Pledgors, and First Union National Bank as Administrative Agent. 11 Statement Re: Computation of per share earnings 27 Financial Data Schedule 99.1 Press Release issued by ShoLodge, Inc. on September 4, 1998 (filed with Form 8-K on September 18, 1998). 6 (b) Reports on Form 8-K A Form 8-K was filed on September 18, 1998, relating to the completion of a sale of 16 Shoney's Inns for a total sales price of $90.0 million. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, The Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ShoLodge, Inc. Date: November 17, 1998 /S/ Leon Moore ------------------------------------ Leon Moore President, Chief Executive Officer, Principal Executive Officer, Director Date: November 17, 1998 /S/ Bob Marlowe ------------------------------------ Bob Marlowe Secretary, Treasurer, Chief Accounting Officer, Principal Accounting Officer, Director Date: November 17, 1998 /S/ Steven P. Birdwell ------------------------------------ Steven P. Birdwell Senior Vice President and Chief Financial Officer EX-4.1 2 THIRD AMENDMENT TO REGISTRATION RIGHTS 1 EXHIBIT 4.1 THIRD AMENDMENT TO REGISTRATION RIGHTS AGREEMENT THIS THIRD AMENDMENT TO REGISTRATION RIGHTS AGREEMENT (sometimes herein this "Third Amendment") is made and entered into as of the 21st day of July, 1998, by and between SHOLODGE, INC., a Tennessee corporation with its principal place of business at 130 Maple Drive North, Hendersonville, Tennessee 37075 (hereinafter referred to as the "Company"), and RICHARD L. JOHNSON, a resident of the State of Tennessee (hereinafter referred to as "Johnson"). W I T N E S S E T H: WHEREAS, the Company and Johnson entered into that certain Registration Rights Agreement (hereinafter referred to as the "Agreement") dated as of December 11, 1991; and WHEREAS, pursuant to that certain First Amendment to Registration Rights Agreement (the "First Amendment"), dated as of October 10, 1996, between the Company and Johnson, certain provisions of the Agreement were amended; and WHEREAS, pursuant to that certain Second Amendment to Registration Rights Agreement (the "Second Amendment"), dated as of June 20, 1997, between the Company and Johnson, certain provisions of the Agreement were further amended ("Agreement" as referred to hereinafter means the Agreement as amended by the First Amendment and by the Second Amendment); and WHEREAS, the Company and Johnson now desire to further amend certain provisions of the Agreement as set forth herein. NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follows: 1. The definition of "Stock Option Agreement" in paragraph 1 of the Agreement is hereby deleted in its entirety and the following is hereby inserted in its place: "Stock Option Agreement" means that certain Amended and Restated Stock Option Agreement dated March 9, 1992, but effective as of April 1, 1984, as amended by that certain First Amendment to Amended and Restated Stock Option Agreement dated as of October 10, 1996, as further amended by that certain Second Amendment to Amended and Restated Stock Option Agreement dated as of June 20, 1997, and as further amended by that certain Third Amendment to Amended and Restated Stock Option Agreement dated as of July 21, 1998, all between Leon Moore and Johnson. 2. Paragraph 2(a) of the Agreement is hereby amended by changing the date "December 11, 1998" in the first sentence thereof to "December 11, 1999". 2 3. Paragraph 3(a) of the Agreement is hereby amended by changing the date "December 11, 1998" in the first sentence thereof to "December 11, 1999". 4. Except as hereby modified and amended, the Agreement shall in all other respects remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Third Amendment to Registration Rights Agreement on the day and year first above written. SHOLODGE, INC. By:/S/ Leon Moore --------------------------- Title: President ------------------------ /S/ Richard L. Johnson ------------------------------ RICHARD L. JOHNSON EX-10.3 3 THIRD AMENDMENT TO RESTATED STOCK OPTION AGREEMENT 1 EXHIBIT 10.3 THIRD AMENDMENT TO AMENDED AND RESTATED STOCK OPTION AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED STOCK OPTION AGREEMENT (sometimes herein this "Third Amendment") is made and entered into as of the 21st day of July, 1998, by and between LEON MOORE (hereinafter referred to as "Moore") and RICHARD L. JOHNSON (hereinafter referred to as "Johnson"). W I T N E S S E T H: WHEREAS, Johnson and Moore entered into that certain Stock Option Agreement (the "Stock Option Agreement") dated December 11, 1991, whereby Moore granted to Johnson an option to acquire five hundred seventy-five thousand (575,000) shares of common stock of ShoLodge, Inc. ("ShoLodge") from Moore; and WHEREAS, Moore and Johnson entered into that certain Amended and Restated Stock Option Agreement dated March 9, 1992, but effective as of April 1, 1984 (the "Amended Agreement"), which Amended Agreement amended and restated the Stock Option Agreement; and WHEREAS, Moore and Johnson entered into that certain First Amendment to Amended and Restated Stock Option Agreement (the "First Amendment") dated as of October 10, 1996, which First Amendment amended the Amended Agreement; and WHEREAS, Moore and Johnson entered into that certain Second Amendment to Amended and Restated Stock Option Agreement (the "Second Amendment"), dated as of June 20, 1997, which Second Amendment further amended the Amended Agreement ("Amended Agreement" as referred to hereinafter means the Amended Agreement as amended by the First Amendment and by the Second Amendment); and WHEREAS, Johnson and Moore desire to further amend the Amended Agreement as set forth below. NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follows: 1. Subparagraph 1(a) of the Amended Agreement is hereby amended in the following respects: (a) By deleting the last item under the heading "Purchase Date" in the initial paragraph thereof, by deleting the last item under the heading "Price" in the initial paragraph thereof and by inserting in lieu of such items the following: 2
Purchase Date Price ------------- ----- If the purchase date occurs after $5.67 per share September 30, 1998, but on or before December 31, 1998 If the purchase date occurs after $5.79 per share December 31, 1998, but on or before March 31, 1999 If the purchase date occurs after $5.91 per share March 31, 1999, but on or before June 30, 1999 If the purchase date occurs after $6.03 per share June 30, 1999, but on or before September 30, 1999 If the purchase date occurs after $6.16 per share September 30, 1999, but on or before December 11, 1999
(b) By changing the date "December 11, 1998" in the first and second sentences of the last paragraph thereof to "December 11, 1999." 2. Subparagraph 1(c) of the Amended Agreement is hereby amended by changing the date "December 11, 1998" in the first and third sentences thereof to "December 11, 1999". 3. Subparagraph 1(j)(iii) of the Amended Agreement is hereby amended by deleting such subparagraph in its entirety and substituting in lieu thereof the following: (iii) Notice. Each stock certificate issued to Johnson as a result of the exercise of the option set forth herein shall be endorsed with the following legend: Notice is hereby given that the sale, assignment, transfer, pledge or other disposition of shares of capital stock represented by this Certificate is subject to a right of first refusal to Leon Moore pursuant to the terms of that certain Amended and Restated Stock Option Agreement dated March 9, 1992, but effective as of April 1, 1984, as amended by that certain First Amendment to Amended and Restated Stock Option Agreement dated as of October 10, 1996, by that certain Second Amendment to Amended and Restated Stock Option Agreement dated as of June 20, 1997, and by that certain Third Amendment to Amended and Restated Stock Option Agreement dated as of July 21, 1998, all by and between Leon Moore and Richard L. Johnson. - 2 - 3 4. Except as hereby modified and amended, the Amended Agreement shall in all other respects remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Third Amendment to Amended and Restated Stock Option Agreement on the day and year first above written. /S/ Leon Moore ------------------------------------- LEON MOORE /S/ Richard L. Johnson ------------------------------------- RICHARD L. JOHNSON - 3 - EX-10.4 4 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.4 SECOND AMENDMENT AND WAIVER AGREEMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT AND WAIVER AGREEMENT TO CREDIT AGREEMENT, dated as of the 21st day of October, 1998 (this "Second Amendment"), to the Credit Agreement referred to below is entered into by and among SHOLODGE, INC., a corporation organized under the laws of Tennessee ("ShoLodge"), the Subsidiaries of ShoLodge party hereto (the "Subsidiary Borrowers", and together with ShoLodge, the "Borrowers"), the Lenders party hereto (the "Lenders"), FIRST UNION NATIONAL BANK (f/k/a FIRST UNION NATIONAL BANK OF TENNESSEE), as Administrative Agent for the Lenders (the "Administrative Agent"), and NATIONSBANK OF TENNESSEE, N.A., as Co-Agent for the Lenders (the "Co-Agent"). Statement of Purpose Pursuant to the Credit Agreement dated as of April 30, 1997 (as supplemented by the Joinder Agreement No. 1 dated as of June 11, 1997, as supplemented by the Consent and Waiver Letter dated November 14, 1997, as amended by the First Amendment to Credit Agreement dated as of January 16, 1998, as supplemented by the Consent Letter dated as of July 16, 1998, as supplemented by the Consent and Waiver Letter dated as of August 13, 1998, and as further amended, restated, supplemented or otherwise modified, the "Credit Agreement") by and among the Borrowers, the Lenders party thereto, the Administrative Agent and the Co-Agent, the Lenders agreed to extend certain loans to the Borrowers as more particularly described therein. Certain of the Borrowers and certain of their Subsidiaries have entered into a Motel Purchase Agreement dated as of July 22, 1998, as amended by the First Amendment to Motel Purchase Agreement dated as of July 30, 1998, by and among the parties set forth on Exhibits A and B thereto (the "Motel Purchase Agreement"). Pursuant to the terms of the Motel Purchase Agreement, certain Borrowers and certain of their Subsidiaries agreed to, among other things, (i) sell 16 limited services motels at various geographic locations operated under the franchise name "Shoney's Inn" or "Shoney's Inn & Suites" (the "Motels"), (ii) accept from the applicable Buyer (as defined in the Purchase Agreement), as partial consideration for the sale of such assets, a non-recourse purchase money note for each motel property which evidences a purchase money loan from those Borrowers and Subsidiaries that are Sellers to such Buyers (the "Motel Sale Notes") and (iii) deposit a portion of the proceeds therefrom in an escrow account to assure payment in full or refinancing of a certain series of tax exempt bonds outstanding with respect to certain Motels (as disclosed on Schedule 4.5 of the Motel Purchase Agreement), such bonds being secured by certain letters of credit issued by First Union National Bank and Wachovia Bank, N.A. (such transaction, the "Motel Sale Transaction"). The Borrowers have requested, and the Agent, the Co-Agent and the Lenders have agreed, to amend the Credit Agreement and to waive certain provisions of the Credit Agreement to provide for, among other matters, (i) the confirmation and acceptance of the Motel Sale Transaction, (ii) the pledge of certain of the Motel Sale Notes (together with the security therefor) executed in connection with the Motel Sale Transaction, (iii) the reduction of the Aggregate Commitment, (iv) the modification of the Revolving Termination Date, (v) certain amendments to the financial 2 covenants provided for in Article IX of the Credit Agreement and (v) certain other amendments and waivers specifically provided for herein, said amendment and waiver being pursuant to the terms and conditions of this Second Amendment. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the parties hereto hereby agree as follows: 1.01 Capitalized Terms. Except as otherwise provided in this Second Amendment, all capitalized undefined terms used in this Second Amendment shall have the meanings assigned thereto in the Credit Agreement. 2.01 Updated Schedules. Attached hereto are updated versions of Schedules 1.1(a), 6.1(a), 6.1(b) and 6.1(v) to the Credit Agreement, which schedules have been revised to include all information required to be provided therein with respect to the Borrowers and their Subsidiaries. In addition, attached hereto are Schedules 1.1(c), 1.1(d) and 2.6(b) to the Credit Agreement as required to be delivered in connection with this Second Amendment. Each reference to Schedules 1.1(a), 1.1(c), 1.1(d), 2.6(b), 6.1(a), 6.1(b) and 6.1(v) in the Credit Agreement which indicates that the information provided therein is true as of the Closing Date of the Credit Agreement shall be deemed to be a reference to such information as of the closing date of this Second Amendment. 3.01 Amendments to Credit Agreement. (a) Commitments. (i) Aggregate Commitment. The parties hereto acknowledge that immediately prior to the closing date of this Second Amendment the Aggregate Commitment was equal to $75,000,000. Upon the closing date of this Second Amendment, the Aggregate Commitment shall equal $30,000,000; provided that until the conditions set forth in Sections 5.01 and 6.01 of this Second Amendment are satisfied, the Aggregate Commitment shall be Fifteen Million Dollars ($15,000,000). (ii) Commitments of each Lender. The parties hereto hereby acknowledge that upon the closing date of this Second Amendment (i) the Commitment of each Lender shall be as set forth on Schedule 1.1(a) to the Credit Agreement (which updated Schedule 1.1(a) to the Credit Agreement is attached hereto), (ii) each outstanding Loan under the Credit Agreement shall be repaid in full and all accrued but unpaid interest due on each such Loan under the Credit Agreement and all accrued but unpaid fees and other amounts under the Credit Agreement shall be paid in full, (iii) each Loan requested by the Borrowers to be made on or after the closing date of this Second Amendment shall be allocated among each Lender according to the Commitment Percentage of each such Lender and each such Loan shall be made in accordance with the terms and provisions of the Credit Agreement, (iv) to the extent that the Commitment of any Lender has been increased or decreased, an amended and restated Revolving Credit Note shall be issued to such Lender in the amount of the Commitment of such Lender (and the existing Revolving Credit Note of each Lender shall be returned to the Borrowers) and (v) the Administrative Agent shall make any adjustments in the Register as are necessary to reflect the increase or the decrease of the Commitment of any Lender. 2 3 (b) Amendment to Existing Definitions. The definitions of the quoted terms set forth below which are set out in Section 1.1 of the Credit Agreement are hereby amended in their entirety to read as follows: "Aggregate Commitment" means the aggregate amount of the Lenders' Commitments hereunder, as such amount may be modified at any time or from time to time pursuant to Section 2.6. On the closing date of the Second Amendment and Waiver Agreement to Credit Agreement dated as of October 21, 1998, the Aggregate Commitment shall be Thirty Million Dollars ($30,000,000); provided that until the conditions set forth in Sections 5.01 and 6.01 of the Second Amendment and Waiver Agreement to Credit Agreement dated as of October 21, 1998 are satisfied, the Aggregate Commitment shall be Fifteen Million Dollars ($15,000,000). "Agreement" means this Credit Agreement, as supplemented by the Joinder Agreement No. 1 dated as of June 11, 1997, as supplemented by the Consent and Waiver Letter dated November 14, 1997, as amended by the First Amendment to Credit Agreement dated as of January 16, 1998, as supplemented by the Consent Letter dated as of July 16, 1998, as supplemented by the Consent and Waiver Letter dated as of August 13, 1998, as amended by the Second Amendment and Waiver Agreement to Credit Agreement dated as of October 21, 1998, and as further amended, restated, supplemented or otherwise modified from time to time. "Loan Documents" means, collectively, this Agreement, the Notes, the Applications, any Hedging Agreement executed by any Lender, the Pledge Agreement and each other document, instrument and agreement executed and delivered by any Borrower, or any Subsidiary thereof in connection with this Agreement or otherwise referred to herein or contemplated hereby, all as may be amended or supplemented from time to time. "Net Income" means, with respect to ShoLodge and its Subsidiaries, the Consolidated net income (or loss) of ShoLodge and its Subsidiaries for such period determined in accordance with GAAP; provided that there shall be excluded from net income (A) any extraordinary gains and (B) any ordinary gains (other than ordinary gains pursuant to the Motel Sale Transaction) which arise from the sale of assets to a Person whose debt rating is not investment grade and pursuant to which any portion of the consideration received is deferred. (c) Additional Defined Terms. Section 1.1 of the Credit Agreement is further amended by the addition of the following definitions: "Collateral" shall have the meaning assigned thereto in the Pledge Agreement. "Completion Costs" means, with respect to ShoLodge and its Subsidiaries at any date, with regard to any uncompleted Construction Project of ShoLodge and its Subsidiaries, the aggregate development and construction costs necessary to complete such Construction Project, as of the date of determination, which have not been expended. 3 4 "Construction Project" means any construction project during the time period from (i) the date of groundbreaking on such construction project (as evidenced by the pouring of footings) to (ii) the date of issuance by the applicable Governmental Authority of a temporary certificate of occupancy (and the actual occupancy thereof). "Eugene Alexander Letter of Credit" means the Letter of Credit issued on July 16, 1998 in the amount of $2,400,000 for the benefit of MetroFirst Mortgage Bankers, Inc. in connection the financing by MetroFirst Mortgage Bankers, Inc. of the construction and continued financing of a hotel by Eugene Alexander, Inc. on real property owned by Southeast Texas Inns, Inc., as Subsidiary of ShoLodge, and located in Bexar County, Texas. "Expended Project Costs" means, with respect to ShoLodge and its Subsidiaries at any date, with regard to any uncompleted Construction Project of ShoLodge and its Subsidiaries, the aggregate development and construction costs which have been expended, as of the date of determination, with respect to such Construction Project. "Intercreditor Agreement" means the Intercreditor Agreement, executed in connection with the Second Amendment and Waiver Agreement to Credit Agreement dated October 21, 1998, by and among the Administrative Agent, on behalf of itself and the Lenders, the holders of the Pledged Notes and the holders of the Non-Pledged Notes (to be in form and substance satisfactory to the Administrative Agent and the Lenders in their sole discretion and to provide for the allocation of the collateral securing the Pledged Notes and the Non-Pledged Notes). "Motel Purchase Agreement" means the Motel Purchase Agreement dated as of July 22, 1998, as amended by the First Amendment to Motel Purchase Agreement dated as of July 30, 1998, by and among certain of the Borrowers and certain of their Subsidiaries party thereto, as set forth on Exhibit A thereto, and certain buyers party thereto, as set forth on Exhibit B thereto. "Motel Sale Transaction" means the series of transactions set forth in the Motel Purchase Agreement and the documents executed in connection therewith pursuant to which certain of the Borrowers and certain of their Subsidiaries agreed to (i) sell 16 limited services motels (the "Motels") at various geographic locations operated under the franchise name "Shoney's Inn" or "Shoney's Inn & Suites", (ii) accept from the applicable buyer party to the Motel Purchase Agreement, as partial consideration for the sale of such assets, a non-recourse purchase money note for each motel property which evidences a purchase money loan from those Borrowers and Subsidiaries that are sellers to such buyers and (iii) deposit a portion of the proceeds therefrom in an escrow account to assure payment in full or refinancing of a certain series of tax exempt bonds outstanding with respect to certain Motels (as disclosed on Schedule 4.5 of the Motel Purchase Agreement), such bonds being secured by certain letters of credit issued by First Union National Bank and Wachovia Bank, N.A. "Non-Pledged Notes" means the promissory notes executed in connection with the Motel Sale Transaction which are not pledged to the Administrative Agent, for the benefit 4 5 of itself and the Lenders, pursuant to the Pledge Agreement, as more particularly described on Schedule 1.1(d) attached hereto. "Pledge Agreement" means the Pledge and Security Agreement dated as of October 21, 1998 executed by the Borrowers party thereto in favor of the Administrative Agent, for the benefit of itself and the Lenders, as amended, restated, modified or supplemented from time to time, substantially in the form of Exhibit I attached hereto. "Pledged Notes" means the promissory notes executed in connection with the Motel Sale Transaction and pledged to the Administrative Agent, for the benefit of itself and the Lenders, pursuant to the Pledge Agreement, as more particularly described on Schedule 1.1(c) attached hereto. "Project Development Expenditures" means, with respect to ShoLodge and its Subsidiaries at any date, with regard to any uncompleted Construction Project of ShoLodge and its Subsidiaries, the sum of (a) Expended Project Costs plus (b) Completion Costs. (d) Amendment to Section 2.1. Section 2.1 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: SECTION 2.1. Revolving Credit Loans. Subject to the terms and conditions of this Agreement, each Lender severally agrees to make Revolving Credit Loans to the Borrowers from time to time from the Closing Date through the Revolving Termination Date as requested by the Borrowers in accordance with the terms of Section 2.3; provided, that (a) the aggregate principal amount of all outstanding Revolving Credit Loans (after giving effect to any amount requested) shall not exceed the Aggregate Commitment less the sum of all outstanding Swingline Loans and the L/C Obligations, (b) the principal amount of outstanding Revolving Credit Loans from any Lender to the Borrowers shall not at any time exceed such Lender's Commitment and (c) the Lenders shall not be required to make any Revolving Credit Loans to the Borrowers in connection with the redemption or purchase of certain shares of the common stock of ShoLodge as permitted under Section 10.8(b) unless the Borrowers shall have complied with the terms of Section 2.8(b). Each Revolving Credit Loan by a Lender shall be in a principal amount equal to such Lender's Commitment Percentage of the aggregate principal amount of Revolving Credit Loans requested on such occasion. Subject to the terms and conditions hereof, the Borrowers may borrow, repay and reborrow Revolving Credit Loans hereunder until the Revolving Termination Date. (e) Amendment to Section 2.4(c). The first sentence of subsection (c) of Section 2.4 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: If pursuant to Section 10.7(c) or (f) an amount equal to the Net Disposition Proceeds is not reinvested into comparable replacement assets by any Borrower or any of its Subsidiaries within twelve (12) months of the applicable Disposition (or within twelve (12) months of the receipt of payment of any deferred payments (including, without limitation, any deferred payments received by ShoLodge under any Sale-Leaseback Agreement)), then within five 5 6 (5) days after the passage of said twelve (12) month period, the Borrowers shall immediately repay to the Administrative Agent for the account of the Lenders, Extensions of Credit in an amount equal to such Net Disposition Proceeds not so reinvested; provided that the Net Disposition Proceeds received by any Borrower or any of its Subsidiaries in connection with the Motel Sale Transaction shall be applied to reduce the Aggregate Commitment as set forth in Section 2.6 of this Agreement. (f) Amendment to Section 2.6(b) and Addition of new Section 2.6(b). Subsection (b) of Section 2.6 of the Credit Agreement is hereby deleted in its entirety and the following subsections (b) and (c) of Section 2.6 of the Credit Agreement are hereby set forth as an addition to the Credit Agreement: (b) The Aggregate Commitment shall be permanently reduced (i) by an amount equal to one hundred percent (100%) of any principal payments received by any Borrower or any of its Subsidiaries made pursuant to the Pledged Notes and (ii) by an amount equal to the applicable percentage set forth on Schedule 2.6(b) of any principal payments received by any Borrower or any of its Subsidiaries made pursuant to the Non-Pledged Notes. (c) Each permanent reduction permitted or required pursuant to this Section 2.6 shall be accompanied by a payment of principal (and with respect to L/C Obligations, furnishing of cash collateral) sufficient to reduce the aggregate outstanding Extensions of Credit of the Lenders after such reduction to the Aggregate Commitment as so reduced. Any reduction of the Aggregate Commitment to zero shall be accompanied by payment of all outstanding Obligations (and furnishing of cash collateral satisfactory to the Administrative Agent for all L/C Obligations) and, if such reduction is permanent, termination of the Commitments and Credit Facility. Such cash collateral shall be applied in accordance with Section 11.2(b). If the reduction of the Aggregate Commitment requires the repayment of any LIBOR Rate Loan, such reduction may be made only on the last day of the then current Interest Period applicable thereto unless such repayment is accompanied by any amount required to be paid pursuant to Section 4.9 hereof. (g) Amendment to Section 2.7. Section 2.7 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: SECTION 2.7. Revolving Termination Date. The Credit Facility (subject to Section 2.2(a) with respect to Swingline Loans) shall terminate on the earliest of (a) June 30, 1999, (b) the date of termination by the Borrowers pursuant to Section 2.6, and (c) the date of termination by the Administrative Agent on behalf of the Lenders pursuant to Section 11.2(a). (h) Amendment to Section 2.8. Section 2.8 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: 6 7 SECTION 2.8. Use of Proceeds. (a) Subject to subsection (b) below, the Borrowers shall use the proceeds of the Loans (i) to refinance certain existing indebtedness including the Refinanced Debt, (ii) to redeem or purchase certain shares of the capital stock of ShoLodge as permitted under Section 10.8(b) and (iii) for working capital and general corporate requirements of ShoLodge and its Subsidiaries, including the payment of certain fees and expenses incurred in connection with the transactions contemplated hereby. (b) ShoLodge shall not be permitted to use greater than $7,500,000 of the Loans in connection with the redemption or purchase of certain shares of the common stock of ShoLodge as permitted under Section 10.8(b). In addition, ShoLodge shall not be permitted to use Loans in connection with such redemption or purchase until ShoLodge has delivered evidence to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, that ShoLodge has redeemed or purchased certain shares of its capital stock in an amount equal to or greater than $5,000,000 from available funds other than the Loans. (i) Amendment of Section 3.1. Clause (ii) of the proviso to the first sentence of Section 3.1 of the Credit Agreement shall be deleted in its entirety and the following shall be inserted in lieu thereof: (ii) be a standby letter of credit issued to support the obligations of the Borrowers, contingent or otherwise, incurred in the ordinary course of business (other than the Eugene Alexander Letter of Credit) (j) Addition of Section 4.12. The following Section 4.12 of the Credit Agreement is hereby set forth as an addition to the Credit Agreement: SECTION 4.12. Security. The Obligations of the Borrowers shall be secured as provided in the Pledge Agreement. (k) Amendment to Section 8.13 and Addition of New Section 8.13. Section 8.13 of the Credit Agreement is amended to become Section 8.14 of the Credit Agreement and the following Section 8.13 of the Credit Agreement is hereby added to the Credit Agreement: SECTION 8.13. Year 2000 Compatibility. Take all actions reasonably necessary to assure that each Borrower's computer based systems are able to operate and effectively process data which includes dates on and after January 1, 2000. At the request of the Administrative Agent, each Borrower shall provide reasonable assurances satisfactory to the Administrative Agent of such Borrower's Year 2000 compatibility, and, to the extent that the computer based systems of any supplier, vendor or customer of any Borrower, is material to the business and operations of such Borrower, such Borrower will provide reasonable assurances satisfactory to the Administrative Agent of such supplier's, vendor's or customer's Year 2000 compatibility. 7 8 (l) Amendment to Section 9.4. Section 9.4 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: SECTION 9.4. Fixed Charge Coverage Ratio. As of the end of any fiscal quarter, permit the ratio of (a) the sum of (i) Consolidated EBIT (excluding (A) accretion income associated with any Defeased Debt and (B) amortization of gain on the sale of assets in connection with the Sale-Leaseback Transactions pursuant to the Sale-Leaseback Agreements) of ShoLodge and its Subsidiaries for the period of four (4) consecutive fiscal quarters ending on such fiscal quarter end plus (ii) Consolidated depreciation and amortization (excluding amortization of gain on the sale of assets in connection with the Sale-Leaseback Transactions pursuant to the Sale-Leaseback Agreements) of ShoLodge and its Subsidiaries for such period of four (4) consecutive fiscal quarters plus (iii) Operating Lease Payments of ShoLodge and its Subsidiaries for such period of four (4) consecutive fiscal quarters to (b) the sum of (i) Interest Expense of ShoLodge and its Subsidiaries for such period of four (4) consecutive fiscal quarters plus (ii) Capitalized Interest for such period of four (4) consecutive fiscal quarters plus (iii) Operating Lease Payments of ShoLodge and its Subsidiaries for such period of four (4) consecutive fiscal quarters plus (iv) any scheduled principal payments during such period of four (4) consecutive fiscal quarters with respect to any Debt (regardless of whether such amounts were actually paid), to be less than 1.50 to 1.00. (m) Addition of Section 9.5. The following Section 9.5 of the Credit Agreement is hereby set forth as an addition to the Credit Agreement: SECTION 9.5. Project Development Expenditures. As of the end of any fiscal quarter, permit Project Development Expenditures to exceed $60,000,000. (n) Amendment to Sections 10.4(d) and (e) and Addition of new Section 10.4(e). Subsection (d) of Section 10.4 of the Credit Agreement is hereby deleted in its entirety, subsection (e) of Section 10.4 of the Credit Agreement is amended to become subsection (f) of Section 10.4 of the Credit Agreement and the following subsections (d) and (e) of Section 10.4 of the Credit Agreement are hereby set forth as an addition to the Credit Agreement: (d) investments, loans or advances not otherwise permitted by this Section 10.4, after the Closing Date in or to other Persons in an aggregate amount not to exceed $10,000,000, provided that (i) such Person shall be a franchisee of ShoLodge, a Subsidiary of ShoLodge or any Affiliate thereof, or engaged in the hotel/motel business and (ii) such permitted amount shall be reduced by the face amount of the Eugene Alexander Letter of Credit; (e) the loans made by certain of the Borrowers and certain of their Subsidiaries in an aggregate amount not to exceed $67,500,002 pursuant to the Motel Sale Transaction, as evidenced by the Pledged Notes and the Non-Pledged Notes described on Schedules 1.1(c) and 1.1(d), respectively; provided that the Pledged Notes, as described on Schedule 1.1(c), shall be pledged to the Administrative Agent, for the benefit of itself and the Lenders, pursuant to the Pledge Agreement; and 8 9 (o) Amendment to Section 10.7(c). Subsection (c) of Section 10.7 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: (c) the sale or disposition (a "Disposition") of fixed assets consisting of real property (including land, improvements and fixtures), equipment and other personalty used or held in connection with hotels owned by ShoLodge or a Subsidiary of ShoLodge or the capital stock or other ownership interest of a corporation or other entity that owns such assets (the "Hotel Fixed Assets") if such sale or disposition has been previously approved in writing by the Administrative Agent and the Required Lenders; provided that, in the event any Disposition is approved in writing by the Administrative Agent and the Required Lenders, the Net Disposition Proceeds from each such Disposition shall be applied as determined by the Administrative Agent and the Required Lenders. (p) Amendment to Sections 10.7(f) and (g) and Addition of new Section 10.7(g). The phrase "and" at the end of subsection (f) of Section 10.7 of the Credit Agreement is hereby deleted, subsection (g) of Section 10.7 of the Credit Agreement is amended to become subsection (h) of Section 10.7 of the Credit Agreement and the following subsection (g) of Section 10.7 of the Credit Agreement is hereby set forth as an addition to the Credit Agreement: (g) the sale of certain assets of the Borrowers and certain of their Subsidiaries pursuant to the Motel Sale Transaction; provided, that the Aggregate Commitment shall be permanently reduced in the manner set forth in Section 2.6 of this Agreement (i) by an amount equal to one hundred percent (100%) of any principal payments received by any Borrower or any of its Subsidiaries pursuant to the Pledged Notes and (ii) by an amount equal to the applicable percentage set forth on Schedule 2.6(b) of any principal payments received by any Borrower or any of its Subsidiaries made pursuant to the Non-Pledged Notes; and (q) Amendment to Sections 10.8(a) and (b) and Addition of new Section 10.8(b). The phrase "and" at the end of subsection (a) of Section 10.8 of the Credit Agreement is hereby deleted, subsection (b) of Section 10.8 of the Credit Agreement is amended to become subsection (c) of Section 10.8 of the Credit Agreement and the following subsection (b) of Section 10.8 of the Credit Agreement is hereby set forth as an addition to the Credit Agreement: (b) ShoLodge may redeem or purchase certain shares of its common stock in an aggregate amount not to exceed $12,500,000; provided that the Lenders shall not be required to make any Revolving Credit Loans to the Borrowers in connection with such redemption or purchase unless the Borrowers shall have complied with the terms of Section 2.8(b); and (r) Addition of new Section 10.14. The following Section 10.14 of the Credit Agreement is hereby set forth as an addition to the Credit Agreement: 9 10 SECTION 10.14. Provisions Respecting the Pledged Notes and the Non-Pledged Notes. (a) In addition to and without limiting the generality of Section 10.3, create, incur, assume or suffer to exist, or permit any Affiliate thereof to create, incur, assume or suffer to exist, any Lien on or with respect to any of the Pledged Notes (other than the Liens of the Administrative Agent for the benefit of itself and the Lenders). (b) Until the execution of the Intercreditor Agreement, upon any default or event of default under any of the Pledged Notes, any of the Non-Pledged Notes or any of the Collateral, seek to enforce, or permit any Affiliate thereof to seek to enforce, any of the rights or remedies thereunder without the consent of the Administrative Agent; provided that the Borrowers, their Subsidiaries and their Affiliates hereby agree to provide prompt notice to the Administrative Agent of (i) any default or event of default under any of the Pledged Notes, any of the Non-Pledged Notes or any of the Collateral or (ii) any event which could materially adversely affect any of the Pledged Notes, any of the Non-Pledged Notes or any of the Collateral. (s) Amendment to Section 13.11. Section 13.11 of the Credit Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: SECTION 13.11. Amendments, Waivers and Consents. Except as set forth below, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived by the Lenders, and any consent given by the Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders (or by the Administrative Agent with the consent of the Required Lenders) and delivered to the Administrative Agent and, in the case of an amendment, signed by the Borrowers; provided, that no amendment, waiver or consent shall (a) increase the amount or extend the time of the obligation of the Lenders to make Loans or issue or participate in Letters of Credit (including without limitation pursuant to Section 2.7), (b) extend the originally scheduled time or times of payment of the principal of any Loan or Reimbursement Obligation or the time or times of payment of interest on any Loan or Reimbursement Obligation, (c) reduce the rate of interest or fees payable on any Loan or Reimbursement Obligation, (d) permit any subordination of the principal or interest on any Loan or Reimbursement Obligation, (e) release any material portion of the Collateral or release the Pledge Agreement (other than as specifically permitted or contemplated in this Agreement or the Pledge Agreement) or (f) amend the provisions of this Section 13.11 or the definition of Required Lenders, without the prior written consent of each Lender. In addition, no amendment, waiver or consent to the provisions of (a) Article XII shall be made without the written consent of the Administrative Agent and (b) Article III without the written consent of the Issuing Lender. (t) Addition to Section 13.19. The following sentence is set forth as an addition to Section 13.19 of the Credit Agreement: The Administrative Agent is hereby permitted to release the Pledge Agreement and all Liens on the Collateral in favor of the Administrative Agent, for the ratable benefit of itself and the Lenders, upon repayment of the outstanding principal of and all accrued 10 11 interest on the Loans, payment of all outstanding fees and expenses hereunder and the termination of the Lender's Commitments. (u) Exhibits. Attached hereto is a copy of Exhibit I as referenced in this Third Amendment. 4.01 Waiver of the Credit Agreement. The Administrative Agent, the Co-Agent and the Lenders hereby waive the following Event of Defaults: (a) Non-compliance with Section 9.3 (Senior Leverage Ratio) of the Credit Agreement for the fiscal quarter ending July 12, 1997; and (b) Non-compliance with Section 9.4 (Fixed Charge Ratio) of the Credit Agreement for the fiscal quarter ending July 12, 1997. 5.01 Effectiveness. This Second Amendment shall become effective upon the satisfaction of the following conditions: (a) Second Amendment Documents. The Borrowers shall have delivered to the Administrative Agent the following documents: (i) a fully executed original hereof; (ii) a fully executed original of each amended and restated Revolving Credit Note; and (iii) a fully executed original of the Pledge Agreement, and each other document reasonably requested by the Administrative Agent in connection therewith, including, without limitation, subject to Section 6.01 (where applicable), (A) each Pledged Note pledged pursuant to the Pledge Agreement, (B) an allonge to each such Pledged Note, (C) a notice of pledge to each obligor on each such Pledged Note, (D) the original of each mortgage securing each such Pledged Note, (E) a collateral assignment of mortgage instrument executed in connection with each mortgage securing each such Pledged Note, (F) (1) copies of the title policies (or, if such title policies are unavailable, the marked-up title commitments) with respect to each mortgage securing each such Pledged Note, (2) the surveys with respect to each mortgage securing each such Pledged Note and (3) endorsements to such title policies, insuring the Administrative Agent, for the benefit of itself and the Lenders, with respect to each mortgage securing each such Pledged Note (if requested by Administrative Agent or the Required Lenders), (G) all UCC-1 financing statements and all UCC-3 financing statements that are necessary to perfect the security interests of the Lenders in the Collateral described in the Pledge Agreement, (H) each original stock certificate, with stock power attached, pledged as security for each such 11 12 Pledged Note, (I) a notice of assignment of each deposit account pledged as security for each such Pledged Note, (J) opinions of counsel with respect to such matters as the Administrative Agent shall request, (K) a fully executed original of an Intercreditor Agreement (such Intercreditor Agreement to be in form and substance satisfactory to the Administrative Agent and the Lenders in their sole discretion and to provide for the allocation of the collateral securing the Pledged Notes and the Non-Pledged Notes), and (L) all other filings, recordations, documents and other agreements that are necessary to perfect the security interests of the Lenders in the Collateral described in the Pledge Agreement or which are reasonably requested by the Administrative Agent in connection with this Second Amendment, all in form and substance satisfactory to the Administrative Agent. (b) Motel Sale Agreement. The Borrowers shall have delivered to the Administrative Agent executed copies of the Motel Sale Agreement, and each other agreement or document reasonably requested by the Administrative Agent which has been executed in connection therewith, each of which are true, correct and complete as of the date of this Second Amendment. (c) Certificates of Secretary. The Administrative Agent shall have received a certificate of the secretary or assistant secretary of each Borrower (i) certifying that the articles of incorporation and the bylaws of such Borrower delivered on the Closing Date of the Credit Agreement have not been repealed, revoked, rescinded or amended in any respect, (ii) certifying that the resolutions duly adopted by the Board of Directors of such Borrower which were delivered on the Closing Date of the Credit Agreement authorize the execution, delivery and performance of this Second Amendment and each other document delivered in connection with this Second Amendment and that such resolutions have not been repealed, revoked, rescinded or amended in any respect; and (iii) as to the incumbency and genuineness of the signature of each officer of such Borrower executing this Second Amendment and the other Loan Documents to which it is a party. In addition, the Administrative Agent shall have received a certificate of the secretary or assistant secretary of each Borrower party to the Pledge Agreement certifying that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Borrower authorizing the execution, delivery and performance of the Pledge Agreement and each other document executed in connection with the Pledge Agreement and that such resolutions have not been repealed, revoked, rescinded or amended in any respect. (d) Opinion of Counsel. The Administrative Agent shall have received a favorable opinion of counsel to the Borrowers addressed to the Administrative Agent and the Lenders with respect to the Borrowers and the Second Amendment (including, without limitation, the Pledge Agreement). (e) Repayment of the Loans. On the closing date of this Second Amendment, the Borrowers shall repay any outstanding Revolving Credit Loans under the Credit Agreement, including, without limitation, all accrued but unpaid interest due thereon. 12 13 (f) Fees and Expenses. The Administrative Agent shall have been reimbursed for all fees, including, without limitation, a waiver and restructuring fee agreed upon by the Administrative Agent and the Borrowers, and out of pocket charges and other expenses incurred in connection with this Second Amendment and the transactions contemplated herein, including, without limitation, the costs and expenses set forth in Section 7.01(c). 6.01 Post-Closing Covenants and Conditions. (a) As soon as possible and in any event within thirty (30) days of the closing date of this Second Amendment, the Borrowers shall provide to the Administrative Agent the following documents, all in form and substance satisfactory to the Administrative Agent: (i) a notice of pledge to each obligor on each such Pledged Note; (ii) to the extent the original of any mortgage has been received by the applicable holder of such Pledged Note, the original of each such mortgage securing each such Pledged Note; provided that to the extent the original of any such mortgage has not been received by the applicable holder of such Pledged Note within such thirty (30) day period, the Borrowers shall provide the original of each such mortgage immediately upon receipt thereof; (iii) a collateral assignment of mortgage instrument executed in connection with each mortgage securing each such Pledged Note; provided that (i) to the extent filing information is not available with respect to any such mortgage, a fully executed collateral assignment of mortgage instrument shall be delivered to the Administrative Agent (with only the blank for the filing information to be included therein) and (ii) the Administrative Agent shall be authorized to file any such collateral assignment of mortgage instrument noted in clause (i) of this proviso upon the receipt of the applicable information; (iv) copies of the title policies with respect to each mortgage securing each such Pledged Note, the surveys with respect to each mortgage securing each such Pledged Note and endorsements to the title policies, insuring the Administrative Agent, for the benefit of itself and the Lenders, with respect to each mortgage securing each such Pledged Note (if requested by the Administrative Agent or the Required Lenders); provided that to the extent copies of the title policies and endorsements to the title policies have not been provided to the Borrowers by the title company with respect to any such mortgage, such copies of such title policies and such endorsements to such title policies shall be provided to the Administrative Agent immediately upon the receipt thereof; (v) all UCC-1 financing statements and all UCC-3 financing statements that are necessary to perfect the security interests of the Lenders in the Collateral described in the Pledge Agreement; provided that (i) to the extent filing information is 13 14 not available with respect to any such UCC-3 financing statement, a fully executed UCC-3 financing statement shall be delivered to the Administrative Agent (with only the blank for the filing information to be included therein) and (ii) the Administrative Agent shall be authorized to file any such UCC-3 financing statements noted in clause (i) upon the receipt of the applicable information; (vi) a notice of assignment of each deposit account pledged as security for each such Pledged Note; (vii) opinions of local counsel with respect to such matters as the Administrative Agent shall request; provided that (i) to the extent that any collateral assignment of mortgage and any UCC-3 financing statement to be covered by any such opinion has not been filed, a draft of such opinion and (ii) upon the filing of the applicable collateral assignment of mortgages and the applicable UCC-3 financing statements, the Borrowers shall immediately deliver executed copies of such opinions; (viii) a fully executed original of an Intercreditor Agreement (such Intercreditor Agreement to be in form and substance satisfactory to the Administrative Agent and the Lenders in their sole discretion and to provide for the allocation of the collateral securing the Pledged Notes and the Non-Pledged Notes); and (ix) all other filings, recordations, documents and other agreements that are necessary to perfect the security interests of the Lenders in the Collateral described in the Pledge Agreement or which are reasonably requested by the Administrative Agent in connection with this Second Amendment. To the extent any documents set forth in this subsection (a) are provided to the Administrative Agent within such thirty (30) day period but have not been fully completed (as permitted thereunder), the Borrowers will provide the applicable information immediately upon obtaining such information. (b) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT AGREEMENT, THE AGGREGATE PRINCIPAL AMOUNT OF ALL OUTSTANDING LOANS (AFTER GIVING EFFECT TO ANY AMOUNT REQUESTED) AND L/C OBLIGATIONS SHALL NOT EXCEED FIFTEEN MILLION DOLLARS ($15,000,000) UNTIL THE CONDITIONS SET FORTH IN THIS SECTION 6.01 ARE SATISFIED WITHOUT THE WRITTEN CONSENT OF THE ADMINISTRATIVE AGENT, THE CO-AGENT AND EACH LENDER. IN CONNECTION THEREWITH, THE LENDERS SHALL NOT BE OBLIGATED TO MAKE ANY LOAN OR ISSUE ANY LETTER OF CREDIT UNTIL THE CONDITIONS SET FORTH IN THIS SECTION 6.01 ARE SATISFIED IF THE AGGREGATE PRINCIPAL AMOUNT OF ALL OUTSTANDING LOANS (AFTER GIVING EFFECT TO ANY AMOUNT REQUESTED) AND L/C OBLIGATIONS WOULD EXCEED FIFTEEN MILLION DOLLARS ($15,000,000). 14 15 7.01 General Provisions. (a) Representations and Warranties. (i) Each Borrower hereby confirms that each representation and warranty made by it under the Loan Documents is true and correct as of the date hereof (or such other date specifically set forth with respect to any such representation and warranty as set forth in the Credit Agreement) and that no Default or Event of Default has occurred or is continuing under the Credit Agreement. (ii) Each Borrower hereby represents and warrants that as of the date hereof there are no claims or offsets against or defenses or counterclaims to their respective obligations under the Credit Agreement or any other Loan Document. (iii) Each Borrower hereby represents and warrants that each Borrower and each of its Subsidiaries has the right, power and authority and has taken all necessary corporate and other action to authorize the execution, delivery and performance of this Second Amendment and each other document executed in connection herewith to which it is a party in accordance with their respective terms. This Second Amendment and each other document executed in connection herewith has been duly executed and delivered by the duly authorized officers of each Borrower and each of its Subsidiaries party thereto, and each such document constitutes the legal, valid and binding obligation of each Borrower and each of its Subsidiaries party thereto, enforceable in accordance with its terms. (iv) Each Borrower (as applicable) hereby represents and warrants that the Motel Sale Agreement and all other agreements and documents executed in connection therewith have been duly executed and delivered by the duly authorized officers of each Borrower and each of its Subsidiaries party thereto, and each such document constitutes the legal, valid and binding obligation of each Borrower and each of its Subsidiaries party thereto, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal debtor relief laws from time to time in effect which affect the enforcement of creditors' rights in general and the availability of equitable remedies. (b) Limited Amendment. Except as expressly supplemented and amended herein, the Credit Agreement and each other Loan Document shall continue to be and shall remain, in full force and effect. The amendments and waivers set forth in this Second Amendment are specific and limited and this Second Amendment shall not be deemed (i) to be a waiver of, or consent to, a modification or amendment of, any other term or condition of the Credit Agreement or the Loan Documents now or in the future or (ii) to prejudice any other right or rights which the Administrative Agent or the Lenders may now have or may have in the future under or in connection with the Credit Agreement or the Loan Documents or any of the instruments or agreements referred to therein, as the same may be amended or modified from time to time. (c) Costs and Expenses. The Borrowers hereby jointly and severally agree to pay or reimburse the Administrative Agent for all of its reasonable and customary out-of-pocket costs and 15 16 expenses incurred in connection with the preparation, negotiation and execution of this Second Amendment, including, without limitation, the reasonable fees and disbursements of counsel. (d) Counterparts. This Second Amendment may be executed by one or more of the parties hereto in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (f) GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF. (g) Fax Transmission. A facsimile, telecopy or other reproduction of this Second Amendment may be executed by one or more parties hereto, and an executed copy of this Second Amendment may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties hereto agree to execute an original of this Second Amendment as well as any facsimile, telecopy or other reproduction hereof. 16 17 IN WITNESS WHEREOF the undersigned hereby cause this Second Amendment to be executed and delivered as of the date first above written. AGENTS AND LENDERS: FIRST UNION NATIONAL BANK (f/k/a FIRST UNION NATIONAL BANK OF TENNESSEE), as Administrative Agent, as Swingline Lender and as Lender By: /s/ Orville Kronk ------------------------------------ Name: Orville Kronk ---------------------------------- Title: Director --------------------------------- [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 18 NATIONSBANK OF TENNESSEE, N.A., as Co- Agent and as Lender By: /s/ B. E. Dishman ------------------------------------ Name: B. E. Dishman ---------------------------------- Title: Vice President --------------------------------- [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 19 SUNTRUST BANK, NASHVILLE, N.A., as Lender By: /s/ William H. Crawford ------------------------------------ Name: William H. Crawford --------------------------------- Title: Assistant Vice President -------------------------------- [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 20 FIRST AMERICAN NATIONAL BANK, as Lender By: /s/ Clark H. Cox ------------------------------------ Name: Clark H. Cox ---------------------------------- Title: Vice President --------------------------------- [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 21 FIRST TENNESSEE BANK, NATIONAL ASSOCIATION, as Lender By: /s/ Malinda Browne -------------------------------- Name: Malinda Browne Title: Commercial Loan Officer [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 22 BORROWERS: SHOLODGE, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President ALABAMA LODGING CORPORATION [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President CAROLINA INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President DELAWARE INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President [SIGNATURES CONTINUED ON THE FOLLOWING PAGE] Second Amendment Signature Page 23 FAR WEST INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President LAFLA INN, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President MIDWEST INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President MOBAT, INC. [CORPORATE SEAL] By: /s/ Richard L. Johnson -------------------------------- Name: Richard L. Johnson Title: President MOORE AND ASSOCIATES, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 24 NASHVILLE AIR ASSOCIATES, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SHONEY'S INN, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SHONEY'S INN NORTH, L.P. By: SHOLODGE, INC., its General Partner [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SHONEY'S INN OF BATON ROUGE By: TWO SEVENTEEN, INC., one of its General Partners [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President [SIGNATURES CONTINUED ON FOLLOWING PAGE] Second Amendment Signature Page 25 By: INN PARTNERS, INC., one of its General Partners [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SHONEY'S INN OF LEBANON, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SOUTHEAST TEXAS INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SUNSHINE INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President [SIGNATURES CONTINUED ON THE FOLLOWING PAGE] Second Amendment Signature Page 26 VIRGINIA INNS, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President THE HOTEL GROUP, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President Second Amendment Signature Page 27 Updated Schedules 1.1(a), 6.1(a), 6.1(b), 6.1(v) to Credit Agreement [Attached Hereto] 28 SCHEDULE 1.1(a) LENDERS AND COMMITMENTS
COMMITMENT AND COMMITMENT LENDER PERCENTAGE ADDRESS - ------ -------------- ------- First Union $10,000,000 150 Fourth Avenue North National Bank 33.3333333333% Nashville, Tennessee 37219 of Tennessee Attention: Orville Kronk Telephone No.: (615) 251-9018 Telecopy No.: (615) 251-0893 NationsBank of $8,000,000 One NationsBank Plaza Tennessee, N.A. 26.6666666667% TN1-100-02-19 Nashville, Tennessee 37239 Attention: Ben Dishman Telephone No.: (615) 749-3815 Telecopy No.: (615) 749-4762 SunTrust Bank, $2,000,000 201 4th Avenue North Nashville, N.A. 6.6666666667% 2nd Floor - Metro Nashville, Tennessee 37219 Attention: Bill Crawford Telephone No.: (615) 748-4629 Telecopy No.: (615) 748-5161 First American $6,000,000 First American Center National Bank 20.0000000000% 2nd Floor Nashville, Tennessee 37237-0202 Attention: Marcy Harris Telephone No.: (615)748-2549 Telecopy No.: (615)748-2672 First Tennessee $4,000,000 511 Union Street Bank, National 13.3333333333% Nashville, Tennessee 37219 Association Attention: Malinda Browne Telephone No.: (615) 734-6232 Telecopy No.: (615) 734-6148
29 Schedule 1.1(c) to Credit Agreement [Attached Hereto] 30 Schedule 1.1(d) to Credit Agreement [Attached Hereto] 31 Schedule 2.6(b) to Credit Agreement Aggregate Commitment Reduction Percentages With Respect to Non-Pledged Notes
Applicable Non-Pledged Note Percentage - ---------------- ---------- 1. Non Pledged-Note, dated July 30, 1998, made 60% by Capitol Music Valley, LLC payable to the order of Shoney's Inn of Music Valley, Ltd. in the original principal amount of $7,717,093 2. Non Pledged-Note, dated July 30, 1998, made 90% by Capitol Demonbreun Hotel Associates, Ltd. payable to the order of Demonbreun Hotel Associates, Ltd. in the original principal amount of $6,983,783 3. Non Pledged-Note, dated July 30, 1998, made 75% by Capitol New Orleans, LLC payable to the order of Shoney's Inns of New Orleans, Ltd. in the original principal amount of $4,819,730 4. Non Pledged-Note, dated July 30, 1998, made 75% by Capitol Bossier City, LLC payable to the order of Shoney's Inn of Bossier City, Ltd. in the original principal amount of $4,635,565
EX-10.5 5 PLEDGE & SECURITY AGREEMENT 1 EXHIBIT 10.5 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT (as amended, restated or otherwise modified, this "Agreement"), dated as of October 21, 1998, is made by SHOLODGE, INC., a corporation organized under the laws of Tennessee ("ShoLodge"), and the Subsidiaries of ShoLodge party hereto (the "Subsidiary Pledgors", and together with ShoLodge, the "Pledgors"), in favor of FIRST UNION NATIONAL BANK, a national banking association (the "Administrative Agent"), as Administrative Agent for the ratable benefit of the Administrative Agent and the financial institutions (the "Lenders") as are, or may from time to time become, parties to the Credit Agreement (as defined below). STATEMENT OF PURPOSE Pursuant to the Credit Agreement dated as of April 30, 1997 (as supplemented by the Joinder Agreement No. 1 dated as of June 11, 1997, as supplemented by the Consent and Waiver Letter dated November 14, 1997, as amended by the First Amendment to Credit Agreement dated as of January 16, 1998, as supplemented by the Consent Letter dated as of July 16, 1998, as supplemented by the Consent and Waiver Letter dated as of August 13, 1998, as amended by the Second Amendment and Waiver Agreement to Credit Agreement of even date herewith, and as further amended, restated, supplemented or otherwise modified, the "Credit Agreement"), by and among ShoLodge and certain of its Subsidiaries party thereto, as Borrowers (the "Borrowers"), the Lenders, the Administrative Agent and NationsBank of Tennessee, N.A., as Co-Agent, the Lenders have extended certain credit facilities to the Borrowers as more specifically described in the Credit Agreement. The Pledgors are the legal and beneficial owners of the indebtedness described on Schedule I hereto (as more fully defined hereinafter, the "Pledged Debt"). Payment of the Pledged Debt is secured by the liens or other security interests granted to the Pledgors pursuant to those certain security agreements, mortgages, financing statements and other instruments described on Schedule II hereto (as more fully defined hereinafter, the "Pledged Security"). In connection with the transactions contemplated by the Credit Agreement and as a condition precedent to the Second Amendment and Waiver Agreement to Credit Agreement of even date herewith (the "Second Amendment"), the Lenders have requested that the Pledgors execute this Agreement, and the Pledgors have agreed to do so pursuant to the terms hereof. NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into the Second Amendment and to continue to make available Loans pursuant to the Credit Agreement, the Pledgors hereby agree with the Administrative Agent for the ratable benefit of the Administrative Agent and the Lenders as follows: SECTION 1. Defined Terms. Capitalized terms used and not otherwise defined in this Agreement, including the preambles and recitals hereof shall have the meaning assigned thereto in the Credit Agreement. In the event of a conflict between capitalized terms defined herein and in the Credit Agreement, the Credit Agreement shall control. The following terms shall have the following meanings: 2 "Agreement" means this Pledge Agreement, as further amended, restated or otherwise modified. "Code" means the Uniform Commercial Code from time to time in effect in the State of North Carolina. "Collateral" means the Pledged Debt, the Pledged Security and the Collateral Account (including, without limitation, all cash deposited therein from time to time, and the investments made pursuant to Section 5 hereof). "Collateral Account" means a cash collateral account established by the Pledgors with the Administrative Agent, in the name and under the exclusive dominion and control of the Administrative Agent, pursuant to Section 5 hereof). "Pledged Debt" means the indebtedness evidenced by the promissory notes described on Schedule I, and all payments of principal and interest and other amounts from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness, together with all other rights of any nature whatsoever with respect thereto that may be issued or granted by the obligors named therein while this Agreement is in effect, and all Proceeds therefrom. "Pledged Security" means all liens or other security interests granted to the Pledgors as security for the Pledged Debt pursuant to the security documents, mortgages and other agreements described on Schedule II, including, without limitation, the security interests in, the deposit accounts and shares of capital stock described therein, and all Proceeds therefrom. "Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of the Code on the date hereof and, in any event, shall include, without limitation, all principal, interest and other amounts due with respect to the Pledged Debt, proceeds of sale thereof or distributions with respect thereto. "Secured Obligations" means the Obligations as defined in the Credit Agreement and any renewals or extensions of any of such Obligations. SECTION 2. Pledge and Grant of Security Interests. (a) The Pledgors hereby deliver to the Administrative Agent, for the ratable benefit of the Administrative Agent and the Lenders, all promissory notes evidencing the Pledged Debt and hereby grant to the Administrative Agent, for the ratable benefit of the Administrative Agent and the Lenders, a first priority security interest in such promissory notes and the Pledged Debt evidenced thereby, together with all other Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations. 2 3 (b) To the extent that the Pledged Security is comprised of any shares of capital stock or mortgage instruments, the Pledgors hereby deliver to the Administrative Agent, for the ratable benefit of the Administrative Agent and the Lenders, the certificates evidencing such shares of capital stock (and the stock powers related thereto) and, to the extent received by the applicable Pledgor from the applicable filing office as of the date hereof, the original of such mortgage instruments (provided that to the extent the original of any such mortgage instrument has not been received by the applicable Pledgor from the applicable filing office as of the date hereof, the Pledgors shall deliver the original of any such mortgage instrument immediately upon its receipt thereof). With respect to the certificates evidencing such shares of capital stock (and the stock powers related thereto), the Administrative Agent shall hold such certificates (and the stock powers related thereto) for the benefit of itself and the Lenders and as bailee for the Pledgors for the purpose of perfecting the security interest of the Administrative Agent, on behalf of itself and the Lenders, and the Pledgors therein. SECTION 3. Representations and Warranties. To induce the Administrative Agent and the Lenders to enter into the Second Amendment and to continue to make available Loans pursuant to the Credit Agreement and accept the security contemplated hereby, the Pledgors hereby represent and warrant that: (a) each Pledgor has the corporate, company or partnership power, authority and legal right, as applicable, to execute and deliver, to perform its obligations under, and to grant the Lien on the Collateral pursuant to, this Agreement and has taken all necessary corporate, company or partnership action to authorize its execution, delivery and performance of, and grant of the Lien on the Collateral pursuant to, this Agreement; (b) this Agreement constitutes a legal, valid and binding obligation of each Pledgor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the availability of equitable remedies; (c) the execution, delivery and performance of this Agreement will not violate any provision of any Applicable Law or contractual obligation of any Pledgor and will not result in the creation or imposition of any Lien on any of the properties or revenues of any Pledgor pursuant to any Applicable Law or contractual obligation, except as contemplated hereby; (d) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder, member, partner or other owner or creditor of any Pledgor or any obligor), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement; (e) the jurisdictions in which each chief executive office of each Pledgor is located is set forth on Schedule III; 3 4 (f) no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of any Pledgor, threatened by or against any Pledgor or against any of its properties or revenues with respect to this Agreement or any of the transactions contemplated hereby; (g) the Pledged Debt is outstanding in the principal amount indicated on Schedule I and the Pledged Security constitutes all of the collateral or other security interests granted as security for the Pledged Debt and is evidenced by the security agreements, mortgages, financing statements and other instruments set forth on Schedule II; (h) each Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Debt listed on Schedule I and the Pledged Security listed on Schedule II (other than the Pledged Security directly related to the Non-Pledged Notes), free of any and all Liens or options in favor of, or claims (other than the existing claim of the holders of the Non-Pledged Notes) of, any other Person, except the Liens created by this Agreement; and (i) upon the filing of properly completed financing statements and mortgage assignments with respect to the Pledged Security (other than the Pledged Security directly related to the Non-Pledged Notes) in the necessary jurisdictions, the Lien granted pursuant to this Agreement will constitute a valid, perfected first priority Lien on the Pledged Security (other than the Pledged Security directly related to the Non-Pledged Notes), enforceable as such against all creditors of any Pledgor and any Persons purporting to purchase any of the Pledged Security (other than the Pledged Security directly related to the Non-Pledged Notes) from any Pledgor. SECTION 4. Certain Covenants. The Pledgors covenant and agree with the Administrative Agent, for the ratable benefit of the Administrative Agent and the Lenders, that, from and after the date of this Agreement until the Secured Obligations are paid in full and the Commitments are terminated: (a) No Pledgor will, without thirty (30) days' prior written notice to the Administrative Agent, change its name, identity or corporate structure so as to make any financing or other statement filed as provided herein become seriously misleading. The Pledgors will, upon request of the Administrative Agent, execute such financing statements, notices of lien, notices of assignment and continuations or amendments to any of the foregoing, and other documents (and pay the costs of filing or recording the same in all public offices deemed necessary by the Administrative Agent) and do such other acts and things, all as the Administrative Agent may from time to time request to establish and maintain a valid perfected pledge and security interest in the Collateral. Each Pledgor hereby constitutes and appoints the Administrative Agent (and any of its officers) as its attorney-in-fact with full power and authority to execute and deliver all documents necessary to perfect and keep perfected the security interests created hereby. This power of attorney hereby granted is a special power of attorney coupled with an interest and shall be irrevocable by each Pledgor. 4 5 (b) Each Pledgor shall notify each obligor in respect of the Pledged Debt that the Pledged Debt has been assigned to the Administrative Agent hereunder and, upon the occurrence and during the continuance of any Event of Default, upon request of the Administrative Agent, each Pledgor will promptly notify (and each Pledgor hereby authorizes the Administrative Agent so to notify) each obligor in respect of the Pledged Debt that the Pledged Debt has been assigned to the Administrative Agent hereunder and that all payments due or to become due in respect of the Pledged Debt are to be made directly to the Administrative Agent or its designee. (c) (i) Each Pledgor shall use all reasonable efforts to cause to be collected from the obligors of the Pledged Debt, as and when due, any and all amounts owing under or on account of the Pledged Debt. (ii) Each Pledgor will perform and comply with all of its obligations in respect of the Pledged Debt and the exercise by the Administrative Agent of any of its rights hereunder shall not release such Pledgor from any of its duties or obligations. (iii) No Pledgor will (A) fail to exercise promptly and diligently each and every material right which it may have under each agreement giving rise to the Pledged Debt or (B) fail to deliver to the Administrative Agent a copy of each material demand, notice or document received by it relating in any way to any agreement giving rise to the Pledged Debt. (d) Without the prior written consent of the Administrative Agent, the Pledgors will not (i) modify, sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, or (ii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person (other than the existing claim of the holders of the Non-Pledged Notes) with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Agreement. The Pledgors will defend the right, title and interest of the Administrative Agent in and to the Collateral against the claims and demands of all Persons (other than the existing claims of the holders of the Non-Pledged Notes) whomsoever. (e) Without the prior written consent of the Administrative Agent, no Pledgor will (A) amend, modify, terminate or waive any material provision of any agreement giving rise to the Pledged Debt in any manner which could reasonably be expected to materially adversely affect the value of the Pledged Debt as Collateral, (B) grant any extension of the time of payment of any of the Pledged Debt or (C) compromise, compound or settle any of the Pledged Debt for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. (f) The Pledgors will advise the Administrative Agent promptly, in reasonable detail, (i) of any Lien or claim (other than the existing claim of the holders of the Non-Pledged Notes) made or asserted against any material part of the Collateral, (ii) of any material change in the composition of the Collateral, and (iii) of the occurrence of any other event relating specifically to any Pledgor or its assets which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereunder. 5 6 (g) In the event any amounts due and owing in excess of $100,000 individually or $250,000 in the aggregate are in dispute between any obligor on the Pledged Debt and any Pledgor, such Pledgor shall provide the Administrative Agent with written notice thereof promptly after such Pledgor's learning thereof, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. In addition, the Pledgors will promptly upon, but in no event later than five (5) Business Days after: (A) any Pledgor's learning thereof, inform the Administrative Agent, in writing, of any material delay in such Pledgor's performance of any of its obligations to any obligor on the Pledged Debt and of any assertion of any claims, offsets or counterclaims by any such obligor and of any allowances, credits and/or other monies granted by such Pledgor to any such obligor, in each case involving amounts in excess of $100,000 individually or $250,000 in the aggregate; and (B) any Pledgor's receipt or learning thereof, furnish to and inform the Administrative Agent of all adverse information relating to the financial condition of any obligor with respect to the Pledged Debt exceeding $100,000 individually or $250,000 in the aggregate. (h) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Pledgors, the Pledgors (i) will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted (including, without limitation, any instruments of transfer or any assignments in blank reasonably requested by the Administrative Agent in connection with this Agreement) and (ii) will promptly deliver such instruments and documents respecting the Pledged Debt and the Pledged Security as the Administrative Agent reasonably requests (including, without limitation, any security agreements, any mortgages, any financing statements, any title insurance policies, any surveys and any other documents or certificates relating thereto). If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Administrative Agent, duly endorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. (i) Each Pledgor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (i) with respect to, or resulting from, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, complying with any Applicable Law applicable to any of the Collateral or (iii) in connection with any of the transactions contemplated by this Agreement. In any suit, proceeding or action brought by the Administrative Agent under the Pledged Debt for any sum owing thereunder, or to enforce any provisions of the Pledged Debt, each Pledgor will save, indemnify and keep the Administrative Agent and the Lenders harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of any obligor thereunder, arising out of a breach by any Pledgor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any 6 7 time owing to or in favor of any obligor or its successors from any Pledgor. The obligations of the Pledgors under this Section 4(h) shall survive the termination of the other provisions of this Agreement. SECTION 5. Collateral Account. (a) There is hereby established with the Administrative Agent a Collateral Account in the name and under the exclusive dominion and control of the Administrative Agent. There shall be deposited from time to time into such account the cash proceeds of the Collateral required to be delivered to the Administrative Agent pursuant to subsection (b) of this Section 5. Any income received by the Administrative Agent with respect to the balance from time to time standing to the credit of the Collateral Account, including any interest or capital gains on investments of amounts on deposit in the Collateral Account, shall remain, or be deposited, in the Collateral Account together with any investments from time to time made pursuant to subsection (c) of this Section 5, shall vest in the Administrative Agent, shall constitute part of the Collateral hereunder and shall not constitute payment of the Secured Obligations until applied thereto as hereinafter provided. (b) Upon the occurrence and during the continuance of an Event of Default, if requested by the Administrative Agent, each Pledgor shall instruct all obligors on the Pledged Debt and other Persons obligated in respect of the Pledged Debt to make all payments in respect of the Pledged Debt either (i) directly to the Administrative Agent (by instructing that such payments be remitted to a post office box which shall be in the name and under the exclusive dominion and control of the Administrative Agent) or (ii) to one or more other banks in any state in the United States (by instructing that such payments be remitted to a post office box which shall be in the name and under the exclusive dominion and control of such bank) under a Lockbox Letter substantially in the form of Annex I hereto duly executed by each Pledgor and such bank or under other arrangements, in form and substance satisfactory to the Administrative Agent, pursuant to which each Pledgor shall have irrevocably instructed such other bank (and such other bank shall have agreed) to remit all proceeds of such payments directly to the Administrative Agent for deposit into the Collateral Account or as the Administrative Agent may otherwise instruct such bank, and thereafter if the proceeds of any Collateral shall be received by any of the Pledgors, each Pledgor will promptly deposit such proceeds into the Collateral Account and until so deposited, all such proceeds shall be held in trust by each Pledgor for and as the property of the Administrative Agent, for the benefit of itself and the Lenders, and shall not be commingled with any other funds or property of any Pledgor. At any time after the occurrence and during the continuance of an Event of Default, the Administrative Agent may itself so instruct the obligors on the Pledged Debt. All such payments made to, or as directed by, the Administrative Agent shall be deposited in the Collateral Account. (c) Amounts on deposit in the Collateral Account shall be promptly liquidated and applied to the payment of the Secured Obligations in the manner specified in Section 13 hereof. SECTION 6. Cash Payments. Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the Pledgors of the Administrative Agent's intent to exercise its rights pursuant to Section 7 below or the remedies pursuant to Section 8 below, the Pledgors shall be permitted to receive all payments of principal and interest paid in respect of the Collateral; provided that in connection with any payments of principal 7 8 with respect to the Collateral, the Aggregate Commitment under the Credit Agreement shall be reduced pursuant to Section 2.6 thereof. SECTION 7. Rights of the Administrative Agent. (a) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice to the Pledgors of its intent to exercise any of the following rights, (i) the Administrative Agent shall have the right to receive any and all payments in respect of the Collateral and make application thereof to the Secured Obligations, in the order set forth in Section 4.5 of the Credit Agreement and (ii) the Administrative Agent or its nominee may exercise any and all rights, privileges or options pertaining to the Collateral as if it were the absolute owner thereof, all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to the Pledgors to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Administrative Agent and the Lenders hereunder shall not be conditioned or contingent upon the pursuit by the Administrative Agent or any Lender of any right or remedy against the Pledgors or against any other Person which may be or become liable in respect of all or any part of the Secured Obligations or against any collateral security therefor, guarantee therefor or right of offset with respect thereto. Neither the Administrative Agent nor any Lender shall be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Administrative Agent be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgors or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. SECTION 8. Remedies. If an Event of Default shall occur and be continuing, the Administrative Agent may exercise, on behalf of itself and the Lenders, (i) all rights and remedies granted in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations and (ii) all rights and remedies of a secured party under the Code. In addition, the Administrative Agent may withdraw all cash, if any, in the Collateral Account and investments made with amounts on deposit in the Collateral Account, and apply such monies, investments and other cash, if any, then held by it as Collateral as specified in Section 13 hereof. Without limiting the generality of the foregoing with regard to the scope of the Administrative Agent's remedies, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor, any Borrower or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales at any office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is 8 9 hereby waived or released. The Administrative Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel thereto, to the payment in whole or in part of the Secured Obligations, in the order set forth in Section 4.5 of the Credit Agreement, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Administrative Agent account for the surplus, if any, to any Pledgor. To the extent permitted by applicable law, the Pledgors waive all claims, damages and demands they may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. SECTION 9. Amendments, etc. With Respect to the Secured Obligations. The Pledgors shall remain obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgors, and without notice to or further assent by the Pledgors, any demand for payment of any of the Secured Obligations made by the Administrative Agent or any Lender may be rescinded by the Administrative Agent or such Lender, and any of the Secured Obligations continued, and the Secured Obligations, or the liability of the Pledgors or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered, or released by the Administrative Agent or any Lender, and the Credit Agreement, the Notes, any other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or part, as the Lenders (or the Required Lenders, as the case may be) may deem advisable from time to time, and any guarantee, right of offset or other collateral security at any time held by the Administrative Agent or any Lender for the payment of the Secured Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Secured Obligations or any property subject thereto. The Pledgors waive any and all notice of the creation, renewal, extension or accrual of any of the Secured Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Agreement; the Secured Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Agreement; and all dealings between the Pledgors, on the one hand, and the Administrative Agent and the Lenders, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Agreement. The Pledgors waive diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgors with respect to any of the Secured Obligations. SECTION 10. No Subrogation. Notwithstanding any payment or payments made by the Pledgors hereunder, or any setoff or application of funds of the Pledgors by the Administrative Agent, or the receipt of any amounts by the Administrative Agent with respect to 9 10 any of the Collateral, the Pledgors shall not be entitled to be subrogated to any of the rights of the Administrative Agent against any Borrower or any guarantor or against any other collateral security held by the Administrative Agent for the payment of the Secured Obligations, nor shall the Pledgors seek any reimbursement from any Borrower or any guarantor in respect of payments made by the Pledgors in connection with the Collateral, or amounts realized by the Administrative Agent in connection with the Collateral, until all amounts owing to the Administrative Agent and the Lenders on account of the Secured Obligations are paid in full and the Credit Agreement is terminated. If any amount shall be paid to the Pledgors on account of such subrogation rights at any time when all of the Secured Obligations shall not have been paid in full, such amount shall be held by the Pledgors in trust for the Administrative Agent, segregated from other funds of the Pledgors, and shall, forthwith upon receipt by the Pledgors, be turned over to the Administrative Agent in the exact form received by the Pledgors (duly indorsed by the Administrative Agent, if required) to be applied against the Secured Obligations, whether matured or unmatured, in such order as set forth in the Credit Agreement. SECTION 11. Irrevocable Authorization and Instruction to Obligors. The Pledgors hereby authorize and instruct each obligor under the Collateral to comply with any instruction received by it from the Administrative Agent in writing that (a) states that an Event of Default has occurred and is continuing and (b) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from the Pledgors, and the Pledgors agree that such obligors shall be fully protected in so complying. SECTION 12. Limitation on Duties Regarding Collateral. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as the Administrative Agent deals with similar securities and property for its own account. Neither the Administrative Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgors or otherwise. SECTION 13. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied by the Administrative Agent in accordance with the terms of Section 4.5 of the Credit Agreement. The Administrative Agent may make distribution hereunder in cash or in kind or, on a ratable basis, in any combination thereof. SECTION 14. Concerning the Administrative Agent. The provisions of Article XII of the Credit Agreement shall inure to the benefit of the Administrative Agent in respect of this Agreement and shall be binding upon the Pledgors and the Lenders. In furtherance and not in derogation of the rights, privileges and immunities of the Administrative Agent therein set forth: (a) The Administrative Agent is authorized to take all such action as is provided to be taken by it as Administrative Agent hereunder and all other action incidental thereto. As to any matters not expressly provided for herein, the Administrative Agent may request instructions from the Lenders and shall act or refrain from acting in accordance with written 10 11 instructions from the Required Lenders (or, when expressly required by this Agreement or the Credit Agreement, all the Lenders) or, in the absence of such instructions, in accordance with its discretion. (b) The Administrative Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of the security interests therein purported to be granted by this Agreement, whether impaired by operation of law or by reason of any action or omission to act on its part (other than any such action or inaction constituting gross negligence or willful misconduct). The Administrative Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement by the Pledgor. SECTION 15. Notices. All notices and communications hereunder shall be given to the addresses and otherwise made in accordance with Section 13.1 of the Credit Agreement. SECTION 16. Rights and Remedies Cumulative; Non-Waiver, etc. The enumeration of the rights and remedies of the Administrative Agent and the Lenders set forth in this Agreement is not intended to be exhaustive and the exercise by the Administrative Agent and the Lenders of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the Loan Documents or that may now or hereafter exist in law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Administrative Agent or any Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or shall be construed to be a waiver of any Event of Default. No course of dealing between the Borrowers, the Administrative Agent and the Lenders or their respective agents or employees shall be effective to change, modify or discharge any provision of this Agreement or any of the other Loan Documents or to constitute a waiver of any Event of Default. This Agreement is a Loan Document executed pursuant to the Credit Agreement. SECTION 17. Successors and Assigns. This Agreement is for the benefit of the Administrative Agent and the Lenders and their permitted successors and assigns. This Agreement shall be binding on the Pledgors and their successors and assigns; provided that the Pledgors may not assign any of their rights or obligations hereunder without the prior written consent of the Administrative Agent and the Lenders. SECTION 18. Amendments, Waivers and Consents. No term, covenant, agreement or condition of this Agreement may be amended or waived, nor may any consent be given, except in the manner set forth in Section 13.11 of the Credit Agreement. SECTION 19. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. SECTION 20. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE 11 12 LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF. SECTION 21. Consent to Jurisdiction. The Pledgors hereby irrevocably consent to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of or any dispute in connection with this Agreement, any rights or obligations hereunder, or the performance of such rights and obligations. The Pledgors hereby irrevocably consent to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Administrative Agent or any Lender in connection with this Agreement, any rights or obligations hereunder, or the performance of such rights and obligations, on behalf of themselves or their property, in the manner provided in Section 13.1 of the Credit Agreement. Nothing in this Section 21 shall affect the right of the Administrative Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Administrative Agent or any Lender to bring any action or proceeding against the Pledgors and their properties in the courts of any other jurisdictions. SECTION 22. Binding Arbitration; Waiver of Jury Trial. (a) Binding Arbitration. Upon demand of any party, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to the Notes or any other Loan Documents ("Disputes"), between or among parties to the Notes or any other Loan Documents shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from supplements to this Agreement executed in the future, or claims concerning any aspect of the past, present or future relationships arising out of or connected with the Loan Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in Charlotte, North Carolina. The expedited procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. (b) Waiver of Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE ADMINISTRATIVE AGENT, EACH LENDER, AND EACH PLEDGOR, BY THEIR ACCEPTANCE OF THIS AGREEMENT OR THE BENEFITS HEREOF, HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF OR ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. 12 13 (c) Preservation of Certain Remedies. Notwithstanding the preceding binding arbitration provisions, the parties hereto preserve, without diminution, certain remedies that such Persons may employ or exercise freely, either alone, in conjunction with or during a Dispute. Each such Person shall have and hereby reserves the right to proceed in any court of proper jurisdiction or by self help to exercise or prosecute the following remedies: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted in this Agreement or under applicable law or by judicial foreclosure and sale, (ii) all rights of self help including peaceful occupation of property and collection of rents, set off, and peaceful possession of property, (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and in filing an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. SECTION 23. Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the Lenders in order to carry out the intentions of the parties hereto as nearly as may be possible; and (b) the invalidity or unenforceability of any provisions hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 24. Headings. The various headings of this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provisions hereof. SECTION 25. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. [Signature Pages Follows] 13 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first written above. SHOLODGE, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President SHONEY'S INN, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President THE HOTEL GROUP, INC. [CORPORATE SEAL] By: /s/ Leon Moore -------------------------------- Name: Leon Moore Title: President 15 SCHEDULE I (to Pledge and Security Agreement) DESCRIPTION OF PLEDGED DEBT
Original Debtor Date Principal Amount Maturity Date Description of Debt - ------ ---- ---------------- ------------- -------------------
[TO INCLUDE ALL PROMISSORY NOTES HELD BY OR TO BE HELD BY THE PLEDGORS]. 16 SCHEDULE II (to Pledge and Security Agreement) DESCRIPTION OF PLEDGED SECURITY [TO INCLUDE ALL A DETAILED DESCRIPTION OF EACH MORTGAGE DOCUMENT, PLEDGE AGREEMENT, SECURITY AGREEMENT, FINANCING STATEMENT AND OTHER AGREEMENT OR INSTRUMENT (I.E., PARTIES, PARTIES, LOCATION, FILING INFORMATION, ETC. RELATING TO THE PLEDGED SECURITY] 17 SCHEDULE III (to Pledge and Security Agreement) JURISDICTIONS 18 ANNEX I (to Pledge Agreement) [FORM OF LOCKBOX LETTER] _______________, 19___ [Name and Address of Lockbox Bank) Re: [CORPORATION] Ladies and Gentlemen: We hereby notify you that effective __________, 19__, we have transferred exclusive ownership and control of our lock-box account(s) no[s]. _____________________ (the "Lockbox Account[s]") maintained with you under the terms of the [Lockbox Agreement] attached hereto as Exhibit A (the "Lockbox Agreement[s]") to First Union National Bank, as Administrative Agent (the "Administrative Agent"). We hereby irrevocably instruct you to make all payments to be made by you out of or in connection with the Lockbox Account(s) (i) to the Administrative Agent for credit to account no. ________ maintained by it at its office at ________________________ or (ii) as you may otherwise be instructed by the Administrative Agent. We also hereby notify you that the Administrative Agent shall be irrevocably entitled to exercise any and all rights in respect of or in connection with the Lockbox Account(s), including, without limitation, the right to specify when payments are to be made out of or in connection with the Lockbox Account(s). All funds deposited into the Lockbox Account(s) will not be subject to deduction, set-off, banker's lien or any other right in favor of any other person than the Administrative Agent, except that you may set-off against the Lockbox Account(s) the face amount of any check deposited in and credited to such Lockbox Account(s) which is subsequently returned for any reason. Your compensation for providing the service contemplated herein shall be mutually agreed between you and us from time to time and we will continue to pay such compensation. 19 Please confirm your acknowledgment of and agreement to the foregoing instructions by signing in the space provided below Very truly yours, By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Acknowledged and agreed to as of this ________ day of ____________, 19___. [LOCKBOX BANK] By: ______________________________________ Name: ____________________________________ Title: ___________________________________ 20 Exhibit A to Lockbox Agreement Form of Lockbox Agreement [To Be Attached As Applicable] EX-11 6 COMPUTATION OF EARNINGS 1
EXHIBIT 11 SHOLODGE, INC AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE BASIC AND ASSUMING DILUTION 12 WEEKS ENDED 40 WEEKS ENDED -------------------------------------------------------------- OCTOBER 4, OCTOBER 5, OCTOBER 4, OCTOBER 5, 1998 1997 1998 1997 -------------------------------------------------------------- BASIC: EARNINGS APPLICABLE TO COMMON STOCK (BASIC): FROM CONTINUING OPERATIONS $ 12,735,981 $ 1,426,758 $ 13,417,368 $ 6,307,306 EXTRAORDINARY LOSS, net of tax effect ($ 1,066,466) ($ 1,066,466) FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ($ 1,164,114) -------------------------------------------------------------- NET EARNINGS $ 11,669,515 $ 1,426,758 $ 12,350,902 $ 5,143,192 ============================================================== SHARES: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,255,810 8,476,605 8,255,810 8,389,769 ============================================================== BASIC EARNINGS PER SHARE: FROM CONTINUING OPERATIONS $ 1.54 $ 0.17 $ 1.63 $ 0.75 EXTRAORDINARY LOSS, net of tax effect ($ 0.13) ($ 0.13) FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ($ 0.14) -------------------------------------------------------------- NET EARNINGS $ 1.41 $ 0.17 $ 1.50 $ 0.61 ============================================================== DILUTED: EARNINGS APPLICABLE TO COMMON STOCK (BASIC): FROM CONTINUING OPERATIONS $ 12,735,981 $ 1,426,758 $ 13,417,368 $ 6,307,306 EXTRAORDINARY LOSS, net of tax effect ($ 1,066,466) ($ 1,066,466) FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ($ 1,164,114) -------------------------------------------------------------- NET EARNINGS $ 11,669,515 $ 1,426,758 $ 12,350,902 $ 5,143,192 INTEREST (LESS TAX) ON CONVERTIBLE SUBORDINATED DEBENTURES $ 598,154 $ 604,696 $ 1,993,846 $ 1,996,962 ADJUSTED EARNINGS APPLICABLE TO COMMON STOCK: FROM CONTINUING OPERATIONS $ 13,334,135 $ 2,031,454 $ 15,411,214 $ 8,304,268 EXTRAORDINARY LOSS, net of tax effect ($ 1,066,466) ($ 1,066,466) FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ($ 1,164,114) -------------------------------------------------------------- NET EARNINGS $ 12,267,669 $ 2,031,454 $ 14,344,748 $ 7,140,154 ============================================================== SHARES: WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 8,553,963 8,553,284 8,690,200 8,524,148 SHARES ISSUABLE UPON CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES 2,316,602 2,316,602 2,316,602 2,316,602 -------------------------------------------------------------- 10,870,565 10,869,886 11,006,802 10,840,750 ============================================================== DILUTED EARNINGS PER SHARE: FROM CONTINUING OPERATIONS $ 1.23 $ 0.17 $ 1.40 $ 0.74 EXTRAORDINARY LOSS, net of tax effect ($ 0.10) ($ 0.10) FROM CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ($ 0.14) -------------------------------------------------------------- NET EARNINGS $ 1.13 $ 0.17 $ 1.30 $ 0.60 ==============================================================
EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY FINANCIAL STATEMENTS FOR THE QUARTER ENDED OCTOBER 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-27-1998 OCT-04-1998 9,681,134 221,615 3,864,615 281,785 0 17,896,613 177,978,337 20,027,075 290,526,729 18,487,477 129,435,493 0 0 1,000 107,633,376 290,526,729 56,749,614 59,191,331 0 54,792,567 0 0 7,563,776 20,898,368 7,522,000 13,376,368 0 (1,066,466) 0 12,309,902 1.49 1.30
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