<PAGE> 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.
<PAGE> 2
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 4, DECEMBER 28,
1998 1997(1)
ASSETS
<S> <C> <C>
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
============= =============
</TABLE>
(1) Derived from fiscal year ended December 28, 1997 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 3
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 4, DECEMBER 28,
1998 1997(1)
<S> <C> <C>
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
============ ============
</TABLE>
(1) Derived from fiscal year ended December 28, 1997 audited financial
statements. See notes to consolidated financial statements.
<PAGE> 4
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE FORTY WEEKS ENDED OCTOBER 4, 1998 AND OCTOBER 5, 1997
<TABLE>
<CAPTION>
12 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 4, OCTOBER 5, OCTOBER 4, OCTOBER 5,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
SHOLODGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE FORTY WEEKS ENDED OCTOBER 4, 1998 AND OCTOBER 5, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS ENDED
OCTOBER 4, OCTOBER 5,
1998 1997
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 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.
<TABLE>
<CAPTION>
10/4/98 10/5/97
------- -------
<S> <C> <C>
Net unrealized gain (loss) on securities
available for sale for the three quarters ($27) $10
</TABLE>
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
<PAGE> 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.
<PAGE> 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'
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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 -
<PAGE> 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.
<PAGE> 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
<PAGE> 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".
<PAGE> 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
<PAGE> 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:
<PAGE> 2
<TABLE>
<CAPTION>
Purchase Date Price
------------- -----
<S> <C>
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
</TABLE>
(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 -
<PAGE> 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 -
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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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
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(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:
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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.
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(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
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(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:
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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
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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
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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.
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(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
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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).
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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
<PAGE> 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
<PAGE> 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
<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
<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
<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
<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
<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
<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
<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
<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
<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
<PAGE> 27
Updated Schedules 1.1(a), 6.1(a), 6.1(b), 6.1(v)
to
Credit Agreement
[Attached Hereto]
<PAGE> 28
SCHEDULE 1.1(a)
LENDERS AND COMMITMENTS
<TABLE>
<CAPTION>
COMMITMENT
AND COMMITMENT
LENDER PERCENTAGE ADDRESS
- ------ -------------- -------
<S> <C> <C>
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
</TABLE>
<PAGE> 29
Schedule 1.1(c)
to
Credit Agreement
[Attached Hereto]
<PAGE> 30
Schedule 1.1(d)
to
Credit Agreement
[Attached Hereto]
<PAGE> 31
Schedule 2.6(b)
to
Credit Agreement
Aggregate Commitment Reduction Percentages
With Respect to Non-Pledged Notes
<TABLE>
<CAPTION>
Applicable
Non-Pledged Note Percentage
- ---------------- ----------
<S> <C>
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
</TABLE>
<PAGE> 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:
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 15
SCHEDULE I
(to Pledge and Security Agreement)
DESCRIPTION OF PLEDGED DEBT
<TABLE>
<CAPTION>
Original
Debtor Date Principal Amount Maturity Date Description of Debt
- ------ ---- ---------------- ------------- -------------------
<S> <C> <C> <C> <C>
</TABLE>
[TO INCLUDE ALL PROMISSORY NOTES HELD BY OR TO BE HELD
BY THE PLEDGORS].
<PAGE> 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]
<PAGE> 17
SCHEDULE III
(to Pledge and Security Agreement)
JURISDICTIONS
<PAGE> 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.
<PAGE> 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: ___________________________________
<PAGE> 20
Exhibit A
to
Lockbox Agreement
Form of Lockbox Agreement
[To Be Attached As Applicable]
<PAGE> 1
<TABLE>
<CAPTION>
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
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==============================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> OCT-04-1998
<CASH> 9,681,134
<SECURITIES> 221,615
<RECEIVABLES> 3,864,615
<ALLOWANCES> 281,785
<INVENTORY> 0
<CURRENT-ASSETS> 17,896,613
<PP&E> 177,978,337
<DEPRECIATION> 20,027,075
<TOTAL-ASSETS> 290,526,729
<CURRENT-LIABILITIES> 18,487,477
<BONDS> 129,435,493
0
0
<COMMON> 1,000
<OTHER-SE> 107,633,376
<TOTAL-LIABILITY-AND-EQUITY> 290,526,729
<SALES> 56,749,614
<TOTAL-REVENUES> 59,191,331
<CGS> 0
<TOTAL-COSTS> 54,792,567
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 7,563,776
<INCOME-PRETAX> 20,898,368
<INCOME-TAX> 7,522,000
<INCOME-CONTINUING> 13,376,368
<DISCONTINUED> 0
<EXTRAORDINARY> (1,066,466)
<CHANGES> 0
<NET-INCOME> 12,309,902
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.30
</TABLE>
