EXHIBIT 10.40
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AGREEMENT AND PLAN OF MERGER
By and Among
Patriot American Hospitality Operating Company,
Patriot American Hospitality, Inc.,
and
CHC International, Inc.
Dated as of September 30, 1997
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TABLE OF CONTENTS
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ARTICLE I. THE MERGER.......................................................2
Section 1.01. The Merger.................................................2
Section 1.02. Effect of the Merger.......................................2
Section 1.03. Conversion of CHCI Shares..................................2
Section 1.04. Pre-Closing Adjustments to Merger Consideration............4
Section 1.06. Closing...................................................12
Section 1.07. Effective Time............................................12
Section 1.08. Certificate of Incorporation..............................13
Section 1.09. By-Laws...................................................13
Section 1.10. Directors and Officers....................................13
Section 1.11. Surrender of Certificates and Delivery of Other Documents;
Stock Transfer Books............................................13
Section 1.12. Stock Options.............................................15
Section 1.13. Withholding...............................................15
ARTICLE II. CERTAIN OBLIGATIONS IN CONNECTION WITH THE MERGER...............15
Section 2.01. Stockholder Indemnification Agreement.....................15
Section 2.02. Credit Agreement..........................................15
Section 2.03. Cash Payment Relating to Unstapling.......................16
Section 2.04. Failure to Consummate Wyndham.............................16
Section 2.05. Tax Gross-Up..............................................17
Section 2.06. Redemption of OpCo Preferred Stock........................17
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF CHCI..........................17
Section 3.01. Making of Representations and Warranties; Certain
Definitions.....................................................17
Section 3.02. Organization and Corporate Power..........................18
Section 3.03. Authority.................................................19
Section 3.04. Capitalization............................................20
Section 3.05. Subsidiaries; Investments.................................20
Section 3.06. Financial Statements......................................21
Section 3.07. Absence of Undisclosed Liabilities........................21
Section 3.08. Absence of Certain Developments...........................22
Section 3.09. Transactions with Affiliates..............................22
Section 3.10. Interests in Real Property................................23
Section 3.11. Personal Property.........................................27
Section 3.12. Tax Matters...............................................28
Section 3.13. Contracts and Commitments.................................29
Section 3.14. Intellectual Property Rights..............................31
Section 3.15. Permits; Compliance with Laws.............................31
(i)
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Section 3.16. Labor Laws................................................32
Section 3.17. Information Supplied to OpCo..............................32
Section 3.18. Employee Benefit Programs.................................32
Section 3.19. Environmental Matters.....................................35
Section 3.20. Insurance.................................................35
Section 3.21. Investment Banking; Brokerage.............................36
Section 3.22. Litigation................................................36
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF OPCO..........................36
Section 4.01. Making of Representations and Warranties; Certain
Definitions.....................................................36
Section 4.02. Organization and Corporate Power..........................36
Section 4.03. Authority.................................................37
Section 4.04. Investment Banking; Brokerage.............................38
Section 4.05. Litigation................................................38
Section 4.06. OpCo SEC Filings..........................................39
Section 4.07. Reservation of OpCo Common Stock..........................39
Section 4.08. Absence of Certain Developments...........................39
Section 4.09. Related Party Transactions................................39
Section 4.10. Information Supplied to CHCI..............................40
Section 4.11. Tax Matters...............................................40
Section 4.12. Net Worth.................................................40
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF REIT..........................40
Section 5.01. Making of Representations and Warranties; Certain
Definitions.....................................................40
Section 5.02. Organization and Corporate Power..........................41
Section 5.03. Authority.................................................41
Section 5.04. Investment Banking; Brokerage.............................42
Section 5.05. Litigation................................................42
Section 5.06. REIT SEC Filings..........................................43
Section 5.07. Reservation of REIT Common Stock..........................43
Section 5.08. Absence of Certain Developments...........................43
Section 5.09. Related Party Transactions................................43
Section 5.10. REIT Status...............................................44
Section 5.11. Information Supplied to CHCI..............................44
ARTICLE VI. COVENANTS OF CHCI...............................................44
Section 6.01. Consents and Approvals....................................44
Section 6.02. Gaming Regulatory Filings.................................45
Section 6.03. Conduct of Hospitality Business...........................45
Section 6.04. Breach of Representations and Warranties..................47
Section 6.05. Access; Confidentiality...................................47
Section 6.06. The Spin Off..............................................48
Section 6.07. Further Action............................................48
(ii)
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Section 6.08. Certain Employee Matters................................48
Section 6.09. Payment of Promissory Note..............................48
Section 6.10. Use of Brand Names......................................48
ARTICLE VII. COVENANTS OF OPCO...............................................49
Section 7.01. Consents and Approvals..................................49
Section 7.02. Publicity...............................................49
Section 7.03. Tax-Free Treatment......................................49
Section 7.04. Breach of Representations and Warranties................50
Section 7.05. Further Action..........................................50
Section 7.06. Certain Employee Matters................................50
Section 7.07. Permitted Investments Coverage..........................50
ARTICLE VIII. CONDITIONS.....................................................52
Section 8.01. Conditions to OpCo's Obligation to Effect the Merger....52
Section 8.02. Conditions to CHCI's Obligation to Effect the Merger....52
ARTICLE IX. TERMINATION OF AGREEMENT........................................53
Section 9.01. Termination.............................................53
Section 9.02. Effect of Termination...................................53
Section 9.03. Asset Sale..............................................53
ARTICLE X. SURVIVAL; INDEMNIFICATION.......................................54
Section 10.01. Survival of Representations, Warranties, Etc............54
Section 10.02. Survival of Certain Provisions..........................54
ARTICLE XI. CERTAIN TAX MATTERS.............................................54
Section 11.01. Defined Terms...........................................54
Section 11.02. Tax Sharing Agreement...................................55
Section 11.03. Computation of Taxes....................................55
ARTICLE XII. MISCELLANEOUS...................................................55
Section 12.01. Law Governing...........................................55
Section 12.02. Notices.................................................55
Section 12.03. Prior Agreements Superseded.............................56
Section 12.04. Assignability...........................................56
Section 12.05. Fees and Expenses.......................................56
Section 12.06. Captions and Gender.....................................57
Section 12.07. Execution in Counterparts...............................57
Section 12.08. Certain Remedies; Severability..........................57
Section 12.09. Amendments; Waivers.....................................57
Section 12.10. Schedules...............................................58
Section 12.11. Certain Definitions.....................................58
(iii)
SCHEDULES AND EXHIBITS
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Schedule A - Stockholders
Schedule 1.04(a) - Phase I Hospitality Assets and Liabilities
Schedule 1.04(c) - Management Contracts
Schedule 1.05(a) - Existing Third Party Management Contracts/Qualified
Third Party Management Contracts
Schedule 1.05(b)(i) - Existing GAH-II Management Contracts/Qualified GAH-II
Management Contracts
Schedule 1.05(b)(ii) - Pending Management Contracts
Schedule 1.10(a) - Directors
Schedule 1.10(b) - Officers
Schedule 9.03 - Leasehold Agreements
Exhibit A - Reorganization Agreement
Exhibit B - Spin Off Term Sheet
Exhibit C - Form of Certificate of Designations
Exhibit D - Form of Articles of Merger
Exhibit E - Form of Certificate of Merger
Exhibit F - Form of Lock-Up Agreement
Exhibit G - Form of Investor Representation Letter
Exhibit H - Form of Stockholder Indemnification Agreement
Exhibit I - Employment Matters Term Sheet
Exhibit J - Business Activities
Exhibit K - Term Sheet for Registration Rights Agreement
Exhibit L - Form of Opinion of Counsel to OpCo
Exhibit M - Form of Tax Sharing Agreement
(iv)
AGREEMENT AND PLAN OF MERGER
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THIS AGREEMENT AND PLAN OF MERGER, dated as of September 30, 1997 (the
"Agreement"), by and among Patriot American Hospitality Operating Company, a
Delaware corporation ("OpCo"), Patriot American Hospitality, Inc., a Delaware
corporation which operates as a real estate investment trust ("REIT"), and CHC
International, Inc., a Florida corporation ("CHCI").
W I T N E S S E T H
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WHEREAS, subject to certain approvals, including but not limited to
approvals by certain appropriate governmental gaming regulatory authorities,
prior to the Closing (as defined in Section 1.06) CHCI intends (a) to effect a
contribution (the "Contribution") of its gaming business (the "Gaming Business")
to a wholly owned subsidiary of CHCI ("Gaming Spinco") while retaining the
Hospitality Business (as hereinafter defined) and (b) to distribute all of the
stock of Gaming Spinco to stockholders of CHCI (the "Spin Off"), all as
described more fully in that certain Reorganization Agreement by and between
CHCI and Gaming Spinco in substantially the form attached hereto as Exhibit A,
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with such changes to the Reorganization Agreement (including such updated
schedules thereto as may be necessary based on facts and circumstances existing
at the time of the Spin Off) as are permitted under Section 6.07 (the
"Reorganization Agreement"), and the Spin Off Term Sheet attached hereto as
Exhibit B;
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WHEREAS, for the purposes of this Agreement, the "Hospitality Assets" shall
mean those assets listed on Annex A to the Spin Off Term Sheet, "Hospitality
Business" shall mean the business conducted with the Hospitality Assets and
"Post-September 1 Hospitality Business" shall mean the Hospitality Business
conducted from and after September 1, 1997;
WHEREAS, subsequent to the Spin Off, OpCo and CHCI desire to effect the
merger of CHCI with and into OpCo (the "Merger"), in accordance with this
Agreement and the laws of the State of Delaware and the State of Florida such
that, upon consummation of the Merger, OpCo will survive the Merger and CHCI
will cease to exist;
WHEREAS, the parties hereto intend that the Merger qualify as a
"reorganization" within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code") and that the Contribution and the
Spin Off qualify as transactions described in Sections 351 and 355 of the Code,
respectively, and/or as "reorganizations" within the meaning of Section 368(a)
of the Code;
WHEREAS, the stockholders and option holders of CHCI listed on Schedule A
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hereto (collectively, the "Stockholders") shall be entitled to receive
consideration from OpCo in connection with the Merger as hereinafter set forth;
and
WHEREAS, the respective Boards of Directors of OpCo and CHCI have each
approved this Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
ARTICLE I. THE MERGER.
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Section 1.01. The Merger. At the Effective Time (as defined in Section
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1.07) and subject to the terms and conditions hereof and the provisions of the
General Corporation Law of the State of Delaware, as amended (the "DGCL"), and
the Florida Business Corporation Act, as amended (the "FBCA"), and in reliance
on the representations, warranties and covenants herein set forth, CHCI will be
merged with and into OpCo in accordance with the DGCL, the FBCA and this
Agreement, whereupon the separate existence of CHCI shall cease and OpCo shall
continue as the surviving corporation (the "Surviving Corporation"). OpCo and
CHCI are sometimes hereinafter referred to collectively as the "Constituent
Corporations."
Section 1.02. Effect of the Merger. The separate corporate existence of
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OpCo, as the Surviving Corporation, shall continue unimpaired by the Merger.
From and after the Effective Time, the Surviving Corporation shall possess all
the rights, privileges, powers, immunities and franchises and be subject to all
of the restrictions, disabilities and duties of the Constituent Corporations,
all as provided under the DGCL. The Surviving Corporation shall, except as
otherwise specifically provided herein, succeed to all the properties and assets
of the Constituent Corporations and to all debts, choses in action and other
interests of, due to or belonging to the Constituent Corporations with the
effect and as more fully set forth in Section 259(a) of the DGCL.
Section 1.03. Conversion of CHCI Shares.
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(a) Conversion of CHCI Shares. At the Effective Time, by virtue of
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the Merger and without any action on the part of OpCo or CHCI, each share of
common stock, par value $.005 per share, of CHCI (the "CHCI Shares") issued and
outstanding immediately prior to the Effective Time and each Option Interest (as
defined in Section 1.12), shall automatically be converted into the right to
receive the number of shares of preferred stock, par value $.01 per share of
OpCo (the "OpCo Preferred Stock") equal to the sum of:
(i) the quotient of (A) the quotient of (x) $97.2 million
(the "Aggregate Consideration"), divided by (y) $23.25 (such quotient shall
hereinafter be referred to as the "Initial Number of OpCo Shares"), divided
by (B) the sum of (x) the total number of issued and outstanding CHCI
Shares immediately prior to the Effective Time and (y) the total number of
Option Interests, and
(ii) the quotient of (A) the quotient of (x) the product of
(I) the Initial Number of OpCo Shares, multiplied by (II) a number,
expressed as a decimal, equal to the dividend that a holder of a Paired
Share (as defined in Section 1.03(b)) would be entitled to receive assuming
such holder owns such Paired Share for the period from the
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date of this Agreement until the earlier of the Effective Time or June 30,
1998, divided by (y) the Current Market Price (as defined in the
Certificate of Designations referred to below) of a Paired Share at each
dividend payment record date occurring during such period (with respect to
the amount of dividend which would have been received under clause (x)
above on such record date), divided by (B) the sum described in Section
1.03(a)(i)(B).
The payments reflected in this Section 1.03(a) are all intended by the
parties to constitute consideration for the CHCI Shares and Option Interests
surrendered in the Merger. The aggregate number of shares of OpCo Preferred
Stock that each Stockholder shall have the right to receive pursuant to this
Agreement shall consist of, to the extent possible, an equal number of shares of
Series A Redeemable Convertible Preferred Stock, par value $.01 per share, of
OpCo (the "Series A Preferred Stock"), and Series B Redeemable Convertible
Preferred Stock, par value $.01 per share, of OpCo (the "Series B Preferred
Stock"); provided that if a Stockholder receives cash pursuant to this
Agreement, such Stockholder must (after giving effect to such substitution of
cash for OpCo Preferred Stock) receive a sufficient number of shares of Series B
Preferred Stock to constitute at least 50% of the total consideration received
by such Stockholder under this Agreement (valuing the Series B Preferred Stock
for this purpose at the Current Market Price at that time). In the event that
one share remains unallocated, then such share shall be designated as a share of
Series B Preferred Stock.
A Certificate of Designations relating to the Series A Preferred Stock
and the Series B Preferred Stock, in substantially the form attached hereto as
Exhibit C (the "Certificate of Designations"), shall be filed with the Secretary
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of State of the State of Delaware prior to the Closing. The Certificate of
Designations shall govern the rights, privileges and preferences of the holders
of the Series A Preferred Stock and the Series B Preferred Stock only upon the
issuance of such shares at the Effective Time.
(b) Automatic Adjustment for a Stock Event. Notwithstanding
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the foregoing, if between the date of this Agreement and the Closing Date (A)
the outstanding CHCI Shares are changed into a different number of shares or a
different class or series, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares (a
"Stock Event") or (B) the outstanding Paired Shares are changed into a different
number of shares or a different class or series, by reason of a Stock Event,
then the number of shares of OpCo Preferred Stock into which each CHCI Share
shall be converted pursuant to Section 1.03(a) above shall be correspondingly
and proportionately adjusted to reflect such Stock Event relating to the CHCI
Shares or Paired Shares, as the case may be. For purposes of this Agreement, the
term "Paired Share" shall mean one share of common stock, par value $.01 per
share, of OpCo (the "OpCo Common Stock") and one share of common stock, par
value $.01 per share, of REIT, paired and transferable and traded only in
combination as a single unit on the New York Stock Exchange (the "NYSE").
(c) Budget Earnout Shares. On the date of this Agreement, CHCI
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shall deliver an annualized schedule of expenses of the Post-September 1
Hospitality Business
3
included as Section 1.03 to the Disclosure Schedule (as hereinafter defined)
(the "Expense Elimination Schedule"), $900,000 (annualized) of which are
expected to be eliminated as of or prior to the Closing Date. On the Closing
Date, CHCI shall deliver a certificate to OpCo which shall set forth CHCI's
calculation of annualized expenses of the Post-September 1 Hospitality Business
set forth on the Expense Elimination Schedule actually eliminated as of or prior
to the Closing Date (the "Final Elimination Amount"). In the event that the
Final Elimination Amount is at least equal to $900,000, then the Surviving
Corporation shall issue to the Stockholders at the Closing an additional 215,054
shares of OpCo Preferred Stock; or if such Final Elimination Amount is less than
$900,000, then the Surviving Corporation shall issue to the Stockholders at the
Closing that number of shares of OpCo Preferred Stock which is equal to the
product of (A) 215,054 and (B) a fraction, the numerator of which is the Final
Elimination Amount and the denominator of which is 900,000 (in either case, such
shares of OpCo Preferred Stock are referred to as the "1997 Budget Shares"). In
addition, the Surviving Corporation shall issue to the Stockholders at the
Closing shares of OpCo Preferred Stock equal to the quotient of (x) the product
of (a) the 1997 Budget Shares and (b) the amount of dividends that a holder of a
Paired Share would be entitled to receive assuming such holder owns such Paired
Share for the period from the date of this Agreement until the earlier of the
Effective Time or June 30, 1998, divided by (y) the Current Market Price of a
Paired Share at each dividend payment record date occurring during such period
with respect to the amount of dividend that would have been received under
clause (x) above on such record date. OpCo shall issue all such shares pursuant
to this Section 1.03(c) to the Stockholders pro rata on the basis of their
respective interests in the CHCI Shares and Option Interests, all as indicated
on Schedule A.
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Section 1.04. Pre-Closing Adjustments to Merger Consideration.
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(a) Adjustments for Certain Liabilities. On or prior to the
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date of this Agreement, CHCI shall have delivered to OpCo a schedule of assets
and liabilities relating to the Hospitality Business as of August 31, 1997 which
is attached hereto as Schedule 1.04(a) (the "Phase I Hospitality Assets and
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Liabilities Schedule"). The Phase I Hospitality Assets and Liabilities Schedule
shall set forth the assets and the liabilities of the Hospitality Business in
such detail reasonably necessary for OpCo to review the particular nature of
certain assets and liabilities and shall provide line items for specific
categories of long term assets and liabilities and short term assets and
liabilities and other relevant categories.
CHCI agrees that, except as set forth in the Schedule of Assumed Assets
and Liabilities included with the Phase I Hospitality Assets and Liabilities
Schedule, (i) none of the assets set forth in the Phase I Hospitality Assets and
Liabilities Schedule other than the Hospitality Assets (to the extent
Hospitality Assets are listed on such Schedule) shall be included in the Post-
September 1 Hospitality Business, and (ii) all liabilities of CHCI for and as of
any period on or prior to August 31, 1997, including, without limitation, the
liabilities listed on the Phase I Hospitality Assets and Liabilities Schedule,
shall be paid, discharged or assumed by Gaming Spinco (or paid or discharged
only from the assets listed on the Phase I Hospitality Assets and Liabilities
Schedule or other assets available to CHCI), provided that no Post-September 1
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Hospitality Revenues (as hereinafter defined) may be used for this purpose.
"Post-September 1 Hospitality Revenues" shall mean all earnings or cash, earned
or accrued, attributable to or derived from the Post-September 1 Hospitality
Business; provided that Post-September 1 Hospitality Revenues shall not include
payments received by CHCI after September 1, 1997 in respect of deferred fees up
to an aggregate of $2,000,000 relating to the Sheraton Grand Westshore Hotel.
CHCI further agrees that the Post-September 1 Hospitality Business shall include
only those liabilities of CHCI and its subsidiaries set forth on the Schedule of
Assumed Assets and Liabilities and shall not include any liabilities of CHCI and
its subsidiaries for that portion of any bonus or incentive payment attributable
to or accrued for any period prior to September 1, 1997, severance payments or
unfunded deferred compensation obligations payable to employees of CHCI or any
subsidiary of CHCI.
On the Closing Date, the chief financial officer of CHCI shall certify
that the most recently available monthly statement of assets and liabilities
relating to the Hospitality Business delivered pursuant to Section 6.03(i) (the
"Phase II Hospitality Assets and Liabilities Schedule") (i) was prepared in
accordance with the books and records of CHCI and the CHCI Subsidiaries, (ii)
accurately reflects the items shown thereon as of the date thereof and (iii)
such officer is not aware of any material change in any of the items listed
thereon during the period from the date of such monthly statement through the
Closing Date (the "Stub Period"), or if there are any such material changes, to
disclose such changes with reasonable specificity and to so certify such
changes. If any item of liability shown on the Phase II Hospitality Assets and
Liabilities Schedule is an Unassumed Liability (as hereinafter defined), then
the Initial Number of OpCo Shares shall be recalculated pursuant to Section
1.03(a) as of the Effective Time based on a reduction in the Aggregate
Consideration by an amount equal to the aggregate amount of all Unassumed
Liabilities. "Unassumed Liabilities" shall mean all liabilities of CHCI and the
CHCI Subsidiaries, other than liabilities incurred in the ordinary course of the
business of the Post-September 1 Hospitality Business, or liabilities paid,
discharged or assumed by Gaming Spinco or paid or discharged from funds other
than Post-September 1 Hospitality Revenues or incurred at the request or
direction of OpCo.
In addition, in the event that aggregate Net Working Capital (as
hereinafter defined) for the Duke Lease (as hereinafter defined) and the
leasehold interests held by CHC Lease Partners as reflected on the Phase II
Hospitality Assets and Liabilities Schedule is less than zero, then the Initial
Number of OpCo Shares shall be reduced at the Closing by an amount equal to the
quotient of (i) the amount by which such aggregate Net Working Capital is less
than zero and (ii) the Current Market Price of a Paired Share on the Closing
Date. If such aggregate Net Working Capital is a positive number, OpCo shall
deliver to the Stockholders, pro rata in accordance with their interests set
forth on Schedule A, the number of shares of OpCo Preferred Stock equal to the
quotient of (i) the amount of such positive aggregate Net Working Capital and
(ii) the Current Market Price of a Paired Share on the Closing Date. Net Working
Capital with respect to a leasehold interest shall mean total current assets
minus total current liabilities with respect to such leasehold, determined in
accordance with generally accepted accounting principles consistently applied,
except that with respect to all leasehold interests other than the Duke Lease,
current assets shall not include any inventory.
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(b) Adjustment for Increased Expenses of the Hospitality
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Business. On the Closing Date, CHCI shall deliver to OpCo a statement of accrued
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operating expenses of CHCI and the CHCI Subsidiaries relating to the
Post-September 1 Hospitality Business for the period between the date of this
Agreement and the date of the most recently available monthly statement of
assets and liabilities delivered under Section 6.03(i), prepared in accordance
with the books and records of CHCI and past accounting practices used by CHCI
(the "Operating Expenses"). In the event that the Operating Expenses (except for
expenses paid, discharged or assumed by Spinco or paid or discharged from funds
other than Post-September 1 Hospitality Revenues) exceed the Estimated Expenses
(as defined below), then the Initial Number of OpCo Shares shall be then
recalculated pursuant to Section 1.03(a) as of the Effective Time based on a
reduction in the Aggregate Consideration by an amount equal to such difference
(the "Excess Expenses"). The "Estimated Expenses" for any period means the total
of the estimated expenses of CHCI and the CHCI Subsidiaries (as hereinafter
defined) relating to the operations of the Post-September 1 Hospitality Business
for such period calculated at the rate of $249,715 per month for the months of
September, October and November 1997 and $242,127 per month beginning in
December 1997.
(c) Adjustments for Loss of Management Contracts. In the event
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that any management contract listed on Schedule 1.04(c) hereto (the "Management
Contracts"), has been terminated, or, to the knowledge of CHCI, is at the
Closing Date subject to an expectation of premature termination or an intention
to terminate prematurely, or cannot, for any reason, including the failure of
CHCI to obtain a third party consent, be transferred to OpCo in connection with
the Merger (collectively, the "Terminated Contracts"), then the Initial Number
of OpCo Shares shall be then recalculated pursuant to Section 1.03(a) as of the
Effective Time based on a reduction in the Aggregate Consideration as provided
in this Section 1.04(c). The Aggregate Consideration shall be reduced by the
product of (i) 9.0 and (ii) 70% of the management fee revenue received during
the twelve full months preceding the date of termination with respect to any
such Terminated Contract, except that with respect to any Management Contract
for which management fee revenues thereunder were reduced in connection with the
obtaining of the consent relating to the Merger, the Aggregate Consideration
shall be reduced by the product of (i) 9.0 and (ii) 70% of the annualized amount
of such reduction in management fee revenues. In the event of any reductions in
the Aggregate Consideration under this Section 1.04(c) as a result of Terminated
Contracts, CHCI may substitute management contracts for the Park Central Hotel,
New York and the Pittsburgh Sheraton Station Square Hotel for such Terminated
Contracts to replace up to the amount of any such reductions, with any changes
to be reflected on a revised Schedule 1.04(c). In no event shall the Aggregate
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Consideration be reduced by more than $8.0 million pursuant to this Section
1.04(c). This Section 1.04(c) shall apply only to Management Contracts with
parties other than OpCo or its affiliates and shall not apply to any termination
of (i) a Management Contract resulting principally from willful or intentional
misconduct of OpCo or its agents, (ii) a Management Contract following a sale by
REIT or any of its subsidiaries of the hotel related to such Management Contract
or (iii) a Management Contract for which no consent was required for its
transfer to OpCo hereunder, where such termination is for cause as provided in
such Management Contract and such cause is attributable to acts of OpCo.
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(d) Adjustment for Holiday Inn North Dallas. In the event that
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CHCI fails to deliver the Holiday Inn North Dallas leasehold agreement
unencumbered by any management contract, then the Initial Number of OpCo Shares
shall be recalculated pursuant to Section 1.03(a) as of the Effective Time based
on a reduction in the Aggregate Consideration by an amount equal to $734,461.
(e) Spin Off Tax Liability. The Tax Liability for the
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Distribution ("311 Liability" or "Spin Off Tax Liability") shall be calculated
in accordance with the following procedures:
(i) Forty-five days prior to the expected Closing Date,
Price Waterhouse LLP ("PW") shall make an estimate of the fair market
value of the Gaming Spinco Group (as defined in Section 11.01) as of
the date of the Distribution, taking into account in the valuation the
best estimate of such group's share of the expenses attributable to the
transactions contemplated by this Agreement.
(ii) PW shall estimate the tax items of CHCI which
are available to reduce such liability (including operating losses, net
operating and capital loss carryovers) (collectively, the "Tax
Attributes"). The Tax Attributes shall be calculated without taking
into account the operations of the Hospitality Business for periods
after September 1, 1997.
(iii) PW shall then subtract from (A) the sum of (w)
the estimated value of the Gaming Spinco Group and (x) the amount of
any other gain or income recognized by CHCI Group and Gaming Spinco as
a result of the Distribution (B) the sum of (y) CHCI's adjusted tax
basis in the stock of Gaming Spinco at such time and (z) the Tax
Attributes. It shall then multiply such remainder by the applicable
Federal, state, foreign and local tax rates applicable to income of
CHCI, and the product shall be the tentative 311 Liability.
(iv) The foregoing calculation shall be submitted in
writing by PW (the "PW Report") to OpCo. OpCo shall then have the
opportunity to review the determination of the tentative 311 Liability.
(v) Within fifteen business days of the receipt of
the PW Report, OpCo shall notify CHCI as to whether it accepts or
disputes the tentative 311 Liability reflected in the PW Report. OpCo
must make such determination in good faith.
(vi) If the tentative 311 Liability is acceptable to
OpCo, it shall be deemed to be the 311 Liability.
(vii) If OpCo disputes the tentative 311 Liability,
it shall state its specific objections in its notice, which objections
must be made in good faith. If the parties and their respective
advisors cannot resolve the objections of OpCo, then the PW
7
Report must be submitted to a nationally recognized accounting firm
acceptable to both OpCo and CHCI. Such firm shall then submit its
determination of the 311 Liability, which determination will be binding
on both parties.
At the Closing, the Initial Number of OpCo Shares shall be reduced by
the number of shares of OpCo Preferred Stock equal to the quotient of (i) the
311 Liability and (ii) the Current Market Price of a Paired Share at the Closing
Date.
(f) No Duplicative Adjustments. If and to the extent that an
--------------------------
adjustment to the Aggregate Consideration is made under any provision of this
Section 1.04 by reason of a fact, circumstance or event which may also give rise
to a further adjustment under another provision of this Section 1.04, the net
effect of any prior adjustment shall be taken into account in determining the
amount of any further adjustments so as to avoid any duplicative adjustments.
Section 1.05. Management Contract Earnout Payments. As additional
------------ ------------------------------------
consideration for the Merger, the Surviving Corporation shall, to the extent
applicable, make a contingent payment (each a "Contingent Payment") with respect
to each Pending Management Contract (as hereinafter defined) as set forth below
to the Stockholders pro rata on the basis of their respective interests in the
CHCI Shares and Option Interests, all as indicated on Schedule A which sets
----------
forth opposite each Stockholder's name such Stockholder's aggregate percentage
interest in each Contingent Payment.
(a) Three Year Earndown Calculation. If as of the third
-------------------------------
anniversary of the Closing Date (the "Third Anniversary") any of the management
contracts listed on Schedule 1.05(a) attached hereto has been canceled or
----------------
otherwise terminated for any reason other than a termination resulting from a
default by the manager after the date hereof or the sale of a hotel by or to
REIT OP (as hereinafter defined) or any affiliate of REIT OP and other than a
termination prior to the Closing for which ▇▇▇ adjustment was made pursuant to
Section 1.04 (any such cancelled or terminated contract is a "Terminated
Contract"), then the amount, if any, by which (i) the percentage set forth on
Schedule 1.05(a) for such Terminated Contract (i.e. 35% or 70%) of the gross
----------------
hotel management fees (which term shall for all purposes of this Section 1.05 be
deemed to include any fees payable for accounting, regular ongoing purchasing or
other regular ongoing services rendered by the manager or an affiliate of the
manager and any tradename license fees if such management contract includes a
license agreement and provides for a licensing fee therefor) accrued and payable
under such Terminated Contract with respect to the twelve (12) month period
immediately preceding such termination exceeds (ii) a percentage equal to the
Applicable Substituted Contract Percentage (as hereinafter defined) of the
annualized gross hotel management fees accrued and payable to the Surviving
Corporation or any affiliate of the Surviving Corporation under any Substituted
Management Contracts (as hereinafter defined), with respect to the initial
twelve (12) months thereof, multiplied by 6.0 shall constitute the "3 Year
Earndown." The Applicable Substituted Contract Percentage shall equal 70% unless
any of the Alibhai Family Group (as hereinafter defined) is also a beneficial
owner of the hotel which is the subject of a Substituted Management Contract, in
which case the
8
Applicable Substituted Contract Percentage shall be the product of 70 and a
fraction, the numerator of which is the aggregate percentage beneficial
ownership of the Stockholders Group (as hereinafter defined) in such hotel and
the denominator of which is the sum of the aggregate percentage beneficial
ownership of the Alibhai Family Group (as hereinafter defined) and the aggregate
percentage beneficial ownership of the Stockholders Group in such hotel. The
Applicable Substituted Contract Percentage shall be provided by the Stockholders
to OpCo upon the execution of a Substituted Management Contract, together with
documents reasonably supporting the calculation thereof in accordance with the
foregoing. The 3 Year Earndown shall be applied against and reduce Contingent
Payments as set forth below. For the purposes of this Section 1.05, management
fees shall be deemed to be "accrued and payable" with respect to a period
notwithstanding that they are not actually paid during such period only to the
extent such fees are booked as income of the manager under accrual basis
generally accepted accounting principles, but in any event excluding fees
deferred or subordinated to debt service or returns to the hotel owner or lessee
except to the extent such deferred or subordinated fees are actually paid or all
conditions set forth in the applicable management contract for the payment of
such deferred or subordinated fees have been fully satisfied and such fees are
to be paid in the ordinary course (A) in the case of a Substituted Management
Contract or a Terminated Contract, on or before the Third Anniversary or (B) in
the case of a Pending Management Contract, on or before the Fifth Anniversary.
(b) Contingent Payments. Subject to reduction by the amount of
-------------------
any PAH Participation Adjustment or 3 Year Earndown as provided below, the
Contingent Payment on each Pending Management Contract shall be calculated and
paid at such time as the hotel which is the subject of such Pending Management
Contract has been open for business for twenty-four (24) months, but not earlier
than the Third Anniversary nor later than the Fifth Anniversary except as
otherwise provided below, and shall be equal to (i) the percentage set forth in
Schedule 1.05(b)(i) for such Pending Management Contract of the annualized hotel
-------------------
management fees accrued and payable to OpCo or any affiliate of OpCo, as
manager, under such Pending Management Contract for the second full year of
operations thereof multiplied by (ii) either (A) 7.0, if the terms of the
applicable Pending Management Contract provide that it cannot be terminated by
any party other than the manager for a period of at least 10 but less than 15
years from the date when normal operations and payments to the manager begin to
accrue thereunder, or (B) 9.0, if the terms of the applicable Pending Management
Contract provide that it cannot be terminated by any party other than the
manager for a period of at least 15 years from the date when normal operations
and payments to the manager begin to accrue thereunder (for all purposes of this
Section 1.05, "normal operation" will be deemed to begin when the applicable
hotel opens for business if there is no so-called "soft opening" and otherwise
upon conclusion of a reasonable soft opening period); provided, however, that,
-------- -------
notwithstanding the foregoing, if, as of the Fifth Anniversary, a hotel which is
the subject of a Pending Management Contract is open for business but has not
been open for business for the twenty-four (24) month period immediately
preceding the Fifth Anniversary, then the Contingent Payment shall be calculated
as of the date on which such hotel has been open for business for twenty-four
(24) months and paid as provided below. A Pending Management Contract shall be
deemed not to be subject to termination by any party other than the manager if
it can only be terminated by such other party
9
(A) for default by the manager, (B) except as otherwise provided below with
respect to a Pending Management Contract on the Grand Bay Philadelphia, as a
result of the sale of the applicable hotel to a third party other than REIT or
any affiliate of REIT as long as the manager receives a termination fee as a
result of such sale in an amount at least equal to the Minimum Termination Fee
Amount (as defined below), (C) as a result of the sale of the applicable hotel
to a governmental authority pursuant to condemnation or as a result of the sale
of the applicable hotel pursuant to foreclosure (or deed in lieu of
foreclosure), (D) as a result of a casualty to the applicable hotel, or (E) as a
result of the failure of the manager to meet reasonable performance criteria
specified in such Pending Management Contract. Notwithstanding the foregoing,
the Partnership agrees that a management contract on the hotel property to be
known as the Grand Bay Philadelphia shall not be disqualified as a Pending
Management Contract solely by reason of its failure to include a termination fee
on sale at least equal to the Minimum Termination Fee Amount as long as (x) such
termination fee on sale is at least equal to the termination fee set forth on
Schedule 1.05(b)(ii) hereto and (y) it is agreed that the 7.0 multiple set forth
--------------------
in clause (ii)(A) above applies notwithstanding the term of such management
contract as long as such term is at least ten (10) years. If at any time the
Management Contract for the Philadelphia Grand Bay is amended to provide for a
termination fee on sale at least equal to the Minimum Termination Fee, then the
9.0 multiple set forth in clause (ii)(B) shall apply as long as the term of such
management contract is at least fifteen (15) years from the date on which normal
operations and payments to the manager begin (or began) to accrue thereunder,
and an additional Contingent Payment (calculated as herein provided) in respect
of the additional 2.0 multiple shall be due to the Stockholders within ten (10)
business days after OpCo receives notice of such amendment to such management
contract together with a copy of such amendment, consistent with the remaining
provisions of this Section 1.05.
If a Contingent Payment, less the 3 Year Earndown (or by the unapplied
portion of the 3 Year Earndown if portions of the 3 Year Earndown have
previously been applied against Contingent Payments) and any applicable PAH
Participation Adjustment, is a positive number, the Surviving Corporation shall
pay to the Stockholders in accordance with the penultimate paragraph of Section
1.03(a), their proportionate shares of the Contingent Payment within ten (10)
business days after the determination thereof in an aggregate number of shares
of OpCo Preferred Stock equal to the amount of the Contingent Payment divided by
the Current Market Price of a Paired Share as of the date of such determination.
Notwithstanding anything to the contrary set forth herein, in no event shall the
aggregate Contingent Payments exceed $18,000,000.
(c) Other Definitions.
-----------------
(i) "Pending Management Contracts" means management
contracts that are entered into by OpCo or any affiliate of
OpCo, as manager, for the hotels listed on Schedule 1.05(b)(i)
-------------------
attached hereto, for which (A) the terms thereof provide that
such management contracts cannot be terminated by any party
other than the manager (as more fully set forth above) for a
period of at least 10 years from the date when normal
operations and accrual of payments to
10
the manager begin thereunder, (B) the hotels which are the
subject of such management contracts begin normal operations
and management fees payable to the manager begin to accrue on
or before the Fifth Anniversary and (C) such management
contracts are otherwise reasonably satisfactory to OpCo (it
being agreed that if OpCo or any affiliate of OpCo enters into
a management contract with respect to any such hotel as
manager, such management contract shall be deemed to be
"otherwise reasonably satisfactory to OpCo" for the purposes
of this clause (C)).
(ii) "PAH Participation Adjustment" shall mean
a decrease in the Contingent Payment to be effected by
subtracting therefrom an amount equal to the product of (A)
the amount of the Contingent Payment otherwise determined and
(B) a fraction, the numerator of which is the aggregate
investment made by REIT, OpCo or any affiliate of REIT or OpCo
(collectively, the "PAH Group") directly or indirectly in the
Pending Management Contracts (including, without limitation,
payment or reimbursement of any termination fees paid to a
prior manager) or in the hotel property that is the subject of
such Pending Management Contract, and the denominator of which
is the aggregate investment on account thereof made by the PAH
Group, the Stockholders and the Alibhai Family Group (and for
the purpose of this paragraph, none of the parties included in
the denominator other than the PAH Group will be considered to
be an affiliate of the PAH Group).
(iii) "Minimum Termination Fee Amount" means an
amount equal to the discounted present value of a stream of
monthly cash flows each equal to one twelfth (1/12th) of the
total management fees (including base fees and, if (and only
to the extent) a multiple of incentive fees was included in
the calculation of the applicable Contingent Payment,
incentive fees, but excluding reimbursements of costs or
expenses) accrued and payable under the applicable Pending
Management Contract with respect to the twelve (12) month
period immediately preceding the termination of such Pending
Management Contract for a period (the "Calculation Period")
beginning on the Termination Date and ending on that date
which is twenty-four (24) months prior to the originally
scheduled expiration of the term of such Pending Management
Contract appropriately prorated for partial months, using an
annual discount rate of eleven percent (11%); provided,
--------
however, that if at the time of the termination of the Pending
-------
Management Contract the remaining term thereof is less than
thirty-six (36) months, then the Calculation Period shall be
equal to fifty percent (50%) of such remaining term.
(iv) "Substituted Management Contract" means any
management contract entered into after the date of this
Agreement between OpCo or an affiliate of OpCo, as manager,
and a hotel owner which is at least 30% beneficially owned by
the Stockholders Group (but not including any Pending
Management Contract or any extension or renewal of any
existing management
11
contract under which OpCo, an affiliate of OpCo, CHCI or any
CHCI Subsidiary (as hereinafter defined) or GAH-II, L.P. is
the manager), for which (A) the hotel which is the subject of
such Substituted Management Contract is in normal operations
and the management fees payable to the manager begin to accrue
on or before the before the Third Anniversary, (B) such
Substituted Management Contract is on economic terms
substantially similar to the economic terms of the Terminated
Contracts and (C) such Substituted Management Contract is
otherwise reasonably satisfactory to OpCo (it being agreed
that if OpCo or any affiliate of OpCo enters into any such
management contract, such management contract shall be deemed
to be "otherwise reasonably satisfactory to OpCo" for the
purposes of this clause (D)).
(v) "Alibhai Family Group" means ▇▇▇▇▇ ▇▇▇▇▇▇▇, his
parents, uncles and aunts, siblings and the children of any of
them or entities beneficially owned and effectively controlled
by any of them.
(vi) "Stockholders Group" means ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇,
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, W. ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ or entities beneficially owned and
effectively controlled by any of them.
Section 1.06. Closing. The transactions contemplated by this Agreement
------------ -------
shall be consummated at a closing (the "Closing") which will take place at the
offices of ▇▇▇▇▇▇▇, Procter & ▇▇▇▇ LLP, ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇▇▇, on the tenth (10th) business day (or such earlier day as shall be
agreed upon by the parties, which agreement shall not be unreasonably withheld)
after the day on which all of the conditions to the Closing set forth in Article
VIII (other than conditions to be satisfied at the Closing which shall be
satisfied or waived as of the Closing) have been satisfied or waived in
accordance with the terms hereof, such day being referred to herein as the
Closing Date; provided, however, that the conditions in Sections 8.01(a) and
8.02(b) cannot be waived by OpCo or CHCI, respectively; provided further, that
in no event shall the Closing take place prior to January 1, 1998 without the
prior written consent of OpCo.
Section 1.07. Effective Time. Subject to the terms and conditions
------------ --------------
hereof, on the Closing Date, CHCI and OpCo shall file (a) Articles of Merger
(the "Articles of Merger") in the form attached hereto as Exhibit D with the
---------
Secretary of State of the State of Florida in accordance with the relevant
provisions of the FBCA and (b) a Certificate of Merger (the "Certificate of
Merger") in the form attached hereto as Exhibit E with the Secretary of State of
---------
the State of Delaware in accordance with the relevant provisions of the DGCL. A
form of the Certificate of Merger and a form of the Certificate of Designations
shall be precleared with the Secretary of State of the State of Delaware prior
to the Closing Date and a form of the Articles of Merger to the extent
practicable, shall be precleared with the Secretary of State of the State of
Florida prior to the Closing Date. The Merger shall be effective at such time as
provided in the Certificate of Merger (the "Effective Time") but in no event
later than the Termination Date (as hereinafter defined).
12
Section 1.08. Certificate of Incorporation. The Amended and Restated
------------ ----------------------------
Certificate of Incorporation of OpCo (the "Certificate of Incorporation") in
effect immediately prior to the Effective Time, as amended by (i) the
Certificate of Designations and (ii) the Certificate of Merger, shall be the
Certificate of Incorporation of the Surviving Corporation until amended in
accordance with applicable law.
Section 1.09. By-Laws. The Amended and Restated By-Laws of OpCo (the
------------ -------
"By-laws") in effect as of the Effective Time shall from and after the Effective
Time be the By-Laws of the Surviving Corporation until amended in accordance
with applicable law or such By-Laws.
Section 1.10. Directors and Officers.
------------ ----------------------
(a) Directors. At the Effective Time, each Person (as
---------
hereinafter defined) listed on Schedule 1.10(a) hereto shall be a director of
----------------
the Surviving Corporation.
(b) Officers. At the Effective Time, each Person listed on
--------
Schedule 1.10(b) hereto shall be an officer of the Surviving Corporation with
----------------
the title or titles set forth across such Person's name.
Section 1.11. Surrender of Certificates and Delivery of Other
------------ -----------------------------------------------
Documents; Stock Transfer Books.
-------------------------------
(a) At the Effective Time, OpCo shall deliver, with respect
to each Stockholder who has complied with the provisions of Section 1.11(b), the
number of shares of OpCo Preferred Stock issuable to such Stockholder pursuant
to Section 1.03(a), provided, however, that no fraction of a share of OpCo
Preferred Stock shall be issued in connection with the Merger and that in lieu
of any such fractional shares, each Stockholder shall be paid an amount in cash
(without interest), rounded to the nearest cent, determined by multiplying (i)
$23.25, by (ii) the fraction of a share of OpCo Preferred Stock to which such
Stockholder would otherwise be entitled to receive under Section 1.03(a) of this
Agreement.
(b) At the Closing, each Stockholder shall (i) surrender to
OpCo a certificate or certificates representing all of the CHCI Shares owned by
him (or an affidavit of lost certificate acceptable in form and substance to
OpCo), (ii) deliver to OpCo an executed LockUp Agreement relating to such
Stockholder's OpCo Preferred Stock substantially in the form of Exhibit F hereto
---------
(the "Lock-Up Agreements"), (iii) deliver to OpCo an executed counterpart
signature page to the Stockholder Indemnification Agreement (as defined in
Section 2.01), and (iv) deliver to OpCo an executed representation letter
relating to certain investor representations substantially in the form of
Exhibit G hereto.
---------
If any Stockholder fails to deliver all of the documents specified
under this Section 1.11(b) (a "Non-Complying Stockholder"), then OpCo shall have
the right to withhold delivery of all or a portion of the shares of OpCo
Preferred Stock of such Non-Complying Stockholder (the "Withheld Shares") until
the earlier to occur of, as the case may be, (i) the expiration of
13
the lock-up period prescribed in the Lock-Up Agreement (as defined in Section
1.11(b)), (ii) the expiration of the Stockholder's obligations under the
applicable provision of the Stockholder Indemnification Agreement, or (iii) the
delivery by such Non-Complying Stockholder of all of the documents specified
under Section 1.11(b) (the "Withholding Period").
The Withheld Shares shall be held for the benefit of the Non-Complying
Stockholder during the Withholding Period. The Withheld Shares shall constitute
issued and outstanding shares of OpCo Preferred Stock and shall be considered
held of record by the Non-Complying Stockholder for all purposes (subject to
OpCo's exercise of its rights under the Stockholder Indemnification Agreement),
including but not limited to participation in dividends and distributions,
voting rights, and any rights upon the liquidation of OpCo.
With respect to any Stockholder who does not execute the Stockholder
Indemnification Agreement as of the Closing Date (a "Non-Executing
Stockholder"), OpCo shall withhold delivery of all or a portion of the shares of
OpCo Preferred Stock of such Non-Executing Stockholder and use such shares to
satisfy such Non-Executing Stockholder's indemnification obligations in all
cases to the extent set forth in the Stockholder Indemnification Agreement.
(c) At the Effective Time, the stock transfer books of CHCI
shall be closed and there shall be no further registration of transfers of CHCI
Shares thereafter on the records of CHCI.
(d) OpCo shall withhold delivery, pro rata among the
Stockholders on the basis of their respective interest in the CHCI Shares and
Option Interests, all as indicated on Schedule A, such number of shares of their
----------
respective shares of OpCo Preferred Stock equal to the quotient of (i)
$10,000,000 divided by (ii) the Current Market Price of a Paired Share at the
Closing Date (the "Stockholder Indemnity Shares") and shall use such shares to
satisfy the Stockholders' indemnification obligations under the Stockholders
Indemnification Agreement. The Stockholder Indemnity Shares shall be so withheld
until the first anniversary of the date of this Agreement; provided, however,
that in the event an indemnification claim is pending pursuant to the
Stockholder Indemnification Agreement on such first anniversary date, such
number of Stockholder Indemnity Shares having an aggregate Current Market Price
not greater than the approximate exposure of OpCo with respect to such pending
indemnification claim shall not be delivered to the Stockholders until such
claim is resolved in accordance with the Stockholder Indemnification Agreement.
Until used to satisfy such indemnification obligations, the Stockholder
Indemnity Shares shall be held for the benefit of the Stockholders during the
period in which such shares are withheld by OpCo. The Stockholder Indemnity
Shares shall constitute issued and outstanding shares of OpCo Preferred Stock
and shall be considered held of record by the Stockholders for all purposes
(subject to OpCo's right to use such shares in accordance with this Section
1.11(d)), including, but not limited to, participation in dividends and
distributions, voting rights, and any rights upon the liquidation of OpCo.
14
Section 1.12. Stock Options.
------------ -------------
(a) Section 1.12(a) of the Disclosure Schedule sets forth a
list of each outstanding option, warrant, right or agreement to which CHCI is a
party which entitles any Person to purchase or otherwise acquire CHCI Shares (or
any right or interest therein) at any time (the "Options") whether granted under
the CHCI Stock Option Plan (the "Stock Plan") or otherwise, which has not been
exercised by the date of this Agreement, and for each Option sets forth (i) the
name of the holder of such Option, (ii) the maximum number of CHCI Shares for
which such Option is exercisable, (iii) the exercise price per CHCI Share of
such Option and (iv) the vesting schedule of such Option.
(b) As soon as practicable following the date of this
Agreement, CHCI shall take all actions (including, without limitation, amending
the provisions of the Stock Plan or option agreements issued thereunder to the
extent permitted thereunder) necessary to provide that:
(i) each Option which has not been exercised, canceled
or otherwise satisfied shall, immediately prior to the Effective Time,
be canceled and each holder of an Option shall be entitled to receive
an amount of consideration at the Closing (the "Option Transaction
Value") which shall be expressed in terms of Option Interests (the
"Option Interests"). Schedule A hereto sets forth a complete list of
----------
all holders of such Options (the "Option Holders") and the Option
Transaction Value and Option Interest which each such holder is
entitled to receive; and
(ii) no Options shall be granted after the date of this
Agreement under the Stock Plan and, as of the Effective Time, the Stock
Plan shall be terminated.
Section 1.13. Withholding. OpCo will be entitled to deduct and withhold
------------ -----------
from the consideration otherwise payable pursuant to this Agreement to any
Stockholder such amounts as may be required to be deducted and withheld with
respect to the making of such payment under the Code, or under any provision of
state, local or foreign Tax (as hereinafter defined) law.
ARTICLE II. CERTAIN OBLIGATIONS IN CONNECTION WITH THE MERGER.
---------- -------------------------------------------------
Section 2.01. Stockholder Indemnification Agreement. OpCo and the
------------ -------------------------------------
Stockholders shall have entered into the Stockholder Indemnification Agreement,
effective as of the Effective Time (the "Stockholder Indemnification Agreement")
in substantially the form of Exhibit H hereto.
---------
Section 2.02. Credit Agreement. OpCo and CHCI shall have entered into a
------------ ----------------
Credit Agreement, effective as of the date hereof (the "Credit Agreement").
15
Section 2.03. Cash Payment Relating to Unstapling. Notwithstanding
------------ -----------------------------------
anything in this Agreement to the contrary (except as provided in Sections 2.04
and 9.03 of this Agreement), in the event that OpCo shall determine in good
faith, as reflected in computations set forth in a certificate executed and
delivered by the Chief Financial Officer of OpCo (an "Officer's Certificate"),
that an issuance (an "Unstapling Issuance") of shares of OpCo Preferred Stock at
any time and from time to time pursuant to this Agreement may result in the
"unstapling" of OpCo and REIT (as determined below), OpCo shall have the right,
in lieu of issuing that number of shares of OpCo Preferred Stock that would
result in such unstapling, to pay in cash an amount equal to the product of (x)
the quotient obtained by dividing the Current Market Price of a Paired Share at
that time by $23.25 and (y) the product of (A) such number of shares of OpCo
Preferred Stock and (B) the Current Market Price at that time of a Paired Share.
For purposes of this Section 2.03, an issuance of OpCo Preferred Stock may be
deemed to result in the "unstapling" of OpCo and REIT if OpCo determines in good
faith, as reflected in an Officer's Certificate, that the aggregate value of all
outstanding securities representing beneficial ownership of OpCo (within the
meaning of Section 269B(c)(2) of the Code) that are not required to be
transferred with securities issued by REIT, including the shares of OpCo
Preferred Stock that would otherwise be issued in the Unstapling Issuance (the
"Aggregate Unstapled Stock Value"), exceeds 95% of the aggregate value of all
outstanding securities representing beneficial ownership of OpCo that are
required to be transferred with securities issued by REIT (the "Aggregate
Stapled Stock Value"). In the event that the aggregate value of the OpCo
Preferred Stock issuable under the terms of this Agreement, including the shares
of OpCo Preferred Stock that would otherwise be issued in the Unstapling
Issuance, would be less than or equal to 95% of the Aggregate Stapled Stock
Value, then the amount of cash payable in lieu of shares of OpCo Preferred Stock
shall be increased by the Tax Gross-Up (as hereinafter defined). As of the date
of this Agreement, after giving pro forma effect to the consummation of the
Merger in accordance with the terms of this Agreement and the consummation of
the merger of Wyndham Hotel Corporation with REIT in accordance with the terms
described in the preliminary joint proxy statement filed with the SEC on
September 23, 1997, OpCo estimates that it may issue up to 4,300,000 shares of
OpCo Preferred Stock under Section 1.03(a) before an Unstapling Issuance would
result.
Section 2.04. Failure to Consummate Wyndham. Notwithstanding anything
------------ -----------------------------
in this Agreement to the contrary, in the event that REIT and Wyndham Hotel
Corporation fail to consummate their currently proposed business combination or
a similar business combination involving the parties and/or their affiliates
prior to December 31, 1997 (which date may be extended for up to 90 days with
the consent of CHCI, which consent shall not be unreasonably withheld), OpCo,
REIT and CHCI shall cooperate with each other in good faith to restructure the
Merger and to consummate a mutually tax efficient business combination involving
OpCo and/or REIT and any of their affiliates and CHCI and of its affiliates (a
"Restructured Transaction") as soon as practicable after the occurrence of the
foregoing failure; provided, however, that if the parties fail to consummate a
Restructured Transaction, OpCo and CHCI shall consummate the Merger in
accordance with this Agreement with OpCo delivering cash in lieu of OpCo
Preferred Stock to the extent required under Section 2.03 except that the Tax
Gross-Up thereunder shall be reduced by 50%.
16
Section 2.05. Tax Gross-Up.
------------ ------------
(a) "Tax Gross-Up" shall mean, with respect to each
Stockholder and each Tax Recognition Event (as hereinafter defined), an
additional amount that would allow such Stockholder to retain, net of all Taxes
that the Stockholder is required to pay at the Tax Rate (as hereinafter defined)
in connection with such Tax Recognition Event (including as a result of the
receipt of payments hereunder), the amount of cash that would have been retained
by such Stockholder as a result of the Tax Recognition Event had no Taxes been
payable with respect to such Tax Recognition Event.
(b) The "Tax Rate" for each Stockholder shall be the
aggregate of such Stockholder's actual federal, state, local and, if applicable,
foreign tax rates for income of the nature that will be recognized by the
Stockholder as a result of the Tax Recognition Event, which tax rates shall take
into account applicable deductions for state and local taxes payable as a result
of such Tax Recognition Event. As promptly as practicable but in no event later
than ten (10) business days after the Tax Recognition Event, the Stockholder
shall provide to OpCo a written statement setting forth the Stockholder's Tax
Rate and the Stockholder's tax basis (as of the Tax Recognition Event) on the
CHCI Shares in question. Promptly upon receipt of such information and in no
event later than three (3) business days before the date on which the
Stockholder must pay Taxes as a result of the Tax Recognition Event, OpCo shall
compute the aggregate Tax Gross-Up for each Stockholder in respect of such Tax
Recognition Event.
(c) "Tax Recognition Event" shall mean the receipt of a cash
payment by a Stockholder pursuant to Section 2.03.
Section 2.06. Redemption of OpCo Preferred Stock. Upon a redemption
------------ ----------------------------------
pursuant to Section 6(a) of the Certificate of Designations of OpCo Preferred
Stock owned by a Stockholder, the Corporation shall pay the Stockholder, in
addition to the redemption proceeds received pursuant to said Section 6(a), an
amount equal to product of (a) the aggregate redemption proceeds received by
such Stockholder and (b) the Ratable Gross-Up Percentage (as hereinafter
defined) in effect at that time. "Ratable Gross-Up Percentage" shall initially
be 120% and shall decline by 11/3% per year on each anniversary of the date of
this Agreement, so that on the fifteenth anniversary, the Ratable Gross-Up
Percentage shall be 100%.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF CHCI.
----------- --------------------------------------
Section 3.01. Making of Representations and Warranties; Certain
------------ -------------------------------------------------
Definitions.
-----------
(a) As a material inducement for OpCo to enter into this
Agreement and consummate the transactions contemplated hereby, CHCI hereby makes
to it as of the date hereof the representations and warranties contained in this
Article III.
17
(b) For purposes of this Agreement, references to (i) the
"Disclosure Schedule" shall mean the disclosure schedule delivered by CHCI under
this Agreement to OpCo; (ii) a "Material Adverse Effect on CHCI" shall mean a
material adverse effect on the properties, assets, business, condition
(financial or otherwise) or results of operations of the Hospitality Business of
CHCI and the CHCI Subsidiaries taken as a whole; and (iii) the "knowledge" or
"best knowledge" of CHCI or words of similar meaning shall be deemed to refer to
actual knowledge of the Persons listed in Section 3.01 of the Disclosure
Schedule.
Section 3.02. Organization and Corporate Power.
------------ --------------------------------
(a) CHCI is a corporation duly organized, validly existing
and in good standing under the laws of the state of Florida, and is duly
qualified or registered as a foreign corporation in, and is in good standing
under the laws of, each jurisdiction (i) listed in Section 3.02 of the
Disclosure Schedule or (ii) in which it is required to be licensed or qualified
to conduct the Hospitality Business or own its properties related to the
Hospitality Business, except where the failure to so qualify or register would
not reasonably be expected to have a Material Adverse Effect on CHCI. CHCI has
all requisite corporate power and authority to conduct the Hospitality Business
as presently conducted. CHCI is not in violation of any term of its Articles of
Incorporation or By-laws.
(b) Each of the CHCI Subsidiaries is a corporation or
partnership duly incorporated or organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization,
has the corporate or partnership power and authority to own its properties and
to carry on its business as it is now being conducted, and is duly qualified to
do business and is in good standing in each jurisdiction in which the ownership
of its property or the conduct of its business requires such qualification,
except for jurisdictions in which such failure to be so qualified or to be in
good standing would not reasonably be expected to have a Material Adverse Effect
on CHCI.
(c) Neither CHCI nor any CHCI Subsidiary is in violation of
any order of any court, governmental authority or arbitration board or tribunal,
or any law, ordinance, governmental rule or regulation to which CHCI or any CHCI
Subsidiary or any of their respective properties or assets relating to the
Hospitality Business is subject, where such violation would reasonably be
expected to have a Material Adverse Effect on CHCI. CHCI and the CHCI
Subsidiaries have obtained all licenses, permits and other authorizations and
have taken all actions required by applicable law or governmental regulations in
connection with the Hospitality Business as now conducted, where the failure to
obtain any such license, permit or authorization or to take any such action
would reasonably be expected to have a Material Adverse Effect on CHCI.
(d) True and complete copies of the Articles of Incorporation
and By-laws of CHCI and the organizational documents and partnership and joint
venture agreements (and in each such case, all amendments thereto) of each of
the CHCI Subsidiaries have previously been delivered to OpCo.
18
Section 3.03. Authority.
------------ ---------
(a) Each of CHCI and the CHCI Subsidiaries has the requisite
power and authority to enter into this Agreement and all other agreements
pursuant to or as contemplated by this Agreement (the "Transaction Agreements")
to be executed and delivered at or prior to the Closing by CHCI and/or the CHCI
Subsidiaries, as applicable, and to carry out the transactions contemplated
hereby or thereby, subject to, among other things, Stockholder Approval (as
defined in Section 8.02(a)) and the Gaming Regulatory Approvals (as defined in
Section 6.02(b)). The execution, delivery and performance of this Agreement and
the Transaction Agreements by CHCI or the CHCI Subsidiaries, as the case may be,
pursuant to this Agreement have been or prior to the Closing will be duly
authorized by all necessary corporate action of CHCI or the CHCI Subsidiaries,
as the case may be, and no other action on the part of CHCI or the CHCI
Subsidiaries, as the case may be, is or prior to the Closing will be required in
connection herewith or therewith. This Agreement and all of the Transaction
Agreements constitute, or when executed and delivered by CHCI or the CHCI
Subsidiaries, as the case may be, will constitute, valid and binding obligations
of CHCI or the CHCI Subsidiaries, as the case may be, enforceable in accordance
with their respective terms, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally, subject to general principles of
equity, and except to the extent that indemnification provisions may be
unenforceable due to public policy.
(b) Except as set forth in Section 3.03 of the Disclosure
Schedule, the execution and delivery by CHCI or the CHCI Subsidiaries, as the
case may be, of this Agreement and the Transaction Agreements does not, and the
performance of their respective obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby will not: (A)
conflict with or result in a breach of any provisions of the Articles of
Incorporation or By-laws of CHCI, or the organizational documents, partnership
agreements or joint venture agreements of CHCI or any CHCI Subsidiary; (B)
violate, or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the assets of CHCI or the CHCI Subsidiaries under, or result in
being declared void, voidable or without further binding effect, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust or any license, franchise, permit, lease, contract, agreement (including,
without limitation, any management or franchise agreement) or other instrument
or obligation, whether written or oral, to which CHCI or any of the CHCI
Subsidiaries is a party, or by which CHCI or any of the CHCI Subsidiaries or any
of their properties relating to the Hospitality Business is bound or affected,
except for any of the foregoing matters which, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect on CHCI; or
(C) other than the filings provided for in this Agreement, including, without
limitation, all filings with and notifications of governmental authorities,
regulatory agencies and other entities required to be made under the
19
▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of ▇▇▇▇ (▇▇▇ "▇▇▇ ▇▇▇"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act of 1933, as amended (the "Securities Act"), or applicable state securities
and "Blue Sky" laws (collectively, the "Regulatory Filings") and all filings
with and notifications of governmental authorities, regulatory agencies and
other entities required to be made by it in connection with the Spin Off,
including but not limited to, filings (the "Gaming Regulatory Filings") with the
Louisiana State Police, the Louisiana Gaming Control Board, the Ontario Casino
Corporation and the Alcohol and Gaming Commission of Ontario (collectively, the
"Gaming Regulatory Authorities"), require any consent, approval or authorization
of, or declaration, filing or registration with, any governmental or regulatory
authority, except where the failure to obtain any such consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority would not reasonably be expected to have a Material
Adverse Effect on CHCI.
Section 3.04. Capitalization. The total authorized capital stock of
------------ --------------
CHCI and the number of shares of capital stock of CHCI issued and outstanding as
of the date hereof is as set forth in Section 3.04 of the Disclosure Schedule.
All of such issued and outstanding shares of capital stock of CHCI are duly and
validly issued, fully paid and nonassessable, were issued in compliance with all
applicable state and federal securities laws and are owned of record by the
Stockholders indicated to own such shares on Schedule A hereto. No shares of
----------
capital stock of CHCI are held in the treasury of CHCI. Schedule A sets forth a
----------
true and correct list of all persons who after the Spin Off will have rights to
acquire shares of capital stock of CHCI and the Option Transaction Value and
Option Interests set forth therein represent the full amount of the obligation
of CHCI in respect of such rights of such persons. Except as set forth in
Schedule A and Section 3.04 of the Disclosure Schedule, (i) no person other than
----------
a Stockholder owns of record any shares of any class of capital stock of CHCI;
(ii) CHCI is not a party to any outstanding subscriptions, options, warrants,
commitments, agreements, arrangements or commitments of any kind for or relating
to the issuance, or sale of, or outstanding securities convertible into or
exchangeable for, any shares of capital stock of any class or other equity
interests of CHCI; (iii) no person has any preemptive right, right of first
refusal or similar right to acquire the CHCI Shares or any other shares of
capital stock of CHCI from CHCI; (iv) CHCI is not a party to any restrictions on
the transfer of any shares of capital stock of CHCI, other than those imposed by
relevant state and federal securities laws or this Agreement; (v) no Person has
any right to cause CHCI to effect the registration under the Securities Act of
any shares of its capital stock or any other securities (including debt
securities); (vi) CHCI has no obligation to purchase, redeem or otherwise
acquire any of its equity securities or any interests therein, or to pay any
dividend other than the Spin Off or make any other distribution in respect
thereof; and (vii) CHCI is not a party to any voting trusts, stockholders'
agreements, or proxies relating to any securities of CHCI. Notwithstanding
anything in this Agreement to the contrary, Schedule A and the representations
and warranties contained in this Section 3.04 shall be true and correct on the
Closing Date to the full extent as if made on such date.
Section 3.05. Subsidiaries; Investments. Except as set forth in Section
------------ -------------------------
3.05 of the Disclosure Schedule, CHCI neither owns nor has any direct or
indirect ownership interest in or
20
control over any corporation, partnership, joint venture, limited liability
company or partnership or other entity of any kind. The Persons listed in
Section 3.05 of the Disclosure Schedule that CHCI owns or has any direct or
indirect ownership interest in or control over immediately following the Spin
Off are hereinafter sometimes referred to collectively as the "CHCI
Subsidiaries" and individually, a "CHCI Subsidiary," and all Persons listed on
Section 3.05 of the Disclosure Schedule are hereinafter sometimes referred to
collectively as "All CHCI Subsidiaries." Except as set forth in Section 3.05 of
the Disclosure Schedule, (i) CHCI owns directly or indirectly each of the
outstanding shares of capital stock or all of the partnership or other equity
interests of each of the CHCI Subsidiaries; (ii) each of the outstanding shares
of capital stock in each of the CHCI Subsidiaries having corporate form is duly
authorized, validly issued, fully paid and nonassessable; (iii) each of the
outstanding shares of capital stock of, or partnership or other equity interests
in, each of the CHCI Subsidiaries is owned, directly or indirectly, by CHCI free
and clear of all liens, pledges, security interests, claims or other
encumbrances; and (iv) following the Spin Off, CHCI will neither own nor have
any direct or indirect ownership interest in or control over any corporation,
partnership, joint venture or other entity of any kind other than the CHCI
Subsidiaries. The following information for each CHCI Subsidiary as of the date
hereof is set forth in Section 3.05 of the Disclosure Schedule: (i) its name and
jurisdiction of incorporation or organization; (ii) its authorized capital stock
or share capital or partnership or other interests; (iii) the name of each
stockholder or owner of a partnership or other equity interest and the number of
issued and outstanding shares of capital stock or share capital or percentage
ownership for non-corporate entities held by it; and (iv) the name of the
general partner or partners, if applicable.
Section 3.06. Financial Statements. CHCI has delivered to OpCo the
------------ --------------------
following financial statements:
(i) consolidated balance sheets for the fiscal years
ended November 30, 1996 and 1995 and statements of income, retained
earnings and cash flows for its fiscal years then ended, with the
appropriate footnotes, certified by PW; and
(ii) balance sheet as of August 31, 1997 (the "Base
Balance Sheet") and statements of income, retained earnings and cash
flows for the nine-month period then ended.
Said financial statements have been prepared in accordance with
generally accepted accounting principles applied consistently during the periods
covered thereby, are complete and correct in all material respects, and present
fairly in all material respects the financial condition of CHCI and its
subsidiaries on a consolidated basis at the dates of said statements and the
results of its operations and its cash flows for the periods covered thereby.
Section 3.07. Absence of Undisclosed Liabilities. Except (a) as
------------ ----------------------------------
disclosed in Section 3.07 of the Disclosure Schedule and (b) for liabilities
which will not be liabilities of CHCI or any CHCI Subsidiary after the Spin Off,
neither CHCI nor any CHCI Subsidiary has liabilities of any nature, whether
accrued, absolute, absolute, contingent or otherwise, asserted or
21
unasserted, known or unknown (including without limitation liabilities as
guarantor or otherwise with respect to obligations of others, or liabilities for
taxes due or then accrued or to become due or contingent or potential
liabilities regardless of whether claims in respect thereof had been asserted as
of the date of the Base Balance Sheet).
Section 3.08. Absence of Certain Developments. Since the date of the
------------ -------------------------------
Base Balance Sheet, except as contemplated by this Agreement, CHCI and the CHCI
Subsidiaries have conducted the Hospitality Business and have incurred
liabilities relating to the activities of the Hospitality Business only in the
ordinary course consistent with past practice and, except as set forth in
Section 3.08 of the Disclosure Schedule or directly related to the Spin Off,
there has been: (i) no change which has had or would reasonably be expected to
have a Material Adverse Effect on CHCI; (ii) no mortgage, encumbrance or lien
placed on any of the assets relating to the Hospitality Business of CHCI or any
CHCI Subsidiary; (iii) no declaration, setting aside or payment of any dividend
or other distribution with respect to, or any direct or indirect redemption or
acquisition of, any shares of any capital stock of any class of CHCI or any CHCI
Subsidiary or any options, warrants or other rights to acquire, or securities
convertible into or exchangeable for, any such capital stock; (iv) no incurrence
or modification of any contingent liability with respect to the obligations of
others, and no incurrence or modification of any other contingent or fixed
obligations or liabilities except in the ordinary course of business consistent
with past practice; (v) no material increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee, agent or
stockholder other than salary increases in the ordinary course of business
consistent with past practice of CHCI or any CHCI Subsidiary; (vi) no material
loss, destruction or damage to any property relating to the Hospitality Business
of CHCI or any CHCI Subsidiary or any property as to which CHCI or any CHCI
Subsidiary has a leasehold interest or a management contract, whether or not
insured; (vii) no notice of any claim of unfair labor practices or labor dispute
or work stoppage involving CHCI or any CHCI Subsidiary and no change in senior
personnel of CHCI or any CHCI Subsidiary; (viii) no acquisition or disposition
of any assets relating to the Hospitality Business (or any contract or
arrangement therefor) other than in the ordinary course of business; (ix) no
employment agreements entered into by CHCI or any CHCI Subsidiary and no
material obligation or liability incurred by CHCI or any CHCI Subsidiary to any
of their officers, directors, stockholders or employees, or any loans or
advances made by CHCI or any CHCI Subsidiary to any of their officers,
directors, stockholders or employees, except normal compensation and expense
allowances payable to officers or employees; (x) no change in accounting methods
or practices, credit practices or collection policies used by CHCI or any CHCI
Subsidiary; and (xi) no agreement or understanding whether in writing or
otherwise, that would result in any of the transactions or events or require
CHCI or any CHCI Subsidiary to take any of the actions specified in clauses (i)
through (x) above.
Section 3.09. Transactions with Affiliates. Except as set forth in
------------ ----------------------------
Section 3.09 of the Disclosure Schedule and except for those items which will
not be liabilities of CHCI or any CHCI Subsidiary after the Spin Off, there are
no loans, leases or other continuing transactions between CHCI or any CHCI
Subsidiary and any present or former stockholder, director or officer of CHCI or
any CHCI Subsidiary, or, to the best knowledge of CHCI, any member of
22
such officer's, director's or stockholder's immediate family, or any person
controlled by such officer, director or stockholder or his or her immediate
family. Except as set forth in Section 3.09 of the Disclosure Schedule and
except for those items which will not be liabilities of CHCI or any CHCI
Subsidiary after the Spin Off, no stockholder, director or officer of CHCI or
any CHCI Subsidiary nor, to the best knowledge of CHCI, any of their respective
spouses or family members, owns directly or indirectly on an individual or joint
basis any material interest in, or serves as an officer or director or in
another similar capacity of, any competitor or supplier of CHCI or any CHCI
Subsidiary, or any organization which has a material contract or arrangement
with CHCI or any CHCI Subsidiary.
Section 3.10. Interests in Real Property. Neither CHCI nor any CHCI
------------ --------------------------
Subsidiary has any direct or indirect interest as an owner or lessee in any real
property except for the following: (i) 100% of the ownership interests in CHC
Durham Management Corporation, a Florida corporation, which is the lessee of the
hotel property known as Washington Duke Inn & Golf Club (the lease creating such
lessee interest, including all amendments and supplements thereto, is the "Duke
Lease"), (ii) 100% of the ownership interests in University Hotel Associates, a
Pennsylvania general partnership, which is the lessee of the hotel property
known as Sheraton University Club Hotel (the lease creating such lessee
interest, including all amendments and supplements thereto, is the "Sheraton
Lease"), and (iii), immediately following the date of this Agreement, 100% of
the ownership interest in CHC Lease Partners, the CHCI Subsidiary which is the
lessee of the Hotels (as hereinafter defined) under the Hotel Leases (as
hereinafter defined). The real property which is the subject of the direct or
indirect interests listed in clauses (i) through (iii) including, without
limitation, the Hotels, is, collectively, hereinafter referred to as the "Real
Property." Full and complete copies of the Duke Lease and the Sheraton Lease
have been delivered to OpCo. Each of the following representations contained in
paragraphs (a) - (o) of this Section 3.10 shall be limited in time to the period
from and after the Lease Date (as hereinafter defined) through the date hereof.
(a) Title. To the knowledge of CHCI, the lessor under the
-----
Duke Lease has good, clear, record and marketable title to the property leased
pursuant to the Duke Lease, and the lessor under the Sheraton Lease has good,
clear, record and marketable title to the property leased pursuant to the
Sheraton Lease. CHC Lease Partners has good, clear, marketable and enforceable
leasehold interests pursuant to the Hotel Leases, in each case free and clear of
all Encumbrances (as hereinafter defined), subject only to the right of
reversion of the lessor and Encumbrances on lessor's fee interest, except as set
forth in Section 3.10 of the Disclosure Schedule.
(b) No Defaults. Other than with respect to any consent
-----------
required in connection with the transactions contemplated hereby, CHC Durham
Management Corporation is not in default under any material terms of the Duke
Lease, nor has any event occurred which, with notice of the passage of time, or
both would give rise to such a default. To the knowledge of CHCI, the lessor
under the Duke Lease is not in default under any material terms of the Duke
Lease and there is no event which, with notice or the passage of time or both,
would give rise to such a default. Other than with respect to any consent
required in connection with the
23
transactions contemplated hereby, University Hotel Associates is not in default
under any material terms of the Sheraton Lease, nor has any event occurred
which, with notice of the passage of time, or both would give rise to such a
default. To the knowledge of CHCI, the lessor under the Sheraton Lease is not in
default under any material terms of the Sheraton Lease and there is no event
which, with notice or the passage of time or both, would give rise to such a
default. Other than with respect to any consent required in connection with the
transactions contemplated hereby, CHC Lease Partners is not in default under any
material terms of the Hotel Leases, nor has any event occurred which, with
notice or the passage of time, or both, would give rise to such a default.
(c) Status of Tenant Leases. All subleases, concessions and
-----------------------
other occupancy agreements in effect with respect to the Duke Lease, the
Sheraton Lease and the Hotel Leases are identified on Section 3.10 of the
Disclosure Schedule (collectively, the "Occupancy Agreements"), and copies
thereof have been made available to OpCo. Each of said Occupancy Agreements has
been duly authorized and executed by the CHCI Subsidiary which is a party
thereto and is in full force and effect. None of the CHCI Subsidiaries which is
a party to any Occupancy Agreement is in default under any material terms of
such agreement, nor has any event occurred which, with notice or the passage of
time, or both, would give rise to such a default. To the knowledge of CHCI, the
other party to each of said Occupancy Agreements is not in default under any
material terms thereof and there is no event which, with notice or the passage
of time, or both, would give rise to such a default. Except as specifically
provided in the Occupancy Agreements, no tenant, subtenant or concessionaire is
entitled to any rebates, allowances, free rent or rent abatement for any period
after the Closing. CHCI does not have knowledge of, nor has CHCI received any
written notice (which written notice remains effective) of, any intention by any
of the parties to any of the Occupancy Agreements to cancel the same, nor have
CHCI or any of the CHCI Subsidiaries canceled any of the same. To the extent
that any of the Occupancy Agreements call for security, such security remains on
deposit with CHCI or the CHCI Subsidiaries, and has not been applied towards any
payment due under said Occupancy Agreements. Neither CHCI nor the CHCI
Subsidiaries have received any advance rent or advance compensation under any of
said Occupancy Agreements in excess of one month. No brokerage commissions or
compensation of any kind shall be due in connection with the Occupancy
Agreements and the rents or revenues to be derived therefrom.
(d) Consents. Except as set forth in Section 3.10 of the
--------
Disclosure Schedule, (i) no consent or approval is required with respect to the
transactions contemplated by this Agreement from the lessor under the Duke
Lease, the lessor under the Sheraton Lease, any party to an Occupancy Agreement,
or from any regulatory authority, (ii) no filing with any regulatory authority
is required in connection therewith, and to the extent that any such consents,
approvals or filings are required, CHCI will obtain or complete them before the
Closing, except where the failure to obtain any consent or approval or to make
any filing under clauses (i) and (ii) above would not reasonably be expected to
have a Material Adverse Effect on CHCI.
24
(e) Compliance with Existing Laws. To CHCI's knowledge, CHCI
-----------------------------
or the applicable CHCI Subsidiary and each of the Hotels possess all
Authorizations (as hereinafter defined) necessary not to cause a Material
Adverse Effect on CHCI relating to the matters covered hereby, each of which
Authorizations is valid and in full force and effect, and no provision,
condition or limitation of any of the Authorizations has been breached or
violated to an extent that would cause a Material Adverse Effect on CHCI. To
CHCI's knowledge, neither CHCI nor any CHCI Subsidiary misrepresented or failed
to disclose any material relevant fact in obtaining any Authorizations, and CHCI
does not have any knowledge of any change in the circumstances under which those
Authorizations were obtained that result in their termination, suspension,
modification or limitation to an extent that would cause a Material Adverse
Effect on CHCI other than the transactions contemplated hereby. CHCI does not
have knowledge of, nor has CHCI received notice of, any existing or threatened
violation of any provision of any Applicable Laws (as hereinafter defined)
including, but not limited to, those of environmental agencies or insurance
boards of underwriters with respect to the ownership, operation, use,
maintenance or condition of the Hotels or any part thereof, or requiring any
repairs or alterations to the Hotels to an extent that would cause a Material
Adverse Effect on CHCI other than those that have been made prior to the date
hereof.
(f) Operating Agreements. To CHCI's knowledge, there are no
--------------------
management, service, supply or maintenance contracts in effect with respect to
the Hotels other than the agreements described in Section 3.10 of the Disclosure
Schedule (collectively, the "Operating Agreements"). To CHCI's knowledge, CHCI
and the CHCI Subsidiaries have performed all of their respective obligations
under each of the Operating Agreements in all material respects and no fact or
circumstance has occurred which, by itself or with the passage of time or the
giving of notice or both, would constitute a default under any of the Operating
Agreements to an extent that would constitute a Material Adverse Effect on CHCI.
To CHCI's knowledge, all other parties to the Operating Agreements have
performed all of their obligations thereunder in all material respects, and are
not in default thereunder in any material respect. Neither CHCI nor any CHCI
Subsidiary has received any written notice (which written notice remains
effective) of any intention by any of the parties to any of the Operating
Agreements to cancel the same, nor has CHCI or any CHCI Subsidiary canceled any
of same.
(g) Condemnation Proceedings; Roadways. CHCI nor any of the
----------------------------------
CHCI Subsidiaries have received any written notice of, any condemnation or
eminent domain proceeding pending or threatened against the Hotels or any part
thereof to an extent that would cause a Material Adverse Effect on CHCI, except
to the extent that OpCo otherwise has actual knowledge of the foregoing. CHCI
does not have any knowledge of any change or proposed change in the route, grade
or width of, or otherwise affecting, any street, creek or road adjacent to or
serving the Hotels to an extent that would cause a Material Adverse Effect on
CHCI, except to the extent that OpCo otherwise has actual knowledge of the
foregoing.
(h) Historical Districts. To CHCI's knowledge, and except as
--------------------
set forth in Section 3.10 of the Disclosure Schedule, none of the Hotels are
listed in any national, state or
25
local register of historic places or areas to an extent that would cause a
Material Adverse Effect on CHCI, except to the extent that OpCo otherwise has
actual knowledge of the foregoing.
(i) Sufficiency of Certain Items. The inventory of in-use
----------------------------
operating supplies at each of the Hotels at the time of Closing shall be
reasonably adequate and sufficient for the current operations of each of such
Hotels.
(j) Americans With Disabilities Act. To CHCI's knowledge,
-------------------------------
neither CHCI nor any of the CHCI Subsidiaries have received any written notice
from any governmental authority of any violation with respect to any Hotel of
the Americans With Disabilities Act to an extent that would cause a Material
Adverse Effect on CHCI.
(k) Zoning and Platting. To CHCI's knowledge, neither CHCI nor
-------------------
any of the CHCI Subsidiaries have received any written notice from any
governmental authority of, any zoning or land use violation with respect to any
Hotel to an extent that would cause a Material Adverse Effect on CHCI.
(l) Access. To CHCI's knowledge, neither CHCI nor any of the
------
CHCI Subsidiaries have received any written notice from any governmental
authority of, any pending or threatened governmental proceeding which would
limit in any material adverse manner or result in the termination of any portion
of any Hotel's existing access to and from public streets or roads to an extent
that would cause a Material Adverse Effect on CHCI.
(m) No Commitments. To the knowledge of CHCI and except as may
--------------
be disclosed in CHCI's title policies with respect to the Hotels or to the
extent that OpCo or REIT shall have made such commitment, no material
commitments have been made to any governmental authority, utility company,
school board, church or other religious body, or any homeowners' association or
any other organization, group or individual, relating to any Hotel which would
impose an obligation upon CHCI or any of the CHCI Subsidiaries (or the Surviving
Corporation after Closing) to make any contribution or dedication of money in
any material amount or land or to construct, install or maintain any
improvements of a public or private nature on or off any portion of the Hotel
property to an extent that would cause a Material Adverse Effect on CHCI.
(n) License and Franchise Agreements. All of the license or
--------------------------------
franchise agreements with respect to the Hotels are listed in Section 3.10 of
the Disclosure Schedule (collectively, the "Licenses"). To CHCI's knowledge, all
of the Licenses are valid and in full force and effect, except as set forth in
Section 3.10 of the Disclosure Schedule. To the knowledge of CHCI, neither CHCI
nor any of the CHCI Subsidiaries is in default with respect to any of the
Licenses (with or without the giving of any required notice and/or lapse of
time) to an extent that could have a Material Adverse Effect on CHCI.
(o) Labor and Materials. At the Closing, other than in
-------------------
connection with the Budgeted Capital Improvements (as hereinafter defined),
there will be no outstanding contracts
26
made by CHCI or any of the CHCI Subsidiaries for the construction or repair of
any improvements to the Real Property that have not been fully paid for, and
CHCI or any CHCI Subsidiary shall discharge all mechanics' or materialmen's
liens arising from any labor or materials furnished to the Real Property prior
to the Closing which did not arise or result from work that was approved by REIT
or its affiliates pursuant to the Hotel Leases or that was approved and funded
by REIT or its affiliates pursuant to the Hotel Leases or bond over such liens
to OpCo's satisfaction, which bond shall be maintained by Gaming Spinco for the
entire pendency of such claim notwithstanding any period provided in this
Agreement for the survival of obligations.
(p) Definitions. For purposes of this Section 3.10,
-----------
(i) "Applicable Laws" means any applicable
building, zoning, subdivision, environmental, health, safety or other
governmental laws, statutes, ordinances, resolutions, rules, codes,
regulations, orders or determinations of any governmental authority or
of any insurance boards of underwriters (or other body exercising
similar functions), or any restrictive covenants or deed restrictions
affecting the Hotels or the ownership, operation, use, maintenance or
condition thereof.
(ii) "Authorizations" means all licenses, permits
and approvals required by any governmental authority with respect to
the construction, ownership, operation, leasing, maintenance, or use of
the Hotels or any portion thereof.
(iii) "Budgeted Capital Improvements" shall mean,
exclusively, the capital improvements which REIT OP, as lessor, is
required to perform under the Hotel Leases (as hereinafter defined),
and which are shown in the capital budgets for each of the Hotels
approved by REIT OP, as lessor under the Hotel Leases.
(iv) "Encumbrances" means any mortgages, liens,
restrictions, encumbrances, leases, assessments, claims, rights,
encroachments, easements, judgments or other matters affecting title.
(v) "Hotels" shall mean the portions of the
Property demised pursuant to the Hotel Leases.
(vi) "Hotel Leases" shall mean the leases set forth
in Section 3.10 of the Disclosure Schedule.
(vii) "Lease Date" shall mean, with respect to each
of the Hotel Leases, the date of such lease as set forth in Section
3.10 of the Disclosure Schedule.
Section 3.11. Personal Property. A general description of the
------------ -----------------
personal property of CHCI and the CHCI Subsidiaries to be transferred to OpCo in
connection with the Merger is set forth on Section 3.11 of the Disclosure
Schedule (the "Personal Property," and together with
27
Real Property, the "Property"). Except as specifically disclosed on Section 3.11
of the Disclosure Schedule or in the Base Balance Sheet, CHCI and the CHCI
Subsidiaries have good and marketable title to all of the Personal Property. All
of the Personal Property is in the custody and control of CHCI and the CHCI
Subsidiaries. None of the Personal Property is subject to any mortgage, pledge,
lien, conditional sale agreement, security title, encumbrance or other charge
except as specifically disclosed on Section 3.11 of the Disclosure Schedule or
in the Base Balance Sheet other than Permitted Encumbrances (as defined below).
The Base Balance Sheet reflects all of the Personal Property of CHCI and the
CHCI Subsidiaries (except to the extent such Personal Property has been
depreciated to zero value) and such Personal Property is sufficient for CHCI and
the CHCI Subsidiaries to continue and carry on the Hospitality Business as
presently conducted. To the best knowledge of CHCI, except as otherwise
disclosed on Section 3.11 of the Disclosure Schedule, all leasehold
improvements, furnishings, machinery and equipment of CHCI are in good repair,
have been well maintained, and substantially comply with all applicable laws,
ordinances and regulations, and such machinery and equipment is in good working
order; CHCI does not know of any pending or threatened change of any such law,
ordinance or regulation which would be reasonably expected to have a Material
Adverse Effect on CHCI or the Hospitality Business. For purposes hereof,
Permitted Encumbrances means any lien, mortgage, security interest or other
encumbrance that results from any of the following: (i) liens for taxes and
assessments not delinquent or actively being contested in good faith by CHCI;
(ii) deposits or pledges for goods or services made in the ordinary course of
CHCI's business; and (iii) customary liens in favor of mechanics, materialmen
and landlords which arise by operation of law and not by CHCI's agreement and
which are incurred in the ordinary course of business.
Section 3.12. Tax Matters.
------------ -----------
(a) CHCI and each of the CHCI Subsidiaries have timely filed
all material Tax Returns (as defined in Section 11.01) required to be filed by
or on behalf of CHCI and each of the CHCI Subsidiaries (together, the "CHCI
Affiliated Group") through the date hereof, and each such Tax Return was
complete and correct in all material respects. The CHCI Affiliated Group has
paid or caused to be paid all material Taxes required to be paid through the
date hereof whether disputed or not, except Taxes which have not yet accrued or
otherwise become due, for which adequate provision has been made in the
pertinent financial statements referred to in Section 3.06 above. The provisions
for Taxes on the Base Balance Sheet and on the latest balance sheet included in
Section 3.06 of the Disclosure Schedule are sufficient as of their respective
dates for the payment of all accrued and unpaid Taxes of any nature of the CHCI
Affiliated Group, and any applicable Taxes owing by the CHCI Affiliated Group to
any foreign jurisdiction, whether or not assessed or disputed. All Taxes and
other assessments and levies which CHCI and each of the CHCI Subsidiaries are
required to withhold or collect have been withheld and collected and have been
paid over to the proper governmental authorities. Neither the Internal Revenue
Service (the "IRS") nor any other governmental authority is now asserting or, to
the best knowledge of CHCI, threatening to assert against CHCI or any of the
CHCI Subsidiaries, any deficiency or claim for additional Taxes. Except as set
forth in Section 3.12 of the Disclosure Schedule, there has not been any audit
of any Tax Return filed by CHCI or
28
any of the CHCI Subsidiaries. Except as set forth in Section 3.12 of the
Disclosure Schedule, no waiver or agreement by CHCI or any of the CHCI
Subsidiaries is in force for the extension of time for the assessment or payment
of any Taxes. Neither CHCI nor any of the CHCI Subsidiaries has received notice
of any claim made by an authority in a jurisdiction where CHCI or any of the
CHCI Subsidiaries does not file Tax Returns that CHCI or any of the CHCI
Subsidiaries is or may be subject to taxation by that jurisdiction. There are no
security interests recorded or asserted on any of the assets of CHCI or any of
the CHCI Subsidiaries that arose in connection with any failure (or alleged
failure) to pay any Tax.
(b) CHCI has delivered to OpCo correct and complete copies of
all Tax and information returns, examination reports, and statements of
deficiencies assessed against or agreed to by CHCI and the CHCI Subsidiaries
that were requested by OpCo.
(c) Neither CHCI nor any of the CHCI Subsidiaries has made any
payments, is obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments that will not
be deductible under Section 280G of the Code. Except as contemplated by the Tax
Sharing Agreement (as hereinafter defined), neither CHCI nor any of the CHCI
Subsidiaries is a party to any tax allocation or sharing agreement. Neither CHCI
nor any of the CHCI Subsidiaries (A) has been a member of an affiliated group
filing a consolidated federal income tax return (other than the CHCI Affiliated
Group) or (B) has any liability for the Taxes of any Person under Treasury
Regulation (S) 1.1502-6 (or any similar provision of state, local, or foreign
law), as a transferee or successor, by contract or otherwise.
(d) The businesses and assets of CHCI and the CHCI
Subsidiaries that constitute the Hospitality Assets and Hospitality Business
constitute (and will constitute at the Effective Time) historic businesses and
historic business assets, respectively, in each case within the meaning of
Treasury Regulation (S)1.368-1(d) of CHCI and the CHCI Subsidiaries.
Section 3.13. Contracts and Commitments.
------------ -------------------------
(a) Except as set forth on Section 3.13 of the Disclosure
Schedule or except for these contracts and commitments of CHCI or any of the
CHCI Subsidiaries which will not be assumed by OpCo by operation of law or
otherwise following the Merger, neither CHCI nor any of the CHCI Subsidiaries is
a party to any written or oral:
(i) (A) contract for the employment of any officer,
individual employee, or other person or entity on a full-time,
part-time, consulting or other basis for a discernible period of time
(not including any oral employment-at-will contracts entered into in
the ordinary course of business or any employment contracts with
non-executives), (B) contract with any labor union, (C) severance
agreement or (D) agreement relating to loans to officers, managers,
members or affiliates, other than advances in the ordinary course of
business consistent with past practice and custom;
29
(ii) agreement or indenture relating to the borrowing
of money or to the mortgaging, pledging or otherwise placing a lien on
any asset or group of assets of such entity;
(iii) guarantee of any obligation for borrowed money
or otherwise;
(iv) agreement with respect to the lending or
investing of funds to or in any other Person;
(v) management contract or other similar arrangement
relating to the management and operation of hotels, operating
agreement, development agreement, or other material contractual
obligation or arrangement pertaining to its properties or assets
(including those set forth on Schedule 1.04(c);
----------------
(vi) except as already disclosed in Section 3.05 of
the Disclosure Schedule, partnership, joint venture or other similar
agreement or arrangement; and
(vii) contract or group of related contracts with the
same party continuing over a period of more than six months from the
date or dates thereof that is not terminable by each party thereto on
sixty (60) days or less notice without penalty.
Except as specifically disclosed in Section 3.13 of the Disclosure
Schedule and except for the transactions contemplated by this Agreement, CHCI
and the CHCI Subsidiaries have performed all material obligations required to be
performed by them and are not in material default under or in breach of nor in
receipt of any claim of material default or material breach under any agreement,
lease, contract, commitment or other agreement to which CHCI or any CHCI
Subsidiary is a party; and no event has occurred which with the passage of time
or the giving of notice or both would result in such a default, breach or event
of noncompliance under any such agreement or would allow any other party to such
agreement to terminate, modify or accelerate any rights under any such
agreements or otherwise take any action which would reasonably be expected to
have a Material Adverse Effect on CHCI. Neither CHCI nor any CHCI Subsidiary has
any knowledge of any material breach or anticipated material breach by any other
party of any agreement relating to the Hospitality Business. Each item described
in Section 3.13 of the Disclosure Schedule is valid, binding and enforceable
against CHCI or any CHCI Subsidiary which is a party thereto in accordance with
its terms, subject to the effect of bankruptcy, insolvency, reorganization or
other similar laws, general principles of equity (whether considered in
proceedings at law or in equity) and except to the extent that indemnification
provisions may be unenforceable due to public policy. Upon consummation of the
transactions contemplated by this Agreement and the Transaction Documents,
subject to the receipt of any necessary approvals and consents, each item
described in Section 3.13 of the Disclosure Schedule shall be in full force and
effect without penalty or other modification. OpCo has been supplied with a true
and correct copy of each of the contracts which are referred to in Section 3.13
of the Disclosure Schedule, together with all amendments, waivers or other
modifications thereto and renewals and extensions thereof.
30
Section 3.14. Intellectual Property Rights.
------------ ----------------------------
(a) Section 3.14 of the Disclosure Schedule sets forth a
complete and correct list of all patent, copyright, trade secret, trademark,
tradename, or other proprietary rights (collectively, "Intellectual Property")
used or to be used in the Hospitality Business of CHCI and the CHCI Subsidiaries
as presently conducted or contemplated including without limitation, the brand
names "Grand Bay" and, by virtue of CHCI's 75% ownership interest in a CHCI
Subsidiary, "Registry" (the "Brand Names"). All of the rights of CHCI and the
CHCI Subsidiaries in such Intellectual Property are freely transferable except
as disclosed in such Schedule. There are no claims or demands of any other
Person pertaining to any of such Intellectual Property and no proceedings have
been instituted, or, to the knowledge of CHCI, are pending or threatened, which
challenge the rights of CHCI or any CHCI Subsidiary in respect thereof.
(b) Except as set forth on Section 3.14 of the Disclosure
Schedule: CHCI and the CHCI Subsidiaries own and possess all right, title and
interest in and to, or to the knowledge of CHCI has a valid and enforceable
license to use, the Intellectual Property used in the operation of the
Hospitality Business as currently conducted and as currently proposed to be
conducted free and clear of all Encumbrances and CHCI and the CHCI Subsidiaries
have taken all necessary action to maintain and protect such Intellectual
Property except where failure to do so would not reasonably be expected to have
a Material Adverse Effect on CHCI; and neither CHCI or any of the CHCI
Subsidiaries have infringed, misappropriated or otherwise conflicted with any
Intellectual Property rights or other rights of any third parties and no
infringement, misappropriation or conflict will occur as a result of the
operation of the Hospitality Business as currently conducted or as currently
proposed to be conducted.
(c) The Intellectual Property owned or used by CHCI and the
CHCI Subsidiaries prior to the Closing will be owned or available for use by
such entity on identical terms and conditions immediately subsequent to the
Closing, except that OpCo will not have the right to use the "Carnival" name
after the Closing.
Section 3.15. Permits; Compliance with Laws. CHCI and the CHCI
------------ -----------------------------
Subsidiaries have all necessary franchises, authorizations, approvals, orders,
consents, licenses, certificates, permits, registrations, qualifications or
other rights and privileges (collectively "Permits") necessary to conduct the
Hospitality Business as the same is presently conducted and all such Permits are
valid and in full force and effect except to the extent the absence of any such
Permit is not reasonably expected to have a Material Adverse Effect on CHCI, and
except that OpCo will not have the right to use the "Carnival" name after the
Closing.
Except as set forth in Section 3.15 and the Disclosure Schedule, CHCI
and the CHCI Subsidiaries are in material compliance with the terms and
conditions of the Permits and have received no notices that they are in
violation of any of the terms or conditions of such Permits. CHCI and the CHCI
Subsidiaries have taken all necessary action to maintain the Permits except to
the extent that the failure to maintain such Permits is not reasonably expected
to have a
31
Material Adverse Effect on CHCI. No loss or expiration of any Permit is
threatened (to the knowledge of CHCI), pending or reasonably foreseeable other
than expiration in accordance with the terms thereof. Except as indicated in
Section 3.15 of the Disclosure Schedule, all of the material Permits shall
survive the Merger.
Section 3.16. Labor Laws. Neither CHCI nor any CHCI Subsidiary is
------------ ----------
delinquent in payments to any of its employees or agents for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed for it to the date hereof or amounts required to be reimbursed to such
employees. There are no charges of employment discrimination or unfair labor
practices or strikes, slowdowns, stoppages of work, or any other concerted
interference with normal operations existing, pending or, to the best knowledge
of CHCI, threatened against or involving CHCI or any CHCI Subsidiary. No
question concerning representation exists respecting any group of employees of
CHCI or any CHCI Subsidiary. Except as set forth in Section 3.16 of the
Disclosure Schedule and except for those matters which will not be assumed by
OpCo by operation of law or otherwise following the Merger there are no claims
or charges relating to or alleging violations of any federal, state or local
employment laws, including without limitation laws relating to discrimination,
harassment, family leave or wage payments, existing, pending or, to the best
knowledge of CHCI, threatened against CHCI or any of the CHCI Subsidiaries nor,
to the best knowledge of CHCI, has there occurred any event or does there exist
any condition on the basis of which any such claim is reasonably likely to be
asserted. CHCI and each CHCI Subsidiary are, and at all times since November 6,
1986 have been, in compliance in all material respects with the applicable
requirements of the Immigration Reform Control Act of 1986.
Section 3.17. Information Supplied to OpCo. CHCI has supplied OpCo with
------------ ----------------------------
all information and documents requested in writing by OpCo and its
representatives in connection with their due diligence review of CHCI and the
CHCI Subsidiaries. Neither the representations and warranties and other
information contained in this Agreement nor the information contained in the
Exhibits, the Disclosure Schedule or the Schedules hereto or to any document
delivered by or on behalf of CHCI pursuant to or in connection with this
Agreement or the transactions contemplated hereby, taken as a whole, contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained herein or therein not misleading with
respect to the Hospitality Business.
Section 3.18. Employee Benefit Programs.
------------ -------------------------
(a) Section 3.18 of the Disclosure Schedule sets forth a list
of every Employee Program (as defined below) that as of the date hereof is
maintained (as such term is further defined below) by CHCI or any CHCI
Subsidiary, together with each "pension plan" (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA that has been maintained by CHCI or any CHCI
Subsidiary or Affiliate (as defined below) at any time during the three-year
period ending on the date hereof (collectively, the "CHCI Plans"); provided,
that a "pension plan" maintained by an Affiliate will be deemed to be a CHCI
Plan only if such "pension plan" was maintained by such Affiliate on a date
during such three-year period when such Affiliate
32
would have been considered a single employer with CHCI under Section 4001(b) of
ERISA or part of the same "controlled group" as CHCI for purposes of Section
302(d)(8)(C) of ERISA. Also set forth on Section 3.18 of the Disclosure Schedule
is a list of Multiemployer Plans to which CHCI or any CHCI Subsidiary or
Affiliate is required as of the date hereof to make contributions.
(b) To CHCI's best knowledge, no event or omission has
occurred which would reasonably be expected to cause any CHCI Plan maintained by
CHCI or any CHCI Subsidiary as of the date hereof (other than a Multiemployer
Plan) to lose its qualification under Section 401(a) or 501(c)(9) of the Code,
as applicable.
(c) To the best knowledge of CHCI, there has not been any
failure of any party to comply with any laws applicable with respect to the
Employee Programs that have been maintained by CHCI or any CHCI Subsidiary which
is reasonably likely to have a Material Adverse Effect on CHCI. No litigation,
arbitration, or governmental administrative proceeding (or investigation) or
other proceeding (other than those relating to routine claims for benefits) is
pending or, to the best knowledge of CHCI, threatened with respect to any such
Employee Program (other than any Multiemployer Plan) which is reasonably likely
to have a Material Adverse Effect on CHCI.
(d) All material payments and/or contributions required to
have been made by CHCI or any CHCI Subsidiary (under the provisions of any
agreements or other governing documents or applicable law) with respect to all
Employee Programs heretofore maintained by CHCI or any CHCI Subsidiary, for all
periods prior to the Closing, either have been made or have been accrued (and
all such unpaid but accrued amounts not set forth in the Base Balance Sheet are
described on Section 3.18 of the Disclosure Schedule). Except as described in
Section 3.18 of the Disclosure Schedule, no Employee Program maintained by CHCI
as of the date hereof and subject to Title IV of ERISA (other than a
Multiemployer Plan) has any "unfunded benefit liabilities" within the meaning of
ERISA Section 4001(a)(18), as of the Closing Date. None of the CHCI Plans
maintained by CHCI or any CHCI Subsidiary as of the date hereof provides health
care or any other benefits to any employees after their employment is terminated
(other than (i) as required by part 6 of subtitle B of title I of ERISA or other
applicable law, (ii) death benefits or retirement benefits under any "pension
plan" (as defined in Section 3(2) of ERISA), (iii) deferred compensation
benefits accrued as liabilities on the books of CHCI or any CHCI Subsidiary, or
(iv) benefits the cost of which is borne by the employee (or beneficiary
thereof)).
(e) Except as set forth in Section 3.18 of the Disclosure
Schedule, with respect to each CHCI Plan maintained by CHCI or any CHCI
Subsidiary as of the date hereof (other than any Multiemployer Plan), complete
and correct copies of the following documents (if applicable to such CHCI Plan)
have previously been or will as soon as reasonably practicable be delivered to
OpCo: (i) all documents embodying or governing such CHCI Plan, and any funding
medium for such CHCI Plan (including, without limitation, trust agreements) as
they may have been amended to the date hereof; (ii) the two most recently filed
IRS Form 5500,
33
with all applicable schedules and accountants' opinions attached thereto; (iii)
the summary plan description for such CHCI Plan and all modifications thereto;
and (iv) any insurance policy (including any fiduciary liability insurance
policy) related to such CHCI Plan.
(f) Except in the case of a Multiemployer Plan or under any
collective bargaining agreement and except as provided in Section 3.18 of the
Disclosure Schedule, the termination as of the date hereof of each Employee
Program maintained by CHCI or any CHCI Subsidiary as of the date hereof would
not result in any material liability to CHCI or such CHCI Subsidiary not
reflected on the Base Balance Sheet (other than liability for accrued but unpaid
benefits pursuant to routine benefit claims).
(g) For purposes of this Section 3.18:
(i) "Employee Program" means (A) all employee benefit
plans within the meaning of Section 3(3) of ERISA, including, but not
limited to, multiple employer welfare arrangements (within the meaning
of Section 3(40) of ERISA), plans to which more than one unaffiliated
employer contributes and employee benefit plans (such as foreign or
excess benefit plans) which are not subject to ERISA; and (B) all stock
option plans, bonus or incentive award plans, severance pay policies or
agreements, deferred compensation agreements, supplemental income
arrangements, vacation plans, and all other employee benefit plans,
agreements, and arrangements not described in (A) above. In the case of
an Employee Program funded through an organization described in Section
501(c)(9) of the Code, each reference to such Employee Program shall
include a reference to such organization;
(ii) "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended;
(iii) an entity "maintains" an Employee Program if
such entity sponsors, contributes to, or provides (or has promised to
provide) benefits under such Employee Program, or has any obligation
(by agreement or under applicable law) to contribute to or provide
benefits under such Employee Program, or if such Employee Program
provides benefits to or otherwise covers employees of such entity (or
their spouses, dependents, or beneficiaries);
(iv) An entity is an "Affiliate" of CHCI for purposes
of this Section 3.18 if, during the relevant time period, it is or
would have been considered a single employer with CHCI under Section
4001(b) of ERISA or part of the same "controlled group" as CHCI for
purposes of Section 302(d)(8)(C) of ERISA; and
(v) "Multiemployer Plan" means an employee benefit
plan to which more than one employer contributes and which is
maintained pursuant to one or more collective bargaining agreements.
34
Section 3.19. Environmental Matters.
------------ ---------------------
(a) Except as set forth in Section 3.19 of the Disclosure
Schedule and except as would not reasonably be expected to have a Material
Adverse Effect on CHCI, (i) neither CHCI nor any CHCI Subsidiary has spilled,
released, or disposed of any Hazardous Material (as hereinafter defined) at any
site presently or formerly operated, leased, or used by it; (ii) neither CHCI
nor any CHCI Subsidiary has transported any Hazardous Material from any site
presently or formerly operated, leased, or used by CHCI or any CHCI Subsidiary
for treatment, storage, or disposal at any other place; (iii) neither CHCI nor
any CHCI Subsidiary has any liability for, or has undertaken remedial efforts
with respect to, any site on which underground storage tanks are or were located
or which contains or contained any asbestos or asbestos-containing material, any
polychlorinated biphenyls (PCBs) or equipment containing PCBs, or any urea
formaldehyde foam insulation (in connection with the presence of such
substances); and (iv) no lien has ever been imposed by any governmental agency
on any property, facility, machinery, or equipment which at the time of such
imposition was owned, operated, leased, or used by CHCI or any CHCI Subsidiary
in connection with the presence of any Hazardous Material.
(b) Except as set forth in Section 3.19 of the Disclosure
Schedule, (i) neither CHCI nor any CHCI Subsidiary has any liability under, nor
has CHCI and any CHCI Subsidiary violated in any material respect, any
Environmental Law (as defined below), which liability or violation would
reasonably be expected to have a Material Adverse Effect on CHCI; (ii) neither
CHCI nor any CHCI Subsidiary has entered into or been subject to any judgment,
consent decree, compliance order, or administrative order with respect to a
violation of any Environmental Laws or received any written request for
information, notice, demand letter, administrative inquiry, or formal or
informal complaint or claim with respect to an alleged violation or the
enforcement of any Environmental Law; and (iii) neither CHCI nor any CHCI
Subsidiary has any knowledge that any of the items enumerated in clause (ii) of
this paragraph will be forthcoming.
(c) For purposes of this Section 3.19, (i) "Hazardous
Material" shall mean and include any hazardous waste, hazardous material,
hazardous substance, petroleum product, oil, toxic substance, pollutant, or
contaminant, as defined or regulated under any Environmental Law; (ii)
"Environmental Law" shall mean any foreign, federal, state or local regulation,
rule, ordinance, or law governing pollution or protection of the environment;
and (iii) "CHCI" shall mean and include CHCI, its respective predecessors and
all other entities for whose conduct CHCI or any CHCI Subsidiary is or may be
held responsible under any Environmental Law.
Section 3.20. Insurance. CHCI and the CHCI Subsidiaries currently
------------ ---------
maintain and have in the past maintained such insurance coverage as is customary
and sufficient to protect the physical properties, assets, business and
operations relating to the Hospitality Business, employees, officers and
directors (in their capacities as such) of CHCI and the CHCI Subsidiaries from
risk of loss. There is no claim by CHCI or any CHCI Subsidiary pending under any
such policies as to which coverage has been questioned, denied or disputed by
the
35
insurer. Said insurance policies and arrangements are in full force and effect,
and CHCI or any CHCI Subsidiary is in compliance in all material respects with
the terms thereof. Said insurance complies with all requirements of applicable
law and all material agreements and leases to which CHCI or any CHCI Subsidiary
is a party.
Section 3.21. Investment Banking; Brokerage. There are no claims for
------------ -----------------------------
investment banking fees, brokerage commissions, finder's fees or similar
compensation (exclusive of professional fees of lawyers and accountants and
similar professionals) in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of CHCI or
any CHCI Subsidiary except that CHCI has retained each of Bear ▇▇▇▇▇▇▇ & Co,
Inc. and ▇▇▇▇▇▇▇▇▇, Lufkin & ▇▇▇▇▇▇▇▇ Securities Corporation as its financial
advisors in connection with the transactions contemplated by this Agreement.
Section 3.22. Litigation. There is no litigation or governmental or
------------ ----------
administrative proceeding or investigation pending or, to the best knowledge of
CHCI, threatened against CHCI or any of the CHCI Subsidiaries or affecting any
of their respective properties or assets, or against any of their respective
officers, directors, stockholders, professional employees or other key employees
which would be reasonably expected to have a Material Adverse Effect on CHCI, or
which would be reasonably likely to call into question the validity or hinder
the enforceability or performance of this Agreement or the agreements and
transactions contemplated hereby; nor, to the best knowledge of CHCI, has there
occurred any event nor does there exist any condition on the basis of which any
such claim may be asserted.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF OPCO.
---------- --------------------------------------
Section 4.01. Making of Representations and Warranties; Certain
------------ -------------------------------------------------
Definitions.
-----------
(a) As a material inducement for CHCI to enter into this
Agreement and consummate the transactions contemplated hereby, OpCo hereby makes
to it as of the date hereof the representations and warranties contained in this
Article IV.
(b) For purposes of this Agreement, references to (i) the
"OpCo Disclosure Schedule" shall mean the disclosure schedule delivered by OpCo
under this Agreement to CHCI; (ii) a "Material Adverse Effect on OpCo" shall
mean a material adverse effect on the properties, assets, business, condition
(financial or otherwise) or results of operations of OpCo; and (iii) the
"knowledge" or "best knowledge" of OpCo or words of similar meaning shall be
deemed to refer to actual knowledge of any executive officer of OpCo.
Section 4.02. Organization and Corporate Power.
------------ --------------------------------
(a) OpCo is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and is duly
qualified or registered as a foreign corporation in, and is in good standing
under the laws of, each jurisdiction in which it is
36
required to be so licensed or qualified to conduct its businesses or own its
properties, except where the failure to so qualify or register would not
reasonably be expected to have a Material Adverse Effect on OpCo. OpCo has all
requisite corporate power and authority to own its properties and conduct its
business as presently conducted. OpCo is not in violation of any term of its
Certificate of Incorporation or By-laws.
(b) Patriot American Hospitality Operating Company, L.P.
("OpCo OP") is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware, has the partnership power
and authority to own its properties and to carry on its business as it is now
being conducted, and is duly qualified to do business and is in good standing in
each jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not reasonably be
expected to have a Material Adverse Effect on OpCo. OpCo OP is classified as a
partnership for federal income tax purposes.
(c) Neither OpCo nor OpCo OP is in violation of any order of
any court, governmental authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which OpCo or OpCo OP or any of
their respective properties or assets is subject, where such violation would
reasonably be expected to have a Material Adverse Effect on OpCo. OpCo and OpCo
OP have obtained all licenses, permits and other authorizations and have taken
all actions required by applicable law or governmental regulations, where the
failure to obtain any such license, permit or authorization or to take any such
action would reasonably be expected to have a Material Adverse Effect on OpCo.
(d) True and complete copies of the Certificate of
Incorporation and By-laws of OpCo and the organizational documents and
partnership agreements (and all amendments thereto) of OpCo OP have previously
been delivered to CHCI.
Section 4.03. Authority.
------------ ---------
(a) OpCo has full corporate power and authority to enter into
this Agreement and the Transaction Agreements to be executed and delivered by it
and to carry out the transactions contemplated hereby and thereby. The
execution, delivery and performance of this Agreement and such Transaction
Agreements by OpCo pursuant to this Agreement (including without limitation the
issuance of shares of OpCo Preferred Stock pursuant to Article I) have been duly
authorized by all necessary corporate action of OpCo, and no other corporate
action on the part of OpCo is required in connection herewith or therewith. This
Agreement and such Transaction Agreements constitute, or when executed and
delivered by OpCo will constitute, valid and binding obligations of OpCo
enforceable in accordance with their respective terms, except to the extent that
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally, subject to general
principles of equity, and except to the extent that indemnification provisions
may be unenforceable due to public policy. The shares of OpCo Preferred Stock to
be issued pursuant to Article I of this
37
Agreement have been duly and validly authorized by all necessary corporate
action on the part of OpCo and, when issued in accordance with the terms hereof,
will be validly issued, fully-paid and non-assessable and free and clear of any
and all claims, liens or encumbrances or rights of first refusal or preemptive
or similar rights.
(b) The execution and delivery by OpCo of this Agreement and
the Transaction Agreements to which it is or will be a party does not, and the
performance of its obligations hereunder and thereunder and the consummation of
the transactions contemplated hereby or thereby by it will not: (A) conflict
with or violate any provisions of the Certificate of Incorporation or By-laws of
OpCo, or the organizational documents or partnership agreements or joint venture
agreements of OpCo or OpCo OP; (B) except as disclosed in Section 4.03 of the
OpCo Disclosure Schedule, violate, or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the assets of
OpCo or OpCo OP under, or result in being declared void, voidable or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license, franchise, permit,
lease, contract, agreement (including, without limitation, any management or
franchise agreement) or other instrument or obligation, whether written or oral,
to which OpCo or OpCo OP is a party or by which OpCo or OpCo OP is bound or
affected, except for any of the foregoing matters which, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
OpCo; or (C) subject to the making of the filings and obtaining the approvals
identified herein, including, without limitation, all Regulatory Filings,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to OpCo or OpCo OP or require any consent, approval or authorization
of, or declaration, filing or registration with, any governmental or regulatory
authority, except where the failure to obtain any such consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority would not reasonably be expected to have a Material
Adverse Effect on OpCo.
Section 4.04. Investment Banking; Brokerage. There are no claims for
------------ -----------------------------
investment banking fees, brokerage commissions, finder's fees or similar
compensation (exclusive of professional fees of lawyers and accountants) in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of OpCo or OpCo OP except that
OpCo has retained ▇▇▇▇▇▇▇ Lynch, Pierce, ▇▇▇▇▇▇ & ▇▇▇▇▇ Incorporated as its
financial advisor in connection with the transactions contemplated by this
Agreement.
Section 4.05. Litigation. There is no litigation or governmental or
------------ ----------
administrative proceeding or investigation pending or, to the best knowledge of
OpCo, threatened against OpCo or OpCo OP or affecting any of their respective
properties or assets, or against any of their respective officers, directors,
stockholders, professional employees or other key employees which would be
reasonably expected to have a Material Adverse Effect on OpCo, or which would be
reasonably likely to call into question the validity or hinder the
enforceability or performance of this Agreement or the agreements and
transactions contemplated hereby; nor,
38
to the best knowledge of OpCo, has there occurred any event nor does there exist
any condition on the basis of which any such claim may be asserted.
Section 4.06. OpCo SEC Filings. Each of the forms, reports, schedules,
------------ ----------------
registration statements and definitive proxy statements (collectively, the "OpCo
SEC Filings") filed by OpCo with the SEC (as such documents have been amended
prior to the date hereof) since and including the Annual Report on Form 10-K of
OpCo for its fiscal year ended December 31, 1996, as of their respective dates,
complied in all material respects with the applicable requirements of the
Securities Act, the Regulations, the Exchange Act, and the rules and regulations
thereunder. The consolidated financial statements of OpCo and its subsidiaries
included in such reports comply in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited interim financial statements, as permitted by Form 10-Q under the
Exchange Act) and fairly present (subject, in the case of the unaudited interim
financial statements, to normal, year-end audit adjustments) the respective
consolidated financial position of OpCo and its subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended.
Section 4.07. Reservation of OpCo Common Stock. OpCo has reserved for
------------ --------------------------------
issuance upon conversion of the OpCo Preferred Stock pursuant to the Certificate
of Designations the number of shares of its common stock required to be issued
upon such conversion ("OpCo Conversion Stock"), and the OpCo Conversion Stock
issuable upon conversion will be, when issued in accordance with the Certificate
of Incorporation, as amended, duly and validly authorized and issued, fully paid
and nonassessable.
Section 4.08. Absence of Certain Developments. Except as contemplated
------------ -------------------------------
by this Agreement, as disclosed in the OpCo SEC Filings filed by OpCo with the
SEC prior to the date hereof, or as set forth in Section 4.08 of the OpCo
Disclosure Schedule, since December 31, 1996, (i) OpCo has conducted its
business only in the ordinary course, consistent with past practice, except
where the failure to so conduct its business in the ordinary course would not be
reasonably expected to have a Material Adverse Effect on OpCo, and (ii) there
has not occurred or arisen any event that, individually or in the aggregate,
would not be reasonably expected to have a Material Adverse Effect on OpCo other
than any developments that generally affect the industry in which OpCo operates.
Section 4.09. Related Party Transactions. Set forth in the OpCo SEC
------------ --------------------------
Filings and/or Section 4.09 of the OpCo Disclosure Schedule is a list of all
arrangements, agreements and contracts entered into by OpCo (which are or will
be in effect as of or after the date hereof) involving payments in excess of
$60,000 with any person who is an officer, director or affiliate of OpCo, any
relative of any of the foregoing or any entity of which OpCo is an affiliate.
39
Section 4.10. Information Supplied to CHCI. OpCo has supplied CHCI with
------------ ----------------------------
all information and documents requested in writing by CHCI and its
representatives in connection with their due diligence review of OpCo and OpCo
OP. Neither the representations and warranties and other information contained
in this Agreement nor the information contained in the Exhibits, the Disclosure
Schedule or the Schedules hereto or to any document delivered by or on behalf of
OpCo pursuant to or in connection with this Agreement or the transactions
contemplated hereby, taken as a whole, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading.
Section 4.11. Tax Matters. OpCo has timely filed all material Tax
------------ -----------
Returns required to be filed by or on behalf of OpCo through the date hereof,
and each such Tax Return was complete and correct in all material respects. OpCo
has paid or caused to be paid all Taxes required to be paid through the date
hereof whether disputed or not except Taxes which have not yet accrued or
otherwise become due. All Taxes and other assessments and levies which OpCo is
required to withhold or collect have been withheld and collected and have been
paid over to the proper governmental authorities. Neither the IRS nor any other
governmental authority is now asserting or, to the best knowledge of OpCo,
threatening to assert against OpCo any deficiency or claim for additional Taxes.
Except as set forth in Section 4.11 of the Disclosure Schedule, there has not
been any audit of a Tax Return filed by OpCo. Except as set forth in Section
4.11 of the Disclosure Schedule, no waiver or agreement by OpCo is in force for
the extension of time for the assessment or payment of any Taxes. OpCo has not
received notice of any claim made by an authority in a jurisdiction where OpCo
does not file Tax Returns that it is or may be subject to taxation by that
jurisdiction. There are no security interests recorded or asserted on any of the
assets of OpCo that arose in connection with any failure (or alleged failure) to
pay any Tax. Notwithstanding any provision of this Section 4.11 to the contrary,
the representations provided in this Section 4.11, to the extent they relate to
taxable periods beginning prior to the merger of Patriot American Hospitality,
Inc., a Virginia corporation, into REIT, are made only to the best knowledge of
OpCo.
Section 4.12. Net Worth. As of the date of this Agreement, OpCo had
------------ ---------
positive net worth.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF REIT.
--------- --------------------------------------
Section 5.01. Making of Representations and Warranties; Certain
------------ -------------------------------------------------
Definitions.
-----------
(a) As a material inducement for CHCI to enter into this
Agreement and consummate the transactions contemplated hereby, REIT hereby makes
to it as of the date hereof the representations and warranties contained in this
Article V.
(b) For purposes of this Agreement, references to (i) the
"REIT Disclosure Schedule" shall mean the disclosure schedule delivered by REIT
under this Agreement to
40
CHCI; (ii) a "Material Adverse Effect on REIT" shall mean a material adverse
effect on the properties, assets, business, condition (financial or otherwise)
or results of operations of REIT; and (iii) the "knowledge" or "best knowledge"
of REIT or words of similar meaning shall be deemed to refer to actual knowledge
of any executive officer of REIT.
Section 5.02. Organization and Corporate Power.
------------ --------------------------------
(a) REIT is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and is duly
qualified or registered as a foreign corporation in, and is in good standing
under the laws of, each jurisdiction in which it is required to be so licensed
or qualified to conduct its businesses or own its properties, except where the
failure to so qualify or register would not reasonably be expect to have a
Material Adverse Effect on REIT. REIT has all requisite corporate power and
authority to own its properties and conduct its business as presently conducted.
REIT is not in violation of any term of its Certificate of Incorporation or By-
laws.
(b) Patriot American Hospitality Partnership, L.P. ("REIT
OP") is a limited partnership duly organized, validly existing and in good
standing under the laws of the Commonwealth of Virginia, has the partnership
power and authority to own its properties and to carry on its business as it is
now being conducted, and is duly qualified to do business and is in good
standing in each jurisdiction in which the ownership of its property or the
conduct of its business requires such qualification, except for jurisdictions in
which such failure to be so qualified or to be in good standing would not
reasonably be expected to have a Material Adverse Effect on OpCo. REIT OP is
classified as a partnership for federal income tax purposes.
(c) Neither REIT nor REIT OP is in violation of any order of
any court, governmental authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which REIT or REIT OP or any of
their respective properties or assets is subject, where such violation would
reasonably be expected to have a Material Adverse Effect on REIT. REIT and REIT
OP have obtained all licenses, permits and other authorizations and have taken
all actions required by applicable law or governmental regulations, where the
failure to obtain any such license, permit or authorization or to take any such
action would reasonably be expected to have a Material Adverse Effect on REIT.
(d) True and complete copies of the Certificate of
Incorporation and By-laws of REIT and the organizational documents and
partnership agreements (and all amendments thereto) of REIT OP have previously
been delivered to CHCI.
Section 5.03. Authority.
------------ ---------
(a) REIT has full corporate power and authority to enter into
this Agreement and the Transaction Agreements to be executed and delivered by it
and to carry out the transactions contemplated hereby and thereby. The
execution, delivery and performance of this
41
Agreement and such Transaction Agreements have been duly authorized by all
necessary corporate action of REIT, and no other corporate action on the part of
REIT is required in connection herewith or therewith. This Agreement and such
Transaction Agreements constitute, or when executed and delivered by REIT will
constitute, valid and binding obligations of REIT enforceable in accordance with
their respective terms, except to the extent that enforceability may be limited
by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally, subject to general principles of equity and except
to the extent that indemnification provisions may be unenforceable due to public
policy.
(b) The execution and delivery by REIT of this Agreement and
the Transaction Agreements to which it is or will be a party does not, and the
performance of its obligations hereunder and thereunder and the consummation of
the transactions contemplated hereby by it will not: (A) conflict with or
violate any provisions of the Amended and Restated Certificate of Incorporation
or Amended and Restated By-laws of REIT or the organizational documents or
partnership agreements or joint venture agreements of REIT or REIT OP; (B)
except as disclosed in Section 5.03 of the REIT Disclosure Schedule, violate, or
conflict with or result in a breach of any provision of, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the assets of REIT or REIT OP under, or result in being
declared void, voidable or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any license, franchise, permit, lease, contract, agreement (including,
without limitation, any management or franchise agreement) or other instrument
or obligation, whether written or oral, to which REIT or REIT OP is a party or
by which REIT or REIT OP is bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on REIT; or (C) subject to the making
of the filings and obtaining the approvals identified herein, including, without
limitation, all Regulatory Filings, conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to REIT, or require any
consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would not reasonably
be expected to have a Material Adverse Effect on REIT.
Section 5.04. Investment Banking; Brokerage. There are no claims for
------------ -----------------------------
investment banking fees, brokerage commissions, finder's fees or similar
compensation (exclusive of professional fees of lawyers and accountants) in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of REIT or REIT OP.
Section 5.05. Litigation. There is no litigation or governmental or
------------ ----------
administrative proceeding or investigation pending or, to the best knowledge of
REIT, threatened against REIT or REIT OP or affecting any of their respective
properties or assets, or against any of their respective officers, directors,
stockholders, professional employees or other key employees
42
which would reasonably be expected to have a Material Adverse Effect on REIT, or
which would be reasonably likely to call into question the validity or hinder
the enforceability or performance of this Agreement or the agreements and
transactions contemplated hereby; nor, to the best knowledge of REIT, has there
occurred any event nor does there exist any condition on the basis of which any
such claim may be asserted. To the best knowledge of REIT, no claim has been
asserted against REIT for renegotiation or price redetermination of any business
transaction.
Section 5.06. REIT SEC Filings. Each of the forms, reports, schedules,
------------ ----------------
registration statements and definitive proxy statements (collectively, the "REIT
SEC Filings") filed by REIT with the SEC (as such documents have been amended
prior to the date hereof) since and including the Annual Report on Form 10-K of
REIT for its fiscal year ended December 31, 1996, as of their respective dates,
complied in all material respects with the applicable requirements of the
Securities Act, the Regulations, the Exchange Act, and the rules and regulations
thereunder. The consolidated financial statements of REIT and its subsidiaries
included in such reports comply in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited interim financial statements, as permitted by Form 10-Q under the
Exchange Act) and fairly present (subject, in the case of the unaudited interim
financial statements, to normal, year-end audit adjustments) the respective
consolidated financial position of REIT and its subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended.
Section 5.07. Reservation of REIT Common Stock. REIT has reserved for
------------ --------------------------------
issuance upon conversion of the OpCo Preferred Stock pursuant to the Certificate
of Designations the number of shares of its common stock required to be issued
upon such conversion ("REIT Conversion Stock"), and the REIT Conversion Stock
issuable upon conversion will be, when issued in accordance with REIT's
Certificate of Incorporation, as amended, duly and validly authorized and
issued, fully paid and nonassessable.
Section 5.08. Absence of Certain Developments. Except as contemplated
------------ -------------------------------
by this Agreement, as disclosed in the REIT SEC Filings filed by OpCo with the
SEC prior to the date hereof, or as set forth in Section 5.08 of the REIT
Disclosure Schedule, since December 31, 1996, (i) REIT has conducted its
business only in the ordinary course, consistent with past practice, except
where the failure to so conduct its business in the ordinary course would not be
reasonably expected to have a Material Adverse Effect on REIT, and (ii) there
has not occurred or arisen any event that, individually or in the aggregate,
would not be reasonably expected to have a REIT Material Adverse Effect on REIT
other than any developments that generally affect the industry in which REIT
operates.
Section 5.09. Related Party Transactions. Set forth in the REIT SEC
------------ --------------------------
Filings and/or Section 5.09 of the REIT Disclosure Schedule is a list of all
arrangements, agreements and
43
contracts entered into by REIT (which are or will be in effect as of or after
the date hereof) involving payments in excess of $60,000 with any person who is
an officer, director or affiliate of REIT, any relative of any of the foregoing
or any entity of which REIT is an affiliate.
Section 5.10. REIT Status. For its taxable year ended December 31, 1993
------------- -----------
and at all times thereafter up to the date of this Agreement, REIT has qualified
to be treated as a real estate investment trust within the meaning of Sections
856-860 of the Code, including, without limitation, the requirements of Sections
856 and 857 of the Code.
Section 5.11. Information Supplied to CHCI. REIT has supplied CHCI with
------------ ----------------------------
all information and documents requested in writing by CHCI and its
representatives in connection with their due diligence review of REIT and REIT
OP. Neither the representations and warranties and other information contained
in this Agreement nor the information contained in the Exhibits, the Disclosure
Schedule or the Schedules hereto or to any document delivered by or on behalf of
REIT pursuant to or in connection with this Agreement or the transactions
contemplated hereby, taken as a whole, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading.
ARTICLE VI. COVENANTS OF CHCI.
---------- -----------------
Section 6.01. Consents and Approvals. CHCI will use its reasonable best
------------ ----------------------
efforts to obtain or cause to be obtained prior to the Closing Date all
necessary consents and approvals to the performance of the obligations of CHCI
under this Agreement, including, without limitation, (i) the consents and
approvals described in Section 3.03 of the Disclosure Schedule, which applicable
consents shall cover the transfer of assets into OpCo OP in good faith for valid
business purposes, and (ii) the Regulatory Filings; provided, however, that the
use of reasonable best efforts shall not require a payment of a material amount
of money not otherwise due or ordinarily incidental to such process. CHCI will
cooperate in all reasonable respects with OpCo with a view toward obtaining
timely satisfaction of the conditions to the Closing set forth herein, it being
understood that all fees and expenses associated with obtaining required
governmental consents and approvals shall be paid in accordance with Section
12.05 hereof unless prohibited by law. CHCI shall use its reasonable best
efforts to make all filings, document submissions, applications, statements and
reports to all federal, state or local government agencies or entities which are
required to be made by it prior to the Closing Date pursuant to any applicable
statute, rule or regulation in connection with this Agreement and the
transactions contemplated hereby, including, without limitation, the Regulatory
Filings, it being understood that the required filing fees in connection
therewith shall be paid in accordance with Section 12.05 hereof; provided,
however, that the use of reasonable best efforts shall not require a payment of
a material amount of money not otherwise due or ordinarily incidental to such
process. CHCI shall (i) furnish to OpCo copies of all filings and such necessary
information and assistance as may be requested by OpCo in connection with its
preparation of required filings or submissions to any governmental agency and
(ii) as promptly as practicable
44
upon CHCI becoming aware of any inquiries made of it or any CHCI Subsidiary by
any federal, state or local agency or authority with respect to this Agreement
or the transactions contemplated hereby, shall give detailed written notice
thereof to OpCo and shall use its reasonable best efforts to update OpCo of the
status of such inquiries.
Section 6.02. Gaming Regulatory Filings. CHCI shall make all Gaming
------------ -------------------------
Regulatory Filings, and shall use its reasonable best efforts to obtain or cause
to be obtained prior to the Closing Date all necessary approvals of the Gaming
Regulatory Filings from the Gaming Regulatory Authorities (the "Gaming
Regulatory Approvals") as soon as practicable; provided, however, that the use
of reasonable best efforts shall not require a payment of a material amount of
money not otherwise due or ordinarily incidental to such process.
Section 6.03. Conduct of Hospitality Business. Between September 1,
------------ -------------------------------
1997 and the Closing Date, CHCI shall do, and CHCI shall cause the CHCI
Subsidiaries to do the following, unless OpCo shall otherwise consent in
writing, except as otherwise contemplated by this Agreement or any Transaction
Agreement or except as OpCo shall do directly or otherwise request or direct
CHCI or the CHCI Subsidiaries:
(a) conduct the Post-September 1 Hospitality Business only in
the ordinary course consistent with past practices, refrain from changing or
introducing any method of management or operations except in the ordinary course
of business and in a manner consistent with past practices and refrain from
incurring any liability or obligation except for (i) liabilities or obligations
incurred in the ordinary course of business necessary and incident to the
conduct of the Hospitality Business, (ii) liabilities or obligations which will
not be assumed by OpCo by operation of law or otherwise following the Merger and
(iii) the obligations of CHCI under the Credit Agreement which may not be paid
from Post-September 1 Hospitality Revenues;
(b) refrain from using Post-September 1 Hospitality Revenues
to pay any liabilities or obligations of CHCI and the CHCI Subsidiaries, other
than liabilities or obligations of the Post-September 1 Hospitality Business
incurred or accrued in the ordinary course of business after September 1, 1997;
(c) refrain from making any purchase, sale or disposition of
any asset relating to the Post-September 1 Hospitality Business other than in
the ordinary course of business, from purchasing or selling any capital asset
costing more than $5,000 and from mortgaging, pledging, subjecting to a lien or
otherwise encumbering any of its properties or assets relating to the
Post-September 1 Hospitality Business;
(d) refrain from making any amendment, modification or change
to, or entering into, or terminating any management contract or other similar
arrangement relating to the management and operation of hotels, operating
agreement, development agreement, lease, or any other material contractual
obligation or arrangement which pertain to its properties and assets, other than
(i) changes which do not materially affect the terms of the contract made in the
ordinary course of business or in connection with the Merger or to obtain a
consent
45
necessary for the Merger and (ii) any such items that result in an adjustment of
Aggregate Consideration pursuant to Section 1.04;
(e) refrain from incurring any contingent liability as a guarantor
or otherwise with respect to the obligations of others, and from incurring any
other contingent or fixed obligations or liabilities except in the ordinary
course of business consistent with past practice or except where such liability
shall not be assumed by OpCo;
(f) refrain from making any change in its incorporation documents,
by-laws or authorized or issued capital stock or from acquiring any securities
issued by any other business organization other than (i) organizational
restructuring which does not materially affect the Post-September 1 Hospitality
Business on a consolidated basis, (ii) changes required by the Spin Off, and
(iii) short-term investments in the ordinary course of business;
(g) refrain from declaring, setting aside or paying any dividend,
making any other distribution in respect of the capital stock of CHCI except
pursuant to the Spin Off, or except in connection with the payment of severance
obligations to employees of CHCI or its subsidiaries, the cancellation or
discharge of currently outstanding stock options or the Spin Off, (i) making any
direct or indirect redemption, purchase or other acquisition of the capital
stock of CHCI or options with respect thereto, (ii) issuing, granting, awarding,
selling, pledging, disposing of or encumbering or authorizing the issuance,
grant, award, sale, pledge, disposition or encumbrance of any shares of, or
securities convertible or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire any shares of the capital stock of
CHCI of any class thereof or (iii) entering into any agreement or commitment
with respect to any of the foregoing;
(h) use its reasonable best efforts to keep intact its business
organization and to preserve the goodwill of and business relationships with all
suppliers, customers, lessees and others having business relations with it;
provided, however, that the use of reasonable best efforts shall not require a
payment of a material amount of money not otherwise due or ordinarily incidental
to such process;
(i) provide (i) monthly financial statements relating to the
Post-September 1 Hospitality Business from and after September 1, 1997,
including a monthly statement of assets and liabilities prepared in
substantially the same format and with the same line items as the Phase I
Hospitality Assets and Liabilities Schedule and a monthly income statement, as
soon as practicable but not later than 30 days after the last day of each month
and (ii) quarterly financial statements meeting the requirements set forth in
Section 3.06 hereof as soon as practicable but not later than 45 days after the
last day of each quarter;
(j) promptly advise OpCo of any material litigation,
arbitration, condemnation or administrative hearing concerning or affecting the
Property of which CHCI obtains actual knowledge;
46
(k) (i) prepare and timely file with the relevant Taxing
Authority all material Tax Returns and reports ("Post-Signing Returns") required
to be filed which include any of CHCI or the CHCI Subsidiaries, on a basis
materially consistent with the elections, accounting methods, conventions and
principles of taxation used for the most recent taxable periods for which Tax
Returns involving similar tax items have been filed and in a manner that does
not unreasonably accelerate deductions or defer income, (ii) timely pay all
Taxes due and payable, or establish reserves therefor in the books and records
of the Company in accordance with generally accepted accounting principles and
consistent with past practice, (iii) promptly notify OpCo of any action, suit,
proceeding, claim or audit pending against or with respect to CHCI, Gaming
Spinco or any CHCI Subsidiary in respect of any Taxes where there is a
reasonable possibility of a determination or decision which would materially
increase the Tax liabilities, or materially decrease the Tax attributes, of any
of CHCI and the CHCI Subsidiaries for any taxable period ending on or after
September 1, 1997, and (iv) not, without the prior written consent of OpCo,
change any of the material Tax elections, accounting methods, conventions or
principles which relate to CHCI or any of the CHCI Subsidiaries (except to the
extent they relate solely to Gaming Spinco);
(l) refrain from taking any action prior to the Effective Time
that would disqualify the Merger as a "reorganization" within the meaning of
Section 368(a)(1)(A) of the Code.
Section 6.04. Breach of Representations and Warranties. As promptly as
------------ ----------------------------------------
practicable, upon CHCI becoming aware of any breach, or the impending or
threatened occurrence of any event which would cause or constitute a breach, or
would have caused or constituted a breach had such event occurred or been known
prior to the date hereof, of any of the representations and warranties of CHCI
contained in this Agreement, individually or in the aggregate, which would
reasonably be expected to have a Material Adverse Effect on CHCI (disregarding
for such purposes all materiality and knowledge qualifiers in the individual
representations and warranties of CHCI contained in this Agreement), CHCI shall
give detailed written notice thereof to OpCo and shall use its reasonable best
efforts to prevent or promptly remedy the same; provided, however, that the use
of reasonable best efforts shall not require a payment of a material amount of
money not otherwise due or ordinarily incidental to such process.
Section 6.05. Access; Confidentiality.
------------ -----------------------
(a) At any time prior to the termination of this Agreement,
upon reasonable notice from OpCo, CHCI shall, and shall cause the CHCI
Subsidiaries to, afford to the officers, employees, accountants, counsel and
other representatives of OpCo, reasonable access during normal business hours
during the period prior to the Effective Time to all of its properties, books,
contracts, commitments and records and shall permit such persons to make such
inspections as they may reasonably require and, during such period, CHCI shall,
and shall cause the CHCI Subsidiaries to, furnish promptly all other information
concerning its business properties, personnel and accountants as OpCo may
reasonably request.
47
(b) All such information shall be deemed "Evaluation Material"
as such term is defined in that certain letter agreement dated February 12, 1997
(the "Confidentiality Agreement"), except as otherwise provided in such
Confidentiality Agreement. The Confidentiality Agreement shall survive the
termination of this Agreement.
Section 6.06. The Spin Off. The parties hereto hereby agree and
------------ ------------
acknowledge that the Spin Off shall not occur unless the terms thereof are
satisfactory to the Gaming Regulatory Authorities, including any revisions as
may be required to the Reorganization Agreement in connection therewith, and
that the Gaming Regulatory Authorities shall be provided such information and
such periods of time as they may request in order to consider the Gaming
Regulatory Approvals; provided, however, that any such required revisions shall
not be materially adverse to the Hospitality Business or materially inconsistent
with the terms of the Spin Off Term Sheet in a manner materially adverse to
OpCo.
Section 6.07. Further Action. CHCI shall, and shall cause the CHCI
------------ --------------
Subsidiaries to, subject to the fulfillment at or before the Effective Time of
each of the conditions of performance set forth herein or the waiver thereof,
perform such further acts and execute such documents as may reasonably be
required to effect the Merger and the transactions contemplated by this
Agreement.
Section 6.08. Certain Employee Matters. The parties hereto agree and
------------ ------------------------
acknowledge that, with respect to certain matters related to employees of CHCI,
each party shall comply in all material respects with the terms set forth on
Exhibit I attached hereto (the "Employment Matters Term Sheet"), and shall
---------
perform such further acts and execute such documents as may reasonably be
required in connection therewith.
Section 6.09. Payment of Promissory Note. On or prior to the Closing
------------ --------------------------
Date, CHCI shall have paid or cause to be paid in cash from funds other than
Post-September 1 Hospitality Revenues all outstanding amounts of principal,
interest or other amounts owed under the promissory note dated October 2, 1995
issued by CHC REIT Management Corporation to Patriot American Hospitality, L.P.
(now named Patriot American Hotel Notes Partnership, L.P.) in the original
principal amount of $3,750,000 and which, as of the next scheduled payment date
on October 25, 1997, will have an outstanding balance of principal and accrued
interest equal to $4,548,186.
Section 6.10. Use of Brand Names. CHCI agrees that from and after
------------ ------------------
September 30, 1997, OpCo and its affiliates shall have the right to enter into
license agreements with CHCI or the applicable CHCI Subsidiary providing for the
use of the "Grand Bay" and "Registry" brand names for such hotels owned or
managed by OpCo or its affiliates as OpCo or its affiliates may from time to
time identify, subject to CHCI's right to approve in its good faith reasonable
discretion the hotel property which is the subject of such license agreement
and, if OpCo or an affiliate is not both the owner and the manager thereof, the
non-OpCo affiliated owner or manager, as applicable. Such license agreement
shall be on customary and commercially reasonable terms including, without
limitation, reasonable quality control provisions and a
48
market rate licensing fee, which market rate licensing fee shall in no event, be
more than 1% of room revenues generated by such hotel.
ARTICLE VII. COVENANTS OF OPCO.
----------- -----------------
Section 7.01. Consents and Approvals. OpCo will use its reasonable best
------------ ----------------------
efforts to obtain or cause to be obtained prior to the Closing Date all
necessary consents and approvals to the performance of the obligations of OpCo
under this Agreement; provided, however, that the use of reasonable best efforts
shall not require a payment of a material amount of money not otherwise due or
ordinarily incidental to such process. OpCo will cooperate in all reasonable
respects with CHCI and the CHCI Subsidiaries with a view toward obtaining timely
satisfaction of the conditions to the Closing set forth herein, it being
understood that all fees and expenses associated with obtaining required
governmental consents and approvals shall be paid in accordance with Section
12.05 hereof unless prohibited by law. OpCo shall use its reasonable best
efforts to make all filings, document submissions, applications, statements and
reports to all federal, state or local government agencies or entities which are
required to be made by it prior to the Closing Date pursuant to any applicable
statute, rule or regulation in connection with this Agreement and the
transactions contemplated hereby, including any Regulatory Filings, it being
understood that the required filing fees in connection therewith shall be paid
in accordance with Section 12.05 hereof; provided, however, that the use of
reasonable best efforts shall not require a payment of a material amount of
money not otherwise due or ordinarily incidental to such process. OpCo shall (i)
furnish to CHCI copies of all filings and such necessary information and
assistance as may be requested by CHCI in connection with its preparation of
required filings or submissions to any governmental agency and (ii) as promptly
as practicable upon OpCo becoming aware of any inquiries made of it by any
federal, state or local agency or authority with respect to this Agreement or
the transactions contemplated hereby, shall give detailed written notice thereof
to CHCI and shall use its reasonable best efforts to update CHCI of the status
of such inquiries.
Section 7.02. Publicity. OpCo, CHCI, and the CHCI Subsidiaries shall
------------ ---------
consult with each other before issuing any press release or otherwise making any
public statements with respect to this Agreement or any transaction contemplated
hereby and shall not issue any such press release or make any such public
statement without the prior consent of the parties, which consent shall not be
unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party, issue such press release or make such public
statement as may be required by law or the applicable rules of any stock
exchange if it has used its reasonable best efforts to consult with the other
party and to obtain such party's consent but has been unable to do so in a
timely manner.
Section 7.03. Tax-Free Treatment. Following the Merger, OpCo will make
------------ ------------------
a good faith effort to (i) continue a significant historic business of CHCI
remaining after the Spin Off or use a significant portion of the historic
business assets of CHCI remaining after the Spin Off in a business within the
meaning of Treasury Regulation (S) 1.368-1(d) and (ii) conduct its
49
business activities described in Exhibit J hereto in the manner set forth in
---------
such Exhibit. For purposes of this representation and covenant, the attributes
and activities of OpCo shall include those of OpCo OP and its partnership or
limited liability company subsidiaries.
Section 7.04. Breach of Representations and Warranties. As promptly as
------------ ----------------------------------------
practicable, upon OpCo becoming aware of any breach, or the impending or
threatened occurrence of any event which would cause or constitute a breach, or
would have caused or constituted a breach had such event occurred or been known
prior to the date hereof, of any of the representations or warranties of OpCo
contained in or referred to in this Agreement, individually or in the aggregate,
which would reasonably be expected to have a Material Adverse Effect on OpCo
(disregarding for such purposes all materiality and knowledge qualifiers in the
individual representations and warranties of OpCo contained in this Agreement),
OpCo shall give detailed written notice thereof to CHCI and shall use its
reasonable best efforts to prevent or promptly remedy the same; provided,
however, that the use of reasonable best efforts shall not require a payment of
a material amount of consideration not otherwise due or ordinarily incidental to
such process.
Section 7.05. Further Action. OpCo shall, subject to the fulfillment at
------------ --------------
or before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger and the
transactions contemplated by this Agreement.
Section 7.06. Certain Employee Matters. The parties hereto agree and
------------ ------------------------
acknowledge that, with respect to certain matters related to employees of CHCI,
each party shall comply in all material respects with the terms set forth on the
Employment Matters Term Sheet, and shall perform such further acts and execute
such documents as may reasonably be required in connection therewith.
Section 7.07. Permitted Investments Coverage.
------------- ------------------------------
(a) For a period of 15 years after the Closing Date, OpCo shall
maintain not less than $150 million (the "Commitment Amount") in Permitted
Investments (as hereinafter defined). OpCo agrees that all of such Permitted
Investments shall be held directly by OpCo, and not by any of its subsidiaries
or affiliates, and that it shall not create or allow to exist any mortgage,
lien, security interest or other encumbrance on such Permitted Investments.
Notwithstanding the foregoing, within ninety (90) days after the sixth
anniversary of the Fiscal Quarter End (as hereinafter defined), OpCo may reduce
the Commitment Amount by an amount equal to 25% of the product of (i) the
Coverage Factor and (ii) the excess, if any, of Tangible Net Worth as of such
sixth anniversary over Tangible Net Worth as of the first anniversary of the
Fiscal Quarter End, and thereafter, within ninety (90) days after the seventh
anniversary of the Fiscal Quarter End and within ninety (90) days after each
anniversary of the Fiscal Quarter End thereafter, by an amount equal to 25% of
the product of (i) the Coverage Factor and (ii) the excess, if any, of Tangible
Net Worth (as hereinafter defined) as of such anniversary over Tangible Net
Worth as of the prior anniversary, plus any unused increases in Tangible Net
50
Worth from such prior periods which have not been previously applied to reduce
the Commitment Amount. "Fiscal Quarter End" shall mean the last day of the
fiscal quarter in which the Closing occurs.
(b) "Tangible Net Worth" shall mean, without duplication, the
consolidated shareholders' equity of OpCo and its subsidiaries minus all
intangible assets, in each case as determined in accordance with generally
accepted accounting principles consistently applied.
(c) "Permitted Investments" shall mean demand loans issued by
REIT in favor of OpCo, other forms of financial support from REIT in favor of
OpCo reasonably satisfactory to CHCI on or prior to the Closing Date, or Cash
Equivalents. OpCo agrees that it will not amend any of the terms of such demand
loans or other forms of financial support and that it will enforce its rights
thereunder to the full extent permitted by the terms thereof. "Cash Equivalents"
shall mean (i) securities issued or directly and fully guaranteed or insured by
the United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof) having maturities of not more than six months from the date of
acquisition, (ii) U.S. dollar denominated time deposits, certificates of deposit
and bankers acceptances of any bank whose short-term commercial paper rating
from S&P is at least A-1 or the equivalent thereof or from ▇▇▇▇▇'▇ is at least
P-1 or the equivalent thereof (any such bank, an "Approved Lender"), in each
case with maturities of not more than six months from the date of acquisition,
(iii) commercial paper issued by any Approved Lender or by the parent company of
any Approved Lender and commercial paper issued by, or guaranteed by, any
industrial or financial company with a short-term commercial paper rating of at
least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's or guaranteed by any industrial company with a long term
unsecured debt rating of at least A or A2, or the equivalent of each thereof,
from S&P or Moody's, as the case may be, and in each case maturing within six
months after the date of acquisition, (iv) marketable direct obligations issued
by any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing within six months from
the date of acquisition thereof and, at the time of acquisition, having one of
the two highest ratings obtainable from either S&P or Moody's, and (v)
investments in money market funds substantially all the assets of which are
comprised of securities of the types described in clauses (i) through (iv)
above.
(d) "Coverage Factor" shall mean (i) 1.0 if the Fixed Charges
Coverage Ratio on a trailing last twelve months basis is 1.75 or higher, (ii)
0.8 if the Fixed Charges Coverage Ratio on a trailing last twelve months basis
is less than 1.75 but greater than or equal to 1.50, and (iii) 0.0 if the Fixed
Charges Coverage Ratio is less than 1.50.
(e) "Fixed Charges Coverage Ratio" shall mean, for any test
period, the ratio of (i) EBITDA (as hereinafter defined) for such period, to
(ii) the sum of (x) total consolidated interest expense (including capitalized
interest) paid or accrued for such period, in each case determined in conformity
with generally accepted accounting principles consistently applied and (y) total
preferred stock dividends paid or accrued by OpCo or its subsidiaries (other
than
51
dividends from any such subsidiaries to OpCo or any other subsidiary) during
such period. "EBITDA" shall mean, for any period, the consolidated net income of
OpCo and its subsidiaries for such period, plus (a) the sum of the following
amounts determined in accordance with generally accepted accounting principles
consistently applied to the extent deducted from revenues in the determination
of such net income: (i) depreciation expense, (ii) amortization and other non-
cash charges, (iii) interest expense, (iv) income tax expense and (v)
extraordinary losses, less (b) extraordinary, unusual or non-recurring gains
determined in conformity with generally accepted accounting principles
consistently applied, to the extent included in the determination of such net
income.
ARTICLE VIII. CONDITIONS.
------------ ----------
Section 8.01. Conditions to OpCo's Obligation to Effect the Merger. The
------------ ----------------------------------------------------
obligation of OpCo to consummate the transactions contemplated by this Agreement
is subject to the fulfillment prior to or at the Closing of the following
conditions, any or all of which, except the condition in Section 8.01(a), may be
waived, in whole or in part, by OpCo, to the extent permitted by applicable law:
(a) Spin Off. CHCI shall have consummated the Spin Off in accordance
--------
with the Reorganization Agreement.
(b) HSR Act. The waiting period applicable to consummation of the
-------
Merger under the HSR Act, if applicable, shall have expired or been terminated.
Section 8.02. Conditions to CHCI's Obligation to Effect the Merger. The
------------ ----------------------------------------------------
obligation of CHCI to effect the transactions contemplated by this Agreement
shall be subject to the fulfillment prior to or at the Closing of the following
conditions, any or all of which, except the condition set forth in Section
8.02(b), may be waived, in whole or in part, by CHCI, to the extent permitted by
applicable law:
(a) Stockholder Approval. This Agreement, the Transaction Agreements,
--------------------
and the transactions contemplated hereby and thereby shall have been approved by
the requisite vote of the Stockholders (the "Stockholder Approval").
(b) Spin Off. CHCI shall have consummated the Spin Off in accordance
--------
with the Reorganization Agreement.
(c) HSR Act. The waiting period applicable to consummation of the
-------
Merger under the HSR Act, if applicable, shall have expired or been terminated.
(d) Registration Rights Agreement. OpCo shall have executed
-----------------------------
Registration Rights Agreements in favor of the Stockholders having terms
substantially as set forth in the Registration Rights Term Sheet attached hereto
as Exhibit K.
---------
52
(e) Opinion of Counsel. At the Closing, CHCI shall have received the
------------------
opinion of ▇▇▇▇▇▇▇, Procter & ▇▇▇▇ LLP in substantially the form of Exhibit L
---------
hereto.
ARTICLE IX. TERMINATION OF AGREEMENT.
---------- ------------------------
Section 9.01. Termination. Subject to the provisions of Section 9.03 to the
------------ -----------
contrary, this Agreement may be terminated any time prior to the Closing Date
with the mutual written consent of OpCo and CHCI.
Section 9.02. Effect of Termination. All obligations of the parties
------------ ---------------------
hereunder shall cease upon any termination pursuant to Section 9.01, provided,
however, that (i) the provisions of this Article VIII and of Sections 6.05(b)
and 12.05 hereof shall survive any termination of this Agreement in any event;
(ii) nothing herein shall relieve any party from any liability for a material
error or omission in any of its representations or warranties contained herein
or a material failure to comply with any of its covenants, conditions or
agreements contained herein, provided, however, that no party shall have any
liability for such material error or omission or failure to comply other than
for wilful errors, omissions or failure to comply, and (iii) any party may
proceed as further set forth in Section 9.03 below.
Section 9.03. Asset Sale. Notwithstanding anything in this Agreement to the
------------
contrary, at the earlier to occur of (a) the final decision of any of the Gaming
Regulatory Authorities denying approval of the Spin Off and (b) June 30, 1998,
OpCo shall have the right to purchase from CHCI, and CHCI shall have the right
to sell to OpCo or OpCo's designee, the Hospitality Assets (the "Asset Sale")
for a purchase price equal to the product of (i) the aggregate number of shares
of OpCo Preferred Stock deliverable pursuant to Sections 1.03 (including in
respect of accrued dividends as provided therein) and 1.04 and (ii) the Current
Market Price of a Paired Share at that date. Such purchase price may be paid, at
OpCo's option, in cash or in Paired Shares valued at such Current Market Price,
provided that such shares have been registered for issuance and sale under the
Securities Act pursuant to a registration statement which has been declared
effective on or prior to the Closing Date so that such Paired Shares are freely
tradeable for at least ninety (90) days after issuance. In the event of an Asset
Sale, OpCo and CHCI shall cooperate and use their reasonable best efforts to
consummate the transaction in a manner which preserves the other economic terms
of this Agreement to the greatest possible extent (except that Section 2.03
shall not be applicable). In the event that the Asset Sale has not been
consummated within 90 days after the occurrence of either of the events in
clause (a) or (b) above (including, in the case of clause (b), as may be
extended pursuant to the next paragraph below), OpCo shall have the option to
purchase for cash the Leasehold Agreements set forth in Schedule 9.03 at the
values thereof set forth in such Schedule. At REIT's option, REIT may exercise
OpCo's purchase rights or assume OpCo's obligation to purchase hereunder.
Unless a final decision of any of the Gaming Regulatory Authorities denying
approval of the Spin Off has been rendered as of June 30, 1998, then, for so
long as CHCI is using its reasonable best efforts to obtain the consents of the
Gaming Regulatory Authorities, the date in
53
clause (b) above shall be extended until September 30, 1998 (the date, as so
extended, if applicable, the "Termination Date").
ARTICLE X. SURVIVAL; INDEMNIFICATION.
--------- -------------------------
Section 10.01. Survival of Representations, Warranties, Etc. Subject to
------------- --------------------------------------------
Section 10.02, all representations, warranties, agreements, covenants and
obligations herein or in any Schedule or certificate delivered by any party
incident to the transactions contemplated hereby are material and may be relied
upon by the party receiving the same and shall survive the Closing regardless of
any investigation by such party and shall not merge into the performance of any
obligation by any party hereto until the expiration of indemnification
obligations with respect thereto as provided in the applicable provision of the
Stockholder Indemnification Agreement.
Section 10.02. Survival of Certain Provisions. In addition to the items
------------- ------------------------------
specified in Section 10.01, the provisions of Sections 1.05, 1.11, 2.06,
6.05(b), 6.08, 7.03, 7.06, 7.07, 9.02, 11.02, 11.03, 12.04 and 12.05 shall
survive the Closing.
ARTICLE XI. CERTAIN TAX MATTERS
---------- -------------------
Section 11.01. Defined Terms. For purposes of this Agreement, the following
------------- -------------
terms shall have the following meanings:
"CHCI Group" shall mean the affiliated group of corporations, within the meaning
of section 1504(a) of the Code, of which CHCI is the common parent.
"Gaming Spinco Group" means Gaming Spinco and its affiliates, determined
immediately after the Spin Off and the Merger.
"Tax" or "Taxes" means all forms of taxation, whenever created or imposed, and
whether of the United States or elsewhere, and whether imposed by a local,
municipal, governmental, state, foreign, federal or other body, and without
limiting the generality of the foregoing, shall include income, sales, use, ad
valorem, gross receipts, license, value added, franchise, transfer, recording,
withholding, payroll, wage withholding, employment, excise, occupation,
unemployment insurance, social security, business license, business
organization, stamp, environmental, premium and property taxes, together with
any related interest (including the actual interest that would have accrued if
there were no netting of Taxes), penalties and additions to any such tax, or
additional amounts imposed by any Taxing Authority (domestic or foreign) upon
the CHCI Group, the Gaming Spinco Group, the OpCo or any of their respective
members or divisions or branches or affiliates.
"Tax Return" means any return, filing, questionnaire, information return or
other document required to be filed, including requests for extensions of time,
filings made with respect to
54
estimated tax payments, claims for refund and amended returns that may be filed,
for any period with any Taxing Authority (whether domestic or foreign) in
connection with any Tax or Taxes (whether or not a payment is required to be
made with respect to such filing).
Section 11.02. Tax Sharing Agreement. Immediately following the
------------- ---------------------
Contribution and Spinoff, Gaming Spinco and CHCI shall enter into a Tax Sharing
Agreement in substantially the form of Exhibit M hereto.
---------
Section 11.03. Computation of Taxes. The amount of any Tax liability for
------------- --------------------
which a party is liable hereunder shall be computed in a manner that is
consistent with the provisions of the Tax Sharing Agreement.
ARTICLE XII. MISCELLANEOUS.
----------- -------------
Section 12.01. Law Governing. This Agreement shall be governed by and
------------- -------------
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws. Each of the parties hereto hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Delaware
Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in any inconvenient forum.
Section 12.02. Notices. Any notice, request, demand or other communication
------------- -------
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon receipt, or if
sent by registered or certified mail upon the sooner of the expiration of three
days after deposit in United States post office facilities properly addressed
with postage prepaid or acknowledgment of receipt, as follows:
To OpCo: Patriot American Hospitality Operating Company
------- Tri-West Plaza
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Chairman
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
55
with a copy to: ▇▇▇▇▇▇▇, Procter & ▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, P.C.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
To CHCI: CHC International, Inc.
------- ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Chairman
or, following the Spin Off: Gaming Spinco
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
with a copy to: Skadden, Arps, Slate, ▇▇▇▇▇▇▇ & ▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ - ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other address of which any party may notify the other parties as
provided above.
Section 12.03. Prior Agreements Superseded. This Agreement supersedes all
------------- ---------------------------
prior understandings and agreements among the parties relating to the subject
matter hereof except as expressly provided herein.
Section 12.04. Assignability. This Agreement shall not be assignable by
------------- -------------
OpCo without the prior written consent of CHCI, or assignable by CHCI without
the prior written consent of OpCo. This Agreement (including without limitation
the provisions of Article IX) shall be binding upon and enforceable by, and
shall inure to the benefit of, the parties hereto and their respective
successors, heirs, executors, administrators and permitted assigns, and no
others. Notwithstanding the foregoing, nothing in this Agreement is intended to
give any Person not named herein the benefit of any legal or equitable right,
remedy or claim under this Agreement, except as expressly provided herein.
Section 12.05. Fees and Expenses. Except as set forth in Section 1.04(e),
------------- -----------------
OpCo shall pay its own expenses and costs associated with the preparation of
this Agreement and the consummation of the transactions contemplated hereby
including regulatory filing fees relative to regulatory approvals, if any,
required to be obtained by OpCo, and CHCI shall pay its own expenses in
connection with the preparation of this Agreement and the consummation of the
56
transactions contemplated hereby; provided, however, that any joint filing fees
shall be borne equally by OpCo and CHCI.
Section 12.06. Captions and Gender. The captions in this Agreement are for
------------- -------------------
convenience only and shall not affect the construction or interpretation of any
term or provision hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter
pronoun, as the context may require.
Section 12.07. Execution in Counterparts. For the convenience of the
------------- -------------------------
parties and to facilitate execution, this Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same document.
Section 12.08. Certain Remedies; Severability. It is specifically
------------- ------------------------------
understood and agreed that any breach of this Agreement by any of the parties
hereto will result in irreparable injury to the aggrieved party, that the remedy
at law alone will be an inadequate remedy for such breach and that, in addition
to any other remedy for such breach and that, in addition to any other remedy it
may have, such aggrieved party shall be entitled to enforce the specific
performance of this Agreement by the breaching party and to seek both temporary
and permanent injunctive relief, without the necessity of proving actual
damages, but without limitation of their rights to recover such damages. In case
any of the provisions contained in this Agreement shall for any reason be held
to be invalid, illegal or unenforceable in any respect, any such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement, but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had been limited or modified (consistent with its
general intent) to the extent necessary to make it valid, legal and enforceable,
or if it shall not be possible to so limit or modify such invalid, illegal or
unenforceable provision or part of a provision, this Agreement shall be
construed as if such invalid, illegal or unenforceable provision or part of a
provision had never been contained in this Agreement.
Section 12.09. Amendments; Waivers. Prior to the Closing, this Agreement
------------- -------------------
may not be amended or modified except by a writing duly and validly executed by
CHCI and OpCo. After the Closing, the surviving provisions of this Agreement may
not be amended or modified except by a writing duly and validly executed by
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ and OpCo. Any party hereto may waive any covenant or
condition intended for its benefit in its discretion, but delay on the party of
any party in exercising any right, power or privilege hereunder shall not
operate as a waiver thereof, nor shall any waiver on the part of any party of
any such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights and remedies of
any party arising out of or otherwise in respect of any inaccuracy in or breach
of any representation or warranty, or any failure to perform or comply with any
covenant or agreement, contained in this Agreement shall in no way be limited by
the fact that the act, omission, occurrence or other state of facts upon which
any claim of any such inaccuracy, breach or failure is based may also be the
subject matter of any other representation, warranty, covenant or agreement
contained in this Agreement (or in any other agreement between the parties) as
to which there is no inaccuracy, breach or failure.
57
Section 12.10. Schedules. The Schedules, Exhibits and the Disclosure
------------- ---------
Schedules to this Agreement are a part of this Agreement as if set forth in full
herein. Any reference to this Agreement or any provision hereof shall be deemed
to include a reference to the Schedules hereto, Exhibits hereto and the
Disclosure Schedules. The information included in each Schedule is hereby
incorporated by reference into each other Schedule hereto, so that each
representation and warranty contained herein shall be deemed to refer to and
incorporate the information contained in all Schedules.
Section 12.11. Certain Definitions. For purposes of this Agreement,
------------- -------------------
references to a "Person" shall mean an individual, a corporation, an
association, an estate, a trust, a partnership or any other entity or
organization.
[END OF TEXT]
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IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed as of the date set forth above.
OPCO:
----
PATRIOT AMERICAN HOSPITALITY
OPERATING COMPANY
ATTEST:
By: /s/ ▇.▇. ▇▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇ ▇▇
--------------------------- ---------------------------
Name: ▇.▇. ▇▇▇▇▇▇▇ Name: ▇▇▇▇▇▇ ▇▇
Title: Senior Vice President
REIT:
----
PATRIOT AMERICAN HOSPITALITY,
INC.
ATTEST:
By: /s/ ▇.▇. ▇▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ III
--------------------------- ---------------------------
Name: ▇.▇. ▇▇▇▇▇▇▇ Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Title: President
CHCI:
----
CHC INTERNATIONAL, INC.
ATTEST:
By: /s/ ▇.▇. ▇▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
--------------------------- ---------------------------
Name: ▇.▇. ▇▇▇▇▇▇▇ Name: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Chairman and CEO
59