<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999
REGISTRATION STATEMENT NO. 333-67065
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERSTATE HOTELS MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MARYLAND 7011 75-2767215
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
THOMAS F. HEWITT
INTERSTATE HOTELS MANAGEMENT, INC.
680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Name, address including zip code, and telephone number,
including area code, of agent for service)
-------------------------
COPIES TO:
CARLA S. MORELAND, ESQ.
JOHN P. BOHLMANN, ESQ.
C/O PATRIOT AMERICAN HOSPITALITY, INC.
1950 STEMMONS FREEWAY
SUITE 6001 DALLAS, TEXAS 75207
(214) 863-1000
TIMOTHY Q. HUDAK, ESQ.
INTERSTATE HOTELS MANAGEMENT, INC.
680 ANDERSEN DRIVE, FOSTER PLAZA TEN
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED MAY , 1999
9,221,743 SHARES
INTERSTATE HOTELS MANAGEMENT, INC.
DISTRIBUTION BY
PATRIOT AMERICAN HOSPITALITY, INC.
TO ITS SHAREHOLDERS OF UP TO
9,221,743 SHARES OF COMMON STOCK
OF INTERSTATE HOTELS MANAGEMENT, INC.
-------------------------
We are sending you this Information Statement/Prospectus to describe the
spin-off of 92% of Interstate Hotels Management, Inc. from Patriot American
Hospitality, Inc., and the business and financial condition of Interstate
Management following the spin-off. When the spin-off is accomplished, you will
receive one share of common stock of Interstate Management for every 19.57
shares of Patriot common stock, Patriot Series A Preferred Stock, Wyndham
International, Inc. Series A and Series B Preferred Stock, Patriot American
Hospitality Partnership, L.P. common and preferred limited partnership units,
and Wyndham International Operating Partnership, L.P. Class A and Class C
preferred limited partnership units you own.
Patriot signed a merger agreement on December 2, 1997 pursuant to which it
was to acquire Interstate Hotels Company. In March 1998, prior to the closing of
the merger, Marriott International, Inc. sued Interstate Hotels Company seeking
to block the transaction, and the merger was preliminarily enjoined in April
1998 pending a trial on the merits of Marriott's claims. On May 27, 1998,
Patriot/Wyndham, Interstate Hotels Company and Marriott reached a settlement
allowing the Patriot/Interstate Hotels Company merger to close on June 2, 1998.
As part of the settlement agreement, Patriot agreed to effect the spin-off of
Interstate Management, which operates and has a 45% managing member interest in
the third-party hotel management business Patriot acquired from Interstate
Hotels Company. Interstate Management has been a subsidiary of Patriot since the
Interstate Hotels Company acquisition. The spin-off achieves two goals: you will
continue to own an equity stake in Interstate Hotels Company's third-party hotel
management business, but Wyndham, shares of which are paired and trade together
as a single unit with Patriot's shares and which is a major competitor of
Marriott's, will not have a direct operational relationship with Marriott or any
Marriott hotels. If you are a holder of record of Patriot securities on May ,
1999, you will receive your Interstate Management shares automatically. You do
not need to take any further action. We intend to apply to have the Interstate
Management shares listed on the New York Stock Exchange under the trading symbol
"IHC."
-------------------------
WE URGE YOU TO READ THIS INFORMATION STATEMENT/PROSPECTUS CAREFULLY SINCE IT
CONTAINS INFORMATION THAT IS IMPORTANT TO YOU. PLEASE PAY PARTICULAR ATTENTION
TO THE "RISK FACTORS" BEGINNING ON PAGE 11.
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NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
-------------------------
The date of this Information Statement/Prospectus is May , 1999.
THE INFORMATION IN THIS INFORMATION STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
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TABLE OF CONTENTS
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PAGE
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Questions and Answers about the Spin-off and Interstate
Management................................................ 1
Summary..................................................... 3
Summary Financial and Other Data............................ 7
Recent Developments......................................... 9
Risk Factors................................................ 11
The Spin-off................................................ 18
Business.................................................... 23
Selected Financial and Other Data........................... 34
Pro Forma Financial Data.................................... 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 44
Management.................................................. 53
Certain Relationships and Related Transactions.............. 61
Security Ownership of Certain Beneficial Owners and
Management................................................ 63
Description of Capital Stock................................ 63
Where You Can Find More Information......................... 68
Index to Combined Financial Information..................... F-1
</TABLE>
In addition to historical information, this Information Statement/Prospectus
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and information based on our current views of our
business and our assumptions concerning future events. The words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"believes," "estimates," "projects" or similar expressions are intended to
identify these forward-looking statements. These statements are subject to risks
and uncertainties that could cause our actual operations and results of
operations to differ materially from those reflected in our forward-looking
statements.
Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on trends which we anticipate in the
lodging industry and the effect on those trends of such factors as industry
capacity, the seasonal nature of the lodging industry, product demand and
pricing and the other matters referred to in the "Risk Factors" section of this
document. Accordingly, you are cautioned not to place undue reliance on our
forward-looking statements.
This Information Statement/Prospectus contains trademarks and trade names of
companies other than Interstate Hotels Management, Inc.
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QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF AND INTERSTATE MANAGEMENT
These questions and answers are qualified by the more detailed information and
the financial statements and notes thereto appearing elsewhere in this
Information Statement/Prospectus. References to "we," "us," and "Interstate
Management" mean Interstate Hotels Management, Inc. and its subsidiaries,
references to "Interstate Hotels, LLC" mean Interstate Hotels, LLC and its
subsidiaries, references to "Patriot" mean Patriot American Hospitality, Inc.
and its subsidiaries, references to "Wyndham" mean Wyndham International, Inc.
and its subsidiaries, references to "Patriot/Wyndham" mean Patriot and its
subsidiaries together with Wyndham and its subsidiaries, references to "Old
Interstate" mean Interstate Hotels Company, references to "Interstate Management
stock" and "Interstate Management shares" mean the common stock of Interstate
Management, and references to "Patriot securities" mean common stock and Series
A Preferred Stock of Patriot, Series A and Series B Preferred Stock of Wyndham,
common and preferred limited partnership units of Patriot American Hospitality
Partnership, L.P. and Class A and Class C Preferred limited partnership units of
Wyndham International Operating Partnership, L.P. All statistics are as of
December 31, 1998, unless otherwise noted, and relate to Interstate Management's
portfolio of hotels for which management contracts or leases were in place as of
April 15, 1999 and/or which we expect to be operated by Interstate Management
following the spin-off.
Q: WHAT WILL HAPPEN IN THE SPIN-OFF?
A: In the spin-off, Patriot/Wyndham will separate from its hotel business Old
Interstate's third-party hotel management business and equity interests in
The Charles Hotel Complex, a hotel, retail and office complex located in
Cambridge, Massachusetts, to create a separate publicly traded company. We
expect that our interests in The Charles Hotel Complex (other than our
interest in the manager of The Charles Hotel) will be sold shortly following
the spin-off. Patriot/Wyndham acquired the assets being included in the
spin-off through Patriot's merger with Old Interstate. "Third-party hotel
management business" refers to the management, leasing and related services
we perform for hotels that we do not own.
Q: WHAT WILL I RECEIVE IN THE SPIN-OFF?
A: You will receive one Interstate Management share for every 19.57 Patriot
securities you own on May , 1999, the record date for the spin-off. We will
not issue any fractional shares. Instead, you will receive cash based on the
market value of any fractional shares.
Example: If you own 100 Patriot securities, then after the spin-off you will
receive five Interstate Management shares and a check for the market value of
the fractional interest.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE SPIN-OFF?
A: Nothing. No proxy or vote is necessary for the spin-off. If you own Patriot
securities as of the close of business on May , 1999, Interstate Management
shares will be mailed to you or credited to your brokerage account. You do
not need to mail in any stock certificates.
Q: WHAT WILL MY SPIN-OFF SHARES BE WORTH?
A: Based on information we have received from Patriot, we have estimated the
initial value of the Interstate Management shares to be per share. The
actual trading value of the Interstate Management shares may be higher or
lower than the estimated value and will depend on many factors. Until an
orderly trading market develops, the market price for the Interstate
Management shares may fluctuate significantly. Please obtain current
quotations prior to deciding whether to purchase or sell Interstate
Management shares.
1
<PAGE> 5
Q: WILL I HAVE TO PAY TAXES ON THE SHARES I RECEIVE IN THE SPIN-OFF?
A: Yes. The fair market value at the time of the spin-off of the Interstate
Management shares you receive in the spin-off with respect to your shares of
Patriot stock and the cash you receive in lieu of fractional shares will be
taxable to you. The distribution will be treated as a dividend and taxable as
ordinary income if it is paid out of Patriot's earnings and profits. Any
amount of the distribution in excess of earnings and profits will first
reduce your tax basis in your Patriot common stock and then will be taxable
to you as capital gain. We have assigned an estimated value of per
share to the Interstate Management shares, but the actual value of the
spin-off distribution could be between and per share. The final
value of the spin-off distribution cannot be determined until after the
distribution is completed. We will make a public announcement of the amount
of the distribution promptly after it is determined and will furnish to you
the required IRS information as promptly as we can. For a more detailed
description of the tax consequences to you of the spin-off, see page 18.
If you receive a distribution of Interstate Management shares with respect to
Patriot securities other than Patriot stock, different rules will apply.
These rules are summarized on page 21.
Q: WHEN WILL I RECEIVE MY INTERSTATE MANAGEMENT SHARES?
A: Patriot will deliver the Interstate Management shares to which you are
entitled as promptly as it can following the spin-off. Patriot will either
mail a stock certificate to you or arrange for your shares to be credited
electronically to your brokerage account.
Q: WHEN WILL I BE ABLE TO BUY AND SELL INTERSTATE MANAGEMENT SHARES?
A: You may buy and sell Interstate Management shares once the spin-off occurs.
Q: WHERE WILL THE INTERSTATE MANAGEMENT SHARES TRADE?
A: Interstate Management intends to apply to have its shares listed on the New
York Stock Exchange under the trading symbol "IHC."
Q: WILL DIVIDENDS BE PAID ON THE INTERSTATE MANAGEMENT SHARES?
A: We do not plan to pay dividends on the Interstate Management shares in the
foreseeable future. We are not a REIT and thus are not required to pay any
dividends. We plan to retain our earnings to fund the development of our
business.
Q: WHOM SHOULD I CALL WITH QUESTIONS ABOUT THE SPIN-OFF AND INTERSTATE
MANAGEMENT?
A: If you have questions about the spin-off or Interstate Management or if you
would like additional copies of this Information Statement/Prospectus or any
document we refer to in this Information Statement/ Prospectus, you should
contact Lisa O'Connor at Interstate Management at (412) 937-0600.
2
<PAGE> 6
SUMMARY
This summary highlights selected information from this Information
Statement/Prospectus and does not contain all of the information that may be
important to you. For a more complete description of the spin-off, you should
read this entire Information Statement/Prospectus as well as the additional
documents we refer to under the heading "Where You Can Find More Information."
THE SPIN-OFF
When the spin-off is consummated, Patriot will distribute to you one Interstate
Management share for every 19.57 Patriot securities you own on May , 1999, the
record date for the spin-off. At the time of the spin-off, Marriott will also
purchase four percent of the outstanding Interstate Management shares for
approximately $2.1 million. We expect the spin-off to occur on May , 1999.
REASONS FOR THE SPIN-OFF
Before Patriot/Wyndham agreed to acquire Old Interstate in December 1997,
Patriot/Wyndham negotiated a non-binding letter of intent with Marriott to
address Marriott's concerns regarding the acquisition of Old Interstate, their
largest franchisee, by a competitor, Patriot/Wyndham. Despite lengthy and
intensive negotiations, Patriot/Wyndham and Marriott were unable to reach a
definitive agreement prior to the planned closing of the Old Interstate merger
and Marriott filed suit in March 1998 seeking to block the merger.
Patriot/Wyndham, Old Interstate and Marriott reached a settlement on May 27,
1998 which allowed the Old Interstate merger to close on June 2, 1998. A major
component of the settlement agreement was the transfer of operations consisting
principally of Old Interstate's third-party hotel management business to a newly
created subsidiary of Patriot/Wyndham, Interstate Management, and the subsequent
spin-off of Interstate Management from Patriot/Wyndham.
OWNERSHIP OF INTERSTATE MANAGEMENT FOLLOWING THE SPIN-OFF
At the time of the spin-off, Marriott will purchase four percent of our
outstanding shares for approximately $2.1 million. In the spin-off,
Interstate Management shares will be distributed to the
counterparties of forward equity contracts into which Patriot/Wyndham has
entered. The Interstate Management shares distributed to the counterparties,
however, will be exchanged immediately following the spin-off for shares of
paired common stock of Patriot/Wyndham of equivalent value, and these Interstate
Management shares will then be cancelled. Following the spin-off and these
transactions, holders of Patriot securities will own 92% of our shares, Marriott
will own four percent of our shares and Patriot/ Wyndham will own four percent
of our shares. This ownership structure was a negotiated part of the settlement
agreement reached with Marriott and will allow each of Patriot/Wyndham and
Marriott to maintain an equal interest in Interstate Management. This structure,
in addition to rights to elect directors held by Wyndham and Marriott, will
allow both Patriot/Wyndham and Marriott to have an influence on the management
of our affairs.
OUR CORPORATE STRUCTURE
After the spin-off, we will initially have two principal subsidiaries,
Interstate Hotels, LLC and IHC II, LLC. We will own a 45% managing member
interest in Interstate Hotels, LLC and a 99.99% interest in IHC II, LLC. Patriot
will retain a 55% non-controlling ownership interest in Interstate Hotels, LLC
and Marriott will own the remaining .01% interest in IHC II, LLC. Interstate
Hotels, LLC is the entity that will operate the third-party hotel management
business that Patriot/Wyndham acquired from Old Interstate, as well as own
equity interests representing in the aggregate an approximate 50.3%
non-controlling interest in The Charles Hotel Complex. We expect that our
interests in The Charles Hotel Complex (other than our interest in the manager
of The Charles Hotel) will be sold shortly following the spin-off. Upon
consummation of the spin-off, substantially all of our assets will be held
through Interstate Hotels, LLC. Because we own only 45% of Interstate Hotels,
LLC, our shareholders will benefit from only 45% of the revenues deriving from
these assets. IHC II, LLC will enter into arrangements under which Marriott will
submanage eleven Marriott hotels acquired by Patriot/Wyndham from Old
Interstate. IHC II, LLC is not expected to make a profit on these arrangements,
but rather will serve to insulate having a direct operational relationship with
each other. Summary diagrams of our structure both prior to and immediately
following the spin-off are set forth below.
3
<PAGE> 7
Included here in the printed version of this Information
Statement/Prospectus are two graphics which depict, using boxes to
represent entities and arrows to represent ownership interests, the
ownership structure of Interstate Management immediately prior to and
immediately following the spin-off.
The first graphic, which depicts the ownership structure of Interstate
Management immediately prior to the spin-off, shows that:
o Patriot will own 99% of Interstate Management and PAH-Interstate
Holdings, Inc., a subsidiary owned 99% by Patriot and one percent
by Wyndham Operating Partnership (itself a subsidiary of which
Wyndham owns at least 85%), will own one percent of Interstate
Management;
o Interstate Management will own 100% of IHC II, LLC;
o Interstate Management will own 45% of Interstate Hotels, LLC and
PAH-Interstate Holdings, Inc. will own 55% of Interstate Hotels,
LLC;
o Interstate Hotels, LLC will own 99% of Crossroads Hospitality
Company, L.L.C., Hilltop Equipment Leasing Company, L.P.,
Continental Design & Supplies Company, L.L.C., and several
entities owning interests in leaseholds, and PAH-Interstate
Member, Inc., a wholly-owned subsidiary of Interstate Management,
will own one percent of Crossroads Hospitality Company, L.L.C.,
Hilltop Equipment Leasing Company, L.P., Continental Design &
Supplies Company, L.L.C., and several entities owning interests
in leaseholds;
o Interstate Hotels, LLC will own 100% of both Colony Hotels and
Resorts Company and Northridge Insurance Company; and
o Interstate Hotels, LLC will own 50.3% in the aggregate of several
entities owning equity interests in The Charles Hotel Complex.
4
<PAGE> 8
The second graphic, which depicts the ownership structure of Interstate
Management immediately following the spin-off, shows that:
o Marriott will own four percent of Interstate Management, the
holders of Patriot securities will own 92% of Interstate
Management, Wyndham will own three percent of Interstate
Management, and PAH-Interstate Holdings, Inc., a subsidiary
owned 99% by Patriot and one percent by Wyndham Operating
Partnership (itself a subsidiary of which Wyndham owns at least
85%), will own one percent of Interstate Management;
o Interstate Management will own 99.99% of IHC II, LLC and Marriott will
own .01% of IHC II, LLC;
o Interstate Management will own 45% of Interstate Hotels, LLC and
PAH-Interstate Holdings, Inc. will own 55% of Interstate Hotels,
LLC;
o Interstate Hotels, LLC will own 99% of Crossroads Hospitality
Company, L.L.C., Hilltop Equipment Leasing Company, L.P.,
Continental Design & Supplies Company, L.L.C., and several
entities owning interests in leaseholds, and PAH-Interstate
Member, Inc., a wholly-owned subsidiary of Interstate Management,
will own one percent of Crossroads Hospitality Company, L.L.C.,
Hilltop Equipment Leasing Company, L.P., Continental Design &
Supplies Company, L.L.C., and several entities owning interests
in leaseholds;
o Interstate Hotels, LLC will own 100% of both Colony Hotels and
Resorts Company and Northridge Insurance Company; and
o Interstate Hotels, LLC will own 50.3% in the aggregate of several
entities owning equity interests in The Charles Hotel Complex.
5
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MANAGEMENT
There initially will be six persons on our Board of Directors. Thomas F. Hewitt
is our Chief Executive Officer and the Chairman of our Board of Directors.
Our principal executive offices are located at 680 Andersen Drive, Foster Plaza
Ten, Pittsburgh, Pennsylvania 15220. Our telephone number is (412) 937-0600.
6
<PAGE> 10
SUMMARY FINANCIAL AND OTHER DATA
We are providing the following summary financial information to aid you in your
analysis of the financial aspects of the spin-off. The table sets forth summary
historical financial data for Interstate Management, prior to the merger of Old
Interstate with Patriot, as the predecessor, as of and for the years ended
December 31, 1994, 1995, 1996 and 1997 and for the period from January 1, 1998
to June 1, 1998, and for Interstate Management, subsequent to the merger of Old
Interstate with Patriot, as the successor, as of December 31, 1998 and for the
period from June 2, 1998 to December 31, 1998. In addition, we have provided a
combined 1998 column which combines the predecessor for the period from January
1, 1998 to June 1, 1998 and the successor for the period from June 2, 1998 to
December 31, 1998. We believe that this presentation is informative to the
reader. In addition, summary pro forma financial data for the year ended
December 31, 1998 is presented.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------------- -------------
YEAR ENDED DECEMBER 31, JAN. 1, 1998 JUNE 2, 1998
----------------------------------------------- THROUGH THROUGH
1994 1995 1996 1997 JUNE 1, 1998 DEC. 31, 1998
-------- ---------- ---------- ---------- ------------ -------------
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STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues............. -- -- $ 9,979 $ 167,855 $ 78,769 $ 115,153
Management and related
fees....................... $ 36,726 $ 45,018 53,733 62,562 27,994 33,241
-------- ---------- ---------- ---------- ---------- ----------
Total revenues........... 36,726 45,018 63,712 230,417 106,763 148,394
Expenses:
Lodging expenses............. -- -- 6,126 85,631 39,834 60,790
Operating expenses and
other(3)................... 20,708 24,934 39,931 34,673 16,623 14,870
Lease expense................ -- -- 3,477 73,283 34,515 51,165
Depreciation and
amortization............... 3,659 4,188 4,385 4,845 2,152 10,659
Interest, net................ (30) (146) (501) (498) (204) (390)
-------- ---------- ---------- ---------- ---------- ----------
Income before income tax
expense...................... 12,389 16,042 10,294 32,483 13,843 11,300
Income tax expense(4).......... -- -- 4,117 12,986 5,528 4,436
-------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest..................... 12,389 16,042 6,177 19,497 8,315 6,864
Minority interest.............. -- -- -- 18 24 209
-------- ---------- ---------- ---------- ---------- ----------
Net income..................... $ 12,389 $ 16,042 $ 6,177 $ 19,479 $ 8,291 $ 6,655
======== ========== ========== ========== ========== ==========
Pro forma net income per common
share(5):
Basic........................
Diluted......................
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents...... $ 6,702 $ 14,035 $ 11,168 $ 2,432 $ 1,652
Total assets................... 30,741 38,420 88,204 118,185 161,157
Long-term debt................. 3,890 1,270 541 370 --
Total equity................... 18,858 24,345 56,886 80,730 92,607
OTHER FINANCIAL DATA:
EBITDA (6)..................... $ 14,178 $ 36,812 $ 15,767 $ 21,360
Net cash provided by operating
activities................... 15,331 12,517 18,359 9,593
Net cash (used in) provided by
investing activities......... (4,338) (35,707) 2,674 (27,707)
Net cash (used in) provided by
financing activities......... (13,860) 14,454 (19,298) 15,599
TOTAL HOTEL DATA (7)
Total hotel revenues........... $858,986 $1,056,279 $1,326,581 $1,600,958
Number of hotels (8)........... 136 150 212 223
Number of rooms (8)............ 31,502 35,044 43,178 45,329
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
COMBINED PRO FORMA
1998(1) 1998(2)
---------- ----------
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STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues............. $ 193,922 $ 193,922
Management and related
fees....................... 61,235 46,736
---------- ----------
Total revenues........... 255,157 240,658
Expenses:
Lodging expenses............. 100,624 100,624
Operating expenses and
other(3)................... 31,493 30,023
Lease expense................ 85,680 85,680
Depreciation and
amortization............... 12,811 18,184
Interest, net................ (594) (1,169)
---------- ----------
Income before income tax
expense...................... 25,143 7,316
Income tax expense(4).......... 9,964 1,317
---------- ----------
Income before minority
interest..................... 15,179 5,999
Minority interest.............. 233 4,024
---------- ----------
Net income..................... $ 14,946 $ 1,975
========== ==========
Pro forma net income per common
share(5):
Basic........................ $ 0.20
Diluted...................... $ 0.20
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents...... $ 1,652 $ 30,442
Total assets................... 161,157 173,604
Long-term debt................. -- --
Total equity................... 92,607 64,372
OTHER FINANCIAL DATA:
EBITDA (6)..................... $ 37,127 $ 10,949
Net cash provided by operating
activities................... 27,952 26,853
Net cash (used in) provided by
investing activities......... (25,033) (11,533)
Net cash (used in) provided by
financing activities......... (3,699) (2,079)
TOTAL HOTEL DATA (7)
Total hotel revenues........... $1,546,926 $1,062,531
Number of hotels (8)........... 176 159
Number of rooms (8)............ 35,214 29,869
</TABLE>
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(1) Represents the summation of the balances from the predecessor for the period
from January 1, 1998 to June 1, 1998 and the successor for the period from
June 2, 1998 to December 31, 1998.
(2) Reflects the spin-off and other adjustments described in "Pro Forma
Financial Data."
(3) Includes a non-recurring expense of $11,896 for the year ended December 31,
1996, relating to the issuance of 785,533 shares of common stock to
executives and key employees of Old Interstate in consideration for the
cancellation of stock options issued by one of Old Interstate's predecessors
in 1995.
(4) Prior to 1996, Old Interstate and its predecessors were organized as S
corporations, partnerships and limited liability companies and, accordingly,
were not subject to federal or significant state income taxes.
(5) Based on 10,002,035 shares of common stock outstanding on a pro forma basis
on the spin-off date.
(6) EBITDA represents earnings before interest, income tax expense, depreciation
and amortization. The 1998 pro forma EBITDA represents Interstate
Management's 45% share of total EBITDA. Management believes that EBITDA is a
useful measure of operating performance because it is industry practice to
evaluate hotel properties based on operating income before interest, taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
EBITDA is unaffected by the debt and equity structure of the property owner.
EBITDA, as calculated by Interstate Management, may not be consistent with
computations of EBITDA by other companies. EBITDA does not represent cash
flow from operations as defined by generally accepted accounting principles,
is not necessarily indicative of cash available to fund all cash flow needs
and should not be considered as an alternative to net income under generally
accepted accounting principles for purposes of evaluating Interstate
Management's results of operations.
(7) Represents all hotels, including the leased hotels, which Interstate
Management operated.
(8) As of the end of the periods presented. The 1998 pro forma number of hotels
and number of rooms excludes 14 hotels with 2,335 rooms that have opened in
1999 or that are scheduled to open in 1999 and that are currently or are
expected to be managed by Interstate Hotels, LLC.
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RECENT DEVELOPMENTS
SETTLEMENT OF EQUITY INNS DISPUTE
We were engaged in a dispute with Equity Inns Partnership, L.P. regarding, among
other matters, the status of leases for 79 hotels we lease from Equity Inns or
its affiliates. The principal issue in the dispute was whether we or Equity Inns
were responsible for funding capital improvements required under the property
improvement plans which were issued, as a result of Patriot's merger with Old
Interstate, by franchisors under whose brand names we operate the leased hotels.
We recently settled this dispute and entered into a consolidated amendment to
our lease agreements and master agreement with Equity Inns. Under the terms of
the consolidated amendment:
- We have agreed to nominate and recommend one appointee of Equity Inns to
our initial Board of Directors.
- Equity Inns acknowledged that we are not responsible for funding the
capital improvements required under the property improvement plans issued
as a result of the Patriot/Old Interstate merger.
- Equity Inns' obligation to offer us the right to lease and manage any
hotel property acquired or developed by Equity Inns prior to November
2001 has been extinguished with the exception of two listed hotels.
- Our obligation to offer Equity Inns the option to acquire all mid-scale,
upper economy, economy or budget hotels which we develop and sell prior
to November 2001 has been extinguished.
- We have granted to Equity Inns a right of first offer in the event we
desire to sell all of the leases or 75% or more of the direct equity
interests in all of the lessees.
- Patriot/Wyndham, which had guaranteed all of the leases, has been
released from its guarantees on a majority of the leases and, upon
receipt of third-party consents, will be released from the remainder of
its guarantees.
- We have agreed to indemnify Patriot/Wyndham in the event Patriot/Wyndham
is required to make any payments in respect of the lease guarantees under
which it remains liable and, in order to secure our indemnification
obligation, we will pledge to Patriot/Wyndham our equity interests in one
of the lessees.
- As guarantor of the leases, we are subject to a minimum net worth
covenant.
- We are subject to performance standards with respect to the leased
hotels, including requirements to maintain (i) room revenue per available
room and expenditures to within specified percentages of the amounts
targeted in the hotels' operating budgets and (ii) continuity in
management personnel at the hotels.
- Equity Inns agreed to enter into a long-term lease for a hotel we
currently operate under a short-term management contract, and we agreed
to terminate a short-term management contract for a separate Equity Inns
hotel.
- We made a one-time additional incentive rent payment (funded by
Patriot/Wyndham) for the 1999 lease year in the amount of $2.0 million to
Equity Inns.
- As guarantor of the leases, we agreed that, so long as either we fail to
meet the minimum net worth covenant or there is a monetary default under
any lease, we will not be permitted to declare or pay dividends or other
distributions.
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PROPOSED SALE OF EQUITY INTERESTS IN THE CHARLES HOTEL
In connection with the spin-off, Patriot/Wyndham will contribute to us several
equity interests relating to The Charles Hotel Complex in Cambridge,
Massachusetts, consisting of:
- - A general partnership interest in the manager of The Charles Hotel; and
- - The general partnership interest and a limited partnership interest in
Intercarp Limited Partnership, which is a general partner in the managing
general partner of the ground lessee of The Charles Hotel Complex.
Patriot/Wyndham and we have reached a tentative agreement under which the
partnership interests in Intercarp Limited Partnership will be sold to another
limited partner in Intercarp Limited Partnership. Interstate Hotels, LLC will
receive an aggregate purchase price for this sale of $19.3 million, consisting
of $13.5 million in cash and $5.8 million in the form of a secured promissory
note. The $5.8 million secured promissory note is a three year note which pays
interest only (at a rate of 10% annually) until the maturity date. As part of
the tentative agreement, we would assume Patriot/Wyndham's obligation to
indemnify the proposed buyer of the partnership interests. In connection with
this obligation, we will be required to indemnify the proposed buyer and its
affiliates against claims brought by third parties (including other limited
partners in The Charles Hotel Complex) arising out of Old Interstate's and
Patriot/Wyndham's purchase of interests in The Charles Hotel Complex, as well as
claims arising out of the sale contemplated by the agreement.
After the spin-off and the sale, Interstate Hotels, LLC will continue to manage
The Charles Hotel through Cambridge Hotel Associates, the manager of The Charles
Hotel, in which it has a general partnership interest. In connection with the
sale, however, the management agreement under which Cambridge Hotel Associates
manages The Charles Hotel will be amended to include terms generally similar to
the existing agreement, but for a new ten year term. In exchange for the
extension of the term to ten years, Interstate Hotels, LLC will receive a lower
portion of the management fees payable to Cambridge Hotel Associates. On a pro
forma basis for the year ended December 31, 1998, the management fees would
equal $1.2 million (rather than the $1.5 million Interstate Hotels, LLC earned
in 1998 under the existing arrangements). Also in connection with the extension
of the management agreement term, Interstate Hotels, LLC will make a $2.5
million unsecured loan to the owner of The Charles Hotel. This loan will bear
interest at 10% and mature in three years. We expect that these transactions
will be consummated in the third quarter of 1999.
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RISK FACTORS
You should carefully read and evaluate the risk factors listed below as well as
the other information contained in this Information Statement/Prospectus.
OUR MANAGEMENT AGREEMENTS MAY EXPIRE OR BE TERMINATED
Almost all of our revenues for the foreseeable future will come from the
operation of hotels for third-party owners. Hotel management agreements will
expire and be terminated and renegotiated in the ordinary course of our
business. Typically, our hotel management agreements may be terminated for many
reasons, including default by us or sale of, or foreclosure on, the underlying
property.
- - Twenty-three of our management agreements (which generated 16.5% of our 1998
pro forma net management fees) may be terminated without cause and without the
payment of a penalty by either party upon thirty to ninety days' notice.
- - An additional 20 management agreements (which generated 14.2% of our 1998 pro
forma net management fees) may be terminated without cause upon thirty to
ninety days' notice with the payment of a termination fee.
- - We have been notified by third-party owners of six hotels (which generated
15.4% of our 1998 pro forma net management fees) that such hotels are
currently for sale.
- - Sixteen of our management agreements (which generated 22.3% of our 1998 pro
forma net management fees) expire by the end of 1999, 19 agreements (which
generated 13.7% of our 1998 pro forma net management fees) expire by the end
of 2000, and eight agreements (which generated 7.3% of our 1998 pro forma net
management fees) expire by the end of 2001.
- - Since the closing of the Patriot/Old Interstate merger, 35 of our management
agreements have been terminated (excluding management agreements that were
transferred to Wyndham in connection with the Patriot/Old Interstate merger)
and we have acquired 13 new management agreements, for a net loss of 22
management agreements.
In aggregate, we estimate the average remaining life of our hotel management
agreements to be approximately five years. We cannot be sure that any of these
management agreements will be renewed or extended or that the terms of any
renewals or extensions will be as favorable to us as the terms of the existing
agreements. We also cannot be sure that we will be able to obtain new
third-party hotel management agreements or that the terms of any new management
agreements will be as favorable to us as the typical terms of our existing
agreements. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Background and General" for a more detailed
discussion.
OUR BUSINESS HAS BEEN DISRUPTED BY THE OLD INTERSTATE MERGER AND PLANS FOR THE
SPIN-OFF
There has been significant disruption to our business caused by the Old
Interstate merger with Patriot, the lengthy and intensive negotiations regarding
the Marriott settlement, the consideration of possible alternatives to the
spin-off including the private sale of Interstate Management to a third party,
and the preparations for the spin-off. In addition, Old Interstate's operations
were required to be divided between those to be retained by Patriot/Wyndham and
those which would be contributed to us in connection with the spin-off. We were
required to expend a substantial amount of resources, particularly the time and
attention of senior management, in order to achieve that division of operations.
The diversion of senior management's attention and the uncertainty with respect
to our future operations caused by these distractions has disrupted our
relationships with hotel owners and adversely affected our financial results.
Since the closing of the Patriot/Old Interstate merger, there has been a net
reduction in our business of 22
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management agreements. In addition, the disruption to our business has reduced
employee morale, increased employee turnover and caused us to be unable to
actively pursue new business. If, following the spin-off, we cannot rectify the
disruption in our relationships with hotel owners and successfully address the
other issues described above, the current negative trend in our business and
financial results will continue.
OUR MANAGEMENT CONTRACTS ON LEASED HOTELS MAY BE TERMINATED IF THE LEASED HOTELS
ARE SOLD
Equity Inns, the owner of substantially all of our 80 leased hotels, has the
right under our lease agreements to sell any or all of the leased hotels from
time to time without our consent. Our leases and management agreements with
respect to these hotels could be terminated upon such a sale. If Equity Inns
were to sell a substantial number of the leased hotels and the new owners did
not continue our management agreements, our results would be negatively
affected. Equity Inns has advised us that it is currently marketing twelve of
the leased hotels for sale.
WE MAY BE REQUIRED TO ASSUME PATRIOT/WYNDHAM'S OBLIGATION TO INDEMNIFY OUR JOINT
VENTURE PARTNER IN THE CHARLES HOTEL COMPLEX
Patriot/Wyndham and we have reached a tentative agreement under which all of our
equity interests in The Charles Hotel Complex, with the exception of our general
partnership interest in the entity which manages The Charles Hotel, will be
sold. For a more detailed discussion of the proposed sale transaction, see page
10. As part of the tentative agreement, we would assume Patriot/Wyndham's
obligation to indemnify the proposed buyer of the partnership interests. In
connection with this obligation, we will be required to indemnify the proposed
buyer and its affiliates against claims brought by third parties (including
other limited partners in The Charles Hotel Complex) arising out of Old
Interstate's and Patriot/Wyndham's purchase of interests in The Charles Hotel
Complex, as well as claims arising out of the sale contemplated by the
agreement.
WE MAY BE OBLIGATED TO PURCHASE OUR JOINT VENTURE PARTNER'S INTEREST IN THE
MANAGER OF THE GROUND LESSEE OF THE CHARLES HOTEL COMPLEX
Should Patriot/Wyndham and we fail to complete the sale of our equity interests
in The Charles Hotel Complex for any reason, we would continue to own the
interests in The Charles Hotel Complex which we will own at the spin-off, and we
will remain obligated under the existing agreements with respect thereto. Under
the existing agreement governing our general partnership interest in the entity
which manages the ground lessee of The Charles Hotel Complex, our joint venture
partner has the right to require us to purchase its 45% interest after October
2, 1999 or earlier upon the occurrence of circumstances set forth in our joint
venture agreement. If our joint venture partner exercises this right, we would
be obligated to (i) purchase its interest for approximately $11.5 million or
(ii) dissolve the ground lessee (and its general partner) and sell its assets to
a third party. Either of such developments could adversely affect our financial
condition or results of operations.
OUR NET INCOME WILL BE NEGATIVELY AFFECTED BY SIGNIFICANT DEPRECIATION AND
AMORTIZATION EXPENSE
A portion of the purchase price of the Patriot/Old Interstate merger was
allocated to the management and lease contracts for hotels that Interstate
Hotels, LLC is expected to operate following the spin-off. The costs allocated
to these contracts have been stated at their estimated fair market values and
are being amortized using the straight-line method over five years for
management contracts and 11 and 13.5 years for lease contracts. The resulting
amortization expense will have a significant impact on our net income for the
foreseeable future. Depreciation and amortization expense was $18.2 million on a
pro forma basis for the
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year ended December 31, 1998 ($17.1 million of which was attributable to
amortization of these management and lease contracts.)
WE COMPETE FOR THIRD-PARTY HOTEL MANAGEMENT AGREEMENTS AND RELATED BUSINESS
We compete for third-party hotel management agreements with international,
national, regional and local hotel management and franchise companies. We
compete with these companies on factors such as relationships with hotel owners
and investors, access to capital, financial performance, contract terms, name
recognition, marketing support and the willingness to provide funds in
connection with new management arrangements. Many of our competitors have
substantially greater financial resources and better name recognition than we
do. In order for us to expand our hotel management business, we may be required
to offer more attractive terms to hotel owners than those contained in our
existing management agreements and we may be required to make debt or equity
investments in hotel properties. We currently have limited capital available to
make such investments and, therefore, we may be required to obtain financing to
provide the necessary funds. We cannot assure you that we could obtain such
financing on commercially reasonable terms.
THIRD-PARTY HOTEL OWNERS ARE NOT REQUIRED TO USE THE ANCILLARY SERVICES WE
PROVIDE
In addition to traditional hotel management services, we offer to third-party
hotel owners several ancillary services such as purchasing, project management,
insurance and risk management. We received approximately 33.7% of our 1998 pro
forma management and related fees from the provision of these services. Our
management contracts do not obligate third-party hotel owners to utilize these
services, and the failure of a substantial number of third-party hotel owners to
utilize these services could adversely affect our overall revenues.
OUR LEASE ARRANGEMENTS SUBJECT US TO RISKS
PAYMENT OF RENT IS UNCONDITIONAL. We lease 80 hotels, including 79 which are
leased from Equity Inns Partnership, L.P. Rent payments under the leases are
comprised of minimum base rent, which is fixed, and incentive rent, which
fluctuates in relation to the leased hotels' revenues. In some cases, income
from operations from a particular hotel may be insufficient to pay the rent on
the hotel. In such an event we would be obligated to provide the difference from
other sources of cash. During 1998, nine of the hotels were unable to generate
sufficient income to make rent payments, and we expended approximately $781,000
in rent in respect of such hotels.
PERFORMANCE STANDARDS. We are subject to performance standards with respect to
the leased hotels, including requirements to maintain (i) room revenue per
available room and expenditures to within specified percentages of the amounts
targeted in the hotels' operating budgets and (ii) continuity in management
personnel at the hotels. If we fail to meet the performance standards, we would
be in default under the leases.
PLEDGE OF OUR EQUITY INTEREST IN A LESSEE. We must obtain the consent of third
parties to release Patriot/ Wyndham and substitute Interstate Management as a
guarantor of 25 of the Equity Inns leases. If we cannot obtain such consent,
Patriot/Wyndham will remain the guarantor of such leases. We have agreed to
indemnify Patriot/Wyndham in the event that Patriot/Wyndham is required to make
any payments in respect of its guarantees of these leases. In order to secure
our indemnification obligation, we have agreed to pledge to Patriot/Wyndham our
equity interests in the entity which is the tenant under 23 of the leases.
NET WORTH COVENANT. We guarantee the 54 leases in respect of which
Patriot/Wyndham is not the guarantor, and will become the guarantor of the
remaining 25 leases if we obtain the third parties' consents to release
Patriot/Wyndham. As guarantor, we are subject to a minimum net worth covenant.
In the event
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that we are unable to maintain the required minimum net worth, we would be
forced to either obtain a letter of credit or other third-party obligation in
order to comply with the covenant. If we are unable to obtain credit upon such
an event, we would be in breach of our guaranty of the leases.
WE DEPEND ON A SMALL NUMBER OF HOTEL OWNERS
We derived 51.8% of our 1998 pro forma net management fees from hotels owned by
seven owners, none of which contributed more than 10% individually. Should any
of these owners decide to terminate their relationship with us, our financial
results would be negatively affected.
OUR ABILITY TO EFFECT A CHANGE OF CONTROL IS LIMITED BY OUR FRANCHISE AGREEMENTS
AND OUR CHARTER AND BYLAWS
The terms of the franchise agreements under which we operate most of our hotels
contain provisions that may restrict, or require franchisor consent for,
transactions resulting in a change of control of Interstate Management. These
provisions, together with our shareholder rights plan and the provisions of our
charter providing for the staggering of the terms of the Class A Directors and
the ability of our Board of Directors to issue preferred stock without
stockholder consent, may discourage acquisition proposals, delay or prevent a
change in control, and hinder the removal of incumbent directors. This may limit
the price that investors might be willing to pay in the future for Interstate
Management shares. See "Description of Capital Stock" for a more complete
description of these charter and bylaw provisions.
WE ARE OBLIGATED TO SATISFY UNFUNDED CLAIMS UNDER OUR HEALTH AND WELFARE PLAN
AND RELATED TRUST
We provide group insurance benefits to our employees under a self-insured health
and welfare plan and related trust. Based on actuarial valuation studies, we
attempt to estimate the amount of claims that will be incurred but not reported
during a particular period and charge premiums in amounts sufficient to fund the
anticipated claims. We are obligated to make up any deficiency between actual
claims and the amount of premiums received. In connection with the spin-off and
the related transfer of hotels to either Patriot/ Wyndham or Marriott, many of
our current employees will become employees of Patriot/Wyndham or Marriott. As
such, we will be responsible for satisfying claims incurred but not reported by
any of these employees during the period that they were employed by us, but not
reported by such employees until after they become employees of Patriot/Wyndham
or Marriott.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY
There is currently no public trading market for our shares. We cannot predict
what the market price for our shares might be. Until an orderly trading market
develops, the market price for our shares may fluctuate significantly. You
should not view historical trading prices of shares of Old Interstate's (or
Patriot/ Wyndham's) stock as a reflection of what the trading price of our
shares might be. Following the spin-off, we will be significantly smaller than
Old Interstate was prior to its merger with Patriot.
Some of the Patriot securityholders who receive Interstate Management shares in
the spin-off may decide that they do not want to own these shares, and may sell
their shares. We believe that some Patriot securityholders may not be interested
in owning the stock of a comparatively smaller company which does not own a
substantial amount of real estate. Additionally, we believe that a number of
Patriot's current stockholders may be arbitrageurs or other short-term investors
who do not intend to hold shares of a lodging company for the long term. Under
the terms of the Marriott settlement, some of our larger stockholders will be
contractually bound, under a Voting Agreement, to sell portions of their
Interstate Management shares within one year after the spin-off in an attempt to
reduce the holdings of Interstate Management shares by affiliates of
Patriot/Wyndham to less than 9.9% of the outstanding Interstate Management
shares by the
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first anniversary of the spin-off. These mandatory sales may depress the trading
price of Interstate Management shares. The Voting Agreement is discussed in more
detail on page 61.
THE HOTEL INDUSTRY INVOLVES RISKS
OPERATING RISKS. The hotels we operate are subject to all of the operating
risks common to the hotel industry, such as:
- overbuilding of hotels, and the corresponding oversupply of hotel rooms,
in a particular geographic area. In Florida, for example, where 12.4% of
the hotel rooms which we manage are located, there was a 3.8% increase in
the supply of hotel rooms during 1998 with no change in demand for hotel
rooms over the same period. In California, where 13.5% of the hotel rooms
which we manage are located, there was a 1.4% increase in the supply of
hotel rooms during 1998 but only a corresponding 0.9% increase in demand
for hotel rooms over the same period;
- changes in travel patterns due to increases in travel expenses and other
factors; and
- changes in national, regional and local economic conditions.
All of these risks could adversely affect our average occupancy and average
daily room rates. Such effects on average occupancy and average daily room rates
could reduce our revenues since our management fees are calculated as a
percentage of revenues and profits of hotels.
COMPETITION. Each of the hotels that we manage or lease competes with the other
hotels in its geographic area. Additional hotel rooms have been or may be built
in many of the geographic areas in which we manage or lease hotels, which could
adversely affect our average occupancy and average daily room rates in these
areas. In addition, the overall supply of hotel rooms in the United States as a
whole has increased substantially over the past several years. All of the hotels
that we operate face competition on factors such as room rates, quality of
accommodations, name recognition, service levels, convenience of location and
the quality and scope of other amenities including food and beverage facilities.
GOVERNMENT REGULATION. As a hotel management company, we are subject to
extensive governmental regulation, including laws which relate to the licensing
of hotels and restaurants, the preparation and sale of food and beverages, the
adaptation of public accommodations for use by the disabled, general building
and zoning requirements and the disposal of hazardous waste. We are also subject
to laws relating to our relationship with our employees, including minimum wage,
overtime, working conditions and work permit requirements. Although third-party
hotel owners are generally responsible for paying all costs, expenses and
liabilities incurred in the operation of the hotels we manage, including
compliance with laws (including environmental laws), we may be contingently
liable for liabilities for which we do not maintain insurance, including claims
arising under the Americans With Disabilities Act of 1990.
OUR FOREIGN HOTELS EXPOSE US TO RISKS
Five of the hotels we manage are located in Canada and Russia. These hotels
accounted for 10.7% of our 1998 pro forma net management fees. Interstate
Hotels, LLC is amortizing, over the life of the contracts, costs incurred in
obtaining the management contracts on the three hotels located in Russia.
Current unamortized costs amount to $1.7 million. If our contracts are
terminated, the unamortized costs would become due from the owner of these
hotels. In addition, pursuant to the management contracts for the three hotels
located in Russia, Interstate Hotels, LLC agreed to fund loans to the hotel
owners. Interstate Hotels, LLC has loans outstanding in the amount of $3.5
million to these owners and currently is obligated to fund up to an additional
$186,000 in aggregate. We cannot be certain of the effect that changing
political climates and economic conditions could have on hotel operations in
such countries and on our ability to collect on our loans to third-party owners
in Russia.
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WE DEPEND ON FRANCHISORS
Most of the hotels we manage, lease or for which we perform related services are
operated under franchise licenses, including franchise licenses for the
AmeriSuites, Colony, Comfort Inn, Courtyard by Marriott, Embassy Suites,
Fairfield Inn by Marriott, Hampton Inn, Hilton, Holiday Inn, Homewood Suites,
Marriott, Radisson, Residence Inn by Marriott, Sheraton and Westin brands. Any
significant decline in the reputation of any of our franchisors could adversely
affect our results of operations.
OUR BUSINESS IS CONCENTRATED IN A SINGLE INDUSTRY
Our business is almost entirely hotel related. In the event of a general
downturn in the hotel industry, the adverse effect on us may be greater than on
a more diversified company with assets or activities outside of the hotel
industry.
WE WILL INITIALLY HAVE LIMITED FINANCIAL RESOURCES
Following the spin-off, we may have difficulty obtaining financing on favorable
terms because our asset base will be smaller than Old Interstate's was prior to
its merger into Patriot and we will not initially own any hotels to provide
collateral for such financing. Accordingly, we will not necessarily be able to
rely on Old Interstate's or Patriot's prior relationships with lenders.
WE RELY ON KEY PERSONNEL
We will be dependent on the efforts of our senior management team. Our future
success and our ability to manage future growth depends in large part on the
efforts of our senior management and on our ability to attract and retain these
key executives and other qualified personnel. Competition for such personnel is
intense, and we cannot assure you that we will succeed in attracting and
retaining such personnel.
HOTEL INVESTMENT AND DEVELOPMENT ACTIVITIES INVOLVE RISKS
We expect to make investments in hotels in the future, and these hotels may fail
to perform in accordance with our expectations. We also may develop new hotels
selectively. New project development is subject to risks such as market or site
deterioration after acquisition and the possibility that regulatory approvals,
inclement weather, labor or material shortages, work stoppages and the lack of
continued availability of construction or permanent financing may lead to
construction delays or cost overruns. We cannot be sure that we will be able to
successfully integrate these new hotels into our existing operations or that
these new hotels will achieve revenue and profitability levels comparable to our
existing hotels.
OUR PLAN FOR GROWTH EXPOSES US TO RISKS
We intend to pursue a growth-oriented business strategy focusing primarily on
adding significantly to our hotel portfolio. Our ability to pursue new growth
opportunities successfully will depend on a number of factors, including our
ability to:
- identify suitable growth opportunities;
- finance acquisitions;
- integrate new contracts into our operations;
- adapt to competition; and
- access sufficient capital on commercially reasonable terms.
We cannot assure you that our systems, procedures and controls, and management,
financial and other resources will be adequate to support such expansion.
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OUR REAL ESTATE OWNERSHIP, LEASING AND INVESTMENT ACTIVITIES EXPOSE US TO RISKS
At April 20, 1999, we operated 80 hotels under leases, 79 of which were
long-term leases. As of the spin-off, we will own equity interests representing
in the aggregate an approximate 50.3% non-controlling interest in The Charles
Hotel Complex. We also intend to make investments in hotels, which will subject
us to risks generally related to owning or leasing real estate, such as:
- changes in national, regional and local economic conditions;
- local real estate market conditions;
- changes in interest rates and in the availability, cost and terms of
financing;
- liability for long-term lease obligations;
- the potential for uninsured casualty and other losses;
- the impact of environmental legislation and compliance with environmental
laws; and
- adverse changes in zoning laws and other regulations.
In addition, real estate investments in general are relatively illiquid, which
could limit our ability to adapt the portfolio of hotels we may own or lease in
response to changes in economic and other conditions.
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THE SPIN-OFF
BACKGROUND OF THE SPIN-OFF
On December 2, 1997, Patriot/Wyndham and Old Interstate entered into a merger
agreement providing for the acquisition of Old Interstate by Patriot/Wyndham.
Before signing the Old Interstate merger agreement, Patriot negotiated with
Marriott a non-binding letter of intent which outlined the terms of a proposed
agreement which was intended to address Marriott's concerns regarding the
acquisition of their largest franchisee by a competitor, Patriot/Wyndham.
Despite lengthy and intensive negotiations, Patriot/Wyndham and Marriott were
not able to reach a definitive agreement prior to the planned closing of the Old
Interstate merger and Marriott filed suit seeking to block the merger. Marriott
obtained a preliminary injunction against the merger pending a trial on its
claims.
Following entry of the preliminary injunction against the Old Interstate merger,
the parties began simultaneously to prepare for trial and to negotiate a
settlement. An agreement for settlement was reached on May 27, 1998, allowing
the Old Interstate merger to close on June 2, 1998.
The principal focus of the settlement agreement is a set of arrangements
designed to prevent Patriot/ Wyndham from having a direct operational
relationship with Marriott or any Marriott branded hotels. For example, the
settlement agreement provides that nine of the Marriott hotels which were owned
by Old Interstate will be converted to the Wyndham brand and ten other Marriotts
previously owned by Old Interstate will convert to Marriott management. The
other major component of the settlement agreement is the spin-off, which
addresses the Marriott hotels and other hotels which were managed or leased by
Old Interstate on behalf of their third-party owners. Patriot/Wyndham agreed to
separate this business from the rest of Old Interstate's hotel operations and
spin it off as a new, publicly traded company. Patriot/Wyndham agreed with
Marriott that each would initially own four percent of the outstanding shares of
the new company and that the remaining 92% would be distributed to Patriot's
shareholders.
The settlement agreement, including the terms of the spin-off, was approved by
special committees of the Boards of Directors of Patriot and Wyndham. The
special committees recognized that the spin-off would be taxable to you based on
the fair market value of the Interstate Management shares distributed to you on
the date of the spin-off with respect to your Patriot common stock. However, the
special committees believed that the benefits of the spin-off, and the related
closing of the Old Interstate merger, outweighed any negative tax consequences
to you from the spin-off.
Based on information we have received from Patriot, we have estimated the value
of the Interstate Management shares you will receive in the spin-off to be
per share. The final value of the spin-off distribution cannot be
determined until after the distribution is completed. We will make a public
announcement of the amount of the distribution promptly after it is determined
and will furnish to you the required IRS information as early as we can so that
you can complete your tax returns.
The actual trading value of the Interstate Management shares may be higher or
lower than the estimated value and will depend on many factors. Until an orderly
trading market develops, the market price for the Interstate Management shares
may fluctuate significantly. Please obtain current market quotations prior to
deciding whether to purchase or sell Interstate Management shares.
DISTRIBUTION OF INTERSTATE MANAGEMENT SHARES
Each holder of Patriot securities as of the close of business on May , 1999
will receive one Interstate Management share for every 19.57 Patriot securities
he or she owns.
In anticipation of the spin-off, immediately following the Old Interstate merger
Patriot/Wyndham contributed to Interstate Management a 35% interest in
Interstate Hotels, LLC, the entity holding Old Interstate's
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<PAGE> 22
third-party hotel management business. The remaining 65% interest was
contributed to a subsidiary owned 99% by Patriot and 1% by Wyndham. Patriot and
Interstate Management have since adjusted their respective ownership percentages
to the current 55% and 45% levels.
Patriot/Wyndham has entered into forward equity contracts with three
counterparties. Patriot/Wyndham is required to settle these forward equity
contracts either in cash or by issuing to the counterparties additional paired
shares of their common stock in lieu of cash. As of , 1999, the
counterparties held paired shares of Patriot/Wyndham. In addition,
Patriot/Wyndham has issued an additional of their paired shares as
collateral in connection with the forward equity contracts.
In the spin-off, Interstate Management shares will be distributed in respect of
both the paired shares presently held by the counterparties and those shares
issued by Patriot/Wyndham as collateral. The counterparties have agreed to
return for cancellation all shares of Interstate Management they receive in the
spin-off, however, in exchange for Patriot/Wyndham paired shares of equivalent
value.
Thus, while shares are being registered with the Commission in
connection with the spin-off, of these shares will immediately be
returned by the counterparties and cancelled. As a result, only the
shares of Interstate Management listed on the cover page of this Information
Statement/ Prospectus will remain outstanding after giving effect to these
transactions.
We will not issue fractional shares in the spin-off. The distribution agent will
distribute cash to you in lieu of such fractional shares.
DISTRIBUTION AGREEMENT
We intend to enter into a Distribution Agreement with Patriot on or before the
date of the spin-off. The Distribution Agreement is intended to allocate assets
and liabilities between Interstate Management and Patriot and to ease our
transition from a subsidiary of Patriot to an independent publicly traded
company.
The Distribution Agreement will outline the principal arrangements between
Interstate Management and Patriot related to the spin-off. The Distribution
Agreement will obligate us to indemnify Patriot for liabilities arising out of
or related to our assets (including assets to be contributed to us by Patriot).
This indemnification will apply to liabilities arising both before and after the
spin-off. Patriot will provide similar indemnification to us in respect of
liabilities arising out of the assets which it retains.
The Distribution Agreement will also provide that Patriot will generally be
responsible for the tax liabilities and be the beneficiary of the tax benefits
arising out of our operations prior to the spin-off.
ALLOCATION OF SHARED EXPENSES
The amended and restated limited liability company agreement of Interstate
Hotels, LLC contains provisions designed to allocate between Interstate Hotels,
LLC and Interstate Management those costs and expenses relating to services
provided by one party in whole or in part for the benefit of the other. Such
costs and expenses will be allocated between Interstate Hotels, LLC and
Interstate Management based on generally accepted accounting principles, on the
basis of which party benefited from the expenditure. To the extent that the
allocation of any such costs and expenses, including general and administrative
expenses, cannot be fairly apportioned, Interstate Hotels, LLC and Interstate
Management will allocate such costs and expenses based upon their respective
gross revenues, so that each party's profit margins are substantially the same
for similar services.
DISTRIBUTION AGENT
The distribution agent for the spin-off will be American Stock Transfer & Trust
Company, 40 Wall Street, 46th Floor, New York, New York 10005 (Telephone: (800)
937-5449). You may contact them if you have
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<PAGE> 23
any questions regarding delivery of your Interstate Management shares and cash
in lieu of fractional shares in the spin-off.
FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF
The following discussion summarizes the material United States federal income
tax consequences of the spin-off to you. We have not attempted to comment on all
United States federal income tax consequences of the spin-off that may be
relevant to you. We based this summary upon current provisions of the tax code,
existing temporary and final treasury regulations, and current administrative
rulings and court decisions, all of which are subject to change, possibly on a
retroactive basis. The IRS could disagree with our summary of these provisions.
We do not intend to obtain a private letter ruling regarding the spin-off from
the IRS or any other taxing authority.
Our discussion below is for general information only, and is not intended to
provide legal or tax advice to any particular holder of Interstate Management
shares. The discussion may not apply to particular stockholders who are subject
to special treatment under the tax code, such as insurance companies, financial
institutions, broker-dealers, tax-exempt organizations and non-U.S.
stockholders. You should consult your personal tax advisor to determine the
specific tax consequences to you of the spin-off, including any state, local or
other tax consequences, in light of your particular investment circumstances.
PATRIOT'S STATUS AS A REIT. Patriot has conducted business and continues to
conduct business in a manner designed to permit it to qualify as a REIT under
the Internal Revenue Code of 1986, as amended. On March 1, 1999, Patriot
announced that it had signed an agreement with an investor group, including
affiliates of Thomas H. Lee Equity Fund IV, L.P., Apollo Real Estate Management
III, L.P., Apollo Management IV, L.P., Beacon Capital Partners, L.P., and Rosen
Consulting Group, providing for an equity investment of up to $1 billion in
Wyndham. In connection with this investment, Patriot would become a subsidiary
of Wyndham, and convert from a REIT to a C corporation. The consummation of this
investment is subject to numerous conditions, including approval by Patriot
shareholders. Since this investment would occur after the date of the spin-off,
the spin-off and related transactions are being accounted for assuming Patriot
qualifies as a REIT. However, if the investment is subsequently consummated in
1999, Patriot's REIT status would be retroactively terminated effective January
1, 1999. Therefore, the following discussion describes the federal income tax
consequences of the spin-off in both scenarios, i.e., assuming that Patriot is a
C corporation at the time of the spin-off and assuming that Patriot qualifies as
a REIT at the time of the spin-off.
TAX CONSEQUENCES OF THE SPIN-OFF TO PATRIOT. Upon consummation of the spin-off,
Patriot will recognize taxable gain equal to the difference between the fair
market value of the Interstate Management shares distributed and Patriot's tax
basis in such shares. Based on information provided by Patriot, we currently
estimate that the amount of gain will be approximately $ million, based
on an estimate that the fair market value of the Interstate Management shares
distributed will be $ per share, or $ million in the aggregate.
However, the final value of the Interstate Management shares cannot be
determined until after the spin-off is completed. In addition, the determination
of the amount of gain is a factual issue that is subject to challenge by the
IRS.
Patriot will recognize this taxable gain regardless of whether it is a C
corporation or a REIT as of the date of the spin-off. If Patriot qualifies as a
REIT as of such date, Patriot will be subject to tax at the highest regular
corporate rate applicable, pursuant to Treasury Regulations not yet promulgated,
to the extent of the "built-in-gain" of Interstate Management's assets at the
time of the Old Interstate merger. Such tax will apply to Patriot as a REIT
because the assets of Interstate Management were acquired on a tax-free basis by
a REIT from a C corporation. In determining the amount Patriot must distribute
annually to shareholders in order to maintain REIT qualification, Patriot will
take into account the excess of the amount
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<PAGE> 24
of recognized built-in-gain over the amount of tax paid. The value of the
Interstate Management shares distributed to Patriot shareholders will apply
towards the annual distribution requirement.
RECEIPT OF INTERSTATE MANAGEMENT SHARES. If you receive Interstate Management
shares with respect to your shares of Patriot common or preferred stock, the
spin-off will be taxable to you for federal income tax purposes based on the
fair market value of the Interstate Management shares (and cash in lieu of
fractional shares) you receive as of the date of the spin-off. You will acquire
an initial tax basis in your Interstate Management shares equal to their value
on the date of the spin-off, and your holding period for such shares will begin
on such date.
Assuming that Patriot qualifies as a REIT, distributions such as the spin-off
made to Patriot's shareholders out of Patriot's current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account as ordinary income. If Patriot is a C corporation as of the date of the
spin-off, these distributions made to Patriot's corporate shareholders may be
eligible for the dividends-received deduction. However, if Patriot qualifies as
a REIT as of such date, such distributions made to Patriot's corporate
shareholders will not be eligible for the dividends-received deduction.
Regardless of whether Patriot is a C corporation or a REIT as of the date of the
spin-off, any amount of the distribution in excess of earnings and profits will
first reduce your tax basis in your Patriot stock and then will be taxable to
you as capital gain. The characterization of the distribution as a dividend will
depend on the amount of Patriot's current and accumulated earnings and profits
allocable to the distribution, which cannot be determined with certainty at this
time. However, we expect that a portion of the distribution may be in excess of
earnings and profits. If Patriot qualifies as a REIT as of the date of the
spin-off, Patriot's ability to designate the distribution of Interstate
Management shares as a capital gain distribution may be limited and will depend
on a variety of factors, and we cannot be sure that the distribution will be so
designated.
After the spin-off, Patriot will determine the fair market value of the shares
distributed based on a number of factors. Patriot will provide to you the
information necessary to determine the amount and character of the distribution
to you, and Patriot will report the amount received by you to the IRS. We cannot
be sure that the IRS or any court will agree that the amount received by you is
equal to the amount determined by Patriot. If the IRS were to challenge the
value or character of the distribution reportable by you on your federal income
tax return, you would have to bear the expense and effort of defending against
or otherwise resolving such challenge.
Different rules will apply if you receive Interstate Management shares with
respect to Wyndham preferred stock or interests in the Patriot or Wyndham
operating partnerships. A distribution of Interstate Management shares with
respect to your Wyndham stock will be taxable as a dividend to the extent made
out of Wyndham's current or accumulated earnings and profits, and will generally
be eligible for the dividends-received deduction for corporations. A
distribution in excess of Wyndham's current and accumulated earnings and profits
will first reduce the tax basis of your Wyndham stock and then will be taxable
to you as capital gain.
If you receive a distribution of Interstate Management shares with respect to
your interest in the Patriot or Wyndham operating partnership, then under the
rules applicable to distributions by partnerships of marketable securities, you
will generally be treated as if you received a cash distribution equal to the
value of the Interstate Management shares distributed, and you will recognize
gain to the extent that the value of the distributed shares, plus any cash
received in lieu of fractional shares, exceeds your basis in your partnership
interest immediately before the distribution. Your basis in the Interstate
Management shares will be equal to their fair market value on the date of the
distribution, and your basis in your partnership interest will generally be
reduced, but not below zero, by the fair market value of the Interstate
Management shares.
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BACKUP WITHHOLDING. Patriot generally will be required to withhold 31% of the
Interstate Management shares to be distributed to you with respect to Patriot or
Wyndham stock if (i) you fail to furnish or certify a taxpayer identification
number to Patriot, (ii) the IRS notifies Patriot that the taxpayer
identification number furnished by you is incorrect, (iii) the IRS notifies
Patriot that you have underreported interest and/or dividend income, or (iv) you
fail to certify to Patriot that you are not subject to withholding for
underreporting interest or dividend income. Any amounts withheld from you under
these backup withholding rules will be allowed as a credit against your federal
income tax liability or as a refund.
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BUSINESS
GENERAL
We are one of the largest independent hotel management companies in the United
States based on total portfolio hotel revenues, number of guestrooms and number
of properties managed. Following the spin-off, we will control and have a 45%
economic interest in Interstate Hotels, LLC, the successor to the third-party
hotel management business conducted by Old Interstate prior to its merger into
Patriot. Since all of the assets being contributed to us by Patriot/Wyndham in
connection with the spin-off will be owned by Interstate Hotels, LLC, our
shareholders will only be entitled to 45% of any economic benefit deriving from
this business. Interstate Hotels, LLC will operate 173 hotels containing
approximately 32,200 rooms. Interstate Hotels, LLC will manage, lease or perform
related services for hotels in all market segments. Its hotels are
geographically dispersed in 37 states in the United States, and in Canada, the
Caribbean and Russia. Interstate Hotels, LLC will operate these hotels under a
variety of major brand names, including AmeriSuites, Colony, Comfort Inn,
Courtyard by Marriott, Embassy Suites, Fairfield Inn by Marriott, Hampton Inn,
Hilton, Holiday Inn, Homewood Suites, Marriott, Radisson, Residence Inn by
Marriott, Sheraton and Westin. Following the spin-off, in addition to conducting
Old Interstate's former third-party hotel management business through our 45%
interest in Interstate Hotels, LLC, we will own an equity interest in The
Charles Hotel Complex. We expect that the equity interest in The Charles Hotel
Complex (other than our general partnership interest in the manager of The
Charles Hotel) will be sold shortly after the spin-off. To facilitate the
management of our diverse portfolio of hotels, we have divided the hotels into
two separate operating divisions--Interstate, which operates luxury and upscale
hotels, and Crossroads, which operates mid-scale, upper economy and budget
hotels.
As part of our business strategy, we plan to pursue future opportunities to
manage or lease hotels on behalf of third-party owners as well as other business
opportunities, such as selective hotel investments and the formation of
strategic alliances. Any new business will be managed, leased or owned directly
by us, not through Interstate Hotels, LLC. Because we have an agreement with
Interstate Hotels, LLC that prevents it from expanding its business beyond its
existing contracts, you will have the full economic benefit of any new business
we acquire, even business we obtain through relationships with the owners of
hotels currently managed by Interstate Hotels, LLC. We intend to attract future
business both through our existing relationships with third-party owners and
through the development of relationships with additional third-party owners.
Our senior management team consists of our Chief Executive Officer Thomas F.
Hewitt, who has more than 30 years of experience in the hospitality industry,
and former Old Interstate executive officers who, together with Mr. Hewitt, have
an average of 24 years of experience in the hospitality industry. In addition,
we employ substantially all of Old Interstate's employees who were a part of Old
Interstate's third-party hotel management business. We intend to capitalize on
this extensive experience, together with our corporate infrastructure and the
diversity of our portfolio of hotels, to obtain future third-party hotel
management contracts and take advantage of other hotel-related opportunities.
BACKGROUND
Old Interstate was founded in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania. Throughout the 1960s and 1970s, Old Interstate built
a portfolio of hotel management contracts and developed its reputation as an
experienced hotel management company. In the late 1980s and early 1990s, Old
Interstate continued to aggressively pursue third-party hotel management
opportunities at a time when financial distress existed within the hotel
industry. By providing experienced hotel management to hotel owners, many of
which were financial institutions which had assumed ownership of hotels through
foreclosure, Old Interstate was able to rapidly expand its portfolio of managed
hotels during this time
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period. During the five years prior to Old Interstate's merger with Patriot, Old
Interstate continued to expand its management portfolio while it pursued a
growth strategy focused largely on acquiring and investing in hotels and hotel
leaseholds, as a result of management's belief that the real estate market was
appreciating rapidly and that significant value could be created through the
ownership of hotel assets. During this time period, Old Interstate completed an
initial public offering, the acquisition of controlling interests in 40 hotels,
the development and construction of four limited-service hotels and the
acquisition of the hotel management and leasing business affiliated with Equity
Inns, Inc.
BUSINESS AND GROWTH STRATEGY
We intend to pursue two core business strategies to take advantage of
opportunities in the lodging industry: (i) improving investment value for hotel
owners by increasing the revenues and the profitability of the hotels we operate
for them; and (ii) expanding our hotel portfolio by adding new management
contracts and long-term hotel operating leases, selectively investing in hotels
and forming strategic alliances with real estate partners to increase the range
of hotel investment and management opportunities available to us.
IMPROVING INVESTMENT VALUE FOR HOTEL OWNERS. Because our profits from hotel
management contracts and leases are generally based on the revenues and
profitability of our hotels, our financial interests are aligned with those of
the owners of the hotels we operate. Our ongoing system of investigation,
prioritization and immediate action is designed to ensure that we maintain high
quality facilities and customer service at the hotels we operate while
implementing effective cost controls. In addition, we provide incentives to
regional and general managers to achieve revenue and operating goals at the
hotels for which they are responsible. We believe these measures, in turn, will
provide greater value for our hotel owners.
EXPANDING HOTEL PORTFOLIO. We plan to expand our hotel portfolio through
implementing the following principal strategies:
ADDITION OF NEW HOTEL MANAGEMENT AGREEMENTS AND LONG-TERM OPERATING
LEASES. Through the efforts of our business development staff, we seek to add
new hotel management agreements and long-term hotel operating leases that are
suitable for integration into our portfolios. We intend to capitalize on Old
Interstate's historical relationships with institutional hotel investors and
franchisors and its reputation for integrity, its track record of delivering
superior financial returns for hotel owners and investors and its willingness to
structure key terms of hotel management agreements and leases to satisfy hotel
owner objectives.
There has been a recent increase in new hotel construction activity which we
hope will provide us with third-party hotel management opportunities. New hotels
are often built by developers and institutional investors who do so for purposes
of real estate investment and who often lack hotel management expertise. These
types of developers typically look to third-party management companies such as
Interstate Management to manage their hotels.
We intend to continue to operate hotels in multiple segments of the lodging
industry, which we believe will increase our opportunities to compete for new
hotel management agreements and long-term operating leases. While we will
participate in each segment of the lodging industry, we believe that the
greatest opportunities for expansion exist in the luxury and upscale segment.
We hope that our existing relationships with owners outside the United States
and our experience in managing their hotels will lead to other international
management opportunities. We believe that our international management
experience will position us to take advantage of growing opportunities in the
international hotel market and enhance our reputation both internationally and
domestically.
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SELECTIVE HOTEL INVESTMENTS. We intend to make strategic investments in
hotel properties with business partners or through equity contributions or
secured loans. We may selectively make strategic investments in order to achieve
high returns on capital and to secure new management contracts. We believe that
our in-house management expertise, as well as our extensive hotel, real estate
and finance industry contacts, will facilitate our ability to identify, evaluate
and negotiate potential hotel investment opportunities. We may selectively
participate in the development of new hotels in the future when we believe the
competitive environment favors such development.
STRATEGIC ALLIANCES. In the past, Old Interstate aligned itself with
institutional investors, such as Blackstone Real Estate Advisors, L.P., and
REITs, such as Equity Inns. These strategic alliances provided to Old Interstate
opportunities to acquire and invest in hotels and hotel leaseholds, obtain new
management contracts and acquire small hotel management companies with
proportionally smaller capital investments. In light of Old Interstate's success
with these alliances and our belief that we can significantly grow our
management business through hotel and real estate investments, we will seek to
form these types of alliances in the future.
COMPETITION
The hotel management industry is highly competitive. We compete for both
limited-service and full-service third-party hotel management contracts and
leaseholds with several hundred companies, including international, national,
regional and local franchise companies and independent hotel management
companies. Within the highly fragmented limited-service hotel management
industry, we compete with a large and diverse group of competitors including
hotel franchise companies, owner-operators, and a number of independent
operators. Within the full-service hotel management industry we compete with a
smaller number of more experienced competitors, primarily consisting of
franchise companies and independent full-service operators. In both industry
segments, we compete on such factors as relationships with hotel owners and
investors, access to capital, financial performance, contract terms, brand name
recognition, marketing support and the willingness to make debt or equity
investments in connection with new management arrangements. In addition,
strategic alliances between hotel owners, including REITs, and our competitors
within the hotel management industry limit the number of management contracts
available to us.
Each of the hotels we operate competes with other hotels in its geographic area.
Like the hotel management business, the lodging industry, in general, is highly
competitive. The supply of hotel rooms in the United States has increased
substantially over the past several years, and we expect that it will continue
to grow. The hotels we operate will compete with other hotels on factors such as
room rates, quality of accommodations, name recognition, service levels,
convenience of location and the quality and scope of other amenities including
food and beverage facilities.
In addition to the factors on which we compete discussed above, we encounter
competitive disadvantages, including the facts that
- our relationships with hotel owners have been disrupted by Old
Interstate's merger with Patriot, the lengthy and intensive negotiations
regarding the Marriott settlement, the consideration of possible
alternatives to the spin-off including the private sale of Interstate
Management to a third party, and the preparations for the spin-off;
- unlike hotels operated by many of the franchisors with whom we compete,
the branded hotels we operate must pay a franchise fee in addition to our
management fee; and
- we generally will have less access to capital than larger companies and
companies that own a substantial amount of real estate.
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OPERATIONS
We provide a wide variety of services to our hotels. We offer specialized
support services, such as purchasing, project management and insurance and risk
management services as well as those services traditionally provided by other
major hotel operating companies, such as sales and marketing support, rooms
services, food and beverage services, human resources and training programs,
financial planning and reporting, management information systems, engineering
services and legal support.
Our services are provided by hotel associates who we employ and who are trained
and supported by our experienced corporate personnel. We provide most of these
services in consideration of the management fees payable to us, which are based
upon a percentage of gross revenues and/or operating profits. Hotel owners are
generally responsible for all operating expenses, capital expenditures and
working capital requirements related to the hotels we manage. We earn
incremental revenues from third-party owners for services such as purchasing,
project management and insurance and risk management services. The following is
a brief description of the services we generally provide to our hotels:
PURCHASING. We assist our hotels with purchases of a wide variety of goods and
services, including perishable food, consumable supplies, dry goods, linens,
cable television systems, audio-visual services, telephone systems, advertising
agency services, independent marketing services, consulting services, printing
services, furniture, fixtures and equipment. Our purchasing service is a key
element of our operating system and our ability to improve the profitability of
our hotels. We offer our purchasing services at a fee based on merchandise
value.
PROJECT MANAGEMENT. We assist and advise our hotels on all aspects of
renovation and construction projects, including design, budgeting, scheduling,
purchasing, systems, materials and contracting. We are actively involved in each
stage of a project, from planning through completion of construction. The
project management services we provide are offered on a contracted fee basis.
INSURANCE AND RISK MANAGEMENT. Through our subsidiary, Northridge Insurance
Company, we offer our hotels reinsurance and risk management services. We
purchase insurance from major insurance carriers at attractive rates due to our
high volume purchasing and the excellent claims history we inherited from Old
Interstate. We then provide our hotels the opportunity to participate in the
policy at prices and coverages that we believe are more advantageous than
third-party hotel owners could otherwise obtain. Northridge also provides direct
insurance coverage to Interstate Management in connection with its self-insured
health care program. In conjunction with our risk management services and in
order to minimize our operating liabilities, we set policies regarding the
standards of operation to which all of our hotels and their employees must
adhere.
SALES AND MARKETING SUPPORT. We provide our hotels with traditional sales and
marketing support, as well as customized assistance, to identify and attract
potential business, leisure and convention guests. We employ a systematic
approach toward identifying and targeting segments of demand for our hotels in
order to maximize market penetration. We support the local sales efforts of our
hotels with corporate sales executives who develop new marketing concepts and
monitor and respond to specific market needs and preferences. We employ revenue
yield management systems to manage our hotels' use of the various distribution
channels in the lodging industry.
ROOMS SERVICES. We assist our hotels in developing quality standard and
operating procedures for room operations, while focusing on controlling expenses
and maximizing profits. Such assistance includes:
- Developing the concept, design and staffing requirements for the front
office, housekeeping, property maintenance, laundry, valet,
telecommunications, garage and other guest services departments;
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- Establishing quality standards for products and services and evaluating
performance against these standards;
- Conducting training conferences and workshops for rooms department
employees at all levels;
- Creating operating procedures, training manuals, training programs and
reference guides;
- Developing, maintaining and auditing front office software applications
and training staff in their proper usage; and
- Selecting equipment and supplies such as linens, guest room amenities and
uniforms.
FOOD AND BEVERAGE SERVICES. We assist our hotels in developing high quality,
profitable food and beverage operations as well as innovative approaches to food
and beverage concepts and designs. Such assistance includes:
- Providing educational and technical training materials and seminars to
improve the skills of our employees;
- Establishing quality levels and management guidelines for new and
existing food and beverage facilities in accordance with area market
expectations;
- Providing ongoing research and development of systems and equipment;
- Creating and implementing system-wide promotional programs to enhance
hotel revenues;
- Conducting business audits that analyze current financial performance
against industry norms, providing a detailed review of existing
procedures and programs and setting a plan for achieving goals in
business growth and cost containment; and
- Providing low cost access to the freshest and highest quality food
products and beverages available in the market through contracts with
national and regional vendors.
HUMAN RESOURCES AND TRAINING PROGRAMS. Our human resources department is
responsible for designing the employee selection process, creating competitive
compensation programs and developing appropriate training programs at all
levels. Our training programs focus on such areas as supervisory development,
middle management training, career planning, technical training and executive
development. In addition, our employees are required to attend outside courses
developed by a variety of managerial and technical organizations both within and
outside the industry.
FINANCIAL PLANNING AND REPORTING. We provide to our hotels a wide variety of
accounting, financial reporting and financial planning services that assist the
hotel owners in making informed decisions.
MANAGEMENT INFORMATION SYSTEMS. We provide to our hotels access to key
operating information and technologies as well as on-going systems support.
Access to key information enables our hotels to set operating objectives and
measure their operating performance on a daily basis.
ENGINEERING SERVICES. We provide to our hotels expertise in physical plant
systems such as mechanical, plumbing, electrical, fire and life safety and
swimming pools.
LEGAL SUPPORT. Our in-house legal department provides to our hotels legal
support with respect to employment law issues, liquor licensing and various
vendor and service contract negotiations.
LODGING INDUSTRY
The hotel industry has experienced profitability gains over the past several
years following a strong recovery from the industry slowdown in the late 1980s
and early 1990s. Moderate growth in the national economy, increased travel and
tourism, a low interest rate environment and improved hotel operating
efficiencies have contributed to increased profitability. According to Smith
Travel Research, 1998 is estimated to have surpassed 1997 as the hotel
industry's most profitable year with an estimated range of aggregate industry
pre-tax income of $20.1 to $22.4 billion.
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Hotel industry profits have resulted, in part, from increased room revenue per
available room over the last several years. According to Smith Travel Research,
room revenue per available room for the industry grew 3.6%, 5.3% and 7.4% in
1998, 1997 and 1996, respectively. Smith Travel Research estimates that room
revenue per available room will continue to grow through 2000, but at a slower
rate due to slower growth in average daily room rates and a continued decline in
average occupancy. According to Smith Travel Research, average daily room rates
increased 4.4%, 6.1% and 7.6% in 1998, 1997 and 1996, respectively. Smith Travel
Research predicts that average daily room rates will increase 3.8% and 4.0% in
1999 and 2000, respectively. Despite the trend in average daily room rates,
average occupancy rates have declined each year since achieving a peak of 65.2%
in 1995. According to Smith Travel Research, occupancy percentage declined 0.8%,
0.9% and 0.2% in 1998, 1997 and 1996, respectively. Smith Travel Research
predicts that the occupancy rate will decline 1.1% in 1999 while remaining
steady at 63.3% in 2000. This decline is largely attributed to an increase in
new construction projects during the period from 1997 to 1999.
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HOTEL PORTFOLIO
The following tables set forth information as of December 31, 1998 with respect
to management contracts and leases of the two operating divisions of Interstate
Hotels, LLC in effect as of April 15, 1999 and/or expected to be operated by
Interstate Hotels, LLC following the spin-off.
INTERSTATE DIVISION
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
HOTEL BRAND HOTELS NUMBER OF ROOMS OCCUPANCY(1) ADR(1) REVPAR(1)(2)
----------- --------- --------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Marriott(3)(4)(5) 20 6,710 73.6% $123.24 $ 90.72
Independent(6) 9 2,281 76.8% $154.36 $118.63
Westin 1 1,354 67.6% $ 92.43 $ 62.47
Embassy Suites(7) 4 1,101 75.0% $134.19 $100.64
Colony 2 888 78.2% $ 92.66 $ 72.41
Hilton(8) 2 815 69.9% $113.12 $ 79.04
Radisson(8) 3 795 69.2% $ 93.39 $ 64.62
Sheraton 1 598 87.8% $ 85.17 $ 74.77
Holiday Inn 1 498 84.0% $ 99.72 $ 83.73
Crowne Plaza 1 415 83.7% $113.20 $ 94.79
Delta 1 374 76.9% $120.18 $ 92.36
AmeriSuites(9) 1 128 0.0% $ 0.00 $ 0.00
--- ------ ----- ------- -------
Total/Average 46 15,957 74.7% $119.88 $ 89.52
=== ======
</TABLE>
- -------------------------
(1) Operating statistics represent results for the year ended December 31, 1998
for the hotels that were open in 1998. ADR represents average daily room
rate.
(2) REVPAR represents total room revenues divided by total available rooms.
(3) Includes one hotel currently managed by Wyndham.
(4) Includes five hotels which owners have notified us are for sale.
(5) Includes one hotel that is currently under contract to be sold.
(6) Includes one hotel which the owner has notified us is for sale.
(7) Includes three hotels currently managed by Wyndham.
(8) Includes two hotels currently managed by Wyndham.
(9) Represents one hotel with respect to which there is insufficient data
because it opened in December 1998.
29
<PAGE> 33
CROSSROADS DIVISION
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
HOTEL BRAND HOTELS NUMBER OF ROOMS OCCUPANCY(1) ADR(1) REVPAR(1)(2)
----------- --------- --------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Hampton Inn(3)(4) 65 8,069 67.0% $ 69.21 $ 46.40
Residence Inn by
Marriott(5) 12 1,539 77.9% $ 92.83 $ 72.30
Homewood Suites(6) 9 1,293 72.8% $ 91.53 $ 66.59
Holiday Inn 6 956 66.2% $ 69.81 $ 46.24
Courtyard by
Marriott(7) 7 868 70.1% $ 98.47 $ 69.03
Independent 5 703 54.6% $ 67.65 $ 36.94
Hilton Garden Inn(8) 3 668 0.0% $ 0.00 $ 0.00
Comfort Inn(9) 4 487 74.4% $ 87.32 $ 64.95
Colony 4 409 42.8% $113.85 $ 48.72
Fairfield Inn by
Marriott 4 328 75.2% $ 55.61 $ 41.83
Radisson(10) 2 236 25.0% $ 95.01 $ 23.75
Doubletree 1 155 55.8% $ 86.11 $ 48.07
Days Inn 1 148 56.6% $ 41.59 $ 23.55
Country Inn and
Suites(11) 1 120 0.0% $ 0.00 $ 0.00
Best Western 1 102 68.7% $ 58.13 $ 39.95
Super 8 1 86 70.5% $ 51.47 $ 36.30
Sleep Inn 1 80 57.0% $ 54.75 $ 31.22
--- ------ ----- ------- -------
Total/Average 127 16,247 67.5% $ 75.45 $ 50.94
=== ======
</TABLE>
- -------------------------
(1) Operating statistics represent results for the year ended December 31, 1998
for the hotels that were open in 1998. ADR represents average daily room
rate.
(2) REVPAR represents total room revenues divided by total available rooms.
(3) Includes three hotels with scheduled openings of May 15, 1999, June 15,
1999 and July 1, 1999.
(4) Includes two hotels that are currently under contract to be sold.
(5) Includes one hotel with a scheduled opening of November 1, 1999.
(6) Includes two hotels with scheduled openings of June 1, 1999.
(7) Includes one hotel currently managed by Wyndham.
(8) Includes two hotels with scheduled openings of June 1, 1999 and November
15, 1999 and one hotel that opened March 16, 1999.
(9) Includes one hotel currently under contract to be sold.
(10) Includes one hotel with a scheduled opening of July 1, 1999.
(11) Includes one hotel with a scheduled opening of December 1, 1999.
30
<PAGE> 34
The geographic diversification of our hotel portfolio reflects our belief that
such diversification helps to insulate the portfolio from local market
fluctuations that are typical for the lodging industry. The following table sets
forth the geographic distribution of our hotel portfolio.
<TABLE>
<CAPTION>
NUMBER OF NUMBER
LOCATION HOTELS OF ROOMS
-------- --------- --------
<S> <C> <C>
California(1)(2)(3) 13 4,357
Florida(4)(5)(6) 16 4,002
New York 10 2,236
Pennsylvania(2)(7) 10 2,012
Illinois(8)(9) 7 1,663
Texas 10 1,384
Tennessee 10 1,326
Canada 2 1,091
North Carolina 7 982
Colorado(3)(10) 6 972
Arizona(3) 6 958
Connecticut(2) 6 925
Ohio(3) 6 884
Michigan(3) 5 876
New Jersey(3) 3 814
Russia 3 746
Vermont 6 595
Washington 2 576
Massachusetts 4 571
Missouri 3 544
West Virginia 4 455
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER
LOCATION HOTELS OF ROOMS
-------- --------- --------
<S> <C> <C>
Georgia 4 443
Alabama(6) 4 424
Mississippi(6) 5 420
South Carolina 3 404
Rhode Island(6) 1 345
Oklahoma 2 332
Virginia 2 267
Kansas 2 254
Hawaii 1 171
Oregon 1 168
New Mexico(11) 1 131
Indiana 1 129
Arkansas 1 123
Minnesota 1 120
Kentucky 1 119
Maryland 1 115
Virgin Islands 1 110
Nebraska 1 80
Wisconsin 1 80
--- ------
Total 173 32,204
=== ======
</TABLE>
- -------------------------
(1) Includes two hotels with scheduled openings of May 15, 1999 and June 15,
1999.
(2) Includes one hotel which the owner has notified us is for sale.
(3) Includes one hotel currently managed by Wyndham.
(4) Includes two hotels which owners have notified us are for sale.
(5) Includes three hotels with scheduled openings of June 1, 1999, July 1, 1999
and December 1, 1999.
(6) Includes one hotel currently under contract to be sold.
(7) Includes one hotel with a scheduled opening of November 1, 1999.
(8) Includes two hotels with scheduled openings of June 1, 1999 and November
15, 1999.
(9) Includes three hotels currently managed by Wyndham.
(10) Includes one hotel with a scheduled opening of June 1, 1999.
(11) Includes one hotel with a scheduled opening of July 1, 1999.
EMPLOYEES
Most of the employees at our leased and managed hotels, as well as those at our
corporate offices, will be employed by either Interstate Hotels, LLC or
Crossroads Hospitality. Third-party hotel owners, however, reimburse us or incur
the expense for all of the wages and benefits for all the employees in their
hotels.
31
<PAGE> 35
Following the spin-off, we will have approximately 13,500 employees,
approximately 13,300 of whom will be employees of specific hotels.
Currently, eight of the properties in our hotel portfolio employ approximately
1,500 workers in the aggregate who are subject to labor union contracts. We have
not experienced any union strikes or other material labor disruptions.
GOVERNMENT REGULATION
The lodging industry is subject to extensive government regulation, including
laws which regulate the licensing of hotels and restaurants, the sale of food
and liquor and the disposal of hazardous waste. We are also subject to laws
regarding our relationship with our employees, including minimum wage, overtime,
working conditions and work permit requirements. Under the ADA, all public
accommodations are required to meet federal requirements relating to access and
use by disabled persons. We believe that our hotels are substantially in
compliance with the requirements of the ADA. However, a determination that our
hotels are not in compliance with the ADA could result in liability for fines
and damages. Third-party hotel owners are generally responsible for paying all
costs, expenses and liabilities incurred in the operation of our managed hotels,
including compliance with laws such as the ADA and environmental laws. We could
be contingently liable, however, for liabilities for which we do not maintain
insurance, including claims arising under the ADA.
ENVIRONMENTAL MATTERS
Various laws impose liability for the costs of removal or remediation of
hazardous or toxic substances on the properties we operate, regardless of
whether we knew of or were responsible for the presence of such hazardous or
toxic substances. Depending on the circumstances, we could also be liable for
personal injury associated with exposure to asbestos-containing materials.
Environmental laws also may restrict the manner in which property may be used or
businesses may be operated, and these restrictions may result in expenditures
and require interruption of such businesses. Equity Inns, the owner of
substantially all of our leased hotels, has agreed to indemnify us from
environmental liabilities relating to the leased hotels, except to the extent
caused by our gross negligence. In addition, most of our currently leased and
managed hotels have been inspected to determine the presence of
asbestos-containing materials. While asbestos-containing materials could be
present in our properties, operations and maintenance programs for maintaining
such asbestos-containing materials have been or are in the process of being
designed and implemented, or the asbestos-containing materials have been
scheduled to be or have been abated at such hotels. We believe that the presence
of asbestos-containing materials in our leased and managed hotels will not have
a material adverse effect on our financial condition or results of operations,
but we cannot be sure that this will be the case.
LEGAL PROCEEDINGS
In the ordinary course of our business, we are named as a defendant in legal
proceedings resulting from incidents at the hotels we operate. In order to limit
our exposure in such matters, we:
- - maintain liability insurance;
- - require hotel owners to maintain adequate insurance coverages; and
- - are generally entitled to indemnity from third-party hotel owners for lawsuits
and damages against us in our capacity as a hotel manager.
32
<PAGE> 36
FACILITIES
Our principal executive offices in Pittsburgh, Pennsylvania are under a lease
expiring December 31, 2003. In addition, we maintain offices in Orlando,
Florida, under a lease expiring July 31, 2005, and Scottsdale, Arizona, under a
lease expiring July 31, 2000.
INTELLECTUAL PROPERTY
Generally, the third-party owners of our hotels, rather than Interstate
Management, are parties to the franchise agreements to use the trade names under
which the hotels are operated. We are a party, however, to franchise agreements
with Bass Hotels & Resorts, Inc., Choice Hotels International, Inc., Marriott
and Promus Hotels, Inc. Our franchise agreements to use these trade names expire
at varying times, generally ranging from 2000 to 2015. The franchisors under
whose brand names we operate hotels have not endorsed or approved the spin-off
or any of the financial results of the hotels set forth in this Information
Statement/ Prospectus. A grant of franchise licenses for our hotels is not
intended as, and should not be interpreted as, an express or implied approval or
endorsement by any such franchisor or licensor (or any of their respective
affiliates, subsidiaries or divisions) of Interstate Management or its stock.
We have registered, or have applied with the United States Patent Office for
registration of, a number of trademarks and service marks incorporating the word
"Colony," as well as many other trademarks and service marks used in our
business. While we utilize our trademarks and service marks (including "Colony"
marks) in connection with managing and leasing hotels, we do not believe that
the loss or expiration of any or all of our marks would have a material adverse
effect on our business. The registrations for our marks expire at varying times,
generally ranging from 2000 to 2011.
33
<PAGE> 37
SELECTED FINANCIAL AND OTHER DATA
We are providing the following selected financial information to aid you in your
analysis of the financial aspects of the spin-off. The table sets forth selected
historical financial data for Interstate Management, prior to the merger of Old
Interstate with Patriot, as the predecessor, as of and for the years ended
December 31, 1994, 1995, 1996 and 1997 and for the period from January 1, 1998
to June 1, 1998, and for Interstate Management, subsequent to the merger of Old
Interstate with Patriot, as the successor, as of December 31, 1998 and for the
period from June 2, 1998 to December 31, 1998. In addition, we have provided a
combined 1998 column which combines the predecessor for the period from January
1, 1998 to June 1, 1998 and the successor for the period from June 2, 1998 to
December 31, 1998. We believe that this presentation is informative to the
reader. In addition, selected pro forma financial data for the year ended
December 31, 1998 is presented.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------------- -------------
YEAR ENDED DECEMBER 31, JAN. 1, 1998 JUNE 2, 1998
----------------------------------------------- THROUGH THROUGH
1994 1995 1996 1997 JUNE 1, 1998 DEC. 31, 1998
-------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms........................ -- -- $ 9,258 $ 158,343 $ 74,265 $ 108,698
Other departmental........... -- -- 721 9,512 4,504 6,455
Net management fees............ $ 22,284 $ 27,022 33,023 39,136 18,018 22,763
Other fees..................... 14,442 17,996 20,710 23,426 9,976 10,478
-------- ---------- ---------- ---------- ---------- ----------
Total revenues........... 36,726 45,018 63,712 230,417 106,763 148,394
Lodging expenses:
Rooms........................ -- -- 2,334 36,919 17,173 26,567
Other departmental........... -- -- 591 5,487 2,674 3,962
Property costs............... -- -- 3,201 43,225 19,987 30,261
General and administrative..... 8,302 9,811 10,369 13,212 6,115 5,822
Payroll and related benefits... 12,420 15,469 17,666 21,892 10,982 10,439
Non-cash compensation (3)...... -- -- 11,896 -- -- --
Lease expense.................. -- -- 3,477 73,283 34,515 51,165
Depreciation and
amortization................. 3,659 4,188 4,385 4,845 2,152 10,659
-------- ---------- ---------- ---------- ---------- ----------
Operating income............... 12,345 15,550 9,793 31,554 13,165 9,519
Other income (expense):
Interest, net................ 30 146 501 498 204 390
Other, net................... 14 346 -- 431 474 1,391
-------- ---------- ---------- ---------- ---------- ----------
Income before income tax
expense...................... 12,389 16,042 10,294 32,483 13,843 11,300
Income tax expense (4)......... -- -- 4,117 12,986 5,528 4,436
-------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest..................... 12,389 16,042 6,177 19,497 8,315 6,864
Minority interest.............. -- -- -- 18 24 209
-------- ---------- ---------- ---------- ---------- ----------
Net income..................... $ 12,389 $ 16,042 $ 6,177 $ 19,479 $ 8,291 $ 6,655
======== ========== ========== ========== ========== ==========
Pro forma net income per common
share(5):
Basic........................
Diluted......................
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents...... $ 6,702 $ 14,035 $ 11,168 $ 2,432 $ 1,652
Total assets................... 30,741 38,420 88,204 118,185 161,157
Long-term debt................. 3,890 1,270 541 370 --
Total equity................... 18,858 24,345 56,886 80,730 92,607
OTHER FINANCIAL DATA:
EBITDA (6)..................... $ 14,178 $ 36,812 $ 15,767 $ 21,360
Net cash provided by operating
activities................... 15,331 12,517 18,359 9,593
Net cash (used in) provided by
investing activities......... (4,338) (35,707) 2,674 (27,707)
Net cash (used in) provided by
financing activities......... (13,860) 14,454 (19,298) 15,599
TOTAL HOTEL DATA (7)
Total hotel revenues........... $858,986 $1,056,279 $1,326,581 $1,600,958
Number of hotels (8)........... 136 150 212 223
Number of rooms (8)............ 31,502 35,044 43,178 45,329
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
COMBINED PRO FORMA
1998(1) 1998(2)
---------- ----------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms........................ $ 182,963 $ 182,963
Other departmental........... 10,959 10,959
Net management fees............ 40,781 30,995
Other fees..................... 20,454 15,741
---------- ----------
Total revenues........... 255,157 240,658
Lodging expenses:
Rooms........................ 43,740 43,740
Other departmental........... 6,636 6,636
Property costs............... 50,248 50,248
General and administrative..... 11,937 12,399
Payroll and related benefits... 21,421 17,450
Non-cash compensation (3)...... -- --
Lease expense.................. 85,680 85,680
Depreciation and
amortization................. 12,811 18,184
---------- ----------
Operating income............... 22,684 6,321
Other income (expense):
Interest, net................ 594 1,169
Other, net................... 1,865 (174)
---------- ----------
Income before income tax
expense...................... 25,143 7,316
Income tax expense (4)......... 9,964 1,317
---------- ----------
Income before minority
interest..................... 15,179 5,999
Minority interest.............. 233 4,024
---------- ----------
Net income..................... $ 14,946 $ 1,975
========== ==========
Pro forma net income per common
share(5):
Basic........................ $ 0.20
Diluted...................... $ 0.20
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents...... $ 1,652 $ 30,442
Total assets................... 161,157 173,604
Long-term debt................. -- --
Total equity................... 92,607 64,372
OTHER FINANCIAL DATA:
EBITDA (6)..................... $ 37,127 $ 10,949
Net cash provided by operating
activities................... 27,952 26,853
Net cash (used in) provided by
investing activities......... (25,033) (11,533)
Net cash (used in) provided by
financing activities......... (3,699) (2,079)
TOTAL HOTEL DATA (7)
Total hotel revenues........... $1,546,926 $1,062,531
Number of hotels (8)........... 176 159
Number of rooms (8)............ 35,214 29,869
</TABLE>
34
<PAGE> 38
- -------------------------
(1) Represents the summation of the balances from the predecessor for the period
from January 1, 1998 to June 1, 1998 and the successor for the period from
June 2, 1998 to December 31, 1998.
(2) Reflects the spin-off and other adjustments described in "Pro Forma
Financial Data."
(3) Represents a non-recurring expense relating to the issuance of 785,533
shares of common stock to executives and key employees of Old Interstate in
consideration for the cancellation of stock options issued by one of Old
Interstate's predecessors in 1995.
(4) Prior to 1996, Old Interstate and its predecessors were organized as S
corporations, partnerships and limited liability companies and, accordingly,
were not subject to federal or significant state income taxes.
(5) Based on 10,002,035 shares of Common Stock outstanding on a pro forma basis
on the spin-off date.
(6) EBITDA represents earnings before interest, income tax expense, depreciation
and amortization. The 1998 pro forma EBITDA represents Interstate
Management's 45% share of total EBITDA. Management believes that EBITDA is a
useful measure of operating performance because it is industry practice to
evaluate hotel properties based on operating income before interest, taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
EBITDA is unaffected by the debt and equity structure of the property owner.
EBITDA, as calculated by Interstate Management, may not be consistent with
computations of EBITDA by other companies. EBITDA does not represent cash
flow from operations as defined by generally accepted accounting principles,
is not necessarily indicative of cash available to fund all cash flow needs
and should not be considered as an alternative to net income under generally
accepted accounting principles for purposes of evaluating Interstate
Management's results of operations.
(7) Represents all hotels, including the leased hotels, which Interstate
Management operated.
(8) As of the end of the periods presented. The 1998 pro forma number of hotels
and number of rooms excludes 14 hotels with 2,335 rooms that have opened in
1999 or are scheduled to open in 1999 and that are currently or are expected
to be managed by Interstate Hotels, LLC.
35
<PAGE> 39
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of Interstate Management
assumes that Patriot/Wyndham has separated the third-party hotel management
business they acquired through the merger of Old Interstate into Patriot on June
2, 1998 to create Interstate Management. The Unaudited Pro Forma Combined
Balance Sheet as of December 31, 1998, is presented as if this spin-off and the
proposed sale of the ownership interest in The Charles Hotel Complex had
occurred on that date. The Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1998 is presented as if the spin-off and the
proposed sale of the ownership interest in The Charles Hotel Complex had
occurred on January 1, 1998. The adjustments required to reflect the spin-off
and related transactions are discussed in the accompanying notes. In
management's opinion, all material adjustments necessary to reflect the effect
of these transactions have been made.
The following unaudited pro forma financial data and notes thereto of Interstate
Management have been derived from and should be read in conjunction with the
historical combined financial statements and notes thereto of Interstate
Management contained elsewhere in this Information Statement/Prospectus. The
historical combined financial statements of Interstate Management have been
carved out of Old Interstate and Patriot and principally include those
historical assets, liabilities, revenues and expenses directly attributable to
the third-party hotel management business of Old Interstate that will succeed to
Interstate Management. The unaudited pro forma financial data is presented for
informational purposes only. The data may not reflect the future results of
operations and financial position of Interstate Management, or be necessarily
indicative of what the actual results of operations and financial position of
Interstate Management would have been had the spin-off occurred as of the dates
indicated.
36
<PAGE> 40
INTERSTATE HOTELS MANAGEMENT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (A) ADJUSTMENTS PRO FORMA
-------------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,652 $ 28,790(B) $ 30,442
Accounts receivable, net........................... 16,816 -- 16,816
Deferred income taxes.............................. 615 -- 615
Net investment in direct financing leases.......... 827 -- 827
Prepaid expenses and other assets.................. 741 -- 741
Related party receivables -- management
contracts....................................... 1,085 (1,085)(C) --
-------- -------- --------
Total current assets....................... 21,736 27,705 49,441
Restricted cash...................................... 2,201 -- 2,201
Marketable securities................................ 2,609 -- 2,609
Property and equipment, net.......................... 4,076 -- 4,076
Officers and employees notes receivable.............. 2,803 -- 2,803
Affiliate receivables................................ 3,381 -- 3,381
Net investment in direct financing leases............ 1,680 -- 1,680
Investment in hotel real estate...................... 22,150 (21,735)(D) 415
Intangibles and other assets......................... 100,521 5,750(D) 106,271
-------- -------- --------
Total assets............................... $161,157 $ 11,720 $172,877
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable -- trade.......................... 2,413 -- 2,413
Accounts payable -- health trust................... 1,785 -- 1,785
Accounts payable -- related parties................ 18,597 (18,597)(B) --
Accrued payroll and related benefits............... 6,120 -- 6,120
Accrued rent....................................... 5,043 -- 5,043
Accrued merger costs............................... 9,344 -- 9,344
Other accrued liabilities.......................... 9,236 -- 236
-------- -------- --------
Total current liabilities.................. 52,538 (18,597) 33,941
Deferred income taxes................................ 11,053 558(E) 11,611
Deferred compensation................................ 2,609 -- 2,609
-------- -------- --------
Total liabilities.......................... 66,200 (18,039) 48,161
-------- -------- --------
Minority interest.................................... 2,350 57,994(E) 60,344
Commitments and contingencies........................ -- -- --
Owners' equity:
Common stock, $0.01 par value...................... -- 100(F) 100
Paid-in capital.................................... -- 64,272(F) 64,272
Owners' equity..................................... 92,607 (92,607)(F) --
-------- -------- --------
Total owners' equity....................... 92,607 (28,235) 64,372
-------- -------- --------
Total liabilities and owners' equity....... $161,157 $ 11,720 $172,877
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this Pro Forma Combined Balance
Sheet.
37
<PAGE> 41
INTERSTATE HOTELS MANAGEMENT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
----------------------------
JAN. 1, 1998 JUNE 2, 1998 COMBINED PRO FORMA
TO TO YEAR ENDED YEAR ENDED
JUNE 1, 1998 DEC. 31, 1998 DECEMBER 31, PRO FORMA DECEMBER 31,
(A) (A) 1998 ADJUSTMENTS 1998
------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms.................... $ 74,265 $108,698 $182,963 -- $182,963
Other departmental....... 4,504 6,455 10,959 -- 10,959
Net management fees........ 18,018 22,763 40,781 $ (9,786)(B) 30,995
Other fees................. 9,976 10,478 20,454 (4,713)(C) 15,741
-------- -------- -------- -------- --------
106,763 148,394 255,157 (14,499) 240,658
Lodging expenses:
Rooms.................... 17,173 26,567 43,740 -- 43,740
Other departmental....... 2,674 3,962 6,636 -- 6,636
Property costs........... 19,987 30,261 50,248 -- 50,248
General and
administrative........... 6,115 5,822 11,937 462(D) 12,399
Payroll and related
benefits................. 10,982 10,439 21,421 (3,971)(E) 17,450
Lease expense.............. 34,515 51,165 85,680 -- 85,680
Depreciation and
amortization............. 2,152 10,659 12,811 5,373(F) 18,184
-------- -------- -------- -------- --------
Operating income........... 13,165 9,519 22,684 (16,363) 6,321
Other income (expense):
Interest, net............ 204 390 594 575(G) 1,169
Other, net............... 474 1,391 1,865 (2,039)(H) (174)
-------- -------- -------- -------- --------
Income before income tax
expense.................. 13,843 11,300 25,143 (17,827) 7,316
Income tax expense......... 5,528 4,436 9,964 (8,647)(I) 1,317
-------- -------- -------- -------- --------
Income before minority
interest................. 8,315 6,864 15,179 (9,180) 5,999
Minority interest.......... 24 209 233 3,791(J) 4,024
-------- -------- -------- -------- --------
Net income................. $ 8,291 $ 6,655 $ 14,946 $(12,971) $ 1,975
======== ======== ======== ======== ========
Basic net income per common
share.................... $ 0.20(K)
========
Diluted net income per
common share............. $ 0.20(K)
========
</TABLE>
- -------------------------
The accompanying notes are an integral part of this Pro Forma Combined Statement
of Operations.
38
<PAGE> 42
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS:
(A) Reflects the historical combined balance sheet of Interstate Management as
of December 31, 1998. The historical balance sheet reflects the historical
carrying amounts recorded on the books of Patriot.
(B) Adjustments to reflect the net increase in cash and cash equivalents as
follows:
<TABLE>
<S> <C>
Cash contribution from Patriot to Interstate Hotels, LLC to
fund working capital...................................... $ 18,887
Repayment of amounts owed to Wyndham to meet Interstate
Management's short-term cash requirements................. (18,597)
Cash proceeds of Marriott's purchase of a 4% ownership
interest in Interstate Management......................... 2,057
Cash contribution from Patriot to Interstate Management to
provide $15.0 million of working capital at the spin-off
date...................................................... 12,943
Cash received by Interstate Hotels, LLC for the sale of the
ownership interest in The Charles Hotel Complex........... 13,500
--------
$ 28,790
========
</TABLE>
(C) Represents adjustments to eliminate management fees and other fee income
receivables related to hotels formerly owned and managed by Old Interstate.
Interstate Management will not manage these hotels subsequent to the
spin-off.
(D) Adjustments to reflect the net decrease in investment in hotel real estate
due to proceeds from the sale of the ownership interest in The Charles Hotel
Complex:
<TABLE>
<S> <C>
Reduction in investment for cash received by Interstate
Hotels, LLC (as discussed in Note (B) above).............. $(13,500)
Reduction in investment for a promissory note received by
Interstate Hotels, LLC in lieu of cash. The note is a
three year note and pays interest only at a rate of 10%
annually until the maturity date.......................... (5,750)
Elimination of third-party minority interest associated with
the ownership interest in The Charles Hotel Complex. The
third-party minority interest partners will be transferred
to the purchaser.......................................... (2,350)
Loss recognized on sale..................................... (135)
--------
$(21,735)
========
</TABLE>
(E) Represents Patriot's 55% non-controlling ownership interest in Interstate
Hotels, LLC, based on 55% of the historical recorded carrying amount of
Interstate Management on the books of Patriot. Subsequent to the spin-off,
Interstate Management will have two principal subsidiaries. Interstate
Hotels, LLC, the successor to the third-party hotel management business
conducted by Old Interstate prior to its merger into Patriot, will own
substantially all of the assets of Interstate Management immediately after
the spin-off, as well as own equity interests representing in the aggregate
an approximate 50.3% non-controlling interest in The Charles Hotel Complex.
Interstate Management will own a 45% managing member interest in Interstate
Hotels, LLC, and therefore will control Interstate Hotels, LLC. Interstate
Management's second subsidiary, IHC II, LLC, will contract with Wyndham to
manage ten Marriott
39
<PAGE> 43
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS--(CONTINUED)
franchise hotels that were owned and managed by Old Interstate, and one
hotel that was owned by Old Interstate and managed by Marriott, prior to the
merger with Patriot. Marriott will submanage these hotels for IHC II, LLC.
Patriot/Wyndham and Interstate Management have reached a tentative agreement
under which all of the equity interests in The Charles Hotel Complex, with
the exception of our general partnership interest in Cambridge Hotel
Associates, the manager of The Charles Hotel, will be sold to an existing
joint venture partner in several of these equity interests. Interstate
Hotels, LLC will receive an aggregate purchase price for this sale of $19.3
million, consisting of $13.5 million in cash and $5.8 million in the form of
a secured promissory note. The $5.8 million secured promissory note is a
three year note which pays interest only (at a rate of 10% annually) until
the maturity date.
After the spin-off and the sale, Interstate Hotels, LLC will continue to
manage The Charles Hotel. In connection with the sale, however, Interstate
Hotels, LLC will amend the management agreement to include terms generally
similar to the existing agreement, but for a new ten year term. In exchange
for the extension of the term to ten years, Interstate Hotels, LLC will
receive a lower portion of the management fees payable to Cambridge Hotel
Associates.
<TABLE>
<S> <C>
Historical book value of owners' equity..................... $ 92,607
Adjustments to eliminate management fees and other fee
income receivables related to hotels formerly owned and
managed by
Old Interstate that will not be managed by Interstate
Hotels, LLC,
(as discussed in Note (C) above).......................... (1,085)
Loss on the sale of the ownership interest in The Charles
Hotel Complex allocated to Interstate Hotels, LLC (as
discussed in Note (D) above).............................. (135)
Elimination of deferred tax asset related to the investment
in The Charles Hotel Complex.............................. (558)
Funding of working capital by Patriot....................... 18,887
--------
109,716
Patriot's minority interest ownership percentage............ 55%
--------
Patriot's minority interest................................. 60,344
Elimination of third-party minority interest associated with
the ownership interest in The Charles Hotel Complex. The
third-party minority interest partners will be transferred
to the purchaser.......................................... (2,350)
--------
$ 57,994
========
</TABLE>
40
<PAGE> 44
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS--(CONTINUED)
(F) Represents adjustments to reflect the issuance of shares of common stock,
par value $0.01, of Interstate Management in connection with the spin-off,
net of the effect of the sale of the ownership interest in The Charles Hotel
Complex, as follows:
<TABLE>
<CAPTION>
NUMBER OF COMMON PAID-IN OWNERS'
SHARES STOCK CAPITAL EQUITY
---------- ------ ------- --------
<S> <C> <C> <C> <C>
Shares distributed to
Patriot's shareholders.... 9,221,743 $ 92 $59,627 $ --
Shares retained by
Patriot................... 390,146 4 2,592 --
Shares purchased by
Marriott.................. 390,146 4 2,053 --
Eliminate historical owners'
equity.................... -- -- -- (92,607)
---------- ---- ------- --------
Total............. 10,002,035 $100 $64,272 $(92,607)
========== ==== ======= ========
</TABLE>
In connection with the merger of Old Interstate into Patriot, operations
consisting principally of the third-party hotel management business, along
with other assets and liabilities, will be transferred to Interstate
Management. Ninety-two percent of the shares of Interstate Management will
be distributed to Patriot's shareholders. Patriot will retain a 4% ownership
interest in Interstate Management's common stock.
In connection with the spin-off of Interstate Management from Patriot,
Marriott will purchase a 4% ownership interest in Interstate Management's
common stock for $2,057 in cash.
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
(A) Reflects the historical combined statements of
operations of Interstate Management for the indicated
period.
(B) Adjustments to reflect the net decrease in net
management fees:
The elimination of management fee revenues related to
ten Patriot-owned hotels that will be submanaged by
Marriott pursuant to an arrangement with IHC II, LLC, to
nine hotels that will be leased to Wyndham, converted to
the Wyndham brand and managed by Wyndham, and to other
hotels that will be leased by Patriot to Wyndham and
will be managed by Wyndham. Prior to the merger of Old
Interstate into Patriot, these hotels were owned and
managed by subsidiaries of Old Interstate............... $(11,794)
The addition of management fee revenues related to seven
Patriot-owned hotels that will be managed by Interstate
Management.............................................. 2,322
The reduction of management fee revenues resulting from
the sale of the ownership interest in The Charles Hotel
Complex................................................. (314)
--------
$ (9,786)
========
</TABLE>
41
<PAGE> 45
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
(C) Adjustments to reflect the net decrease in other fees:
The elimination of fees for insurance services,
purchasing, leasing and other ancillary services that
Interstate Management provided to the hotels that were
owned and managed by subsidiaries of Old Interstate and
are currently owned by Patriot, as discussed in Note (B)
above. Interstate Management will not provide such
services to these hotels subsequent to the spin-off..... $ (5,598)
The addition of fees for insurance services, purchasing
and other ancillary services that Interstate Management
will provide to seven Patriot-owned hotels, as discussed
in Note (B) above....................................... 885
--------
$ (4,713)
========
(D) Adjustments to reflect the net increase in general and
administrative expense:
The increase in expense to reflect costs related to
managing and administering a publicly held company...... $ 500
The decrease in expense resulting from the sale of the
ownership interest in The Charles Hotel Complex......... (38)
--------
$ 462
========
(E) Adjustment to payroll and related benefits expense to
reflect the elimination of salaries and related benefits
of employees who were terminated subsequent to the
merger of IHC into Patriot and whose positions have been
eliminated. The reduction in employees relates
principally to the reduction in the size of Interstate
Management subsequent to the merger..................... $ (3,971)
========
(F) Adjustments to depreciation and amortization to reflect
the net increase in amortization of management and lease
contract costs associated with the step-up in basis
arising from the allocation of purchase price resulting
from the merger of Old Interstate into Patriot. The
management and lease contract costs have been stated at
their estimated fair market values and are being
amortized using the straight-line method over five years
for the management contracts and 11 and 13.5 years for
the lease contracts. The management contracts'
amortization period was determined using the average
remaining life of the original contract terms, and the
amortization period of the lease contracts is based on
the remaining original lease life....................... $ 5,373
========
(G) Adjustment to interest, net to reflect interest earned
on a $5,750 promissory note at a rate of 10% annually
with a three year term arising from the proceeds from
the sale of the ownership interest in The Charles Hotel
Complex................................................. $ 575
========
(H) Adjustment to other income to reflect the elimination of
equity in earnings resulting from the sale of the
ownership interest in The Charles Hotel Complex......... $ (2,039)
========
</TABLE>
42
<PAGE> 46
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------
NOTE 2 -- PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
(I) Adjustment reflects the provision for income tax expense
based on Interstate Management's estimated effective
income tax rate of 40% after reduction of minority
interest................................................ $ (8,647)
========
(J) Adjustments to reflect the net increase in minority
interest:
The elimination of minority interest resulting from the
sale of the ownership interest in The Charles Hotel
Complex.................................................. $ (233)
The increase in minority interest to reflect Patriot's
55% non-controlling interest in Interstate Hotels,
LLC...................................................... 4,024
--------
$ 3,791
========
(K) Pro forma basic and diluted net income per common share
has been calculated using 10,002,035 shares of Common
Stock. The historical combined financial statements of
Interstate Management have been carved out of Old
Interstate and Patriot, and principally include those
historical assets, liabilities, revenues and expenses
directly attributable to the third-party hotel
management business to be conducted by Interstate
Management. Historical earnings per share information
for the carved out company has not been presented
because management believes it is not meaningful.
(L) The pro forma statement of operations excludes a $2,000
one-time charge for additional incentive lease expense
for the 1999 year arising from the settlement of the
dispute with Equity Inns arising pursuant to the merger
of Old Interstate into Patriot. This expense will be
included in Interstate Management's historical statement
of operations for the quarter ended March 31, 1999.
</TABLE>
43
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Information Statement/Prospectus
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and information based on our current views of our
business and our assumptions concerning future events. The words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"believes," "estimates," "projects" or similar expressions are intended to
identify these forward-looking statements. These statements are subject to risks
and uncertainties that could cause our actual operations and results of
operations to differ materially from those reflected in our forward-looking
statements.
Forward-looking statements are not guarantees of future performance. They are
subject to Interstate Management:
- reversing the current negative trend in Interstate Management's business
and financial results;
- successfully implementing its business strategy;
- limiting the costs and realizing the expected benefits of that strategy;
and
- generating sufficient cash flow to fund its lease payments, debt service
requirements, working capital needs and other significant expenditures.
Our forward-looking statements are based on trends which we anticipate in the
lodging industry and the effect on those trends of such factors as industry
capacity, the seasonal nature of the lodging industry, product demand and
pricing and the other matters referred to in the "Risk Factors" section of this
document. Accordingly, you are cautioned not to place undue reliance on our
forward-looking statements.
The historical combined financial statements of Interstate Management presented
elsewhere in this Information Statement/Prospectus have been carved out of the
historical consolidated financial statements of Old Interstate and its
subsidiaries and predecessors. The historical combined financial statements
include only those historical assets, liabilities, revenues and expenses
directly attributable to the third-party hotel management business. "Third-party
hotel management business" refers to the management, leasing and related
services we perform for hotels that we do not own. The working capital and
operating results of the leased hotels are included in the historical combined
financial statements because the operating performance associated with such
hotels is guaranteed by Interstate Management. These financial statements have
been prepared as if Interstate Management had operated as a free-standing entity
for all periods presented. The following items have been carved out of the
historical combined financial statements of Interstate Management:
- the results of operations of the hotels that were owned by subsidiaries
of Old Interstate prior to the merger of Old Interstate into Patriot, as
well as other operating subsidiaries that are not included in the
continuing business of Interstate Management;
- the investments in such hotels; and
- the debt associated with such investments.
The following discussion and analysis includes discussion and analysis of
Interstate Management's pro forma financial position and results of operations
in addition to its historical data, and should be read in conjunction with the
pro forma financial information included elsewhere in this Information
Statement/ Prospectus. The pro forma adjustments described below result
primarily from the merger of Old Interstate into Patriot on June 2, 1998, the
spin-off of Interstate Management and the proposed sale of the ownership
interest in The Charles Hotel Complex. The pro forma adjustments consist
primarily of the elimination of costs and revenues associated with the hotels
that were once owned and managed by Old Interstate but will
44
<PAGE> 48
be retained by Patriot, and therefore will not be included in Interstate
Management, after the spin-off. In connection with the merger, an intangible
asset related to the estimated fair market value of management contracts of
$69.9 million and a deferred tax liability of $5.5 million were recorded, as of
June 2, 1998, and will be amortized over five years.
BACKGROUND AND GENERAL
Interstate Management provides a wide variety of management and other services
to hotels that Interstate Management operates on behalf of third-party owners.
Additionally, Interstate Management holds leasehold interests of 80 hotels, 79
of which are owned by Equity Inns. The management agreements generally provide
for payment of a base management fee which ranges from 1% to 4% of the hotel's
gross revenues. In addition, some of the management agreements provide for
payment of an incentive management fee, which generally ranges from 10% to 20%
of the excess of operating profits or net operating cash flow over a defined
threshold level. Interstate Management also earns incremental revenues from
third-party owners for ancillary services, such as purchasing, project
management and insurance and risk management services. At December 31, 1998,
Interstate Management managed, leased or performed related services for 176
hotels with 35,214 rooms, compared to 223 hotels with 45,329 rooms at December
31, 1997. Interstate Management's management agreements have initial terms that
range from one month to 49 years expiring through 2044, and Interstate
Management's lease agreements have initial terms of 10 to 15 years expiring
through 2013.
The following table sets forth the expiration dates and corresponding percentage
of pro forma net management fees for the year ended December 31, 1998 for the
hotels expected to be managed (excluding the leaseholds) by Interstate Hotels,
LLC following the spin-off:
MANAGED HOTELS
<TABLE>
<CAPTION>
PERCENTAGE OF PRO FORMA
NET MANAGEMENT FEES FOR
THE YEAR ENDED
YEAR OF EXPIRATION NO. OF HOTELS DECEMBER 31, 1998
------------------ ------------- -----------------------
<S> <C> <C>
1999.............................. 16 22.3%
2000.............................. 19 13.7%
2001.............................. 8 7.3%
2002.............................. 8 3.8%
2003.............................. 8 7.4%
Thereafter 34 35.1%
</TABLE>
We have been notified by third-party owners of six of our managed hotels that
such hotels are currently for sale. These six hotels generated $4.8 million, or
15.4%, of our pro forma net management fees for the year ended December 31,
1998.
In addition, Interstate Management was a party to long-term operating leases for
81 of its hotels with 9,929 rooms at December 31, 1998.
There has been significant disruption to Interstate Management's business caused
by the Old Interstate merger with Patriot, the lengthy and intensive
negotiations regarding the Marriott settlement, the consideration of possible
alternatives to the spin-off including the private sale of Interstate Management
to a third party, and the preparations for the spin-off. In addition, Old
Interstate's operations were required to be divided between those to be retained
by Patriot/Wyndham and those which would be contributed to Interstate Management
in connection with the spin-off. Interstate Management was required to expend a
substantial amount of resources, particularly the time and attention of senior
management, in order to
45
<PAGE> 49
achieve that division of operations. The diversion of senior management's
attention and the uncertainty with respect to Interstate Management's future
operations caused by these distractions has disrupted Interstate Management's
relationships with hotel owners and adversely affected Interstate Management's
financial results. Since the closing of the Patriot/Old Interstate merger, there
has been a net reduction in Interstate Management's business of 22 management
agreements. In addition, the disruption to Interstate Management's business has
reduced employee morale, increased employee turnover and caused Interstate
Management to be unable to actively pursue new business. If, following the
spin-off, Interstate Management cannot rectify the disruption in its
relationships with hotel owners and successfully address the other issues
described above, the current negative trend in its business and financial
results will continue.
In addition, Interstate Management currently believes its fiscal 1999 results
will be negatively affected by a $2.0 million one-time payment to Equity Inns
for additional 1999 incentive rent, disruption at the leased hotels arising from
scheduled improvements to the properties and anticipated terminations of
management contracts during 1999. As a result, 1999 results are expected to be
below 1998 pro forma levels.
RESULTS OF OPERATIONS
Pro Forma Year Ended December 31, 1998 Compared to Historical Year Ended
December 31, 1998
Pro forma net management fees include adjustments to eliminate $8.4 million of
management fee revenues related to ten Patriot-owned hotels that will be
submanaged by Marriott pursuant to an arrangement with IHC II, LLC and nine
hotels that will be leased to Wyndham, converted to the Wyndham brand and
managed by Wyndham. Prior to the merger of Old Interstate into Patriot, these
hotels were owned and managed by subsidiaries of Old Interstate. The remaining
hotels that were owned and managed by subsidiaries of Old Interstate prior to
the merger have also been leased by Patriot to Wyndham and will be managed by
Wyndham, resulting in an elimination of $3.4 million of management fee revenues.
In addition, pro forma net management fees include an adjustment to eliminate
$0.3 million of management fee revenues resulting from the sale of the ownership
interest in The Charles Hotel Complex. These elimination adjustments are offset
by the addition of $2.3 million of management fee revenues related to seven
Patriot-owned hotels that will be managed by Interstate Management.
Pro forma other fees include adjustments to eliminate $3.3 million of fees for
insurance services and $2.3 million of fees for purchasing and other ancillary
services that Interstate Management provided to the hotels that were owned and
managed by subsidiaries of Old Interstate and are currently owned by Patriot.
Interstate Management will not provide such services to these hotels subsequent
to the spin-off. These elimination adjustments are offset by the addition of
$0.9 million of other fee revenues related to seven Patriot-owned hotels that
will be managed by Interstate Management.
Pro forma general and administrative expense includes an adjustment to reflect
costs of $0.5 million of costs related to managing and administering a publicly
held company.
Pro forma payroll and related benefits expense includes an adjustment to
eliminate $4.0 million of salaries and related benefits of employees who were
terminated subsequent to the merger of Old Interstate into Patriot and whose
positions have been eliminated.
Pro forma depreciation and amortization primarily represents $16.9 million of
amortization of management and lease contract costs associated with the step-up
in basis arising from the allocation of purchase price resulting from the merger
of Old Interstate into Patriot. The management and lease contract costs have
been stated at their estimated fair market values and are being amortized using
the straight-line method over five years for the management contracts and 11 and
13.5 years for the lease contracts. The management contracts' amortization
period was determined using the average remaining life of the original contract
terms, and the amortization period of the lease contracts is based on the
remaining original lease life.
46
<PAGE> 50
Pro forma interest, net includes an adjustment to reflect $0.6 million of
interest earned on a $5.8 million promissory note arising from the proceeds from
the sale of the ownership interest in The Charles Hotel Complex.
Pro forma other, net includes an adjustment to eliminate $2.0 million of equity
in earnings, which resulted from the sale of the ownership interest in The
Charles Hotel Complex.
Pro forma income tax expense was computed based on Interstate Management's
estimated effective tax rate of 40% after reduction of minority interest.
Pro forma minority interest primarily reflects Patriot's 55% non-controlling
interest, or $4.0 million, in Interstate Hotels, LLC, the successor to the
third-party hotel management business conducted by Old Interstate prior the
merger of Old Interstate into Patriot.
Historical Year Ended December 31, 1998 Compared to Historical Year Ended
December 31, 1997
Total revenues increased by $24.8 million, or 10.7%, from $230.4 million in 1997
to $255.2 million in 1998. The most significant portion of this increase related
to lodging revenues, which consist of rooms, food and beverage and other
departmental revenues from leased hotels. Lodging revenues increased by $26.0
million, or 15.5%, from $167.9 million in 1997 to $193.9 million in 1998. This
increase was due to the operations of the leased hotels since their respective
inception dates.
The average daily room rate for the leased hotels increased by 6.0%, from $67.93
during 1997 to $71.98 during 1998, and the average occupancy rate decreased to
68.2% during 1998 from 71.1% during 1997. This resulted in an increase in room
revenue per available room of 1.7% to $49.08 during 1998. The statistical
results of our leased hotels reflect the current trends within the lodging
industry, as reported by Smith Travel Research. As such, the increase in average
daily room rate resulted from inflation and improvement resulting from our
management expertise. The decrease in the average occupancy rate resulted from
an increase of new supply within the lodging industry.
Net management fees increased by $1.7 million, or 4.2%, from $39.1 million in
1997 to $40.8 million in 1998. This increase was due to increased revenues
associated with incentive management fees earned as a result of the performance
improvement of existing managed hotels. Other fees decreased by $2.9 million, or
12.7%, from $23.4 million in 1997 to $20.5 million in 1998 due to a decrease in
the total number of hotels operated in 1998 as compared to 1997. Other fees also
include insurance revenues of $8.4 million in 1998 compared to $9.1 million in
1997.
Lodging expenses, which consist of rooms, food and beverage, property costs and
other departmental expenses from leased hotels, increased by $15.0 million, or
17.5%, from $85.6 million in 1997 to $100.6 million in 1998. This increase was
due to the addition of the operations of the leased hotels since their
respective inception dates. The operating margin of the leased hotels decreased
from 49.0% during 1997 to 48.1% during 1998.
General and administrative expenses are associated with the management of hotels
and consist primarily of centralized management expenses such as operations
management, sales and marketing, finance and other hotel support services, as
well as general corporate expenses. General and administrative expenses
decreased by $1.3 million, or 9.7%, from $13.2 million in 1997 to $11.9 million
in 1998. This decrease was primarily due to a reduction in development
activities and legal and accounting costs. General and administrative expenses
as a percentage of revenues decreased to 4.7% during 1998 compared to 5.7%
during 1997. This decrease was primarily due to the increase in lodging revenues
resulting from the inclusion of the operations of the leased hotels since their
respective inception dates.
47
<PAGE> 51
Payroll and related benefits decreased slightly by $0.5 million, or 2.2%, from
$21.9 million in 1997 to $21.4 million in 1998. Payroll and related benefits as
a percentage of revenues decreased to 8.4% during 1998 compared to 9.5% during
1997, primarily due to the increase in lodging revenues resulting from the
inclusion of the operations of the leased hotels since their respective
inception dates.
Lease expense represents base rent and participating rent that is based on a
percentage of rooms and food and beverage revenues from the leased hotels. Lease
expense increased by $12.4 million, or 16.9%, from $73.3 million in 1997 to
$85.7 million in 1998. This increase was due to the addition of the operations
of the leased hotels since their respective inception dates.
Depreciation and amortization increased by $8.0 million from $4.8 million in
1997 to $12.8 million in 1998. This increase was due to incremental amortization
of management contract costs associated with the step-up in basis arising from
the allocation of purchase price resulting from the merger of Old Interstate
into Patriot. The management contract costs have been stated at their estimated
fair market values and are being amortized using the straight-line method over
five years.
Operating income decreased by $8.9 million, or 28.1%, from $31.6 million in 1997
to $22.7 million in 1998. The operating margin decreased from 13.7% during 1997
to 8.9% during 1998. This decrease in operating income and in the operating
margin reflects the inclusion of the operating results of the leased hotels
since their respective inception dates and the increase in depreciation and
amortization during 1998.
Other income increased by $1.5 million from $0.4 million in 1997 to $1.9 million
in 1998 primarily due to an increase in equity in earnings from The Charles
Hotel Complex, which resulted from Interstate Management's acquisition of
additional interests in The Charles Hotel Complex.
Income tax expense in 1997 and 1998 was computed based on an effective tax rate
of 40%.
As a result of the changes noted above, net income decreased by $4.5 million, or
23.3%, from $19.5 million in 1997 to $14.9 million in 1998. The net income
margin decreased from 8.5% during 1997 to 5.9% during 1998, reflecting the
inclusion of the operating results of the leased hotels since their respective
inception dates and the increase in depreciation and amortization during 1998.
Historical Year Ended December 31, 1997 Compared to Historical Year Ended
December 31, 1996
Total revenues increased by $166.7 million from $63.7 million in 1996 to $230.4
million in 1997. The most significant portion of this increase related to
lodging revenues which increased by $157.9 million during 1997. This increase
was due to the addition of the operations of 89 leased hotels commencing in
November 1996 and continuing during 1997. The average daily room rate for the
leased hotels increased by 23.7%, from $54.93 during 1996 to $67.93 during 1997,
and the average occupancy rate increased to 71.1% during 1997 from 58.4% during
1996. This resulted in an increase in room revenue per available room of 50.5%
to $48.27 during 1997. The variance of the operating results is primarily due to
the leased hotels being operated by Interstate Management for only two months in
1996 as compared to the entire year of 1997.
Net management fees increased by $6.1 million, or 18.5%, from $33.0 million in
1996 to $39.1 million in 1997 due to the net addition of 11 new management
contracts and increased revenues associated with the performance improvement of
existing managed hotels, which resulted in increased incentive management fees.
Other fees increased by $2.7 million, or 13.1%, from $20.7 million in 1996 to
$23.4 million in 1997 due to incremental revenues associated with the net
addition of new hotels during 1996 and 1997, many of which utilize Interstate
Management's ancillary services. Other fees also include insurance revenues of
$9.1 million in 1997 compared to $8.1 million in 1996.
48
<PAGE> 52
Lodging expenses increased by $79.5 million from $6.1 million in 1996 to $85.6
million in 1997 due to the addition of the operations of 89 leased hotels
commencing in November 1996 and continuing during 1997. The operating margin of
the leased hotels increased from 38.6% during 1996 to 49.0% during 1997. This
increase in operating margin is primarily due to the leased hotels being
operated by Interstate Management for only two months in 1996 as compared to the
entire year of 1997.
General and administrative expenses increased by $2.8 million, or 27.4%, from
$10.4 million in 1996 to $13.2 million in 1997. This increase was primarily due
to incremental expenses associated with the growth of Interstate Management's
business. General and administrative expenses as a percentage of revenues
decreased to 5.7% during 1997 compared to 16.3% during 1996 as a result of the
addition of the operations of 89 leased hotels commencing in November 1996 and
continuing during 1997.
Payroll and related benefits increased by $4.2 million, or 23.9%, from $17.7
million in 1996 to $21.9 million in 1997. This increase was related to the
addition of corporate management and staff personnel as the number of hotels for
which Interstate Management provides management and other services grew,
primarily resulting from the addition of the leased hotels for which Interstate
Management provides centralized accounting services. Payroll and related
benefits as a percentage of revenues decreased to 9.5% during 1997 compared to
27.7% during 1996 as a result of the addition of the operations of 89 leased
hotels commencing in November 1996 and continuing during 1997.
Non-cash compensation of $11.9 million in 1996 resulted from the issuance of
785,533 shares of common stock to executives and key employees of Old Interstate
in consideration for the cancellation of stock options issued by one of Old
Interstate's predecessors in 1995.
Lease expense increased by $69.8 million from $3.5 million in 1996 to $73.3
million in 1997 due to the addition of 89 leased hotels commencing in November
1996 and continuing during 1997.
Depreciation and amortization increased by $0.4 million, or 10.5%, from $4.4
million in 1996 to $4.8 million in 1997. This increase is due to incremental
amortization of $3.2 million during 1997 related to goodwill and the cost of
lease contracts associated with Interstate Management's acquisition of the
management and leasing businesses affiliated with Equity Inns in November 1996.
This increase was offset by decreased amortization of $2.5 million associated
with investments in management contracts that became fully amortized during
1996.
Operating income, exclusive of non-cash compensation, increased by $9.9 million,
or 45.5%, from $21.7 million in 1996 to $31.6 million in 1997. The operating
margin decreased from 34.0% during 1996 to 13.7% during 1997. This increase in
operating income and decrease in the operating margin reflects the inclusion of
the operating results of the leased hotels commencing in November 1996 and
continuing during 1997, and the increase in general and administrative and
payroll and related benefits expenses.
Income tax expense in 1996 and 1997 was computed based on an effective tax rate
of 40%.
As a result of the changes noted above, net income increased by $13.3 million
from $6.2 million in 1996 to $19.5 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Interstate Management's cash and cash equivalent assets were $1.7 million at
December 31, 1998 compared to $2.4 million at December 31, 1997. At December 31,
1998, current liabilities exceeded current assets by $30.8 million partially as
a result of $18.6 million of amounts owed to Wyndham to meet short-term cash
requirements. As part of the spin-off, Patriot has agreed to contribute cash to
Interstate Management so that, at the time of the spin-off, Interstate
Management's current assets will equal current liabilities. In addition, Patriot
has committed to infuse $15.0 million of additional capital into Interstate
Management. Interstate
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Management's pro forma cash and cash equivalents after giving effect to such
capital infusions were $30.4 million at December 31, 1998. In addition, in
connection with approximately $5.7 million of potential expenditures arising
from such issues as the resolution of the dispute with Equity Inns, year 2000
compliance and loan forgiveness, Patriot has agreed to fund 50% of these
potential expenditures into an escrow account and indemnify Interstate
Management against the remaining 50%. Patriot has also agreed to fund the
payment of cash in lieu of fractional shares in the spin-off.
Interstate Management's principal source of liquidity during 1998 was cash from
operations. Net cash provided by operating activities was $28.0 million during
1998 compared to $12.5 million during 1997. The increase was primarily related
to a decrease in accounts receivable during 1998 compared to 1997 and lower
income taxes due for 1998 resulting from accelerated deductions recognized for
income tax purposes. Interstate Management used cash of $25.0 million in
investing activities during 1998, which primarily related to amounts paid in
connection with the merger of Old Interstate into Patriot. During 1997,
Interstate Management used cash of $35.7 million in investing activities,
consisting primarily of $16.1 million in connection with its acquisition of
interests in The Charles Hotel Complex and $7.6 million due to increases in
notes and other receivables. Interstate Management's capital expenditure budget
through December 31, 1999 relating to current operations is approximately $2.7
million, consisting primarily of expenditures for computer and related
equipment. Interstate Management intends to fund these expenditures from its pro
forma cash and cash equivalents and from the escrow account and indemnity from
Patriot, as discussed above. Net cash used in financing activities of $3.7
million during 1998 resulted primarily from $11.6 million used for distributions
to Patriot, offset by $8.3 million of amounts borrowed from related entities to
meet short-term cash requirements. During 1997, cash provided by financing
activities of $14.5 million resulted from $10.3 million of amounts borrowed from
related entities to meet short-term cash requirements, offset by $4.4 million
used for distributions to related entities.
After the spin-off, Interstate Management will be required to distribute 55% of
Interstate Hotels, LLC's cash flows from operations to Patriot/Wyndham under the
terms of the amended and restated limited liability company agreement.
Interstate Management intends to pursue future opportunities to manage or lease
hotels on behalf of third-party owners, as well as pursue other business
opportunities, such as selective hotel investments and the formation of
strategic alliances. Interstate Management believes that the cash provided by
Patriot at the time of the spin-off and future cash flow provided by operations
may be insufficient to fully fund the execution of its business and growth
strategy. As a result, Interstate Management may be required to obtain debt or
equity financing to achieve its business plan. Interstate Management plans to
obtain a line of credit from a lending institution in order to partially finance
its business and growth strategy. Negotiations to obtain such line of credit
have not commenced at this time, however, and are not expected to be completed
by the time of the spin-off. Additionally, there is no assurance that the line
of credit or any other form of financing will be available to Interstate
Management on commercially reasonable terms, or at all. If Interstate Management
does not obtain additional financing, its pursuit of its business strategy and
growth may be impaired.
YEAR 2000 COMPLIANCE
The year 2000 issue relates to computer programs written using two digits rather
than four to define the applicable year. Computer programs written this way may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in systems failures or miscalculations causing disruptions of hotel
operations or a temporary inability to process transactions, prepare financial
statements or engage in similar normal business activities.
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<PAGE> 54
We have developed and begun implementing a comprehensive plan (i) to address
potential year 2000 problems both at our corporate offices and at the hotels we
manage and lease, and (ii) to minimize the impact on operations to the extent
possible. Our plan, which is designed to identify and address potential problems
in the most critical operational systems first in order to minimize any
disruption in service to hotel guests, consists of the following four steps:
Step 1 -- Inventory: Conduct an inventory to identify (a) all
computer hardware and software systems and
building systems in use and (b) any potential
year 2000 problems that may exist in such
systems.
Step 2 -- Vendor Survey: Identify and contact third-party vendors to
determine whether their systems or services
are or will be made year 2000 compliant. We
are conducting Step 2 simultaneously with
Step 1.
Step 3 -- Planning and Cost
Estimation: Prepare a prioritized year 2000 compliance
plan for remediation or replacement of
non-compliant systems. Step 3 will be
performed through a joint effort between
management and hotel owner representatives
and a year 2000 consultant.
Step 4 -- Implementation and
Testing: Implement the year 2000 compliance plan
prepared in Step 3 and test all systems to
ensure maximum possible compliance and
develop contingency plans for continuing
operations in the event problems arise.
We have engaged a consultant to complete Steps 1 and 2, at an estimated cost of
$13,500 per hotel for upscale hotels and $7,500 for midscale and economy hotels.
We have instructed the hotels that we operate to increase their capital budgets
for 1999 to accommodate this cost. The inventories at the hotels and our
corporate offices have been substantially completed. In addition, we are
currently determining the year 2000 readiness of the third-party vendors
identified by our consultant during these inventories.
At this time, we cannot identify the total costs that will be incurred to
complete Steps 3 and 4. Our management and information systems department is in
the process of completing initial written assessments, however, which prioritize
the corporate and hotel year 2000 compliance plans for remediation and estimate
the costs of such remediation. Once each written assessment is finalized, we
will be able to provide an estimate of those costs. We have instructed all
hotels that we manage and lease to include in their 1999 capital budgets a
minimal amount (ranging from $10,000 to $50,000, depending on the size of the
hotel) to be utilized for these purposes. As specific costs become known, our
budgets will be adjusted as necessary.
We believe that the expenses incurred to complete the year 2000 compliance
program at each managed hotel are the responsibility of the hotel owner, and we
believe that the terms of our management contracts provide adequate basis for
this position. Nonetheless, it is possible that some third-party hotel owners
may challenge this position. With respect to the hotels leased by us, we also
believe that the expenses associated with year 2000 compliance with respect to
our leased hotels are the responsibility of the hotel owner. To the extent that
such expense is not considered a capital expenditure, however, it may be deemed
to be our responsibility. Further, we will be responsible for funding the year
2000 compliance expenses for corporate operations. These expenses, which will
cover both updating and replacing system components, will be funded through
operating cash flow. The costs incurred to date have not been material. We have
provided for approximately $2.7 million in capital expenditures in our 1999
management and information systems capital budget, approximately $2.4 million of
which is expected to be spent addressing our year 2000 issues.
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Our time and cost estimates for year 2000 compliance are based on currently
available information. These estimates could be affected by unforeseen
developments including the availability and cost of trained personnel, the
ability to locate and correct problems in all relevant systems, and the year
2000 compliance efforts of our third-party vendors. We believe the most likely
"worst-case" scenario is that our third-party vendors may not be year 2000
compliant, which could potentially cause disruptions in operations at hotels
which use the services of such third-party vendors. In addition, operations at
our hotels outside the United States may be adversely affected by failures of
businesses in those countries to take adequate steps to address the year 2000
problem. While such failures could affect critical operations at our hotels in a
significant manner, we cannot at present estimate either the likelihood or the
potential cost of such failures. The contingency plans for continuing operations
referenced in Step 4 described above are being developed to address these
failures, using existing disaster contingency plans in place at our hotels. In
addition, while we believe the indemnification provisions in our management
contracts and leases provide adequate protection from liability that may arise
from a failure to be year 2000 compliant, such failure could result in lower
hotel revenues (and, as a result, lower management fee revenues) because of
general adverse economic conditions and lower profits caused by expenses
incurred with contingency plans.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and executive
officers. The Board will in general be classified into three classes, with the
initial members to serve for the periods identified below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas F. Hewitt 55 Chief Executive Officer and Chairman of the
Board of Directors (term on Board of Directors
expiring 2002)
J. William Richardson 51 Chief Financial Officer and Executive Vice
President, Finance and Administration
Kevin P. Kilkeary 47 President and Chief Operating Officer
Henry L. Ciaffone 58 Executive Vice President, International
Operations and Development
Charles R. Tomb 44 Senior Vice President, Development
Timothy Q. Hudak 36 Senior Vice President, General Counsel
William W. Evans III 46 Director (term expiring 2000)
- ------------------------------------- -- Director (term expiring 2001)
- ------------------------------------- -- Director (term expiring 2001)
- ------------------------------------- -- Director (term expiring 2000)
</TABLE>
THOMAS F. HEWITT became our Chief Executive Officer and the Chairman of our
Board of Directors in March 1999. Mr. Hewitt previously was President and Chief
Operating Officer of Carnival Resorts & Casinos, where he headed all hotel and
resort operations. At Carnival Resorts & Casinos, Mr. Hewitt was responsible for
over 80 hotels and 17,000 employees in the United States, South America, the
Caribbean and Mexico. Mr. Hewitt joined Carnival Resorts & Casinos in 1985 (when
it was known as The Continental Companies) after a career spanning more than 20
years with Sheraton Corporation, most recently as the President of its North
American division from 1983 to 1985.
J. WILLIAM RICHARDSON was Old Interstate's Chief Financial Officer and Executive
Vice President of Finance and Administration from 1994 until its merger with
Patriot, and has served in the same capacities for us since the merger. Mr.
Richardson previously served as Controller and Treasurer of Old Interstate since
1988. Previously, Mr. Richardson was Vice President and a partner in an Atlanta
based hotel management and development company and worked with Marriott
Corporation prior thereto. His experience in the hospitality industry spans over
a period of approximately 28 years. He served as our acting President and Chief
Executive Officer from January to March of 1999.
KEVIN P. KILKEARY became our President and Chief Operating Officer in April
1999. Mr. Kilkeary previously served as our Executive Vice President, and as our
Senior Vice President and President and Chief Operating Officer, Crossroads
Hospitality. Mr. Kilkeary joined Old Interstate in 1972 and held a variety of
positions in hotels and at the corporate office, including executive positions
as General Manager, Regional Vice President of Operations, Vice President of
Sales and Marketing and Vice President of Staff Operations.
HENRY L. CIAFFONE is our Executive Vice President, International Operations and
Development, a position he has held since January 1999. Mr. Ciaffone, who joined
Old Interstate in 1989, previously served as our Senior Vice President and
Treasurer. Prior to joining Old Interstate, Mr. Ciaffone held positions in hotel
finance and real estate development at Koala Inns of America, Sheraton
Corporation and the Howard Johnson Company.
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<PAGE> 57
CHARLES R. TOMB is our Senior Vice President of Development. He joined Old
Interstate in 1992, and most recently, he oversaw Old Interstate's development
activities in the Western Region as Vice President of Development. Mr. Tomb has
approximately 20 years of experience in the hotel industry, including prior
positions with Holiday Inns Worldwide, Americana Hotels & Resorts and Hyatt
Hotels.
TIMOTHY Q. HUDAK joined Old Interstate in 1992 as Assistant General Counsel and
now serves as our Senior Vice President and General Counsel. Prior to joining
Old Interstate, Mr. Hudak held the position of Associate General Counsel for
Cyclops Industries, Inc. and, prior to that, practiced law at the firm of Tucker
Arensberg.
WILLIAM W. EVANS III joined our Board of Directors in January 1999. Mr. Evans
serves as President and Chief Operating Officer and a member of the Board of
Directors of Patriot and as an Executive Vice President of Wyndham. Prior to
joining Patriot in March 1997, Mr. Evans was a Managing Director in
PaineWebber's Real Estate Group with responsibility primarily for the
origination and structuring of principal transactions. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody & Co. in December 1994.
Prior to joining Kidder, Peabody in 1992, Mr. Evans was a First Vice President
and head of the Real Estate Financing Division of Swiss Bank Corporation, where
he was responsible for all U.S. real estate activities.
DIRECTOR COMPENSATION
Directors who are not employees of Interstate Management are paid an annual
retainer fee of $15,000 in quarterly installments of $3,750. In addition, each
such director will be paid $1,000 for attendance at each meeting of our Board of
Directors and $750 for attendance at each meeting of a committee of our Board of
Directors of which such director is a member held on a date other than a date on
which a full Board of Directors meeting is held. The annual retainer fee and
meeting fees will be paid in cash, but the directors will be entitled to elect
in advance to receive all or part of the fees in the form of Interstate
Management shares. Directors who are employees of ours will not receive any fees
for their service on the Board of Directors or a committee thereof. In addition,
we will reimburse directors for their out-of-pocket expenses incurred in
connection with their service on the Board of Directors.
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<PAGE> 58
EXECUTIVE COMPENSATION
Interstate Management was incorporated in May 1998. The following table sets
forth information regarding (i) the compensation paid or accrued in 1998 by Old
Interstate and Interstate Management, as well as
(ii) the expected compensation to be paid in 1999 by Interstate Management, to
Old Interstate's (and Interstate Management's) former Chief Executive Officer,
Interstate Management's new Chief Executive Officer and each of the four other
most highly compensated executive officers of Old Interstate and Interstate
Management who are expected to be executive officers of Interstate Management
during 1999 and who earned at least $100,000 in total salary and bonus from Old
Interstate and Interstate Management in 1998. The executive officers listed in
the table below (other than Mr. Parrington, who resigned effective December 31,
1998) are sometimes referred to elsewhere in this Information
Statement/Prospectus as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
EXPECTED 1999
1998 COMPENSATION LONG-TERM COMPENSATION COMPENSATION(1)
------------------- ----------------------- -------------------
SECURITIES
UNDERLYING LTIP ALL OTHER 1998
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS PAYOUTS COMPENSATION SALARY BONUS
- --------------------------- -------- -------- ------------ -------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Hewitt(2)........... -- -- -- 400,000 800,000
Chief Executive Officer and
Chairman of the Board
W. Thomas Parrington, Jr. .... 380,173 565,000 6,994,688(3) -- --
Former President and Chief
Executive Officer
J. William Richardson......... 265,123 397,684 4,145,690(4) 265,000 530,000
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Kevin P. Kilkeary............. 242,844 273,199 2,346,519(5) 250,000 375,000
President and Chief Operating
Officer
Henry L. Ciaffone............. 181,610 187,567 2,016,934(6) 200,000 240,000
Executive Vice President,
International Operations and
Development
Charles R. Tomb............... 160,284 75,000 1,113,663(7) 190,000 237,500
Senior Vice President,
Development
</TABLE>
- -------------------------
(1) The amounts listed under "Expected 1999 Compensation" represent the expected
salary and the maximum bonus possible.
(2) Mr. Hewitt became our Chief Executive Officer and the Chairman of our Board
of Directors in March 1999.
(3) Consists of a change in control payment of $12,561, stock option proceeds of
$3,800,000, special bonus of $430,000, loan forgiveness of $2,048,436,
Executive Retirement Plan contribution of $49,400, and deferred compensation
payment of $654,291.
(4) Consists of a change in control payment of $9,690, stock option proceeds of
$1,921,875, special bonus of $300,000, loan forgiveness of $1,060,920,
Executive Retirement Plan contribution of $34,466, and deferred compensation
payment of $818,739.
(5) Consists of stock option proceeds of $1,070,125, loan forgiveness of
$90,000, and a change in control payment of $1,186,394.
(6) Consists of stock option proceeds of $412,500, loan forgiveness of $170,000,
and a change in control payment of $955,314 with a tax gross up of $479,120.
(7) Consists of stock option proceeds of $155,000, deal commission of $11,134,
relocation expenses of $111,212, restricted stock of $79,844, a change in
control payment of $747,713, and a car allowance of $8,760.
COMPENSATION PLANS AND ARRANGEMENTS
MANAGEMENT BONUS PLAN. We have established a Management Bonus Plan under which
all key management employees who are directly involved in our growth and success
(other than Messrs. Hewitt and
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Richardson, whose bonuses are determined pursuant to their employment
agreements) are eligible to receive bonuses based upon the achievement of
specified targets and goals for Interstate Management and the individual
employee. Awards under the Management Bonus Plan are made by the Compensation
Committee of the Board of Directors and range from zero to specified levels
depending on the position of the individual. Currently, approximately 80
employees are eligible for awards under the Management Bonus Plan, with
approximately 40 of such employees eligible to receive up to 45% of their base
salaries, approximately ten of such employees eligible to receive up to 55% of
their base salaries, four of such employees eligible to receive up to 125% of
their base salaries and one such employee eligible to receive up to 150% of his
base salary.
EXECUTIVE RETIREMENT PLAN. Our employees holding job classifications of Vice
President or above, including the Named Executive Officers, will be eligible to
participate in our Executive Retirement Plan. The plan is intended to be a
non-qualified and unfunded plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees. Actual participation in the plan will be determined by
the Board or a committee of the Board.
We plan to contribute 8.0% of each participant's base salary to the plan and we
may make discretionary contributions of up to an additional 5.0% of each
participant's base salary. These discretionary contributions will be based on
our net increase in earnings per share in a given year. In addition, plan
participants will be eligible to designate a portion (to be specified by the
Board or the committee administering the plan) of their cash bonus to be
contributed to the plan.
The funds contributed by Interstate Management or participants will be held in a
grantor trust established by Interstate Management. Unless the Board or the
committee administering the plan determines that the amounts contributed to the
plan on behalf of a participant are payable earlier, in general, a participant
in the plan will receive his plan benefits one year after his retirement or
termination of employment. Plan benefits are paid out in a lump sum and are
deductible by the Company and taxable to the plan participant as ordinary income
upon receipt by the participant.
STOCK PURCHASE PLAN. We plan to establish a Stock Purchase Plan. Under the
Stock Purchase Plan, each full-time employee who has completed 12 consecutive
months of employment with Interstate Management or a predecessor, excluding any
employee whose customary employment is not for more than 20 hours per week or
more than five months per calendar year, is eligible to participate. A
participating employee may elect to authorize us to withhold a maximum of 8.0%
of such employee's salary. The withheld amount will be held in the participating
employee's account and used to purchase Interstate Management shares on a
semi-annual basis at a price equal to a designated percentage, established
semi-annually by the Board or the administrator of the plan, from 85% to 100% of
the average closing sale price for Interstate Management shares as reported by
the New York Stock Exchange on the date the shares are purchased. Such sale
price may not be less than the lesser of (i) 85% of the fair market value of
such shares on the date of the regular offering of the right to participate in
such plan and (ii) 85% of the fair market value of such shares on the date the
shares are purchased. The fair market value of the shares available for purchase
by a participating employee (determined as of the offering date) generally may
not exceed $25,000 per calendar year.
Employees may generally resell Interstate Management shares acquired under the
Stock Purchase Plan without restrictions. Any "affiliate" who acquires
Interstate Management shares under the Stock Purchase Plan, however, may resell
only upon compliance with Rule 144 under the Securities Act, except that the
one-year holding period requirement of Rule 144 will not apply. For this
purpose, the term "affiliate" includes any participating employee who directly,
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, Interstate Management.
We expect to reserve 400,000 authorized but unissued Interstate Management
shares for purchase under the Stock Purchase Plan. The Stock Purchase Plan will
remain in effect until terminated at any time by the
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<PAGE> 60
Board, except that such termination will be subject to employees' rights to
purchase shares in any outstanding semi-annual offering period.
The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of Interstate Management shares
that may be issued and sold under the Stock Purchase Plan (except for
authorizations pursuant to the antidilution provisions of the Stock Purchase
Plan) without further approval by our shareholders. Furthermore, no amendment
that would cause the Stock Purchase Plan to fail to meet the requirements of
Section 423 of the Code will be adopted without shareholder approval.
EQUITY INCENTIVE PLAN. Our Equity Incentive Plan is designed to attract and
retain qualified officers and other key employees. The Equity Incentive Plan
authorizes the grant of:
- - options to purchase Interstate Management shares;
- - restricted shares;
- - unrestricted shares; and
- - deferred shares.
The Board or a committee of the Board will administer the Equity Incentive Plan
and determine to whom grants will be made and the terms and conditions thereof.
The number of Interstate Management shares that may be issued or transferred and
covered by outstanding awards granted under the Equity Incentive Plan shall at
all times equal 20% of the outstanding Interstate Management shares, which may
be shares of original issuance or treasury shares or a combination of both.
Officers, including officers who are members of the Board, and our key employees
and consultants and those of our subsidiaries may be selected to receive
benefits under the Equity Incentive Plan. As of the date of the spin-off,
options to purchase Interstate Management shares will have been granted to
Interstate Management employees and shares will be available for additional
awards under the Equity Incentive Plan.
The Board or the committee administering the plan may grant stock options that
entitle the optionee to purchase Interstate Management shares at a price equal
to or greater or less than market value on the date of grant. The exercisability
of such stock options may be conditioned on the achievement of specified
performance objectives. Subject to adjustment as provided in the Equity
Incentive Plan, no participant shall be granted stock options, in the aggregate,
for more than shares during any calendar year.
An award of restricted shares involves the immediate transfer by us to a
participant of ownership of a specific number of Interstate Management shares in
consideration of the performance of services. The participant is entitled
immediately to voting, dividend and other ownership rights in the shares. The
transfer may be made without additional consideration or for consideration in an
amount that is less than the market value of the shares on the date of grant, as
the Board or the committee administering the plan may determine. Restricted
shares must be subject to a "substantial risk of forfeiture" within the meaning
of Section 83 of the Code, for a period to be determined by the Board or the
committee administering the plan. The Board or the committee administering the
plan could provide, for example, that the restricted shares would be forfeited
if the participant failed to serve as an officer or other salaried employee of
Interstate Management for a specified number of years. The Board or the
committee administering the plan may provide for a shorter period during which
the forfeiture provisions are to apply in the event of a change in control of
Interstate Management or other similar transaction or event.
Like restricted shares, an award of unrestricted shares:
- - involves the immediate transfer by us to a participant of ownership of a
specific number of Interstate Management shares in consideration of the
performance of services;
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- - entitles the participant immediately to voting, dividend and other ownership
rights in the shares; and
- - may be made without additional consideration or for consideration in an amount
that is less than the market value of the shares on the date of grant.
Unlike restricted shares, however, unrestricted shares are not subject to
forfeiture.
An award of deferred shares constitutes an agreement by us to deliver Interstate
Management shares to the participant in the future in consideration of the
performance of services, subject to the fulfillment of such conditions during a
deferral period as the Board or the committee administering the plan may
specify. During the deferral period, the participant has no right to transfer
any rights covered by the award and no right to vote the shares covered by the
award. On or after the date of any grant of deferred shares, the Board or the
committee administering the plan may authorize the payment of dividend
equivalents thereon on a current, deferred or contingent basis in either cash or
additional Interstate Management shares. Grants of deferred shares may be made
without additional consideration or for consideration in an amount that is less
than the market value of the shares on the date of grant. Deferred shares must
be subject to a deferral period, as determined on the date of grant by the Board
or the committee administering the plan. The Board or the committee
administering the plan, however, may provide for a shorter deferral period in
the event of a change in control of Interstate Management or other similar
transaction or event.
With limited exceptions, no stock option or other "derivative security" within
the meaning of Rule 16b-3 under the Exchange Act is transferable by a
participant except by will or the laws of descent and distribution. Stock
options generally may not be exercised during a participant's lifetime except by
the participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision. Notwithstanding
the foregoing, the Board or the committee administering the plan, in its sole
discretion, may provide for the transferability of the particular awards under
the Equity Incentive Plan so long as such provisions will not disqualify the
exemption for other awards under Rule 16b-3 under the Exchange Act if such rule
is then applicable to awards under the plan.
The maximum number of shares that may be issued or transferred under the Equity
Incentive Plan, the number of shares covered by outstanding stock options, and
the option prices or base prices per share applicable thereto, are subject to
adjustment in the event of stock dividends, stock splits, combinations of
shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations,
liquidations, issuances of rights or warrants and similar transactions or
events. In the event of any such transaction or event, the Board or the
committee administering the plan may provide in substitution for any or all
outstanding awards under the Equity Incentive Plan such alternative
consideration as it may in good faith determine to be equitable in the
circumstances, and may require the surrender of all awards so replaced. The
Board or the committee administering the plan may also, in order to reflect any
such transaction or event, make or provide for adjustments in the number of
shares that may be issued or transferred and covered by outstanding awards
granted under the Equity Incentive Plan and the number of shares permitted to be
covered by stock options granted to any one participant during any calendar
year.
The Equity Incentive Plan may be amended from time to time by the Board or the
committee administering the plan. Without further approval by shareholders,
however, no such amendment may (i) increase the aggregate number of Interstate
Management shares that may be issued or transferred and covered by outstanding
awards or increase the number of shares which may be granted to any participant
in any calendar year or (ii) otherwise cause Rule 16b-3 under the Exchange Act
to cease to be applicable to the Equity Incentive Plan.
To the extent that a participant in any of our plans recognizes ordinary income
by virtue of his participation in such plan, we or the subsidiary for which the
participant performs services will be entitled to a
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corresponding deduction provided that, among other things, any applicable
reporting obligations are satisfied and the income:
- - meets the test of reasonableness;
- - is an ordinary and necessary business expense;
- - is not an "excess parachute payment" within the meaning of Section 280G of the
Code; and
- - is not disallowed by the $1.0 million limitation on compensation paid to each
of our Chief Executive Officer and our four other most highly compensated
executive officers during any fiscal year.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
We have entered into an employment agreement with Mr. Hewitt pursuant to which:
- - He shall serve as Chief Executive Officer and Chairman of the Board of
Interstate Management.
- - He shall be employed for a term beginning March 1, 1999 and ending February
28, 2003 subject to, on the second anniversary of the date of his employment
and every even-numbered anniversary thereafter, automatic two year extensions,
unless either party gives 90 days prior written notice otherwise.
- - With respect to termination of Mr. Hewitt's employment, he shall be entitled
to receive:
- his minimum bonus, if he is terminated for cause or resigns without good
reason;
- his minimum bonus, an amount equal to twice his base pay and minimum
bonus, continuation for 24 months of his employee benefits, and
acceleration of his restricted stock grant, if his employment is
terminated for any reason other than cause or disability; and
- his minimum bonus for the year of termination of his employment, his base
pay and minimum bonus for a period of 12 months following the termination
of his employment, and acceleration of his restricted stock grant, if his
employment is terminated as a result of his death or disability.
- - In the event of a change in control of Interstate Management, Mr. Hewitt shall
be entitled to:
- a $2 million cash payment, acceleration of his restricted stock grant,
and benefits continuation, in the event that his employment is terminated
without cause or he resigns for good reason within 36 months of the
change in control;
- a $2 million cash payment, acceleration of his restricted stock grant,
and benefits continuation, in the event that he terminates his employment
for any reason within the first 24 months immediately following the
change in control; and
- a gross-up of his compensation under this section if he incurs the tax on
"excess parachute payments" under the Code.
- - Mr. Hewitt has agreed to non-compete and non-solicitation provisions.
- - Mr. Hewitt is obligated to keep in strict confidence any trade secrets and
confidential business and technical information of Interstate Management.
- - Mr. Hewitt is entitled to have his legal fees and related expenses paid by us
in connection with interpretation, enforcement or defense of his rights under
the employment agreement.
We have also entered into employment agreements with Mr. Ciaffone and Mr. Tomb.
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<PAGE> 63
Pursuant to the terms of Mr. Ciaffone's employment agreement:
- - In the event of the termination of Mr. Ciaffone's employment for any reason
other than cause or disability, he shall be entitled to (i) the greater of
either his salary and bonus for the immediately preceding six months or his
salary and bonus for the remainder of the term of the agreement, and (ii) the
continuation of health and other welfare benefits for six months following
termination of employment.
- - Mr. Ciaffone has agreed to non-compete and non-solicitation provisions.
- - Mr. Ciaffone is obligated to keep in strict confidence any trade secrets and
confidential business and technical information of Interstate Management.
- - Mr. Ciaffone is entitled to have his legal fees and related expenses paid by
us in connection with enforcing or defending his rights under the employment
agreement.
Pursuant to the terms of Mr. Tomb's employment agreement:
- - As a result of the change in control triggered by the merger of Old Interstate
into Patriot, Mr. Tomb has received 50% of the severance compensation he was
entitled to receive under his severance agreement with Old Interstate in place
at the time of the merger.
- - Mr. Tomb has received a loan in an amount equal to the remaining 50% of such
severance compensation, which amortizes over a 30-month period.
- - At any time prior to the date that is 30 days following the effective date of
the spin-off, Mr. Tomb may elect to terminate his employment with or without
cause, and the entire severance loan will be forgiven.
- - After such date, if Mr. Tomb terminates his employment for reasons other than
a change in control or a material change in his job responsibilities, he is
required to repay the unamortized portion of the severance loan.
- - In the event we terminate Mr. Tomb without cause or either Mr. Tomb or we
terminate his employment as the result of a change in control or a material
change in his job responsibilities during the initial three year term of his
employment, he is entitled both to forgiveness of the severance loan and
continuation of health and other welfare benefits for the greater of 18 months
or the remainder of the term of the agreement.
- - If we terminate Mr. Tomb without cause or he terminates his employment as a
result of a change in control or a material change in his job responsibilities
after the expiration of the initial three year term of his employment, he is
entitled to an amount equal to his salary and bonus for up to a maximum of six
months.
- - Mr. Tomb has agreed to non-compete and non-solicitation provisions.
- - Mr. Tomb is obligated to keep in strict confidence any trade secrets and
confidential business and technical information of Interstate Management.
- - Mr. Tomb is entitled to have his legal fees and related expenses paid by us in
connection with interpretation, enforcement or defense of his rights under the
employment agreement.
We are currently negotiating the terms of employment agreements with the other
Named Executive Officers.
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<PAGE> 64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXECUTIVE LOANS
In 1996, Interstate Management's predecessor loaned $2.0 million and $1.0
million to Messrs. Parrington and Richardson, respectively. The remaining unpaid
balances of these loans, along with additional loans of $134,062 and $96,000,
respectively, were forgiven as of June 2, 1998 in connection with Old
Interstate's merger into Patriot and in accordance with the change of control
provisions of their respective severance agreements with Old Interstate.
Interstate Management also loaned an additional $100,000 and $357,317 to Messrs.
Parrington and Richardson, respectively, as advances against their 1998 bonuses.
On June 2, 1998, in connection with Old Interstate's merger into Patriot and in
accordance with the change of control provisions of their respective severance
agreements with Old Interstate, Interstate Management forgave loans in the
amount of $90,000 and $170,000 to Messrs. Kilkeary and Ciaffone, respectively.
Interstate Management loaned Mr. Ciaffone an additional $232,200, which was
repaid in full on October 29, 1998.
Interstate Management has also loaned $238,000 to Mr. Tomb to cover expenses
incurred in his relocation to Pittsburgh, as well as $29,774 as an advance
against his 1998 bonus.
VOTING AGREEMENT
GENERAL. Upon consummation of the spin-off, three directors and/or executive
officers of Patriot/ Wyndham and entities with which the directors and/or
officers are affiliated will enter into a Voting Agreement with Interstate
Management. Such directors, officers, and affiliated entities shall be referred
to in the section as the "Shareholders."
VOTING PROVISIONS. The Voting Agreement will apply to all shareholder votes
taken at any time when the Shareholders, together with Patriot/Wyndham and other
identified directors and executive officers of Patriot/Wyndham (collectively
referred to in this section as the "Affiliated Shareholders"), own greater than
9.9% of the outstanding Interstate Management shares. The Voting Agreement will
provide that, in such circumstances, the Shareholders will vote their Interstate
Management shares in proportion with the results of voting on the particular
matter by all Interstate Management shareholders other than the Shareholders and
the Affiliated Shareholders. This proportional voting will have the effect of
nullifying the impact of voting by the Shareholders on the particular matter and
reducing the impact of voting by the Affiliated Shareholders on such matter.
DIVESTITURE PROVISIONS. The Voting Agreement will also provide that the
Shareholders will use reasonable efforts to sell or otherwise dispose of a
number of Interstate Management shares such that the Shareholders and the
Affiliated Shareholders will collectively own 9.9% or less of the outstanding
Interstate Management shares by the first anniversary of the spin-off. Based on
their holdings of Patriot securities on , 1999, we estimate that the
Shareholders and the Affiliated Shareholders will collectively own
Interstate Management shares, or % of the outstanding Interstate Management
shares, upon consummation of the spin-off. The Shareholders will thus be
obligated under the Voting Agreement to sell an aggregate of Interstate
Management shares, or % of the outstanding Interstate Management shares, by
the first anniversary of the spin-off. Thereafter, the Shareholders' selling
obligations will become effective again at any time within five years after the
spin-off that the Shareholders are informed by Interstate Management that the
Shareholders and the Affiliated Shareholders collectively own greater than 9.9%
of the outstanding Interstate Management shares.
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<PAGE> 65
INTERSTATE MANAGEMENT CALL RIGHT. In the event that the Shareholders fail to
comply with their obligations to sell Interstate Management shares as described
above within five years after the spin-off, Interstate Management will have a
call right to purchase from the Shareholders for fair market value the number of
Interstate Management shares the Shareholders were obligated to sell. Marriott
will have the right to compel Interstate Management to exercise its call right
if Interstate Management fails to do so.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of Interstate Management shares that
will be beneficially owned immediately following the spin-off and the related
transactions by each person or "group" known to us to be the beneficial owner of
more than 5% of Interstate Management shares, each of our directors and Named
Executive Officers, and all of our directors and executive officers as a group.
Unless indicated otherwise, the address for each of the persons named in the
table is c/o Interstate Hotels Management, Inc., 680 Andersen Drive, Foster
Plaza Ten, Pittsburgh, Pennsylvania 15220. For purposes of the table, a person
or group of persons is deemed to have "beneficial ownership" as of a given date
of any shares which such person has the right to acquire within 60 days after
such date.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME SHARES OWNED SHARES OWNED
- ---- ------------ -------------
<S> <C> <C>
Thomas F. Hewitt........................................... [ ] [ ]%
J. William Richardson...................................... 879(1) *%
Kevin P. Kilkeary.......................................... 255 *%
Henry L. Ciaffone.......................................... 0 0%
Charles R. Tomb............................................ 189 %
William W. Evans III.......................................
Director................................................... %
Director................................................... %
Director................................................... %
All directors and executive officers as a group (
persons)................................................. %
</TABLE>
- -------------------------
* Less than 1%
(1) Includes shares held by Mr. Richardson's daughter.
DESCRIPTION OF CAPITAL STOCK
We have summarized below the material provisions of our Articles of
Incorporation and Bylaws as they are contemplated to be in effect at the time of
the spin-off. Our summary may not contain all of the information that is
important to you. See "Where You Can Find More Information" for information
about how to obtain a copy of the documents we refer to in this section.
CAPITAL STOCK
Under the Articles of Incorporation, we are authorized to issue up to
million shares of stock, consisting of:
- million shares of Class A common stock;
- million shares of Class B common stock;
- million shares of Class C common stock; and
- million shares of preferred stock.
COMMON STOCK. Each holder of Class A shares, Class B shares and Class C shares
shall be entitled to one vote for each share held by such holder and no
shareholders shall have cumulative voting rights. The three classes shall vote
separately for the election of Interstate Management's Board of Directors as
explained in detail under "Additional Corporate Governance and Takeover-related
Matters -- Board of Directors."
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<PAGE> 67
If Marriott and its affiliates own in the aggregate at least two percent of our
outstanding stock, then we are prohibited from entering into various
transactions with any of Patriot/Wyndham or its affiliates unless the holders of
the Class B shares (Marriott) give their approval. If Patriot/Wyndham and its
affiliates own in the aggregate at least two percent of our outstanding stock,
then we are prohibited from entering into various transactions with any of
Marriott or its affiliates unless the holders of the Class C shares (Wyndham)
give their approval. Except as required by law, the holders of common stock
shall vote together as a single class on all other matters submitted to
stockholders for a vote. In all respects other than those mentioned above, each
class of common stock shall be identical and shall entitle its holders to
identical rights and privileges. We will be distributing Class A shares in the
spin-off. The Class B shares will be held by Marriott and the Class C shares
will be controlled by Wyndham.
Holders of shares of common stock have no preemptive, subscription or redemption
rights, and no liability exists for further calls or assessments. Holders of
Class B and Class C shares may, at their discretion, convert their respective
shares into Class A shares. The Class B shares and Class C shares will
automatically convert into Class A shares upon the occurrence of events
specified in the bylaws, including the transfer of Class B or Class C shares
from Marriott or Wyndham, as the case may be, to an unaffiliated entity.
Holders of shares of common stock are entitled to receive such dividends as may
be declared by our Board out of funds legally available for the payment of
dividends. Upon the liquidation, dissolution or winding up of Interstate
Management, holders of shares of common stock share ratably in those assets of
Interstate Management available for distribution to stockholders generally,
subject to the preferential rights of any then outstanding shares of preferred
stock. No shares of preferred stock are currently outstanding.
PREFERRED STOCK. The preferred shares may be issued in one or more series, with
such rights and qualifications as our Board may determine before such shares are
issued. Our Board could, without the approval of stockholders, issue preferred
shares having voting or conversion rights that could adversely affect the voting
power of the holders of common stock. In addition, the issuance of preferred
shares could be used to render more difficult or discourage a hostile takeover
of Interstate Management.
STOCK EXCHANGE LISTING
We intend to apply to list our common stock for trading on the New York Stock
Exchange.
There is currently no trading market for our shares. The price at which our
shares will trade after the spin-off cannot be predicted. Until our shares are
fully distributed and an orderly market develops, the prices at which trading in
our shares occurs may fluctuate significantly. The price at which our stock
trades will be determined by the marketplace and may be influenced by many
factors, including:
- the depth and liquidity of the market for our stock;
- investor perception of Interstate Management and our business;
- our dividend policy;
- interest rates; and
- general economic and market conditions.
SHARES AVAILABLE FOR RESALE
Interstate Management shares distributed to you in the spin-off may be traded
freely and without restriction if you are not deemed to be an "affiliate" of
Interstate Management under the rules of the SEC. Persons who may be deemed to
be affiliates of Interstate Management after the spin-off include individuals or
entities that control, are controlled by or are under common control with
Interstate Management, and may include officers and directors of Interstate
Management as well as principal stockholders of Interstate
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<PAGE> 68
Management. Persons who are affiliates of Interstate Management will be
permitted to sell their Interstate Management shares only pursuant to an
effective registration statement or an exemption from the registration
requirements of the securities laws.
ADDITIONAL CORPORATE GOVERNANCE AND TAKEOVER-RELATED MATTERS
The Articles of Incorporation and Bylaws provide for the following:
ACTIONS OF STOCKHOLDERS. Subject to exceptions for holders of Class B shares
and Class C shares, our Articles of Incorporation do not permit actions to be
taken by written consent. Stockholder actions may only be taken at annual or
special meetings of the stockholders called in accordance with our Articles of
Incorporation and Bylaws. Special meetings of stockholders may only be called
by:
- the vote of a majority of directors then in office;
- by the Chairman of the Board or, if none is elected, by the Chief
Executive Officer or, if none, the President; and
- by the Secretary of Interstate Management upon the written request of the
holders of a majority of all shares entitled to vote at such meeting.
Only business that is specified in the notice of the annual or special meeting
or properly brought before the meeting may be discussed at any meeting. The
first annual meeting of our stockholders will be held in 2000, on a date and at
a time designated by the Board.
BOARD OF DIRECTORS. Our business and affairs are managed under the direction of
our Board, which shall consist of six members until the first annual meeting of
stockholders, expected to be held in 2000. Of the six initial directors, the
holders of Class A shares will be entitled to elect five directors and the
holders of Class B shares (Marriott) will be entitled to elect one director.
Should a voting deadlock occur at any time while the Board consists of six
members, Mr. Hewitt shall recuse himself from voting on the deadlocked issue in
order to break the deadlock. The Board of Directors shall have a nominating
committee and a compensation committee, each of which shall initially be
composed of Messrs. Evans, , and .
At the first annual meeting of stockholders, the holders of Class C shares
(Wyndham) shall be entitled to elect one director to the Board. If at the time
of this election Patriot is no longer a REIT, the size of the Board shall be
fixed at seven, and the number of directors which the holders of Class A shares
are entitled to elect shall remain at five. If at the time of this election
Patriot is still a REIT, the size of the Board shall be fixed at eleven, and the
number of directors which the holders of Class A shares are entitled to elect
shall be increased to nine. On March 1, 1999, Patriot/Wyndham publicly announced
that, in connection with a proposed equity investment in Wyndham (the
consummation of which is subject to numerous conditions), it plans to merge
Patriot into a subsidiary of Wyndham and, in so doing, relinquish its REIT
status. After September 30, 2003, or prior to such date upon the occurrence of
events specified in our Articles of Incorporation, the size of the Board may be
fixed by a resolution adopted by the Board.
Class A directors are elected by the holders of the outstanding Class A shares.
Class A directors are classified into three classes, as nearly equal in number
as possible, designated Class A-I, Class A-II and Class A-III. The term of the
director(s) first appointed to Class A-I will expire at the annual meeting of
stockholders to be held in 2000. The term of the director(s) first appointed to
Class A-II will expire at the annual meeting of stockholders to be held in 2001.
The term of the director(s) first appointed to Class A-III will expire at the
annual meeting of stockholders to be held in 2002. Class A directors are elected
for three-year terms by a plurality of votes cast by holders of Class A shares
at each annual meeting.
The Class B director will be elected by the holders of Class B shares (Marriott)
within ten days after the initial issuance of Class B shares. The term for the
initial Class B director will expire at the annual meeting of stockholders to be
held in 2002. Thereafter, the Class B director will serve one-year terms
expiring at
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<PAGE> 69
each subsequent annual meeting of stockholders. Class B directors are elected by
a plurality of all votes cast by holders of Class B shares at such annual
meeting or by unanimous written consent. Upon the occurrence of events specified
in the bylaws, the Class B shares will automatically convert into Class A
shares. In connection with this conversion:
- the Class B director then in office will be removed;
- the number of Class A directors will automatically be increased by one;
and
- the resulting vacancy will be filled by either the remaining directors or
the holders of Class A shares.
The Class C director will be elected by the holders of Class C shares (Wyndham)
as provided above. The term for the initial Class C director will expire at the
annual meeting of stockholders to be held in 2002. Thereafter, the Class C
director will serve one-year terms expiring at each subsequent annual meeting of
stockholders. Class C directors are elected by a plurality of all votes cast by
holders of Class C shares at such annual meeting or by unanimous written
consent. Upon the occurrence of events specified in the bylaws, the Class C
shares will automatically convert into Class A shares. In connection with this
conversion:
- the Class C director then in office will be removed;
- the number of Class A directors will automatically be increased by one;
and
- the resulting vacancy will be filled by either the remaining directors or
the holders of Class A shares.
The Bylaws provide that directors may only be nominated by the Board or by any
stockholder who has delivered notice of his or her nominees not less than 75
days nor more than 120 days prior to any annual meeting. The stockholder's
notice must contain specific information concerning the stockholder and the
stockholder's nominees, including:
- their names and addresses;
- proof that the stockholder is a stockholder of record and plans to
appear in person at the annual meeting;
- the class and number of shares of Interstate Management stock owned
by such stockholder and the stockholder's nominees;
- any agreements between the relevant parties pursuant to which the
nomination is to be made; and
- the signed consent of each nominee to serve as a director of
Interstate Management, if elected.
The presiding officer of the annual meeting may refuse to acknowledge the
nomination of any person not made in compliance with these requirements or the
requirements of the securities laws.
Any vacancy that occurs on the Board will be filled by first giving effect to
the respective rights of holders of Class B shares and Class C shares to replace
Class B directors and Class C directors. Otherwise, a majority of the votes cast
by the holders of Class A shares may fill vacancies due to removal for cause,
and the majority vote of the remaining directors may generally fill vacancies
which occur for any reason other than an increase in the number of directors.
Any director may be removed from office for cause by the affirmative vote of the
holders of at least 75% of the shares then entitled to vote at a meeting of
stockholders called for that purpose. Additionally, any Class B director or
Class C director may be removed from office with or without cause by the
affirmative vote of a majority of the holders of Class B shares or the holders
of Class C shares, respectively, at a meeting of such stockholders called for
the purpose. Class B and Class C directors may also be removed by unanimous
written consent of their respective class of stockholders.
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<PAGE> 70
INDEMNIFICATION OF OFFICERS AND DIRECTORS. We have agreed to indemnify our
officers and directors to the maximum extent authorized or permitted under
applicable law. Maryland's corporation law generally permits the liability of
directors and officers to a corporation for monetary damages to be limited,
unless it is proven that:
- the director or officer actually received an improper personal benefit in
money, property or services;
- the director or officer acted in bad faith; or
- the director's or officer's act or omission was the result of active and
deliberate dishonesty.
In addition, it must be proven that the director's or officer's act or omission
was material to the matter giving rise to the proceeding. In the case of a suit
by or in the right of Interstate Management, however, a director or officer may
not be indemnified in respect of any proceeding in which he shall have been
adjudged liable to Interstate Management unless a court of appropriate
jurisdiction determines that such person is fairly and reasonably entitled to
indemnity for such expenses as such court may deem proper. Any amendment or
repeal of our Articles of Incorporation may not adversely affect the rights of
any person entitled to indemnification for any event occurring prior to such
amendment or repeal.
AMENDMENT OF THE BYLAWS. Except as provided by law, the Board has the exclusive
power to alter or repeal the Bylaws by the affirmative vote of a majority of the
directors then in office. In limited circumstances, a bylaw may only be amended
by (i) the affirmative vote of a majority of the directors than in office and
each of the Class B and Class C directors or (ii) by the holders of a majority
of the outstanding shares entitled to vote on the matter.
SHAREHOLDER RIGHTS PLAN
We intend to adopt a shareholder rights plan. In connection with the adoption of
the rights plan, we will declare a dividend distribution of one preferred stock
purchase right (a "Right") for each outstanding Interstate Management share to
stockholders of record as of a specified date. Each Right will entitle its
holder to purchase from Interstate Management a unit consisting of a specified
number of shares of Preferred Stock of Interstate Management at a specified cash
exercise price per unit, subject to adjustment.
Initially, the Rights will not be exercisable and will attach to and trade with
all Interstate Management shares outstanding as of, or issued subsequent to, the
record date. The Rights will separate from Interstate Management shares and will
become exercisable upon the earlier of:
- - the close of business on the tenth calendar day following the first public
announcement that a person or group of affiliated or associated persons has
acquired beneficial ownership of 10% or more of the outstanding Interstate
Management shares (an "Acquiring Person"); or
- - the close of business on the tenth business day following the commencement of
a tender offer or exchange offer that would result upon its consummation in a
person or group becoming the beneficial owner of 10% or more of the
outstanding Interstate Management shares.
Grandfathered persons are defined in the rights agreement as stockholders of
Interstate Management who beneficially own 10% or more of outstanding Interstate
Management shares as of a specified date. Rights generally will be distributed
to a grandfathered person only if such stockholder acquires or proposes to
acquire additional Interstate Management shares. In addition, a grandfathered
person generally will become an Acquiring Person only if such person acquires
additional Interstate Management shares.
The shareholder rights agreement will effectively prevent any person or group
from acquiring more than 10% of our shares without our Board's approval.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 in connection
with the spin-off. As permitted by SEC rules, this Information
Statement/Prospectus does not contain all of the information contained in the
registration statement or in the exhibits to the registration statement. For
further information you may read and copy documents at the public reference room
of the SEC at 450 5th Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC at 7 World Trade Center, Suite 1300, New York, New York 10048
and at Citicorp Center, Suite 1400 and 500 West Madison Street, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. The SEC charges a fee for copies. Copies of this
material should also be available through the Internet at the SEC EDGAR Archive,
the address of which is http://www.sec.gov. In addition, our filings may be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
Following the spin-off, we will be required to file annual, quarterly and other
reports with the SEC. We will also be subject to the proxy rules and,
accordingly, will furnish audited financial statements to you in connection with
our annual meetings of stockholders.
No person is authorized by Patriot or Interstate Management to give any
information or to make any representations other than those contained in this
Information Statement/Prospectus, and, if given or made, you should not rely
upon such information.
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INTERSTATE HOTELS MANAGEMENT, INC.
INDEX TO COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants........................... F-2
Combined Balance Sheets as of December 31, 1997 and 1998.... F-3
Combined Statements of Operations and Owners' Equity for the
years ended December 31, 1996 and 1997 and for the period
from January 1, 1998 to June 1, 1998 and for the period
from June 2, 1998 to December 31, 1998.................... F-4
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1997 and for the period from January
1, 1998 to June 1, 1998 and for the period from June 2,
1998 to December 31, 1998................................. F-5
Notes to Combined Financial Statements...................... F-6 - F-19
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Patriot American Hospitality,
Inc.:
We have audited the accompanying combined balance sheets of Interstate Hotels
Management, Inc. (Interstate Management), comprised of businesses of Interstate
Hotels Company, which was acquired by Patriot American Hospitality, Inc., as
described in Note 1 of the combined financial statements, as of December 31,
1998 and 1997, and the related combined statements of operations and owners'
equity and cash flows for the period from January 1, 1998 to June 1, 1998 and
for the period from June 2, 1998 to December 31, 1998 and for each of the two
years in the period ended December 31, 1997. These combined financial statements
are the responsibility of Interstate Management's management. Our responsibility
is to express an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, Interstate Management was not a separate legal entity
during the periods presented. The accompanying combined financial statements
have been prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and are not intended to be a complete
presentation of the combined financial statements of Interstate Hotels Company
or its affiliates.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Interstate
Management as of December 31, 1998 and 1997, and the combined results of its
operations, owners' equity and cash flows for the period from January 1, 1998 to
June 1, 1998 and for the period from June 2, 1998 to December 31, 1998 and for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 3, Interstate Management adopted the provisions of Emerging
Issues Task Force Issue 97-14 effective September 30, 1998.
/s/ PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
March 5, 1999, except for the last two paragraphs of Note 8,
as to which the date is March 31, 1999, and
Note 18, as to which the date is April 23, 1999.
F-2
<PAGE> 74
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------- --------
DECEMBER 31,
------------------------
1997 1998
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,432 $ 1,652
Accounts receivable, net.................................. 15,707 16,816
Deferred income taxes..................................... 1,151 615
Net investment in direct financing leases................. 751 827
Prepaid expenses and other assets......................... 3,613 741
Related party receivables -- management contracts......... 1,761 1,085
-------- --------
Total current assets................................. 25,415 21,736
Restricted cash............................................. 2,324 2,201
Marketable securities....................................... -- 2,609
Property and equipment, net................................. 3,639 4,076
Officers and employees notes receivable..................... 12,157 2,803
Affiliate receivables....................................... 5,113 3,381
Net investment in direct financing leases................... 1,524 1,680
Investment in hotel real estate............................. 17,042 22,150
Deferred income taxes....................................... 660 --
Intangible and other assets................................. 50,311 100,521
-------- --------
Total assets......................................... $118,185 $161,157
======== ========
Current liabilities:
Accounts payable -- trade................................. 3,478 2,413
Accounts payable -- health trust.......................... 1,382 1,785
Accounts payable -- related parties....................... 10,260 18,597
Accrued payroll and related benefits...................... 9,586 6,120
Accrued rent.............................................. 5,875 5,043
Accrued merger costs...................................... -- 9,344
Other accrued liabilities................................. 6,501 9,236
Current portion of long-term debt......................... 180 --
-------- --------
Total current liabilities............................ 37,262 52,538
Long-term debt.............................................. 190 --
Deferred income taxes....................................... -- 11,053
Deferred compensation....................................... -- 2,609
-------- --------
Total liabilities.................................... 37,452 66,200
Minority interest........................................... 3 2,350
Commitments and contingencies............................... -- --
Owners' equity.............................................. 80,730 92,607
-------- --------
Total liabilities and owners' equity................. $118,185 $161,157
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE> 75
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- -----------------
PERIOD FROM
YEAR ENDED DECEMBER -------------------------------------
31, JANUARY 1, 1998 JUNE 2, 1998
--------------------- TO TO
1996 1997 JUNE 1, 1998 DECEMBER 31, 1998
-------- -------- --------------- -----------------
<S> <C> <C> <C> <C>
Lodging revenues:
Rooms....................... $ 9,258 $158,343 $ 74,265 $108,698
Other departmental.......... 721 9,512 4,504 6,455
Net management fees........... 33,023 39,136 18,018 22,763
Other fees (Note 13).......... 20,710 23,426 9,976 10,478
-------- -------- -------- --------
63,712 230,417 106,763 148,394
-------- -------- -------- --------
Lodging expenses:
Rooms....................... 2,334 36,919 17,173 26,567
Other departmental.......... 591 5,487 2,674 3,962
Property costs.............. 3,201 43,225 19,987 30,261
General and administrative.... 10,369 13,212 6,115 5,822
Payroll and related
benefits.................... 17,666 21,892 10,982 10,439
Non-cash compensation......... 11,896 -- -- --
Lease expense................. 3,477 73,283 34,515 51,165
Depreciation and
amortization................ 4,385 4,845 2,152 10,659
-------- -------- -------- --------
53,919 198,863 93,598 138,875
-------- -------- -------- --------
Operating income.............. 9,793 31,554 13,165 9,519
Other income:
Interest, net............... 501 498 204 390
Other, net.................. -- 431 474 1,391
-------- -------- -------- --------
Income before income tax
expense..................... 10,294 32,483 13,843 11,300
Income tax expense.......... 4,117 12,986 5,528 4,436
-------- -------- -------- --------
Income before minority
interest.................... 6,177 19,497 8,315 6,864
Minority interest............. -- 18 24 209
-------- -------- -------- --------
Net income.................... $ 6,177 $ 19,479 $ 8,291 $ 6,655
======== ======== ======== ========
Owners' equity:
Beginning of period......... 63,840 56,886 80,730 79,181
Net income.................. 6,177 19,479 8,291 6,655
Net capital distributions... (60,548) 4,365 (9,840) (49,981)
Change in Basis (Note 3).... -- -- -- 56,752
Acquisition of hotel leases
for stock................ 47,417 -- -- --
-------- -------- -------- --------
End of period............... $ 56,886 $ 80,730 $ 79,181 $ 92,607
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE> 76
INTERSTATE HOTELS MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- -----------------
PERIOD FROM
YEAR ENDED ------------------------------------
DECEMBER 31, JANUARY 1, 1998 JUNE 2, 1998
---------------------- TO TO
1996 1997 JUNE 1, 1998 DECEMBER 31, 1998
-------- -------- --------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 6,177 $ 19,479 8,291 6,655
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 4,385 4,845 2,152 10,659
Equity in earnings from
unconsolidated subsidiaries...... -- (373) (513) (1,526)
Deferred income taxes.............. (1,644) 167 (1,555) 8,346
Other.............................. -- 18 200 344
Cash (used) provided by assets and
liabilities:
Accounts receivable, net........... 2,848 (8,158) (3,661) 2,552
Prepaid expenses and other
assets........................... (3,033) (267) 307 1,092
Related party receivables.......... (2,912) 1,312 (341) 1,017
Accounts payable................... 9,096 (2,572) 1,053 (5,181)
Accrued liabilities................ 414 (1,934) 12,426 (14,365)
-------- -------- -------- --------
Net cash provided by operating
activities.................... 15,331 12,517 18,359 9,593
-------- -------- -------- --------
Cash flows from investing activities:
Net investment in direct financing
leases............................. (1,007) (33) 145 (377)
Change in restricted cash............ (9) (219) 540 (417)
Purchase of property and equipment,
net................................ (695) (2,170) (709) (487)
Purchases of marketable securities... -- -- -- (10,725)
Proceeds from sale of marketable
securities......................... -- -- -- 14,567
Net cash invested in unconsolidated
subsidiaries....................... -- (16,147) 1,085 (2,327)
Change in notes receivable, net...... (3,384) (7,554) (2) (989)
Net investment in management
contracts.......................... -- (2,116) (666) (548)
Merger related acquisition costs..... -- -- -- (26,484)
Change in affiliate receivables...... 751 (5,071) 2,043 (311)
Acquisitions of leases............... -- (2,500) -- --
Other................................ 6 103 238 391
-------- -------- -------- --------
Net cash (used in) provided by
investing activities.......... (4,338) (35,707) 2,674 (27,707)
-------- -------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt.......... (729) (171) (180) (190)
Net distributions to minority
interest........................... -- -- (44) (55)
Related party payables............... -- 10,260 (9,234) 17,571
Net (distributions) contributions to
owners............................. (13,131) 4,365 (9,840) (1,727)
-------- -------- -------- --------
Net cash (used in) provided by
financing activities.......... (13,860) 14,454 (19,298) 15,599
-------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents..................... (2,867) (8,736) 1,735 (2,515)
Cash and cash equivalents at beginning
of period............................ 14,035 11,168 2,432 4,167
-------- -------- -------- --------
Cash and cash equivalents at end of
period............................... $ 11,168 $ 2,432 $ 4,167 $ 1,652
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE> 77
INTERSTATE HOTELS MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Interstate Hotels Company and Subsidiaries (Interstate or the Predecessor) was
merged into Patriot American Hospitality, Inc. (Patriot) on June 2, 1998.
Interstate owned 23 hotels and had a controlling interest in 17 other hotels
(collectively, the Owned Hotels), held long-term leasehold interests in 89
hotels (the Leased Hotels), and provided management and other related services
to 94 hotels (the Managed Hotels) owned by third parties as of December 31,
1997. The Owned Hotels, the Leased Hotels and the Managed Hotels (collectively,
the Hotels) were located in 35 states and the District of Columbia, Canada, the
Caribbean, and Russia, with the largest concentration in the states of Florida
and California. The Hotels were operated under a number of franchise agreements,
with the largest franchisors being Marriott International, Inc. (Marriott) and
Promus Hotels, Inc. The Hotels were all subject to management agreements with
Interstate Hotels Corporation (IHC), Crossroads Hospitality Company, L.L.C.
(Crossroads) or Colony Hotels and Resorts Company (Colony), all wholly-owned
subsidiaries of Interstate.
Prior to the consummation of the merger of Interstate into Patriot (the
"Merger"), Marriott filed a lawsuit to stop the closing of the transaction as a
result of a dispute over certain franchise agreements Marriott had with
Interstate. On May 27, 1998, and pursuant to a settlement agreement with
Marriott, Patriot and Interstate announced a plan to transfer certain
operations, principally the third-party hotel management business, an ownership
interest in the Charles Hotel and the Leased Hotels, and certain assets and
liabilities of Interstate to a new entity, Interstate Hotels Management, Inc.
(the Company or Interstate Management). The Company is expected to be spun-off
from Patriot (the Spin-off) prior to March 31, 1999, which will result in the
Company operating as an independent entity with publicly traded common stock.
Ninety-two percent of the shares of the Company will be distributed to Patriot's
shareholders. Patriot and Marriott will each hold a 4% ownership interest in the
Company's common stock after the Spin-off.
These financial statements, prior to the Merger, have been prepared using the
predecessor basis of accounting for the years ended December 31, 1996 and 1997
and for the period from January 1, 1998 to June 1, 1998 (June 1998 period) and
have been prepared using the successor basis of accounting for the period June
2, 1998 to December 31, 1998 (December 1998 period) to coincide with the periods
before and after the Merger. The Merger was accounted for using the purchase
method of accounting and Patriot allocated the purchase price to the fair market
value of the assets acquired. The spin-off will be accounted for using this
historical basis of accounting. All references as of and for the two years in
the period ended December 31, 1997 and for the June 1998 period relate to the
predecessor and all references to December 31, 1998 and the December 1998 period
relate to the successor.
The Company was not a separate legal entity during the periods presented in
these financial statements. The accompanying combined financial statements of
the Company have been carved out of Interstate using the predecessor basis of
accounting and subsequent to the merger with Patriot include the successor's
basis of accounting which considers the effect of the purchase price allocation.
The financial statements include only those assets, liabilities, revenues and
expenses directly attributable to the third-party hotel management business, the
ownership interest in the Charles Hotel, the Leased Hotels and other services
described in the paragraph above which will succeed to the Company. These
activities were conducted primarily by IHC, Crossroads and Colony. These
combined financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission, and as
if the Company had operated as a free-standing entity for all periods presented.
All investments in, associated debt, and results of operations of the Owned
Hotels, as well as certain other operating subsidiaries (see Note
F-6
<PAGE> 78
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
13) that will not be included in the continuing business of the Company, have
been carved out of the historical combined financial statements.
The Company will have two principal subsidiaries. One subsidiary, Interstate
Hotels, LLC (IHC LLC) will assume management of the Managed Hotels and will hold
the ownership interest in the Charles Hotel and the leasehold interests of the
Leased Hotels as well as provide ancillary services previously provided by
Interstate, primarily centralized purchasing, equipment leasing and insurance
services. The Company will own a 45% managing member interest in this subsidiary
and Patriot will retain a 55% non-controlling ownership interest. The other
subsidiary will enter into management contracts to manage eleven Owned Hotels
with the tenant of such Owned Hotels, Wyndham International Operating
Partnership, L.P., and will then subcontract the management to Marriott. The
Company will retain a controlling 99.99% interest in this subsidiary and
Marriott will own a .01% interest in this subsidiary.
The Company includes the revenues and expenses and assets and liabilities of the
Leased Hotels in the financial statements since the risk of operating these
hotels is borne by the Company, as lessee, under the terms of the lease. As a
result of the terms of the management contracts, the revenues and expenses from
operations of the Managed Hotels are not included in the financial statements
since the contracts are generally cancellable, not transferable and do not shift
risks of operations to the Company. Accordingly, the Company records revenues
from management fees for the Managed Hotels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination and Consolidation:
The combined financial statements include the accounts of the entities described
in Note 1. All significant intercompany transactions and balances have been
eliminated.
Cash and Cash Equivalents:
All unrestricted, highly liquid investments purchased with a remaining maturity
of three months or less are considered to be cash equivalents. The Company
maintains cash and cash equivalents with various financial institutions in
excess of the amount insured by the Federal Deposit Insurance Corporation.
Management believes the credit risk related to these cash and cash equivalents
is minimal. Beginning in 1997, certain cash of the Company was swept from
individual accounts and combined with Interstate's cash in a central account.
Amounts owed to related entities to meet short-term cash requirements in
connection with Interstate's centralized cash account are recorded as Accounts
payable -- related parties.
Restricted Cash:
Capital restricted under applicable government insurance regulations is included
in restricted cash, and represents approximately 20% of the annual insurance
premiums written by the Company (See Note 13).
Direct Financing Leases:
Equipment acquired and subsequently leased to hotels under capital leases is
recorded at the net investment in direct financing leases, which represents the
total future minimum lease payments receivable net of
F-7
<PAGE> 79
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
unearned income. When payments are received, the receivable is reduced and the
unearned income is recognized on a pro-rata basis over the life of the lease.
Property and Equipment:
Property and equipment are recorded at cost, and are depreciated on the
straight-line method over their estimated useful lives. Expenditures for repairs
and maintenance are expensed as incurred. Expenditures for major renewals and
betterments that significantly extend the useful life of existing property and
equipment are capitalized and depreciated. The cost and the related accumulated
depreciation applicable to property no longer in service are eliminated from the
accounts and any gain or loss thereon is included in operations.
Officers and Employees Notes Receivable:
Officers notes receivable consist principally of the advances on expected
severance payments and notes from two executives at December 31, 1997. The notes
from the two executives and the advances were forgiven effective with the
Merger. The Company also makes loans from time to time to other employees, which
are payable upon demand and generally do not bear interest until such demand is
made. Certain notes may be forgiven and expensed provided certain conditions are
satisfied. Officers and employees notes receivable also include a note with a
former officer and significant shareholder of Interstate (see Note 15).
Intangible and Other Assets:
Intangible and other assets consist of the amounts paid to obtain management and
lease contracts including the allocation of the Interstate purchase price paid
by Patriot. Goodwill is also included in intangible and other assets through
December 31, 1997, and represents the excess of the purchase price over the book
value of the net assets of businesses acquired. Intangibles and other assets are
amortized on the straight-line method over the life of the underlying contracts
or estimated useful lives.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:
The carrying values of long-lived assets, which include property and equipment
and all intangible assets, are evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. Adjustments are made if the sum of expected future net cash flows is
less than book value. No adjustments to the carrying values of long-lived assets
have been recorded to date.
Deferred Income Taxes:
Deferred income taxes are recorded in the combined financial statements of
Interstate Management using the liability method. Under this method, deferred
tax assets and liabilities are provided for the differences between the
financial statement and the tax basis of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse.
Income Tax Status:
The entities that comprised Interstate Management were included in the
consolidated federal income tax return of Interstate and all tax liabilities
were paid by Interstate or Patriot. The income tax provision for each period
presented in these combined financial statements has been calculated as if
Interstate Management had prepared and filed a separate income tax return for
those periods. Accordingly, the effective tax rate for
F-8
<PAGE> 80
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Interstate Management in future years could vary from historical effective rates
depending on Interstate Management's future legal and tax elections. The income
tax liability for all current income taxes for purposes of these combined
financial statements have been settled with Interstate or Patriot through
owners' equity.
Insurance:
Insurance revenues are earned through reinsurance premiums, direct premiums
written and reinsurance premiums ceded. Reinsurance premiums are recognized when
policies are written and any unearned portion of the premium is recognized to
account for the unexpired term of the policy (as-reported basis). Direct
premiums written are recognized pursuant to the underlying policy and
reinsurance premiums ceded are recognized on a pro-rata basis over the life of
the related policies. Unearned premiums represent the portion of premiums
applicable to the unexpired term of policies in force. Losses are provided for
reported claims, claims incurred but not reported and claims settlement expense
at each balance sheet date. Such losses are based on management's estimate of
the ultimate cost of settlement of claims and historical loss rates. Accrued
claims liabilities are carried at present value without discounting since the
contracts are of a short duration and discounting would not be significant.
Actual liabilities may differ from estimated amounts. Any changes in estimated
losses and settlements are reflected in current earnings.
Owners' Equity:
Owners' equity represents the net equity of Interstate and Patriot in Interstate
Management. Net contributions/distributions from owners represent non-operating
transfers to and from Interstate and Patriot.
Revenue Recognition:
The Leased Hotels recognize revenue from their rooms, food and beverage and
other departments as earned on the close of each business day. Management and
other related fees are recognized when earned.
Reimbursable Expenses:
Interstate Management is reimbursed for costs associated with providing
insurance and risk management services, purchasing and project management
services, MIS and legal support, centralized accounting, training and relocation
programs to the Managed and Leased Hotels. These revenues are included in other
fees and the corresponding costs are included in general and administrative and
payroll and related benefits in the combined statements of operations and
owners' equity.
Financial Instruments:
As a policy, Interstate Management does not engage in speculative or leveraged
transactions, nor does Interstate Management hold or issue financial instruments
for trading purposes.
Earnings Per Share:
Because the accompanying combined financial statements have been carved out of
Interstate and Patriot and certain of its subsidiaries, some of which are/were
corporations and some of which are/were partnerships, Interstate Management
believes that the earnings per share calculations required to be presented are
not meaningful for periods presented herein and, therefore, have not been
provided. In conjunction with the
F-9
<PAGE> 81
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Spin-off the Company will distribute common stock which will be accounted for in
a manner similar to a recapitalization or stock split. Accordingly, after the
Spin-off, the Company will provide earnings per share based on the then
outstanding shares.
Use of Estimates:
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These may affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
combined financial statements. They may also affect the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
3. MERGER:
In connection with the Merger, Patriot allocated the purchase price to the
estimated fair market value of the assets acquired. The fair market value of the
assets held by Interstate Management were determined using historical and
projected cash flow and earnings at then current market multiples. As a result,
on June 2, 1998, Interstate Management recorded an additional intangible asset
related to management contracts of $69,862, a net decrease in other assets of
$7,652 related to hotel leases and a deferred tax liability of $5,458, resulting
in a net increase to owners' equity of $56,752 (Change in Basis). The intangible
asset related to the management contacts will amortize over five years, based on
the average remaining contract term, and the intangible asset related to the
Leased Hotels will be amortized over the remaining periods of the leases of 11
and 13.5 years beginning June 2, 1998.
Prior to the Merger, merger-related costs incurred by Interstate were not
reflected in the accompanying combined statement of operations for the June 1998
period, as they did not relate specifically to the ongoing business of
Interstate Management. In connection with the Merger, severance payments and
other merger-related costs were incurred by Patriot and capitalized as part of
the purchase price of Interstate. Certain of these costs were paid by Interstate
in the December 1998 period and certain remain unpaid at December 31, 1998.
These remaining merger-related costs, amounting to $9,344 at December 31, 1998,
have been accrued by Interstate Management and consist principally of unpaid
severance and professional fees.
4. CHANGE IN ACCOUNTING:
Effective September 30, 1998, the Company adopted the provisions of Emerging
Issues Task Force Issue 97-14 "Accounting for Deferred Compensation Arrangements
Where Amounts Earned are Held in a Rabbi Trust and Invested" (EITF 97-14). The
issue requires that the accounts of the rabbi trust (Trust) be consolidated with
the accounts of the employer. Previously the accounts of the Trust were not
consolidated.
The Company provides deferred compensation for certain executives and hotel
general managers by depositing amounts into a Trust for the benefit of the
participating employees. Deposits into the Trust are expensed under both
accounting methods and amounted to $331, $662, $178 and $250 for the years ended
December 31, 1996 and 1997 and for the June 1998 and December 1998 periods,
respectively. Amounts in the Trust earn investment income, which serves to
increase the corresponding deferred compensation obligation. Amounts in the
Trust are always fully vested.
F-10
<PAGE> 82
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
4. CHANGE IN ACCOUNTING, CONTINUED:
The effect of adopting EITF 97-14 as of September 30, 1998 was an increase in
investments and deferred compensation of $6,451. Investments are recorded at
market value, which approximates cost, are directed by the Company, and consist
principally of mutual funds. The adoption did not have any effect on net income
in the December 1998 period and is not expected to significantly impact net
income in future periods.
In October 1998 Interstate Management paid $4,213 in deferred compensation from
the Trust to certain executives.
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Leasehold improvements (10 years)........................... $ 1,345 $ 1,000
Furniture, fixtures and equipment (5 to 20 years)........... 6,021 3,522
------- -------
7,366 4,522
Less accumulated depreciation............................... (3,727) (446)
------- -------
$ 3,639 $ 4,076
======= =======
</TABLE>
Depreciation expense was approximately $523, $666, $313 and $446 for the years
ended December 31, 1996 and 1997 and for the June 1998 and December 1998
periods, respectively.
6. NET INVESTMENT IN DIRECT FINANCING LEASES:
The Company leases office, computer and telephone equipment to managed hotels
under capital leases. The following represents the components of the net
investment in direct financing leases at December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Total future minimum lease payments receivable.............. $ 2,918 $ 3,118
Less unearned income........................................ 643 611
------- -------
2,275 2,507
------- -------
Less current portion........................................ 751 827
------- -------
$ 1,524 $ 1,680
======= =======
</TABLE>
Future minimum lease payments to be received under these leases for each of the
years ending December 31 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 1,297
2000........................................................ 846
2001........................................................ 630
2002........................................................ 262
2003........................................................ 83
-------
$ 3,118
=======
</TABLE>
Included in the direct financing leases is $1,015 and $1,122 of leases due from
the Owned Hotels as of December 31, 1997 and 1998, respectively.
F-11
<PAGE> 83
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
7. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Management contracts (3 to 6 years through June 1998, 5
years in December 1998)................................ $ 8,568 $ 74,109
Lease contracts (15 and 11 years through June 1998, 13.5
and 11 years in December 1998)......................... 24,284 36,832
Goodwill (25 years)...................................... 21,725 --
Other.................................................... 2,056 --
------- --------
56,633 110,941
Less accumulated amortization............................ (6,322) (10,420)
------- --------
$50,311 $100,521
======= ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Leases, entered into by the Leased Hotels, have initial terms of 10 to 15 years
expiring through 2012, and provide for fixed base rent and variable components
based on a percentage of hotel revenues. Future fixed minimum lease payments are
computed based on the base rent of each lease, as defined, and are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 49,901
2000........................................................ 49,901
2001........................................................ 49,901
2002........................................................ 49,901
2003........................................................ 49,901
Thereafter.................................................. 364,814
--------
$614,319
========
</TABLE>
Interstate Management accounts for the leases of office space (the office leases
expire at varying times through 2005) and certain office equipment (the
equipment leases expire at varying times through 2003) as operating leases.
Total rent expense amounted to approximately $1,020, $1,571, $911 and $1,305 for
the years ended December 31, 1996 and 1997 and for the June, 1998 and December
1998 periods, respectively. The following is a schedule of future minimum lease
payments under these leases:
<TABLE>
<S> <C>
1999........................................................ $ 2,170
2000........................................................ 1,923
2001........................................................ 1,849
2002........................................................ 1,337
2003........................................................ 1,331
Thereafter.................................................. 408
-------
$ 9,018
=======
</TABLE>
Interstate Management, pursuant to certain management contracts, has agreed to
provide additional loans of up to $750, in the aggregate, to the owner of a
hotel located in Russia.
F-12
<PAGE> 84
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES, CONTINUED:
In the ordinary course of business, various lawsuits, claims and proceedings
have been or may be instituted or asserted against Interstate. Interstate
Management will be held liable for certain of the lawsuits, claims and
proceedings instituted or asserted against Interstate to the extent that the
claim relates to operations of Interstate Management. Based on currently
available facts, management believes that the disposition of matters that are
pending or asserted against Interstate Management will not have a material
adverse effect on the combined financial position, results of operations or
liquidity of Interstate Management.
Risk Related to Dispute Over Leased Hotel Portfolio:
As of the December 31, 1998, Interstate Management was engaged in a dispute with
Equity Inns Partnership, L.P. (Equity Inns) regarding, among other matters, the
status of leases for 79 hotels Interstate Management leases from Equity Inns or
its affiliates. The principal issue in the dispute was whether Interstate
Management or Equity Inns was responsible for funding property improvement plans
(PIPs) which were issued by franchisors under whose brand names Interstate
Management operates the leased hotels. Although franchise agreements generally
provide to franchisors the right to require third-party operators to fund PIPs
at any time, these PIPs were issued as a result of Patriot's merger with
Interstate. The total amount required to be funded under the PIPs is
approximately $6.0 million.
On March 31, 1999, the Company settled the dispute and entered into amended
lease agreements and master agreement with Equity Inns. As part of the amended
agreement, Equity Inns acknowledged that the Company is not responsible for the
funding of the PIPs. The Company agreed to pay a one-time additional incentive
rent payment for the 1999 lease year in the amount of $2.0 million. In addition
the amended agreement now requires, among other things, performance standards
with respect to the leased hotels, including requirements to maintain room
revenue per available room and expenditures to within specified percentages of
the amounts targeted in the hotels' operating budgets and a minimum net worth
covenant. Failure to meet the performance standards or maintain the minimum net
worth would be a default under the leases.
9. NET MANAGEMENT FEES:
Interstate Management's management agreements have initial terms that range from
one month to 49 years, expire through the year 2044 and are generally cancelable
under certain conditions, including the sale of the hotel.
The management agreements specify the base management fees to be earned, which
are generally based on percentages of gross revenues. In certain cases,
incentive management fees are earned based on the hotels' profitability as
defined by the management agreements. The net management fees earned for the
years ended December 31 and the June 1998 and December 1998 periods were as
follows:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Base management fees................. $27,802 $32,220 $14,435 $16,108
Incentive management fees............ 5,766 7,238 3,882 7,096
------- ------- ------- -------
33,568 39,458 18,317 23,204
Less:
Administrative fees................ 545 322 299 441
------- ------- ------- -------
$33,023 $39,136 $18,018 $22,763
======= ======= ======= =======
</TABLE>
F-13
<PAGE> 85
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
10. NON-CASH COMPENSATION:
Prior to an initial public offering of Interstate's common stock in 1996,
Interstate issued 785,533 shares of common stock to executives and key employees
in consideration for the cancellation of stock options issued by IHC in 1995.
The shares were valued based on the estimated value of the common stock at the
time the shares were issued. As a result of the cancellation of the stock
options issued by IHC in 1995 and the issuance of the common stock at no cost to
the recipients, Interstate Management recorded non-cash compensation expense of
$11,896.
11. INCOME TAXES:
Income tax expense consisted of the following for the years ended December 31
and for the June 1998 period and the December 1998 period:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Current:
Federal................................ $ 5,041 $11,217 $ 6,198 $(3,421)
State.................................. 720 1,602 885 (489)
------- ------- ------- -------
5,761 12,819 7,083 (3,910)
------- ------- ------- -------
Deferred:
Federal................................ (1,438) 146 (1,360) 7,303
State.................................. (206) 21 (195) 1,043
------- ------- ------- -------
(1,644) 167 (1,555) 8,346
------- ------- ------- -------
Income tax expense..................... $ 4,117 $12,986 $ 5,528 $ 4,436
======= ======= ======= =======
</TABLE>
The provision for income tax was recorded based on the federal statutory rate of
35% plus the state tax rate, net of federal income tax benefit of 5% after
consideration of minority interests in passthrough tax entities. These rates
approximate Interstate's historical rates.
The components of net deferred tax assets and liabilities consisted of the
following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and amortization................... $ 410 $ -- $ -- $11,749
Payroll and related benefits.................... 121 -- 139 --
Self-insured health trust....................... 36 -- 614 --
Retirement plan................................. 1,356 -- -- 90
Other........................................... -- 362 -- 48
Investment in Hotel real estate................. 250 -- 696 --
------ ---- ------ -------
$2,173 $362 $1,449 $11,887
====== ==== ====== =======
</TABLE>
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest amounted to $274, $29, $20 and $10 for the years ended
December 31, 1996, and 1997 and for the June 1998 and December 1998 periods,
respectively. Non-cash, equity-related compensation of $11,896 was excluded from
the combined statement of cash flows in 1996. Additionally, stock
F-14
<PAGE> 86
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
12. SUPPLEMENTAL CASH FLOW INFORMATION, CONTINUED:
valued at $47,417 was used to purchase certain hotel leases and was also
excluded from the combined statement of cash flows in 1996.
In connection with the Merger, in the December 1998 period, Interstate
Management excluded a non-cash step-up of $30,268 which includes an increase to
the management contract intangible of $43,378, a decrease in other assets
related to hotel leases of $7,652 and a deferred tax liability of $5,458, from
the December 1998 period statement of cash flows. In addition, as a result of
the change in accounting discussed in Note 4, the Company recorded marketable
securities and deferred compensation in the amount of $6,451 as of September 30,
1998 which was also excluded from the December 1998 period statement of cash
flows.
13. INSURANCE:
Interstate Management provides certain insurance coverage to hotels under the
terms of the various management and lease contracts. This insurance is generally
arranged through third-party carriers. Northridge Insurance Company
(Northridge), a subsidiary of Interstate Management, reinsures a portion of the
coverage from these third-party primary insurers. The policies provide for
layers of coverage with minimum deductibles and annual aggregate limits. The
policies are for coverage relating to innkeepers' losses (general/comprehensive
liability), wrongful employment practices, garagekeeper's legal liability,
replacement cost automobile losses and real and personal property insurance.
Interstate Management is liable for any deficiencies in the IHC Employee Health
and Welfare Plan (and related Health Trust), which provides employees of
Interstate Management with group health insurance benefits. Interstate
Management has a financial indemnity liability policy with Northridge which
indemnifies Interstate Management for certain obligations for the deficiency in
the related Health Trust. The premiums for this coverage received from the
properties managed by Interstate Management, net of intercompany amounts paid
for employees at Interstate Management's corporate offices and Leased Hotels,
are recorded as direct premiums written. There was a deficiency of $1,451 in the
related Health Trust as of December 31, 1998, which was recorded as a liability
of Interstate Management on the accompanying combined balance sheet.
All accounts of Northridge are classified with assets and liabilities of a
similar nature in the combined balance sheets. Amounts restricted due to
statutory requirements consist of cash and cash equivalents of $1,762 and $1,610
at December 31, 1997 and 1998, respectively. These amounts are included in
restricted cash in the accompanying balance sheets. The combined statements of
operations and owners' equity include the insurance income earned and related
insurance expenses incurred. The insurance income earned has been included in
other fees in the consolidated statements of operations and owners' equity and
is comprised of the following for the years ended December 31, 1996 and 1997 and
the June 1998 period and the December 1998 period:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------ ------ ------ --------
<S> <C> <C> <C> <C>
Reinsurance premiums written............... $5,245 $5,811 $3,191 $2,585
Direct premiums written.................... 2,032 2,221 625 875
Reinsurance premiums ceded................. (414) (544) (130) (170)
Change in unearned premiums reserve........ 158 (55) (87) (103)
Loss sharing premiums...................... 1,101 1,687 702 926
------ ------ ------ ------
Insurance income........................... $8,122 $9,120 $4,301 $4,113
====== ====== ====== ======
</TABLE>
F-15
<PAGE> 87
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
14. FINANCIAL INSTRUMENTS:
The carrying values and fair values of Interstate Management's financial
instruments consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------------- ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents................ $ 2,432 $ 2,432 $1,652 $1,652
Restricted cash.......................... 2,324 2,324 2,201 2,201
Officers and employees notes
receivable............................. 12,157 12,157 2,803 2,803
Marketable securities.................... -- -- 2,609 2,609
Long-term debt, including current
portion................................ 370 370 -- --
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents and restricted cash: The carrying amounts approximate
fair value because of the short maturity of these investments.
Officers and employees notes receivable: The fair value of officers and
employees notes receivable is based on anticipated cash flows and approximates
carrying value.
Long-term debt: The fair value of long-term debt is based on interest rates
that are currently available to Interstate Management for issuance of debt with
similar terms and remaining maturities.
Marketable securities: The fair value of marketable securities is based
principally on the quoted market prices of the underlying security.
15. RELATED PARTY TRANSACTIONS:
Transactions with Significant Related Parties:
Included in net management fees are management fees earned pursuant to
management agreements between Interstate Management and the affiliates of
Interstate or Patriot that owned the Owned Hotels. In addition, certain of the
Owned Hotels were subject to management agreements between Interstate Management
and the third-party owners of these hotels prior to the Owned Hotels'
acquisition by Interstate. Included in net management fee revenue in the
accompanying combined statements of operations are fees related to the Owned
Hotels (including periods prior to their acquisition by Interstate, if
applicable) amounting to $11,726, $15,752, $6,987, and $6,129 for the years
ended December 31, 1996 and 1997 and the June 1998 and December 1998 periods,
respectively. Receivables from management fee revenues from the Owned Hotels
comprise the Related Party Receivables -- management contracts in the
accompanying combined balance sheets and amount to $1,260 and $705 at December
31, 1997 and 1998, respectively.
Revenues from other fees include primarily insurance revenues and purchasing
fees. Insurance revenues, which are described in Note 13, from Owned Hotels
amounted to $2,521, $2,842, $1,378 and $1,929 for the years ended December 31,
1996 and 1997 and the June 1998 and December 1998 periods, respectively.
Purchasing fees from Owned Hotels amounted to $969, $1,574, $616 and $552 for
the years ended December 31, 1996 and 1997 and the June 1998 and December 1998
periods, respectively.
Included in accounts receivable is approximately $302 and $548 at December 31,
1997 and 1998, respectively, due from hotels that Milton Fine, former Chairman
of the Interstate Board of Directors and
F-16
<PAGE> 88
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
15. RELATED PARTY TRANSACTIONS, CONTINUED:
significant shareholder of Interstate, has an ownership interest. Interstate
Management has waived the management fees for one of these hotels through
November 1998.
Affiliate Receivables:
Affiliate receivables consist principally of short-term interest bearing loans
to third-party owners.
Concentration of Risk:
Interstate Management manages three hotels located in Russia, one of which opens
in December 1998. As of December 31, 1997 and 1998, receivables from these
hotels amounted to $3,471 and $3,677, respectively. The Company currently
estimates the receivables as collectable, however, actual collections could
differ from current estimates.
16. INVESTMENT IN HOTEL REAL ESTATE:
On October 2, 1997, the Company, through a 95% owned subsidiary, Intercarp
Limited Partnership (Intercarp), purchased a 55% non-controlling general
partnership interest in Charles Square Associates (CSA), a joint venture general
partnership, which serves as the managing general partner of CH&S Limited
Partnership (CHS), and a 25% interest in Cambridge Hotel Associates (CHA) from
an unrelated third party for approximately $13,000. CH&S owns The Charles Hotel
Complex, which includes the hotel and related offices and retail space in
Cambridge, Massachusetts. CHA manages The Charles Hotel.
On October 10, 1997, Intercarp purchased 7.5 limited partnership units of CHS
for $150. During 1998, Intercarp purchased an additional 99.25 limited
partnership units for $2,948 and exchanged an 11.68% interest in Intercarp in
exchange for an additional 66.25 limited partnership units. As of December 31,
1998 Intercarp holds 173 of the 289 outstanding limited partnership units of
CHS.
In connection with the purchase of the interests in CSA and CHA, Intercarp is
party to certain put/call rights (P/C Options) with certain affiliates of the
45% general partnership interest in CSA and the 25% limited partnership interest
in CHA. The P/C Options allow Intercarp to acquire the interests in both CSA and
CHA anytime prior to December 31, 2000 for a price equal to approximately
$11,625. The Partnership may be required to buy the interest at the Option Price
upon the earlier of the completion of certain events, as defined, or October 2,
1999. As of December 31, 1998, neither party has exercised its rights under the
P/C Options.
The Company, accounts for its investment in CSA and CHA using the equity method
of accounting. Equity in earnings are included in other net in the statement of
income and the investments are included in Investment in Hotel Real Estate on
the balance sheet. The Company recognized equity in earnings from CHA of $136,
$146 and $123 for the year ended December 31, 1997 and the periods from January
1, 1998 to June 1, 1998 and June 2, 1998 to December 31, 1998, respectively.
Selected financial information of CSA consolidated with CHS as of and for the
year ended December 31, 1997 and as of December 31, 1998
F-17
<PAGE> 89
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
16. INVESTMENT IN HOTEL REAL ESTATE, CONTINUED:
and for the period from January 1, 1998 to June 1, 1998 and for the period June
2, 1998 to December 31, 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1998
------- -------
<S> <C> <C>
Assets.................................................... $67,453 $79,321
Liabilities............................................... 59,580 56,947
------- -------
Total net equity.......................................... 7,873 22,374
Net equity-others......................................... (8,292) 670
------- -------
Net equity-Intercarp...................................... $16,165 $21,704
======= =======
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
----------------------------------
YEAR ENDED JANUARY 1, TO JUNE 2, TO
1997 JUNE 1, 1998 DECEMBER 31, 1998
---------- ------------- -----------------
<S> <C> <C> <C>
Revenues.......................... $ 40,924 $ 17,052 $ 23,873
Expenses.......................... (37,054) (15,426) (21,597)
-------- -------- --------
Net income........................ 3,870 1,626 2,276
Income allocated to others........ 3,633 1,259 963
Income allocated to Intercarp..... 237 367 1,313
</TABLE>
17. SEGMENT INFORMATION:
Interstate Management adopted the provisions of Statement of Financial
Accounting Standards Board No. 131 "Disclosures about Segments of an Enterprise
and Related Information," effective December 31, 1998. The statement requires
disclosure of segment information for all periods presented. As discussed in
Note 1, during the periods of these financial statements, Interstate Management
was carved out of Interstate and Patriot. The manner of determining the segment
information presented below may be modified in future periods as the Company
finalizes the Spin-off and becomes a stand alone entity. In that event the
Company will restate all amounts to conform to the modification of the segment
information.
The Company determined that its reportable segments are those that are based on
the Company's method of internal reporting, which disaggregates its business by
operating entities which provide differing services.
The Company's reportable segments are: operations of luxury and upscale hotels,
operations of mid-scale, upper economy and budget, and the Charles Hotel. The
luxury and upscale hotels segment derives revenues from management fees and
other products which directly relate to providing management services including
revenues from insurance, purchasing and equipment leasing. The mid-scale, upper
economy and budget segment derives revenues from managing and leasing hotels and
certain specialized support services. The Charles Hotel segment is an equity
investment which is described in note 16. The operations of this segment differ
from those of the other segments and the results are separately reviewed by the
Company's chief operating decision maker.
The accounting policies of the segment are the same as those described in Note
2. The Company evaluates the performance of its segments and allocates resources
to them based on operating income.
F-18
<PAGE> 90
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
17. SEGMENT INFORMATION, CONTINUED:
The table below presents information about operating income and segment assets
as of and for the three years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Luxury and Upscale Hotels......... $49,131 $ 57,961 $ 26,010 $ 30,745
Mid-Scale, Upper Economy
and Budget Hotels............... 14,581 172,456 80,753 117,649
------- -------- -------- --------
Consolidated Totals............. $63,712 $230,417 $106,763 $148,394
======= ======== ======== ========
OPERATING INCOME
Luxury and Upscale Hotels......... $ 8,675 $ 28,322 $ 11,887 $ 10,134
Mid-Scale, Upper Economy and
Budget Hotels................... 1,118 3,232 1,278 (615)
------- -------- -------- --------
Consolidated Totals............. $ 9,793 $ 31,554 $ 13,165 $ 9,519
======= ======== ======== ========
</TABLE>
Depreciation and amortization included in segment operating income for the three
years in the period ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
JUNE DECEMBER
1996 1997 1998 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Luxury and Upscale Hotels......... $ 4,141 $ 1,646 $ 776 $ 8,437
Mid-Scale, Upper Economy
and Budget Hotels............... 244 3,199 1,376 2,222
------- -------- -------- --------
Consolidated Totals............. $ 4,385 $ 4,845 $ 2,152 $ 10,659
======= ======== ======== ========
</TABLE>
Intangible and other assets by segment are as follows as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C> <C>
Luxury and Upscale Hotels......... $ 3,817 $ 4,909 $ 60,823
Mid-Scale, Upper Economy
and Budget Hotels............... 48,075 45,402 39,698
------- -------- --------
Consolidated Totals............. $51,892 $ 50,311 $100,521
======= ======== ========
</TABLE>
18. SUBSEQUENT EVENT:
Patriot and the Company have reached a tentative agreement under which all of
the partnerships interests in CSA and CHS will be sold to an existing joint
venture partner in these equity interests. The Company, through IHC LLC, will
receive an aggregate purchase price on the sale of $19,300, consisting of
$13,500 in cash and $5,800 in the form of a secured promissory note. The $5,800
secured promissory note is a three-year note that pays interest only, at a rate
of 10% per annum, until maturity date. The loss on the sale of CSA and CHS is
expected to approximate $135. The management contract for the Charles Hotel will
also be amended in conjunction with the sale to provide for a reduction in
management fees in exchange for a ten-year life for the management agreement and
IHC LLC will be required to loan the hotel an amount not to exceed $2,500.
F-19
<PAGE> 91
- ---------------------------------------------------------
- ---------------------------------------------------------
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE SPIN-OFF. IF ANYONE GIVES YOU ANY SUCH
INFORMATION OR MAKES ANY SUCH REPRESENTATIONS, YOU SHOULD NOT RELY ON IT OR THEM
AS HAVING BEEN AUTHORIZED BY INTERSTATE MANAGEMENT. THE AFFAIRS OF INTERSTATE
MANAGEMENT MAY CHANGE AND YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS
INFORMATION STATEMENT/PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS
DATE. THIS INFORMATION STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about the Spin-
off and Interstate Management....... 1
Summary............................... 3
Summary Financial and Other Data...... 7
Recent Developments................... 9
Risk Factors.......................... 11
The Spin-off.......................... 18
Business.............................. 23
Selected Financial and Other Data..... 34
Pro Forma Financial Data.............. 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 44
Management............................ 53
Certain Relationships and Related
Transactions........................ 61
Security Ownership of Certain
Beneficial Owners and Management.... 63
Description of Capital Stock.......... 63
Where You Can Find More Information... 68
Index to Combined Financial
Information......................... F-1
</TABLE>
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES MAY BE REQUIRED TO DELIVER THIS INFORMATION STATEMENT/PROSPECTUS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
9,221,743 SHARES
INTERSTATE HOTELS
MANAGEMENT, INC.
COMMON STOCK
--------------------------------------------------
INFORMATION STATEMENT/PROSPECTUS
--------------------------------------------------
MAY , 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
The following table sets forth the estimated expenses payable by Interstate
Management in connection with the spin-off:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- -------
<S> <C>
SEC Registration Fee........................................ $13,408
New York Stock Exchange Filing Fee.......................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Blue Sky Qualification Fees and Expenses.................... *
Distribution Agent's Fee.................................... *
Miscellaneous............................................... *
-------
Total.................................................. $ *
=======
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and New York Stock Exchange
fees, are in each case estimated.
* To be completed by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Interstate Management's officers and directors are indemnified to the maximum
extent authorized or permitted under applicable law. Maryland's corporation law
generally permits the liability of directors and officers to a corporation for
monetary damages to be limited, unless it is proven that (i)(a) the director or
officer actually received an improper personal benefit in money, property or
services, (b) the director or officer acted in bad faith, or (c) the director's
or officer's act or omission was the result of active and deliberate dishonesty,
and (ii) the director's or officer's act or omission was material to the matter
giving rise to the proceeding. However, in the case of a suit by or in the right
of Interstate Management, a director or officer may not be indemnified in
respect of any proceeding in which he shall have been adjudged liable to
Interstate Management, unless and only to the extent a court of appropriate
jurisdiction determines that such person is fairly and reasonably entitled to
indemnity for such expenses as such court may deem proper. Any amendment or
repeal of Interstate Management's Articles of Incorporation may not adversely
affect the rights of any person entitled to indemnification for any event
occurring prior to such amendment or repeal.
Interstate Management's Bylaws provide for indemnification by Interstate
Management of its officers and certain non-officer employees under certain
circumstances against expenses (including attorneys' fees, judgments, fines and
amounts paid in settlement) reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of Interstate Management if such person acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of Interstate Management, and, with respect to criminal actions
or proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
II-1
<PAGE> 93
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Interstate Management has issued unregistered securities to a limited number of
persons, as described below. No underwriters or underwriting discounts or
commissions were involved. There was no public offering in any such transaction,
and Interstate Management believes that each transaction was exempt from the
registration requirements of the Securities Act of 1933, as amended, by reason
of Section 4(2) thereof, based on the private nature of the transactions and the
financial sophistication of the purchasers, all of whom had access to complete
information concerning Interstate Management and acquired the securities for
investment and not with a view to the distribution thereof.
(1) On June 2, 1998, Interstate Management issued an aggregate of 9,900
shares of Interstate Management's Class B Non-Voting Common Stock to
Patriot American Hospitality, Inc. in exchange for (i) a 35% managing
membership interest in Interstate Hotels, LLC; (ii) Patriot's rights under
its contract with Interstate Hotels, LLC pursuant to which Interstate
Hotels, LLC agreed not to pursue or conduct any third-party hotel
management business other than that in existence on June 2, 1998 (including
any renewals or extensions of management contracts in existence on such
date); and (iii) Patriot's rights under its contract with Interstate
Hotels, LLC pursuant to which Interstate Hotels, LLC agreed that it would
cease to manage certain identified hotels upon consummation of the
spin-off.
(2) On June 2, 1998, Interstate Management issued an aggregate of 100
shares of Interstate Management's Class A Voting Common Stock to
PAH-Interstate Holdings, Inc. for an aggregate purchase price of $478,836.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a complete list of Exhibits filed as part of this
Registration Statement.
<TABLE>
<S> <C>
2.1* Form of Distribution Agreement by and among Patriot American
Hospitality, Inc. and Interstate Hotels Management, Inc.
3.1 Form of Articles of Amendment and Restatement of Interstate
Hotels Management, Inc.
3.2+ Form of Amended and Restated Bylaws of Interstate Hotels
Management, Inc.
3.3 Form of Shareholder Rights Plan of Interstate Hotels
Management, Inc.
5.1* Opinion of Goodwin, Procter & Hoar LLP
10.1+ Form of Limited Liability Company Agreement of IHC II, LLC
10.2+ Form of Amended and Restated Limited Liability Company
Agreement of Interstate Hotels, LLC
10.3+ Form of Voting Agreement among Interstate Hotels Management,
Inc. and the identified stockholders of Interstate Hotels
Management, Inc.
10.4 Form of Owner Agreement by and between Patriot American
Hospitality Partnership, L.P., Wyndham International
Operating Partnership, L.P., IHC II, LLC and [Marriott
International, Inc./Marriott Hotel Services, Inc.]
10.5 Form of Lease Agreement
10.6 Form of Management Agreement by and between Wyndham
International Operating Partnership, L.P. and IHC II, LLC
10.7 Form of Submanagement Agreement by and between [Marriott
International, Inc./Marriott Hotel Services, Inc.] and IHC
II, LLC
10.8* Form of Interstate Hotels Management, Inc. Guaranty
10.9 Settlement Agreement dated as of May 27, 1998 by and among
Marriott International, Inc., Interstate Hotels Corporation,
Interstate Hotels Company, Patriot American Hospitality,
Inc. and Wyndham International, Inc.
</TABLE>
II-2
<PAGE> 94
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, CONTINUED
<TABLE>
<S> <C>
10.10+ Employment Agreement by and between Interstate Hotels
Management, Inc. and Thomas F. Hewitt
10.11* Employment Agreement by and between Interstate Hotels
Management, Inc. and J. William Richardson
10.12+ Employment Agreement by and between Interstate Hotels
Management, Inc. and Henry L. Ciaffone
10.13+ Employment Agreement by and between Interstate Hotels
Management, Inc. and Charles R. Tomb, as amended
21.1* List of Subsidiaries of Interstate Hotels Management, Inc.
23.1 Consent of PricewaterhouseCoopers LLC
23.2* Consent of Goodwin, Procter & Hoar LLP (to be included in
Exhibit 5.1)
27.1+ Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
(b) All applicable required schedules are included in the Information
Statement/Prospectus and are therefore omitted from this section.
ITEM 17. UNDERTAKINGS
(a) -- (g) Not applicable.
(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(i) -- (j) Not applicable.
II-3
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh,
Commonwealth of Pennsylvania, on April 28, 1999.
Interstate Hotels Management, Inc.
By: /s/ THOMAS F. HEWITT
-----------------------------------
Thomas F. Hewitt
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ THOMAS F. HEWITT Chief Executive Officer and April 28, 1999
- ---------------------------------- Chairman of the Board of Directors
Thomas F. Hewitt (Principal Executive Officer)
/s/ J. WILLIAM RICHARDSON Chief Financial Officer and April 28, 1999
- ---------------------------------- Executive Vice President, Finance
J. William Richardson and Administration (Principal
Financial Officer and Principal
Accounting Officer)
/s/ WILLIAM W. EVANS III Director April 28, 1999
- ----------------------------------
William W. Evans III
</TABLE>
II-4
<PAGE> 1
Exhibit 3.1
FORM OF
ARTICLES OF
AMENDMENT AND RESTATEMENT
OF
INTERSTATE HOTELS MANAGEMENT, INC.
<PAGE> 2
THIS IS TO CERTIFY THAT:
FIRST: Interstate Hotels Management, Inc., a Maryland corporation with
its principal office in the State of Maryland, and its resident agent, as set
forth below in ARTICLES IV and V, respectively, of these Articles of Amendment
and Restatement desires to amend and restate its charter as filed with the State
Department of Assessments and Taxation on May 29, 1998, as amended on October
30, 1998, as set forth in these Articles of Amendment and Restatement.
SECOND: The following provisions are all of the provisions of the
charter currently in effect as hereinafter amended:
ARTICLE I
INCORPORATION
The undersigned, Michael J. O'Connor, whose post office address is c/o
Goodwin, Procter & Hoar LLP, 53 State Street, Boston, Massachusetts, 02109,
being at least eighteen (18) years of age, does hereby form a corporation under
the Maryland General Corporation Law (the "MGCL").
ARTICLE II
NAME
The name of the corporation (the "Corporation") is:
Interstate Hotels Management, Inc.
ARTICLE III
PURPOSES
The Corporation is being formed to operate and manage hotels and to
engage in any lawful act or activity for which a corporation may be organized
under the MGCL. The foregoing purposes shall be in no way limited or restricted
by reference to, or inference from, the terms of any other clause of these
Articles of Incorporation, as amended from time to time, and each shall be
regarded as independent. The foregoing purposes are also to be construed as
powers of the Corporation, and shall be in addition to and not in limitation of
the general powers of corporations under the laws of the State of Maryland.
<PAGE> 3
ARTICLE IV
PRINCIPAL OFFICE ADDRESS
The address of the principal office of the Corporation in Maryland is
c/o The Corporation Trust, Inc., 300 East Lombard Street, Suite 1400, Baltimore,
Maryland 21202.
ARTICLE V
THE RESIDENT AGENT
The resident agent of the Corporation in Maryland is The Corporation
Trust, Inc., whose address is 300 East Lombard Street, Suite 1400, Baltimore,
Maryland 21202.
ARTICLE VI
BOARD OF DIRECTORS
6.1 General Powers; Action by Committee. The business and affairs of
the Corporation shall be managed under the direction of the Board of Directors
and, except as otherwise expressly provided by law, these Articles or the
bylaws, as amended from time to time (the "Bylaws"), of the Corporation, all of
the powers of the Corporation shall be vested in such Board of Directors. Any
action which the Board of Directors is empowered to take may be taken on behalf
of the Board of Directors by a duly authorized committee thereof except (i) to
the extent limited by Maryland law, these Articles or the Bylaws and (ii) for
any action which requires the affirmative vote or approval of a majority of all
Directors then in office (unless, in such case, these Articles or the Bylaws
specifically provide that a duly authorized committee can take such action on
behalf of the Board of Directors). A majority of the Board of Directors shall
constitute a quorum and, except as otherwise specifically provided in these
Articles, the affirmative vote of a majority of the Directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
6.2 Number. Until the annual meeting of stockholders to be held in
2000, the number of Directors of the Corporation shall be fixed at five. From
the date of the annual meeting of stockholders to be held in 2000 (the "First
Annual Meeting Date") until the earliest to occur of (i) such time that there
are no shares of Class B Common Stock outstanding, (ii) such time that there are
no shares of Class C Common Stock outstanding and (iii) September 30, 2003, the
number of Directors of the Corporation shall be fixed at (x) eleven in the event
that, on the First Annual Meeting Date, Patriot American Hospitality, Inc., a
Delaware corporation ("Patriot"), qualifies as a "real estate investment trust"
(within the meaning of Section 856 of the Internal Revenue Code of 1986, as
amended) (a "REIT"), or (y) seven in the event that, on the First Annual Meeting
Date, Patriot does not qualify as a REIT. After the earliest to occur of (A)
such time that there are no shares of Class B Common Stock
2
<PAGE> 4
outstanding, (B) such time that there are no shares of Class C Common Stock
outstanding and (C) September 30, 2003, the number of Directors of the
Corporation shall be fixed from time to time by a resolution duly adopted by the
Board of Directors; provided, however, that the total number of Directors shall
not be increased above (x) eleven in the event that, on the First Annual Meeting
Date, Patriot qualifies as a REIT, or (y) seven in the event that, on the First
Annual Meeting Date, Patriot does not qualify as a REIT, prior to September 30,
2003 without the consent of the Class B Director, if any, or Class C Director,
if any, then serving on the Board of Directors; provided, further, that the
total number of Directors shall not be reduced below eleven prior to September
30, 2003 at any time while Patriot qualifies as a REIT without the consent of
the Class C Director, if any, then serving on the Board of Directors; and
provided, further, that the total number of Directors shall be not fewer than
three unless there are fewer than three stockholders at the time. No reduction
in the number of Directors shall cause the removal of any Director from office
prior to the expiration of his or her term.
6.3 Initial Board; Term; Election. The initial Directors of the
Corporation (hereinafter referred to, together with their direct and indirect
successors, as the "Class A Directors") shall be __________, __________,
___________ and __________. The Class A Directors shall be further classified,
with respect to the term for which they severally hold office, into three
classes, as nearly equal in number as possible. The initial Class A-I Director
of the Corporation, who shall serve a term expiring at the annual meeting of
stockholders to be held in 2000, shall be ; the initial Class A-II Director of
the Corporation, who shall serve a term expiring at the annual meeting of
stockholders to be held in 2001, shall be ____________________; and the initial
Class A-III Directors of the Corporation, who shall serve terms expiring at the
annual meeting of stockholders to be held in 2002, shall be and _________. On
the First Annual Meeting Date, (a) if Patriot qualifies as a REIT, five
additional Class A Directors shall be elected to the Board and such additional
Directors shall be classified by the Board of Directors into appropriate classes
so that the classes of the Board of Directors will thereafter be as nearly equal
in number as possible, or (b) if Patriot does not qualify as a REIT, one
additional Class A Director shall be elected to the Board and such additional
Director shall be classified into the class of Directors whose terms expire in
2003. At each annual meeting of stockholders, the successor or successors of the
group of Class A Directors whose term expires at that meeting shall be elected
by the vote of holders of a plurality of the shares of Class A Common Stock
present in person or represented by proxy at such meeting and entitled to vote
on the election of Class A Directors, and shall hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of his or their election. One Director of the Corporation (hereinafter referred
to, together with his direct and indirect successors, as the "Class B Director")
shall, in accordance with and subject to Section 7.5 hereof, be elected by the
holders of shares of Class B Common Stock. The initial Class B Director of the
Corporation shall be elected at either a meeting of holders of shares of Class B
Common Stock or by the unanimous written consent of such holders, within ten
days after the initial issuance of shares of Class B Common Stock, and shall
serve a term expiring at the annual meeting of stockholders to be held in 2001.
Thereafter, the Class B Director shall serve one-year terms expiring at each
subsequent annual meeting of stockholders. At each meeting of stockholders at
which a Class B Director is to be elected, the Class B Director shall be elected
by the vote of holders of a plurality of the shares of Class
3
<PAGE> 5
B Common Stock present in person or represented by proxy at such meeting and
entitled to vote on the election of Class B Directors. Upon the First Annual
Meeting Date, one Director of the Corporation (hereinafter referred to, together
with his direct and indirect successors, as the "Class C Director") shall, in
accordance with and subject to Section 7.6 hereof, be elected by the holders of
shares of Class C Common Stock. The initial Class C Director of the Corporation
shall be elected on the First Annual Meeting Date at either a meeting of holders
of shares of Class C Common Stock or by the unanimous written consent of such
holders, and shall serve a term expiring at the annual meeting of stockholders
to be held in 2001. Thereafter, the Class C Director shall serve one-year terms
expiring at each subsequent annual meeting of stockholders. At each meeting of
stockholders at which a Class C Director is to be elected, the Class C Director
shall be elected by the vote of holders of a plurality of the shares of Class C
Common Stock present in person or represented by proxy at such meeting and
entitled to vote on the election of Class C Directors. The Directors shall hold
office until their successors are duly elected and qualified or until their
earlier death, disqualification, resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
these Articles or any articles supplementary thereto, the holders of any one or
more series of Stock shall have the right, voting separately as a series or
together with holders of other such series, to elect Directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of such provisions and any articles supplementary applicable thereto, to
the extent applicable, and, except for Class A Directors, such Directors so
elected shall not be divided into classes pursuant to this Section 6.3.
During any period when the holders of any series of Stock have the
right to elect additional Directors as provided for or fixed pursuant to the
provisions of these Articles or any articles supplementary thereto, then upon
commencement and for the duration of the period during which such right
continues: (a) the then otherwise total authorized number of Directors of the
Corporation shall automatically be increased by such specified number of
Directors, and the holders of such Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions and
(b) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification, resignation
or removal. Except as otherwise provided by the Board of Directors in the
resolution or resolutions establishing such series, whenever the holders of any
series of Stock having such right to elect additional Directors are divested of
such right pursuant to the provisions of such Stock, the terms of office of all
such additional Directors elected by the holders of such Stock, or elected to
fill any vacancies resulting from the death, resignation, disqualification or
removal of such additional Directors, shall forthwith terminate and the total
authorized number of Directors of the Corporation shall be reduced accordingly.
6.4 Resignation or Removal of Directors. Any Director may resign from
the Board of Directors or any committee thereof at any time by written notice to
the Board of Directors,
4
<PAGE> 6
effective upon execution and delivery to the Corporation of such notice or upon
any future date specified in the notice. Subject to the rights, if any, of the
holders of any class or series of Stock to elect Directors and to remove any
Director whom such holders have the right to elect, and except as otherwise
provided in Section 7.5.1 and Section 7.6.1, any Director (including persons
elected by Directors to fill vacancies in the Board of Directors) may be removed
from office (a) only with cause and (b) only by the affirmative vote of the
holders of at least 75% of the shares then entitled to vote at a meeting of the
stockholders called for that purpose. At least 30 days prior to any meeting of
stockholders at which it is proposed that any Director be removed from office,
written notice of such proposed removal shall be sent to the Director whose
removal will be considered at the meeting. For purposes of these Articles,
"cause," with respect to the removal of any Director, shall mean only (i)
conviction of a felony, (ii) declaration of unsound mind by order of a court,
(iii) gross dereliction of duty, (iv) commission of any act involving moral
turpitude or (v) commission of an act that constitutes intentional misconduct or
a knowing violation of law if such action in either event results both in an
improper substantial personal benefit to such Director and a material injury to
the Corporation.
6.5 Vacancies. Subject to the rights, if any, of the holders of any
class or series of Stock to elect Directors and to fill vacancies on the Board
of Directors relating thereto, (i) any vacancy on the Board of Directors which
results from the removal of a Director for cause may be filled by the
affirmative vote of a majority of votes cast by the holders of Class A Common
Stock, (ii) any vacancy occurring on the Board of Directors for any reason,
except as a result of an increase in the number of Directors, may be filled by a
majority vote of the remaining Directors, notwithstanding that such majority is
less than a quorum, and (iii) any vacancy occurring on the Board of Directors as
a result of an increase in the number of Directors may be filled by a majority
vote of the entire Board of Directors. A Director elected by the Board of
Directors to fill a vacancy shall hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualified. A Director
elected by the stockholders to fill a vacancy which results from the removal of
a Director shall hold office for the balance of the term of the removed
Director. In the event of a vacancy in the Board of Directors, the remaining
Directors, except as otherwise provided by law or by these Articles or by the
Bylaws, may exercise the powers of the full Board of Directors until such
vacancy is filled.
6.6 Powers. These Articles, as amended or supplemented from time to
time, shall be construed with a presumption in favor of the grant of power and
authority to the Directors. The determination as to any of the following
matters, made in good faith by or pursuant to the direction of the Board of
Directors consistent with these Articles and in the absence of actual receipt of
an improper benefit in money, property or services or active and deliberate
dishonesty established by a court, shall be final and conclusive and shall be
binding upon the Corporation and every holder of shares of its Stock: the amount
of the net income of the Corporation for any period and the amount of assets at
any time legally available for the payment of dividends, redemption of its Stock
or the payment of other distributions on its Stock; the amount of paid-in
surplus, net assets, other surplus, annual or other net profit, net assets in
excess of capital, undivided profits or excess of profits over losses on sales
of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any
5
<PAGE> 7
reserves or charges and the propriety thereof (whether or not any obligation or
liability for which such reserves or charges shall have been created shall have
been paid or discharged); the fair value, or any sale, bid or asked price to be
applied in determining the fair value, of any asset owned or held by the
Corporation; any matter relating to the acquisition, holding and disposition of
any assets by the Corporation; or any other matter relating to the business and
affairs of the Corporation.
ARTICLE VII
STOCK
7.1 Authorized Stock. The total number of shares of stock ("Stock")
which the Corporation has authority to issue is ________________ million
(____________) shares, initially consisting of (i) ______ million (____________)
shares of Preferred Stock, par value $.01 per share; (ii) ______ million
(____________) shares of Class A Common Stock, par value $.01 per share ("Class
A Common Stock"); (iii) ________ (_______) shares of Class B Common Stock, par
value $.01 per share ("Class B Common Stock"); and (iv) _________ (________)
shares of Class C Common Stock, par value $.01 per share ("Class C Common Stock"
and, together with the Class A Common Stock and the Class B Common Stock, the
"Common Stock"). The aggregate par value of all the shares of all classes of
Stock is $__________. If shares of one class of Stock are classified or
reclassified into shares of another class of Stock pursuant to this Article VII,
the number of authorized shares of the former class shall be automatically
decreased and the number of shares of the latter class shall be automatically
increased, in each case by the number of shares so classified or reclassified,
so that the aggregate number of shares of Stock of all classes that the
Corporation has authority to issue shall not be more than the total number of
shares of Stock set forth in the first sentence of this paragraph.
7.2 Preferred Stock. Subject to any limitations prescribed by law, the
Board of Directors is expressly authorized to classify any unissued shares of
Preferred Stock and reclassify any previously classified but unissued shares of
Preferred Stock of any series from time to time, in one or more classes or
series of such Stock and, by filing articles supplementary with the State
Department of Assessments and Taxation of the State of Maryland, to establish or
change from time to time the number of shares to be included in each such class
or series, and to fix the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of each class or series.
Any action by the Board of Directors under this Section 7.2 shall require the
affirmative vote of a majority of the Directors then in office; provided,
however, that by the affirmative vote of a majority of the Directors then in
office, the Board of Directors may appoint a committee to act on behalf of the
Board of Directors under this Section 7.2, and in such event the affirmative
vote of a majority of the members of such committee then in office shall be
required for any action under this Section 7.2.
6
<PAGE> 8
7.3 Common Stock. Except as otherwise expressly provided herein, all
shares of Common Stock shall be identical and shall entitle the holders thereof
to the same rights and privileges. Subject to all of the rights, powers and
preferences of the Preferred Stock and except as provided by law or in these
Articles (or in any articles supplementary regarding any class or series of
Preferred Stock):
7.3.1 Voting Rights. Except as otherwise provided herein, the
holders of shares of Common Stock shall be entitled to vote on all
matters requiring stockholder action, and each holder of shares of
Common Stock shall be entitled to one vote for each share of Common
Stock held by such stockholder. Except as required by law or as set
forth herein, the holders of Common Stock shall vote together as a
single class on all matters submitted to stockholders for a vote.
7.3.2 Dividend Rights. Holders of Common Stock shall be
entitled to receive such dividends and other distributions in cash,
Stock or property of the Corporation as may be authorized and declared
by the Board of Directors upon the Common Stock out of any assets or
funds of the Corporation legally available therefor, but only when and
as authorized by the Board of Directors or any authorized committee
thereof from time to time.
Before payment of any dividends or other distributions, there
may be set aside out of any assets of the Corporation available for
dividends or other distributions such sum or sums as the Board of
Directors may from to time, in its absolute discretion, think proper as
a reserve fund for contingencies, for equalizing dividends or other
distributions, for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors shall
determine to be in the best interests of the Corporation, and the Board
of Directors may modify or abolish any such reserve in the manner in
which it was created.
Notwithstanding any other provision of these Articles, no
dividend or other distribution may be declared or paid upon any class
of Common Stock, whether payable in cash or in shares of such class or
any other class of Common Stock or otherwise, unless a comparable
dividend shall be declared and paid upon each other class of Common
Stock then outstanding. If a dividend declared upon Class A Common
Stock is payable in shares of Class A Common Stock, the comparable
dividend declared upon Class B Common Stock shall be payable in shares
of Class B Common Stock and the comparable dividend declared upon Class
C Common Stock shall be payable in shares of Class C Common Stock, and
vice versa.
7.3.3 Rights Upon Liquidation. Upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
subject to the rights of holders of any shares of Preferred Stock, the
net assets of the Corporation available for distribution to the holders
of Common Stock shall be distributed pro rata to such holders in
proportion to the number of shares of Common Stock held by each.
7
<PAGE> 9
7.4 Class A Common Stock. The holders of the outstanding shares of
Class A Common Stock shall be entitled, as a class, to initially elect four
Class A Directors of the Corporation. At each annual meeting of stockholders,
the presence in person or by proxy of the holders of a majority of the
outstanding shares of Class A Common Stock shall be required and be sufficient
to constitute a quorum of such class for the election of Directors by such
class. Class A Directors may be removed from office in accordance with Section
6.4. In addition, the holders of the outstanding shares of Class A Common Stock
shall be entitled, as a class, to elect additional Class A Directors of the
Corporation if so permitted by these Articles, including, without limitation, as
permitted by Section 6.3, Section 7.5 and Section 7.6.
7.5 Class B Common Stock.
7.5.1 Voting Rights.
(a) The holders of the outstanding shares of Class B
Common Stock shall be entitled, as a class, to elect one Class
B Director of the Corporation. A Class B Director shall be
removed from office (i) with or without cause only by the
affirmative vote of the holders of a majority of the shares of
Class B Common Stock then entitled to vote at a meeting of
such stockholders called for the purpose or by the unanimous
written consent of holders of shares of Class B Common Stock,
(ii) automatically upon the occurrence of a Class B Conversion
Event (as defined below) or (iii) in accordance with Section
6.4. Upon the occurrence of a Class B Conversion Event, the
number of Class A Directors shall be automatically increased
by one and the vacancy created thereby may be filled in
accordance with Section 6.5 either by the remaining Directors
or by the holders of Class A Common Stock. If such vacancy is
filled by the remaining Directors, such remaining Directors
shall classify the new Director into the class of Directors
whose terms expire at the next annual meeting of stockholders.
If such vacancy is filled by the holders of Class A Common
Stock, the remaining Directors shall classify the new Director
into an appropriate class so that the classes of the Board of
Directors will thereafter be as nearly equal in number as
possible. Any Class B Director who dies, resigns, is removed
in accordance with Section 6.4 or otherwise ceases to be a
Director for any reason other than a Class B Conversion Event
shall be replaced by the vote of holders of a plurality of the
shares of Class B Common Stock then entitled to vote at a
meeting of such stockholders called for the purpose or by the
unanimous written consent of holders of Class B Common Stock.
(b) So long as any shares of Class B Common Stock are
outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of
Class B Common Stock then entitled to vote, voting as a class,
at a meeting of such stockholders called for the purpose or by
the unanimous written consent of holders of shares of Class B
Common Stock, enter into a definitive agreement with respect
to, or authorize the corporate
8
<PAGE> 10
action necessary to carry out, a Patriot Related Transaction
(as defined below), if at the time of the vote of the Board of
Directors authorizing the entry into such agreement or the
effectuation of such corporate action Patriot and Wyndham
International, Inc., a Delaware corporation ("Wyndham"),
together with the respective Affiliates (as defined below) of
Patriot and Wyndham, own in the aggregate at least 10% of the
outstanding Common Stock. For purposes of this Article VII,
"Patriot Related Transaction" shall mean (i) a merger,
consolidation, or share exchange with Patriot or Wyndham or
any Affiliate of Patriot or Wyndham; (ii) the sale, lease,
transfer or other disposition of a substantial portion of the
Corporation's assets to Patriot or Wyndham or any Affiliate of
Patriot or Wyndham in one transaction or a series of
transactions within a 12 month period; (iii) the issuance or
transfer by the Corporation, in one transaction or a series of
transactions, of any equity securities of the Corporation
which have an aggregate market value of 10% or more of the
total market value of the outstanding Stock of the Corporation
to Patriot or Wyndham or any Affiliate of Patriot or Wyndham;
(iv) the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation in which anything other than
cash or a pro rata distribution of assets will be received by
Patriot or Wyndham or any Affiliate of Patriot or Wyndham; or
(v) a reverse stock split which has the effect, directly or
indirectly, in one transaction or a series of transactions, of
increasing by 5% or more the proportionate amount of the
outstanding shares of Common Stock owned by Patriot or Wyndham
or any Affiliate of Patriot or Wyndham. For purposes of this
Article VII, an "Affiliate" of a specified individual or
entity is an individual or entity that directly, or indirectly
through one or more intermediaries, controls or is controlled
by, or is under common control with, such specified individual
or entity.
(c) For the purposes of taking the actions specified
in this Section 7.5.1, special meetings of holders of Class B
Common Stock shall be called by the Secretary of the
Corporation upon the written request of the holders of not
less than a majority of the shares of Class B Common Stock
then outstanding. Any such request shall state the purpose of
such meeting and the matters proposed to be acted upon at such
meeting. The Secretary shall inform such holders of Class B
Common Stock of the reasonably estimated cost of preparing and
mailing notice of the meeting and, upon payment to the
Corporation by such stockholders of such costs, the Secretary
shall give notice to each holder of Class B Common Stock
entitled to notice of the meeting. At any such meeting, the
presence in person or by proxy of holders of a majority of the
outstanding shares of Class B Common Stock shall be required
and be sufficient to constitute a quorum for the taking of
action at such meeting. Holders of Class B Common Stock shall
also be entitled to take any action specified in this Section
7.5.1 without a meeting upon the unanimous written consent of
holders of Class B Common Stock.
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<PAGE> 11
7.5.2 Voluntary Conversion into Class A Common Stock. Subject
to and upon compliance with the provisions of Section 7.7, each share
of Class B Common Stock shall be convertible, at the option of the
holder thereof, into one fully paid and non-assessable share of Class A
Common Stock. Each holder of Class B Common Stock shall be entitled to
convert shares of Class B Common Stock if such holder provides a
written request for conversion to the Corporation at least ten business
days prior to the date on which such holder desires to convert his
Class B Common Stock stating the date on which such holder desires to
convert his Class B Common Stock, which notice shall be binding and
irrevocable on the holder and, to the extent the holder otherwise
complies with the provisions of Section 7.7, the Corporation.
7.5.3 Automatic Conversion into Class A Common Stock. Each
share of Class B Common Stock shall automatically be converted into one
fully paid and non-assessable share of Class A Common Stock upon the
sale or other transfer, whether by operation of law or otherwise, of
such share of Class B Common Stock to any individual or entity other
than an Affiliate of Marriott International, Inc., a Delaware
corporation ("Marriott"), or any successor of Marriott or of any
Affiliate of Marriott. In addition, each share of Class B Common Stock
then outstanding shall automatically be converted into one fully paid
and non-assessable share of Class A Common Stock upon the occurrence of
a Class B Conversion Event. A "Class B Conversion Event" shall mean
such time that Marriott, together with its Affiliates, shall cease to
own at least [two percent] of the outstanding Common Stock. Each owner
of record of shares of Class B Common Stock shall provide to the
Corporation, as promptly as practicable, a written statement or
affidavit stating such information as the Corporation may request in
order to determine whether a Class B Conversion Event has occurred
(including, if requested by the Corporation, information relating to
the level of Beneficial Ownership (as defined below) of any class of
Common Stock by such owner of record and such other party or parties
necessary to determine whether a Class B Conversion Event has occurred
(to the extent such information is known to such owner of record)).
7.5.4 Record Ownership. All shares of Class B Common Stock
outstanding shall be owned of record at all times by Marriott, an
Affiliate of Marriott, or a successor of Marriott or of an Affiliate of
Marriott. The direct Beneficial Owner of shares of Class B Common Stock
shall at all times be the owner of record of such shares. "Beneficial
Ownership," when used with respect to ownership of shares of Stock by
any person, shall mean all shares of Stock which are (i) directly owned
by such person or (ii) beneficially owned by such person pursuant to
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided, however, that in determining the number of
shares Beneficially Owned by a person or group, no share shall be
counted more than once although applicable to both clauses (i) and (ii)
of this definition or (in the case of a group) although Beneficially
Owned by more than one person in such group. If a person Beneficially
Owns shares of Stock that are not actually outstanding (e.g., shares
issuable upon the exercise of an option or convertible security)
("Option Shares"), then, whenever these Articles require a
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<PAGE> 12
determination of the percentage of outstanding shares of a class of
Stock Beneficially Owned by that person, the Option Shares Beneficially
Owned by that person shall also be deemed to be outstanding.
7.6 Class C Common Stock.
7.6.1 Voting Rights.
(a) Upon the First Annual Meeting Date, the holders
of the outstanding shares of Class C Common Stock shall be
entitled, as a class, to elect one Class C Director of the
Corporation. A Class C Director shall be removed from office
(i) with or without cause only by the affirmative vote of the
holders of a majority of the shares of Class C Common Stock
then entitled to vote at a meeting of such stockholders called
for the purpose or by the unanimous written consent of holders
of shares of Class C Common Stock, (ii) automatically upon the
occurrence of a Class C Conversion Event (as defined below) or
(iii) in accordance with Section 6.4. Upon the occurrence of a
Class C Conversion Event, the number of Class A Directors
shall be automatically increased by one and the vacancy
created thereby may be filled in accordance with Section 6.5
either by the remaining Directors or by the holders of Class A
Common Stock. If such vacancy is filled by the remaining
Directors, such remaining Directors shall classify the new
Director into the class of Directors whose terms expire at the
next annual meeting of stockholders. If such vacancy is filled
by the holders of Class A Common Stock, the remaining
Directors shall classify the new Director into an appropriate
class so that the classes of the Board of Directors will
thereafter be as nearly equal in number as possible. Any Class
C Director who dies, resigns, is removed in accordance with
Section 6.4 or otherwise ceases to be a Director for any
reason other than a Class C Conversion Event shall be replaced
by the vote of holders of a plurality of the shares of Class C
Common Stock then entitled to vote at a meeting of such
stockholders called for the purpose or by the unanimous
written consent of holders of Class C Common Stock.
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<PAGE> 13
(b) So long as any shares of Class C Common Stock are
outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the shares of
Class C Common Stock then entitled to vote, voting as a class,
at a meeting of such stockholders called for the purpose or by
the unanimous written consent of holders of shares of Class C
Common Stock, enter into a definitive agreement with respect
to, or authorize the corporate action necessary to carry out,
a Marriott Related Transaction (as defined below), if at the
time of the vote of the Board of Directors authorizing the
entry into such agreement or the effectuation of such
corporate action Marriott, together with its Affiliates, owns
in the aggregate at least 10% of the outstanding Common Stock.
For purposes of this Article VII, "Marriott Related
Transaction" shall mean (i) a merger, consolidation, or share
exchange with Marriott or any Affiliate of Marriott; (ii) the
sale, lease, transfer or other disposition of a substantial
portion of the Corporation's assets to Marriott or any
Affiliate of Marriott in one transaction or a series of
transactions within a 12 month period; (iii) the issuance or
transfer by the Corporation, in one transaction or a series of
transactions, of any equity securities of the Corporation
which have an aggregate market value of 10% or more of the
total market value of the outstanding Stock of the Corporation
to Marriott or any Affiliate of Marriott; (iv) the adoption of
any plan or proposal for the liquidation or dissolution of the
Corporation in which anything other than cash or a pro rata
distribution of assets will be received by Marriott or any
Affiliate of Marriott; or (v) a reverse stock split which has
the effect, directly or indirectly, in one transaction or a
series of transactions, of increasing by 5% or more the
proportionate amount of the outstanding shares of Common Stock
owned by Marriott or any Affiliate of Marriott.
(c) For the purposes of taking the actions specified
in this Section 7.6.1, special meetings of holders of Class C
Common Stock shall be called by the Secretary of the
Corporation upon the written request of the holders of not
less than a majority of the shares of Class C Common Stock
then outstanding. Any such request shall state the purpose of
such meeting and the matters proposed to be acted upon at such
meeting. The Secretary shall inform such holders of Class C
Common Stock of the reasonably estimated cost of preparing and
mailing notice of the meeting and, upon payment to the
Corporation by such stockholders of such costs, the Secretary
shall give notice to each holder of Class C Common Stock
entitled to notice of the meeting. At any such meeting, the
presence in person or by proxy of holders of a majority of the
outstanding shares of Class C Common Stock shall be required
and be sufficient to constitute a quorum for the taking of
action at such meeting. Holders of Class C Common Stock shall
also be entitled to take any action specified in this Section
7.6.1 without a meeting upon the unanimous written consent of
holders of Class C Common Stock.
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<PAGE> 14
7.6.2 Voluntary Conversion into Class A Common Stock. Subject
to and upon compliance with the provisions of Section 7.7, each share
of Class C Common Stock shall be convertible, at the option of the
holder thereof, into one fully paid and non-assessable share of Class A
Common Stock. Each holder of Class C Common Stock shall be entitled to
convert shares of Class C Common Stock if such holder provides a
written request for conversion to the Corporation at least ten business
days prior to the date on which such holder desires to convert his
Class C Common Stock stating the date on which such holder desires to
convert his Class C Common Stock, which notice shall be binding and
irrevocable on the holder and, to the extent the holder otherwise
complies with the provisions of Section 7.7, the Corporation.
7.6.3 Automatic Conversion into Class A Common Stock. Each
share of Class C Common Stock shall automatically be converted into one
fully paid and non-assessable share of Class A Common Stock upon the
sale or other transfer, whether by operation of law or otherwise, of
such share of Class C Common Stock to any individual or entity other
than Patriot, Wyndham, any Affiliate of Patriot or Wyndham, or any
successor of Patriot or Wyndham or of any Affiliate of Patriot or
Wyndham. In addition, each share of Class C Common Stock then
outstanding shall automatically be converted into one fully paid and
non-assessable share of Class A Common Stock upon the occurrence of a
Class C Conversion Event. A "Class C Conversion Event" shall mean such
time that Patriot and Wyndham, together with their respective
Affiliates and the successors of Patriot and Wyndham and their
respective Affiliates, shall cease to own at least [two percent] of the
outstanding Common Stock. Each owner of record of shares of Class C
Common Stock shall provide to the Corporation, as promptly as
practicable, a written statement or affidavit stating such information
as the Corporation may request in order to determine whether a Class C
Conversion Event has occurred (including, if requested by the
Corporation, information relating to the level of Beneficial Ownership
(as defined in Section 7.5.4) of any class of Common Stock by such
owner of record and such other party or parties necessary to determine
whether a Class C Conversion Event has occurred (to the extent such
information is known to such owner of record)).
7.6.4 Record Ownership. All shares of Class C Common Stock
outstanding shall be owned of record at all times by Patriot, Wyndham,
an Affiliate of Patriot or Wyndham, or a successor of Patriot or
Wyndham or of an Affiliate of Patriot or Wyndham. The direct Beneficial
Owner (as defined in Section 7.5.4) of shares of Class C Common Stock
shall at all times be the owner of record of such shares.
7.7 Voluntary Conversion Procedures.
7.7.1 Surrender of Certificates. Each conversion of shares of
Class B or Class C Common Stock into shares of Class A Common Stock
pursuant to Section 7.5.2 or Section 7.6.2 shall be effected by the
surrender of the certificate or certificates representing the shares of
Class B or Class C Common Stock to be converted, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly
executed
13
<PAGE> 15
stock powers relating thereto), at the principal executive office of
the Corporation or the offices of the transfer agent for the Common
Stock or such office or offices in the continental United States of an
agent for conversion as may from time to time be designated by notice
to the holders of the Class B and/or Class C Common Stock by the
Corporation, together with written notice by the holder of such Class B
or Class C Common Stock stating that such holder desires to convert the
shares, or a stated number of the shares, of Class B or Class C Common
Stock represented by such certificate(s) into Class A Common Stock,
which notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Class A
Common Stock shall be issued and shall include instructions for
delivery thereof. Upon surrender of a certificate representing Class B
or Class C Common Stock for conversion, the Corporation shall issue and
send by hand delivery, by courier or by first class mail (postage
prepaid) to the holder thereof or to such holder's designee, at the
address designated by such holder, a certificate or certificates for
the number of shares of Class A Common Stock to which such holder shall
be entitled upon conversion. In the event that there shall have been
surrendered a certificate or certificates representing Class B or Class
C Common Stock, only part of which are to be converted, the Corporation
shall issue and send to such holder or such holder's designee, in the
manner set forth in the preceding sentence, a new certificate or
certificates representing the number of shares of Class B or Class C
Common Stock which shall not have been converted. If the certificate or
certificates for Class A Common Stock are to be issued in a name other
than the name of the registered holder of the stock surrendered for
conversion, the Corporation shall not be obligated to issue or deliver
any certificate unless and until the holder of the stock surrendered
has paid to the Corporation the amount of any tax that may be payable
in respect of any transfer involved in such issuance or shall establish
to the satisfaction of the Corporation that such tax has been paid.
7.7.2 Date of Conversion. Such conversion shall be deemed to
have been effected as of the later of (i) the close of business on the
date on which such certificate or certificates shall have been
surrendered or (ii) the date on which the holder shall have fully
complied with the provisions of this Section 7.7, and at such time the
rights of the holder of such Class B or Class C Common Stock (or
specified portion thereof) as to such converted shares shall cease and
the person or persons in whose name or names any certificate or
certificates for shares of Class A Common Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of
record of the shares of Class A Common Stock represented thereby.
7.7.3 Reservation of Class A Common Stock. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Class A Common Stock, solely for the purpose of
issuance upon the conversion of the Class B and Class C Common Stock,
such number of shares of Class A Common Stock as are issuable upon the
conversion of all outstanding shares of Class B and Class C Common
Stock.
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<PAGE> 16
7.7.4 No Reissuance. No share or shares of the Class B or
Class C Common Stock acquired by the Corporation by reason of
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation
shall be authorized to issue. The Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce
the authorized number of shares of the Class B or Class C Common Stock
accordingly.
7.7.5 No Limitation of Automatic Conversion. Nothing in this
Section 7.7 or otherwise shall in any way limit the right of the
Corporation to effect the automatic conversion of shares of Class B or
Class C Common Stock in accordance with the provisions of Sections
7.5.3 and 7.6.3 hereof, and all of such shares shall be deemed
automatically converted into shares of Class A Common Stock in
accordance with such Sections regardless of whether any holder of Class
B or Class C Common Stock to be converted surrenders his or her stock
certificates or otherwise complies with this Section 7.7.
7.8 Classification of Stock. The Board of Directors may classify or
reclassify any unissued shares of Stock from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications, and terms
and conditions of redemption for each class or series, including, but not
limited to, the reclassification of unissued shares of Common Stock to shares of
Preferred Stock or unissued shares of Preferred Stock to shares of Common Stock
or the issuance of any rights plan or similar plan.
7.9 Issuance of Stock. The Board of Directors may authorize the
issuance from time to time of shares of Stock of any class or series, whether
now or hereafter authorized, or securities or rights convertible into shares of
Stock, for such consideration as the Board of Directors may deem advisable (or
without consideration in the case of a share split or dividend), subject to such
restrictions or limitations, if any, as may be set forth in these Articles or
the Bylaws of the Corporation.
7.10 Dividends or Distributions. The Directors may from time to time
authorize and declare and pay to stockholders such dividends or distributions in
cash, property or other assets of the Corporation or in securities of the
Corporation or any other entity or from any other source as the Directors in
their discretion shall determine.
7.11 Ambiguity. In the case of an ambiguity in the application of any
of the provisions of this Article VII, the Board of Directors shall have the
power to determine the application of the provisions of this Article VII with
respect to any situation based on the facts known to it.
7.12 Severability. Each provision of this Article VII shall be
severable and an adverse determination as to any such provision shall in no way
affect the validity of any other provision of this Article VII or any other
Article.
15
<PAGE> 17
7.13 Articles and Bylaws. All persons who shall acquire Stock in the
Corporation shall acquire the same subject to the provisions of these Articles
and the Bylaws.
ARTICLE VIII
LIMITATION ON PREEMPTIVE RIGHTS
No holder of any Stock or any other securities of the Corporation,
whether now or hereafter authorized, shall have any preferential or preemptive
rights to subscribe for or purchase any Stock or any other securities of the
Corporation other than such rights, if any, as the Board of Directors, in its
sole discretion, may fix by articles supplementary, by contract or otherwise;
and any Stock or other securities which the Board of Directors may determine to
offer for subscription may, within the Board of Directors' sole discretion, be
offered to one or more of the holders of any class, series or type of Stock or
other securities at the time outstanding to the exclusion of other holders of
such class, series or type of Stock or other securities or the holders of any or
all other classes, series or types of Stock or other securities at the time
outstanding.
ARTICLE IX
RIGHTS AND POWERS OF CORPORATION,
BOARD OF DIRECTORS AND OFFICERS
In carrying on its business, or for the purpose of attaining or
furthering any of its objects, the Corporation shall have all of the rights,
powers and privileges granted to corporations by the laws of the State of
Maryland, as well as the power to do any and all acts and things that a natural
person or partnership could do as now or hereafter authorized by law, either
alone or in partnership or conjunction with others. In furtherance and not in
limitation of the powers conferred by statute, the powers of the Corporation and
of the Directors and stockholders shall include the following:
9.1 Conflicts of Interest. Any Director or officer individually, or any
firm of which any Director or officer may be a member, or any corporation or
association of which any Director or officer may be a director or officer or in
which any Director or officer may be interested as the holder of any amount of
its Stock or otherwise, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation, and, in the
absence of fraud, no contract or other transaction shall be thereby affected or
invalidated; provided, however, that (a) such fact shall have been disclosed or
shall have been known to the Board of Directors or the committee thereof that
approved such contract or transaction and such contract or transaction shall
have been approved or ratified by the affirmative vote of a majority of the
disinterested Directors, or (b) such fact shall have been disclosed or shall
have been known to the stockholders entitled to vote, and such contract or
transaction shall have been approved or ratified by a majority of the votes cast
by the stockholders entitled to vote, other than the votes of shares owned of
record or beneficially by the interested Director or
16
<PAGE> 18
officer or corporation, firm or other entity, or (c) the contract or transaction
is fair and reasonable to the Corporation. Any Director of the Corporation who
is also a director or officer of or interested in such other corporation or
association, or who, or the firm of which he is a member, is so interested, may
be counted in determining the existence of a quorum at any meeting of the Board
of Directors of the Corporation which shall authorize any such contract or
transaction, with like force and effect as if he were not such director or
officer of such other corporation or association or were not so interested or
were not a member of a firm so interested.
9.2 Amendment of Articles. The Corporation reserves the right, from
time to time, to make any amendment of its Articles, now or hereafter authorized
by law, including any amendment which alters the contract rights, as expressly
set forth in its Articles, of any outstanding Stock.
No amendment or repeal of these Articles shall be made unless the same
is first approved by the Board of Directors pursuant to a resolution adopted by
the Board of Directors in accordance with the MGCL, and, except as otherwise
provided by law, thereafter approved by the stockholders.
Whenever any vote of the holders of voting stock is required to amend
or repeal any provision of these Articles, then in addition to any other vote of
the holders of voting stock that is required by these Articles, the affirmative
vote of the holders of a majority of the outstanding shares of Stock of the
Corporation entitled to vote on such amendment or repeal, voting together as a
single class, and the affirmative vote of the holders of a majority of the
outstanding shares of each class entitled to vote thereon as a class, shall be
required to amend or repeal any provision of these Articles; provided, however,
that the affirmative vote of the holders of not less than two-thirds of the
outstanding shares entitled to vote on such amendment or repeal, voting together
as a single class, and the affirmative vote of the holders of not less than
two-thirds of the outstanding shares of Class B Common Stock, voting as a single
class, and Class C Common Stock, voting as a single class, shall be required to
amend or repeal any of the provisions of Sections 6.2, 6.3, 6.4 or 6.5 of
Article VI, Sections 7.3, 7.5, 7.6 or 7.7 of Article VII, Article IX or Article
XI of these Articles.
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<PAGE> 19
ARTICLE X
INDEMNIFICATION
The Corporation (which for the purpose of this Article X shall include
predecessor entities of the Corporation as set forth in Section 2-418 of the
MGCL) shall have the power to the maximum extent permitted by Maryland law in
effect from time to time, to obligate itself to indemnify, and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to, (a) any individual who is a present or former Director or officer of the
Corporation or (b) any individual who, while a Director of the Corporation and
at the request of the Corporation, serves or has served as a director, officer,
partner or trustee of another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or any other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his status as a present or former
Director or officer of the Corporation. The Corporation shall have the power,
with the approval of the Board of Directors, to provide such indemnification and
advancement of expenses to a person who served a predecessor of the Corporation
in any of the capacities described in (a) or (b) above and to any employee or
agent of the Corporation or a predecessor of the Corporation.
ARTICLE XI
LIMITATION OF LIABILITY
To the fullest extent permitted under the MGCL as in effect on the date
of filing these Articles or as the MGCL is thereafter amended from time to time,
no Director or officer shall be liable to the Corporation or its stockholders
for money damages. Neither the amendment or the repeal of this Article, nor the
adoption of any other provision in the Corporation's Articles inconsistent with
this Article, shall eliminate or reduce the protection afforded by this Article
to a Director or officer of the Corporation with respect to any matter which
occurred, or any cause of action, suit or claim which but for this Article would
have accrued or arisen, prior to such amendment, repeal or adoption.
ARTICLE XII
EXEMPTION FROM BUSINESS COMBINATION STATUTE
Pursuant to Section 3-603(e)(1)(iii) of the MGCL, the Corporation
expressly elects not to be governed by the provisions of Section 3-602 of the
MGCL with respect to any business combination (as defined in Section 3-601 of
the MGCL).
18
<PAGE> 20
ARTICLE XIII
MISCELLANEOUS
13.1 Provisions in Conflict with Law or Regulations.
(a) The provisions of these Articles are severable, and if the
Board of Directors shall determine that any one or more of such provisions are
in conflict with applicable federal or state laws, the conflicting provisions
shall be deemed never to have constituted a part of these Articles, even without
any amendment of these Articles pursuant to Section 9.2 hereof; provided,
however, that such determination by the Directors shall not affect or impair any
of the remaining provisions of these Articles or render invalid or improper any
action taken or omitted prior to such determination. No Director shall be liable
for making or failing to make such a determination.
(b) If any provision of these Articles or any application of
such provision shall be held invalid or unenforceable by any federal or state
court having jurisdiction, such holding shall not in any manner affect or render
invalid or unenforceable such provision in any other jurisdiction, and the
validity of the remaining provisions of these Articles shall not be affected.
Other applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
THIRD: The amendment to and restatement of the Charter as hereinabove
set forth has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation
is as set forth in Article IV of the foregoing amendment and restatement of the
charter.
FIFTH: The name and address of the Corporation's current resident agent
is as set forth in Article V of the foregoing amendment and restatement of the
charter.
SIXTH: The number of directors of the Corporation and the names of
those currently in office are as set forth in Article VI of the foregoing
amendment and restatement of the Charter.
SEVENTH: The undersigned President acknowledges these Articles of
Amendment and Restatement to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
19
<PAGE> 21
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested to by its Secretary on this _____ day of _____________,
1999.
ATTEST: INTERSTATE HOTELS
MANAGEMENT, INC.
____________________________ By: __________________________
Secretary President
[SEAL]
20
<PAGE> 1
Exhibit 3.3
- --------------------------------------------------------------------------------
INTERSTATE HOTELS MANAGEMENT, INC.
and
[TRANSFER AGENT],
as Rights Agent
Form of
Shareholder Rights Agreement
Dated as of April ____, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Certain Definitions...........................................................................................1
2. Appointment of Rights Agent...................................................................................7
3. Issue of Right Certificates...................................................................................7
4. Form of Right Certificates....................................................................................9
5. Countersignature and Registration............................................................................10
6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed,
Lost or Stolen Right Certificates........................................................................11
7. Exercise of Rights; Exercise Price; Expiration Date of Rights................................................12
8. Cancellation and Destruction of Right Certificates...........................................................14
9. Reservation and Availability of Preferred Stock..............................................................15
10. Preferred Stock Record Date.................................................................................16
11. Adjustment of Exercise Price, Number and Kind of Shares or Number of Rights.................................16
12. Certificate of Adjusted Exercise Price or Number of Shares..................................................25
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power........................................26
14. Fractional Rights and Fractional Shares.....................................................................29
15. Rights of Action............................................................................................29
16. Agreement of Right Holders..................................................................................30
17. Right Certificate Holder Not Deemed a Shareholder...........................................................31
18. Concerning the Rights Agent.................................................................................31
19. Merger or Consolidation or Change of Name of Rights Agent...................................................31
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
20. Duties of Rights Agent......................................................................................32
21. Change of Rights Agent......................................................................................34
22. Issuance of New Right Certificates..........................................................................35
23. Redemption..................................................................................................36
24. Exchange....................................................................................................37
25. Notice of Certain Events....................................................................................39
26. Notices.....................................................................................................40
27. Supplements and Amendments..................................................................................40
28. Successors..................................................................................................41
29. Determinations and Actions by the Board of Directors........................................................41
30. Benefits of this Agreement..................................................................................42
31. Severability................................................................................................42
32. Governing Law...............................................................................................42
33. Counterparts................................................................................................42
34. Descriptive Headings........................................................................................42
</TABLE>
Exhibit A -- Articles Supplementary to the Articles of
Incorporation classifying and designating
the Series A Junior Participating
Cumulative Preferred Stock
Exhibit B -- Form of Right Certificate
ii
<PAGE> 4
SHAREHOLDER RIGHTS AGREEMENT
Agreement, dated as of April ____, 1999 between Interstate Hotels
Management, Inc., a Maryland corporation (the "Company"), and [TRANSFER AGENT],
a _________________ (the "Rights Agent").
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company desires to provide
shareholders of the Company with the opportunity to benefit from the long-term
prospects and value of the Company and to ensure that shareholders of the
Company receive fair and equal treatment in the event of any proposed takeover
of the Company; and
WHEREAS, effective as of April ___, 1999 the Board of Directors of the
Company authorized and declared a dividend distribution of one Right (as such
term is hereinafter defined) for each outstanding share of Common Stock, par
value $0.01 per share, of the Company (the "Common Stock") outstanding as of the
close of business on April __, 1999 (the "Record Date"), and contemplates the
issuance of one Right for each share of Common Stock of the Company issued
(whether originally issued or sold from the Company's treasury, except in the
case of treasury shares having associated Rights) between the Record Date and
the earlier of the Distribution Date or the Expiration Date (as such terms are
hereinafter defined), each Right initially representing the right to purchase
[one one-thousandth] of a share of Series A Junior Participating Cumulative
Preferred Stock of the Company having the rights, powers and preferences set
forth on Exhibit A hereto, upon the terms and subject to the conditions
hereinafter set forth (the "Rights"); and
WHEREAS, the Company desires to appoint the Rights Agent to act as
rights agent hereunder, in accordance with the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
<PAGE> 5
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates (as such term is
hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, shall be the Beneficial Owner (as such term is hereinafter defined)
of 10% or more of the shares of Common Stock of the Company then outstanding,
but shall not include (i) the Company, (ii) any Subsidiary (as such term is
hereinafter defined) of the Company, (iii) any employee benefit plan or
compensation arrangement of the Company or any Subsidiary of the Company or (iv)
any Person holding shares of Common Stock of the Company organized, appointed or
established by the Company or any Subsidiary of the Company for or pursuant to
the terms of any such employee benefit plan or compensation arrangement (the
Persons described in clauses (i) through (iv) above are referred to herein as
"Exempt Persons").
Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition by the Company of Common Stock of the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 10% or more
of the shares of Common Stock of the Company then outstanding; provided,
however, that if a Person shall become the Beneficial Owner of 10% or more of
the shares of Common Stock of the Company then outstanding by reason of share
purchases by the Company and shall, after such share purchases by the Company,
become the Beneficial Owner of any additional shares (other than pursuant to a
stock split, stock dividend or similar transaction) of Common Stock of the
Company and immediately thereafter be the Beneficial Owner of 10% or more of the
shares of Common Stock of the Company then outstanding, then such Person shall
be deemed to be an "Acquiring Person."
In addition, notwithstanding the foregoing, a Person shall not be an
"Acquiring Person" if (i) the Board of Directors of the Company determines that
a Person who would otherwise have been an "Acquiring Person," as defined
pursuant to the foregoing provisions of this Section 1(a), on the date of this
Agreement became such inadvertently, and, if the Board of Directors of the
Company so requests, such Person shall have taken or agreed to take such action
as the Board of Directors shall have deemed appropriate (any such Person being
referred to herein as an "Inadvertent Grandfathered Person"), or (ii) the Board
of Directors of the Company determines that a Person (including an Inadvertent
Grandfathered Person) who would otherwise be an "Acquiring Person," has become
such inadvertently, and such Person divests as promptly as practicable (or
within such period of time as the Board of Directors of the Company determines
is reasonable) a sufficient number of shares of Common Stock of the Company so
that such Person would no longer be an "Acquiring Person," as defined pursuant
to the foregoing provisions of this Section 1(a). Notwithstanding the foregoing,
(A) an Inadvertent Grandfathered Person shall become an Acquiring Person if
after the date of this Agreement such Inadvertent Grandfathered Person becomes
the Beneficial Owner of more than the percentage of the outstanding shares of
Common Stock of the Company that such Inadvertent Grandfathered Person
Beneficially Owned as of the date of this Agreement plus an additional 1% (the
"Inadvertent Grandfathered Percentage"), (B) in the event any Inadvertent
2
<PAGE> 6
Grandfathered Person shall sell, transfer, or otherwise dispose of any
outstanding shares of Common Stock of the Company after the date of this
Agreement, the Inadvertent Grandfathered Percentage applicable to such
Inadvertent Grandfathered Person shall, subsequent to such sale, transfer or
disposition, mean, with respect to such Inadvertent Grandfathered Person, the
lesser of (x) the Inadvertent Grandfathered Percentage as in effect immediately
prior to such sale, transfer or disposition or (y) the percentage of outstanding
shares of Common Stock of the Company that such Inadvertent Grandfathered Person
Beneficially Owns immediately following such sale, transfer or disposition plus
an additional 1%, and (C) any Inadvertent Grandfathered Person who after the
date of this Agreement becomes the Beneficial Owner of less than 10% of the
shares of Common Stock of the Company then outstanding shall cease to be an
Inadvertent Grandfathered Person. Any references in this Agreement to a 10%
threshold shall mean, solely with respect to any Inadvertent Grandfathered
Person, the Inadvertent Grandfathered Percentage applicable to such Inadvertent
Grandfathered Person.
(b) "Adjustment Shares" shall have the meaning set forth in
Section 11(a)(ii) hereof.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations (the "Rules") under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as in effect on the date of this Agreement; provided,
however, that no Person who is a director or officer of the Company shall be
deemed an Affiliate or an Associate of any other director or officer of the
Company solely as a result of his or her position as director or officer of the
Company.
(d) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, beneficially
owns (as determined pursuant to Rule 13d-3 of the Rules under
the Exchange Act, as in effect on the date of this Agreement);
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has:
(A) the right to acquire (whether such right
is exercisable immediately or only after the passage
of time or upon the satisfaction of any conditions or
both) pursuant to any agreement, arrangement or
understanding (whether or not in writing) (other than
customary agreements with and between underwriters
and selling group members with respect to a bona fide
public offering of securities) or upon the exercise
of conversion rights, exchange rights, rights (other
than the Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed
the "Beneficial Owner"
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<PAGE> 7
of, or to "beneficially own," (1) securities tendered
pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's
Affiliates or Associates until such tendered
securities are accepted for purchase or exchange; (2)
securities issuable upon exercise of these Rights at
any time prior to the occurrence of a Triggering
Event; or (3) securities issuable upon exercise of
Rights from and after the occurrence of a Triggering
Event, which Rights were acquired by such Person or
any of such Person's Affiliates or Associates prior
to the Distribution Date or pursuant to Sections
3(a), 11(i) or 22 hereof; or
(B) the right to vote pursuant to any
agreement, arrangement or understanding (whether or
not in writing); provided, however, that a Person
shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this clause
(B) if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable
proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance
with, the Rules of the Exchange Act and (2) is not
also then reportable by such person on Schedule 13D
under the Exchange Act (or any comparable or
successor report); or
(C) the right to dispose of pursuant to any
agreement, arrangement or understanding (whether or
not in writing) (other than customary arrangements
with and between underwriters and selling group
members with respect to a bona fide public offering
of securities); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (whether or not in writing) (other than
customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities) for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in clause
(B) of Section 1(d)(ii) hereof) or disposing of any securities
of the Company;
provided, however, that (1) no Person engaged in business as an underwriter of
securities shall be deemed the Beneficial Owner of any securities acquired
through such Person's participation as an underwriter in good faith in a firm
commitment underwriting until the expiration of 40 days after the date of such
acquisition, and (2) no Person who is a director or an officer of the Company
shall be deemed, as a result of his or her position as director or officer of
the Company, the Beneficial Owner of any securities of the Company that are
beneficially owned by any other director or officer of the Company.
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<PAGE> 8
(e) "Business Day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the City of New York, New York
are authorized or obligated by law or executive order to close.
(f) "Close of Business" on any given date shall mean 5:00
P.M., New York, New York time, on such date; provided, however, that if such
date is not a Business Day it shall mean 5:00 P.M., New York, New York time, on
the next succeeding Business Day.
(g) "Common Stock" when used in reference to the Company shall
mean the common stock, par value $0.01 per share, of the Company or any other
shares of capital stock of the Company into which such stock shall be
reclassified or changed. "Common Stock" when used with reference to any Person
other than the Company organized in corporate form shall mean (i) the capital
stock or other equity interest of such Person with the greatest voting power,
(ii) the equity securities or other equity interest having power to control or
direct the management of such Person or (iii) if such Person is a Subsidiary of
another Person, the Person or Persons which ultimately control such
first-mentioned Person and which have issued any such outstanding capital stock,
equity securities or equity interest. "Common Stock" when used with reference to
any Person not organized in corporate form shall mean units of beneficial
interest which (x) shall represent the right to participate generally in the
profits and losses of such Person (including without limitation any flow-through
tax benefits resulting from an ownership interest in such Person) and (y) shall
be entitled to exercise the greatest voting power of such Person or, in the case
of a limited partnership, shall have the power to remove or otherwise replace
the general partner or partners.
(h) "Current Value" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(i) "Depositary Agent" shall have the meaning set forth in
Section 7(c) hereof.
(j) "Distribution Date" shall have the meaning defined in
Section 3(a) hereof.
(k) "Exchange Act" shall have the meaning set forth in the
definition of "Affiliate" and "Associate".
(l) "Exempt Person" shall have the meaning set forth in the
definition of "Acquiring Person".
(m) "Exercise Price" shall have the meaning defined in Section
4(a) hereof.
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<PAGE> 9
(n) "Expiration Date" and "Final Expiration Date" shall have
the meanings set forth in Section 7(a) hereof.
(o) "Fair Market Value" of any securities or other property
shall be as determined in accordance with Section 11(d) hereof.
(p) "Inadvertent Grandfathered Percentage" shall have the
meaning set forth in the definition of "Acquiring Person".
(q) "Inadvertent Grandfathered Person" shall have the meaning
set forth in the definition of "Acquiring Person".
(r) "Person" shall mean (a) an individual, a corporation, a
partnership, an association, a joint stock company, a trust, a business trust, a
government or political subdivision, any unincorporated organization, or any
other association or entity, and (b) a "group" as that term is used for purposes
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
(s) "Preferred Stock" shall mean shares of Series [__] Junior
Participating Cumulative Preferred Stock, par value [$0.01] per share, of the
Company having the rights and preferences set forth in the form of Articles
Supplementary attached hereto as Exhibit A.
(t) "Preferred Stock Equivalents" shall have the meaning set
forth in Section 11(b) hereof.
(u) "Principal Party" shall have the meaning defined in
Section 13(b) hereof.
(v) "Redemption Price" shall have the meaning defined in
Section 23 hereof.
(w) "Registered Common Stock" shall have the meaning set forth
in Section 13(b) hereof.
(x) "Right Certificate" shall have the meaning set forth in
Section 3(a) hereof.
(y) "Rules" shall have the meaning set forth in the definition
of "Affiliate" and "Associate".
(z) "Section 11(a)(ii) Event" shall have the meaning defined
in Section 11(a)(ii) hereof.
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<PAGE> 10
(aa) "Section 11(a)(ii) Trigger Date" shall have the meaning
set forth in Section 11(a)(iii) hereof.
(bb) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.
(cc) "Section 24(a)(i) Exchange Ratio" shall have the meaning
set forth in Section 24(a)(i) hereof.
(dd) "Section 24(a)(ii) Exchange Ratio" shall have the meaning
set forth in Section 24(a)(ii) hereof.
(ee) "Spread" shall have the meaning set forth in Section
11(a)(iii) hereof.
(ff) "Stock Acquisition Date" shall mean the date of the first
public announcement (which for purposes of this definition shall include,
without limitation, the issuance of a press release or the filing of a
publicly-available report or other document with the Securities and Exchange
Commission or any other governmental agency) by the Company, acting pursuant to
a resolution adopted by the Board of Directors of the Company, or an Acquiring
Person that an Acquiring Person has become such.
(gg) "Subsidiary" shall mean, with reference to any Person,
any corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient, in the absence of contingencies, to
elect a majority of the board of directors or other persons performing similar
functions of such corporation or other entity are at the time directly or
indirectly beneficially owned or otherwise controlled by such Person either
alone or together with one or more Affiliates of such Person.
(hh) "Substitution Period" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(ii) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date (as
hereinafter defined in Section 3(a)) also be the holders of the Common Stock of
the Company) in accordance with the terms and conditions hereof, and the Rights
Agent hereby accepts such appointment. The Company may from time to time appoint
such Co-Rights Agents as it may deem necessary or desirable. In the event the
Company appoints one or more Co-Rights Agents, the respective duties of the
Rights Agent and any Co-Rights Agents shall be as the Company shall determine.
The
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<PAGE> 11
Company shall give notice to the Rights Agent of the appointment of one or more
Co-Rights Agents and the respective duties of the Rights Agent and any such
Co-Rights Agents.
Section 3. Issue of Right Certificates.
(a) From the date hereof until the earlier of (i) the Close of
Business on the tenth calendar day after the Stock Acquisition Date or (ii) the
Close of Business on the tenth Business Day (or such later calendar day, if any,
as the Board of Directors of the Company may determine in its sole discretion)
after the date a tender or exchange offer by any Person, other than an Exempt
Person, is first published or sent or given within the meaning of Rule 14d-4(a)
of the Exchange Act, or any successor rule, if, upon consummation thereof, such
Person would be the Beneficial Owner of 10% or more of the shares of Common
Stock of the Company then outstanding (including any such date which is after
the date of this Agreement and prior to the issuance of the Rights) (the
earliest of such dates being herein referred to as the "Distribution Date"), (x)
the Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for the Common Stock of the Company registered in the names
of the holders of the Common Stock of the Company (which certificates for Common
Stock of the Company shall be deemed also to be certificates for Rights) and not
by separate certificates, and (y) the Rights will be transferable only in
connection with the transfer of the underlying shares of Common Stock of the
Company. As soon as practicable after the Distribution Date, the Rights Agent
will, at the Company's expense send, by first-class, insured, postage prepaid
mail, to each record holder of the Common Stock of the Company as of the Close
of Business on the Distribution Date, at the address of such holder shown on the
records of the Company, one or more certificates, in substantially the form of
Exhibit B hereto (the "Right Certificates"), evidencing one Right for each share
of Common Stock of the Company so held, subject to adjustment as provided
herein. In the event that an adjustment in the number of Rights per share of
Common Stock of the Company has been made pursuant to Section 11(o) hereof, the
Company may make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) at the time of distribution of the Right
Certificates, so that Right Certificates representing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights. As of
and after the Close of Business on the Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
(b) With respect to certificates for the Common Stock of the
Company issued prior to the Close of Business on the Record Date, the Rights
will be evidenced by such certificates for the Common Stock of the Company on or
until the Distribution Date (or the earlier redemption, expiration or
termination of the Rights), and the registered holders of the Common Stock of
the Company also shall be the registered holders of the associated Rights. Until
the Distribution Date (or the earlier redemption, expiration or termination of
the Rights), the transfer of any of the certificates for the Common Stock of the
Company outstanding prior to the date of this Agreement shall also constitute
the transfer of the Rights associated with the Common Stock of the Company
represented by such certificate.
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<PAGE> 12
(c) Certificates for the Common Stock of the Company issued
after the Record Date, but prior to the earlier of the Distribution Date or the
redemption, expiration or termination of the Rights, shall be deemed also to be
certificates for Rights, and shall bear a legend, substantially in the form set
forth below:
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in a Shareholder Rights
Agreement between Interstate Hotels Management, Inc. and
[TRANSFER AGENT], as Rights Agent, dated as of April ___,
1999, as amended, restated, renewed or extended from time to
time (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on
file at the principal offices of Interstate Hotels Management,
Inc. and the stock transfer administration office of the
Rights Agent. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this
certificate. Interstate Hotels Management, Inc. may redeem the
Rights at a redemption price of $0.01 per Right, subject to
adjustment, under the terms of the Rights Agreement.
Interstate Hotels Management, Inc. will mail to the holder of
this certificate a copy of the Rights Agreement, as in effect
on the date of mailing, without charge promptly after receipt
of a written request therefor. Under certain circumstances,
Rights issued to or held by Acquiring Persons or any
Affiliates or Associates thereof (as defined in the Rights
Agreement), and any subsequent holder of such Rights, may
become null and void. The Rights shall not be exercisable, and
shall be void so long as held, by a holder in any jurisdiction
where the requisite qualification, if any, to the issuance to
such holder, or the exercise by such holder, of the Rights in
such jurisdiction shall not have been obtained or be
obtainable.
With respect to such certificates containing the foregoing legend, the Rights
associated with the Common Stock of the Company represented by such certificates
shall be evidenced by such certificates alone until the Distribution Date (or
the earlier redemption, expiration or termination of the Rights), and the
transfer of any of such certificates shall also constitute the transfer of the
Rights associated with the Common Stock of the Company represented by such
certificates. In the event that the Company purchases or acquires any shares of
Common Stock of the Company after the Record Date but prior to the Distribution
Date, any Rights associated with such Common Stock of the Company shall be
deemed canceled and retired so that the Company shall not be entitled to
exercise any Rights associated with the shares of Common Stock of the Company
which are no longer outstanding. The failure to print the
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<PAGE> 13
foregoing legend on any such certificate representing Common Stock of the
Company or any defect therein shall not affect in any manner whatsoever the
application or interpretation of the provisions of Section 7(e) hereof.
Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of election to
purchase shares and of assignment and certificate to be printed on the reverse
thereof) shall each be substantially in the form of Exhibit B hereto and may
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law, rule or regulation or with any rule or
regulation of any stock exchange on which the Rights may from time to time be
listed, or to conform to customary usage. The Right Certificates shall be in a
machine printable format and in a form reasonably satisfactory to the Rights
Agent. Subject to the provisions of Section 11 and Section 22 hereof, the Right
Certificates, whenever distributed, shall be dated as of the Record Date, shall
show the date of countersignature, and on their face shall entitle the holders
thereof to purchase such number of one one-thousandths of a share of Preferred
Stock as shall be set forth therein at the price set forth therein (the
"Exercise Price"), but the number of such shares and the Exercise Price shall be
subject to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by (i) an Acquiring
Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee
of an Acquiring Person (or of any Associate or Affiliate of an Acquiring Person)
who becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding (whether or not in writing)
regarding the transferred Rights, the shares of Common Stock of the Company
associated with such Rights or the Company or (B) a transfer which the Board of
Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of Section
7(e) hereof, and any Right Certificate issued pursuant to Section 6, Section 11
or Section 22 upon transfer, exchange, replacement or adjustment of any other
Right Certificate referred to in this sentence, shall have deleted therefrom the
second sentence of the existing legend on such Right Certificate and in
substitution therefor shall contain the following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or an Associate of an Acquiring Person
(as such terms are defined in the Rights Agreement). This
Right
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<PAGE> 14
Certificate and the Rights represented hereby may become null
and void under certain circumstances as specified in Section
7(e) of the Rights Agreement.
The Company shall give notice to the Rights Agent promptly after it becomes
aware of the existence and identity of any Acquiring Person or any Associate or
Affiliate thereof. The Company shall instruct the Rights Agent in writing of the
Rights which should be so legended. The failure to print the foregoing legend on
any such Right Certificate or any defect therein shall not affect in any manner
whatsoever the application or interpretation of the provisions of Section 7(e)
hereof.
Section 5. Countersignature and Registration.
(a) The Right Certificates shall be executed on behalf of the
Company by its Chairman of the Board of Directors, or its President or any Vice
President and by its Treasurer or any Assistant Treasurer, or by its Secretary
or any Assistant Secretary, either manually or by facsimile signature, and shall
have affixed thereto the Company's seal or a facsimile thereof which shall be
attested to by the Secretary or any Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by an authorized signatory of the Rights Agent and shall not be
valid for any purpose unless so countersigned, and such countersignature upon
any Right Certificate shall be conclusive evidence, and the only evidence, that
such Right Certificate has been duly countersigned as required hereunder. In
case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by an authorized
signatory of the Rights Agent, and issued and delivered by the Company with the
same force and effect as though the person who signed such Right Certificates
had not ceased to be such officer of the Company; and any Right Certificates may
be signed on behalf of the Company by any person who, at the actual date of the
execution of such Right Certificate, shall be a proper officer of the Company to
sign such Right Certificate, although at the date of the execution of this
Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at one of its offices designated as the appropriate
place for surrender of Right Certificates upon exercise or transfer, books for
registration and transfer of the Right Certificates issued hereunder. Such books
shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
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<PAGE> 15
(a) Subject to the provisions of Section 4(b), Section 7(e)
and Section 14 hereof, at any time after the Close of Business on the
Distribution Date, and at or prior to the Close of Business on the Expiration
Date, any Right Certificate or Certificates may be transferred, split up,
combined or exchanged for another Right Certificate or Certificates, entitling
the registered holder to purchase a like number of one one-thousandths of a
share of Preferred Stock (or following a Triggering Event, preferred stock,
cash, property, debt securities, Common Stock of the Company or any combination
thereof) as the Right Certificate or Certificates surrendered then entitled such
holder to purchase and at the same Exercise Price. Any registered holder
desiring to transfer, split up, combine or exchange any Right Certificate shall
make such request in writing delivered to the Rights Agent, and shall surrender
the Right Certificate or Certificates to be transferred, split up, combined or
exchanged, with the form of assignment and certificate duly executed, at the
office or offices of the Rights Agent designated for such purpose. Neither the
Rights Agent nor the Company shall be obligated to take any action whatsoever
with respect to the transfer of any such surrendered Right Certificate until the
registered holder shall have completed and signed the certificate contained in
the form of assignment on the reverse side of such Right Certificate and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to Section
4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person
entitled thereto a Right Certificate or Certificates, as the case may be, as so
requested. The Company may require payment by the registered holder of a Right
Certificate, of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Right Certificate, and, in case of loss, theft or destruction,
of indemnity or security satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate, if
mutilated, the Company will execute and deliver a new Right Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Exercise Price; Expiration Date of
Rights.
(a) Subject to Section 7(e) hereof, the registered holder of
any Right Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and the certificate on the reverse side thereof duly
executed, to the Rights Agent at the office or offices of the Rights Agent
designated for such purpose, together with payment of the aggregate Exercise
Price for the total number of one one-thousandths of a share of Preferred Stock
(or other securities, cash or other assets, as
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<PAGE> 16
the case may be) as to which such surrendered Rights are then exercised, at or
prior to the earlier of (i) the Close of Business on the tenth anniversary of
the date of this Agreement (the "Final Expiration Date"), (ii) the time at which
the Rights are redeemed as provided in Section 23 hereof or (iii) the time at
which such Rights are exchanged as provided in Section 24 hereof (the earlier of
(i), (ii) or (iii) being herein referred to as the "Expiration Date"). Except as
set forth in Section 7(e) hereof and notwithstanding any other provision of this
Agreement, any Person who prior to the Distribution Date becomes a record holder
of shares of Common Stock of the Company may exercise all of the rights of a
registered holder of a Right Certificate with respect to the Rights associated
with such shares of Common Stock of the Company in accordance with the
provisions of this Agreement, as of the date such Person becomes a record holder
of shares of Common Stock of the Company.
(b) The Exercise Price for each one one-thousandth of a share
of Preferred Stock pursuant to the exercise of a Right shall initially be
$______, shall be subject to adjustment from time to time as provided in Section
11 and Section 13 hereof and shall be payable in lawful money of the United
States of America in accordance with Section 7(c) below.
(c) As promptly as practicable following the Distribution
Date, the Company shall deposit with a corporation, trust, bank or similar
institution in good standing organized under the laws of the United States or
any State of the United States, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision or
examination by a federal or state authority (such institution is hereinafter
referred to as the "Depositary Agent"), certificates representing the shares of
Preferred Stock that may be acquired upon exercise of the Rights and the Company
shall cause such Depositary Agent to enter into an agreement pursuant to which
the Depositary Agent shall issue receipts representing interests in the shares
of Preferred Stock so deposited. Upon receipt of a Right Certificate
representing exercisable Rights, with the form of election to purchase and the
certificate on the reverse side thereof duly executed, accompanied by payment of
the Exercise Price for the shares to be purchased and an amount equal to any
applicable transfer tax (as determined by the Rights Agent) in cash, or by
certified check or bank draft payable to the order of the Company, the Rights
Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) requisition
from the Depositary Agent (or make available, if the Rights Agent is the
Depositary Agent) depository receipts or certificates for the number of one
one-thousandths of a share of Preferred Stock to be purchased and the Company
hereby irrevocably authorizes the Depositary Agent to comply with all such
requests, (ii) when appropriate, requisition from the Company the amount of
cash, if any, to be paid in lieu of issuance of fractional shares in accordance
with Section 14 hereof, (iii) promptly after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names as
may be designated by such holder and (iv) when appropriate, after receipt
promptly deliver such cash to or upon the order of the registered holder of such
Right Certificate. In the event that the Company is obligated to issue other
securities (including Common Stock) of the Company, pay
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<PAGE> 17
cash or distribute other property pursuant to Section 11(a) hereof, the Company
will make all arrangements necessary so that such other securities, cash or
other property are available for distribution by the Rights Agent, if and when
appropriate. The payment of the Exercise Price may be made in cash or by
certified or bank check payable to the order of the Company, or by wire transfer
of immediately available funds to the account of the Company (provided that
notice of such wire transfer shall be given by the holder of the related Right
to the Rights Agent).
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to the registered holder of
such Right Certificate or to his duly authorized assigns, subject to the
provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event or
Section 13 Event, any Rights beneficially owned by (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any Associate or Affiliate of an Acquiring Person) who
becomes a transferee after the Acquiring Person becomes such or (iii) a
transferee of an Acquiring Person (or of any Associate or Affiliate of an
Acquiring Person) who becomes a transferee prior to or concurrently with the
Acquiring Person becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights, the shares of Common Stock of the Company
associated with such Rights or the Company, or (B) a transfer which the Board of
Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall be null and void without any further action and no holder of
such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
use all reasonable efforts to ensure that the provisions of this Section 7(e)
and Section 4(b) hereof are complied with, but shall have no liability to any
holder of Right Certificates or other Person as a result of its failure to make
any determinations with respect to an Acquiring Person or any Affiliates or
Associates of an Acquiring Person or any transferee of any of them hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder of Rights upon the
occurrence of any purported exercise as set forth in this Section 7 unless such
registered holder shall have (i) completed and signed the certificate contained
in the form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the
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<PAGE> 18
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Right Certificates to the Company.
Section 9. Reservation and Availability of Preferred Stock.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock or any authorized and issued shares of Preferred Stock held in
its treasury, the number of shares of Preferred Stock that will be sufficient to
permit the exercise in full of all outstanding and exercisable Rights. Upon the
occurrence of any events resulting in an increase in the aggregate number of
shares of Preferred Stock issuable upon exercise of all outstanding Rights in
excess of the number then reserved, the Company shall make appropriate increases
in the number of shares so reserved.
(b) The Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares of Preferred Stock
issued or reserved for issuance to be listed, upon official notice of issuance,
upon the principal national securities exchange, if any, upon which the Common
Stock of the Company is listed or, if the principal market for the Common Stock
of the Company is not on any national securities exchange, to be eligible for
quotation on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or any successor thereto or other comparable quotation system.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as required by law following the
Distribution Date, as the case may be, a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities purchasable upon exercise of the Rights on an appropriate form, (ii)
cause such registration statement to become effective as soon as practicable
after such filing and (iii) cause such registration statement to remain
effective (with a prospectus that at all times meets the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities or (B) the Expiration Date. The Company
will also take such action as may be
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<PAGE> 19
appropriate under, and which will ensure compliance with, the securities or
"blue sky" laws of the various states in connection with the exercisability of
the Rights. The Company may temporarily suspend, for a period of time not to
exceed ninety (90) days after the date determined in accordance with the
provisions of the first sentence of this Section 9(c), the exercisability of the
Rights in order to prepare and file such registration statement and permit it to
become effective. Upon such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect, in each case with prompt written notice to the Rights Agent.
Notwithstanding any such provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all shares of Preferred Stock
delivered upon the exercise of the Rights shall, at the time of delivery of the
certificates or depositary receipts for such shares (subject to payment of the
Exercise Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Right
Certificates or of any certificates for shares of Preferred Stock upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Right Certificates to a person other than, or in respect of the issuance or
delivery of securities in a name other than that of, the registered holder of
the Right Certificates evidencing Rights surrendered for exercise or to issue or
deliver any certificates for securities in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Right Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose name any
certificate for Preferred Stock (including any fraction of a share of Preferred
Stock) is issued upon the exercise of Rights shall for all purposes be deemed to
have become the holder of record of the shares of Preferred Stock represented
thereby on, and such certificate shall be dated, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Exercise Price (and any applicable transfer taxes) was made; provided, however,
that if the date of such surrender and payment is a date upon which the
Preferred Stock transfer books of the Company are closed, such person shall be
deemed to have become the record holder of such shares on, and such certificate
shall be dated, the next succeeding Business Day on which the Preferred Stock
transfer books of the Company are open; and further provided, however, that if
delivery of shares of Preferred Stock is delayed pursuant to Section 9(c), such
Person shall be deemed to have become the record holder of such shares of
Preferred Stock only when
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<PAGE> 20
such shares first become deliverable. Prior to the exercise of the Right
evidenced thereby, the holder of a Right Certificate shall not be entitled to
any rights of a shareholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Exercise Price, Number and Kind of Shares or
Number of Rights. The Exercise Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred
Stock payable in shares of Preferred Stock, (B) subdivide the
outstanding Preferred Stock, (C) combine the outstanding
Preferred Stock into a smaller number of shares or (D) issue
any shares of its capital stock in a reclassification of the
Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company
is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e)
hereof, the Exercise Price in effect at the time of the record
date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number
and kind of shares of capital stock issuable on such date,
shall be proportionately adjusted so that the holder of any
Right exercised after such time shall be entitled to receive
the aggregate number and kind of shares of capital stock
which, if such Right had been exercised immediately prior to
such date and at a time when the Preferred Stock transfer
books of the Company were open, such holder would have owned
upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification;
provided, however, that in no event shall the consideration to
be paid upon the exercise of a Right be less than the
aggregate par value of the shares of capital stock of the
Company issuable upon exercise of a Right. If an event occurs
which would require an adjustment under both Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in
this Section 11(a)(i) shall be in addition to, and shall be
made prior to, any adjustment required pursuant to Section
11(a)(ii) hereof.
(ii) Subject to the provisions of Section 24 hereof,
in the event any Person, alone or together with its Affiliates
and Associates, shall become an Acquiring Person (a "Section
11(a)(ii) Event"), then promptly following any such
occurrence, proper provision shall be made so that each holder
of a Right, except as provided in Section 7(e) hereof, shall
thereafter have a right to receive, upon exercise thereof at
the then current Exercise Price in accordance with the terms
of this Agreement, such number of shares of Preferred Stock of
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<PAGE> 21
the Company as shall equal the result obtained by (x)
multiplying the then current Exercise Price by the then number
of one one-thousandths of a share of Preferred Stock for which
a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, whether or not such
Right was then exercisable, and dividing that product by (y)
50% of the Fair Market Value per one one-thousandth of a share
of the Preferred Stock (determined pursuant to Section 11(d))
on the date of the occurrence of a Section 11(a)(ii) Event
(such number of shares being referred to as the "Adjustment
Shares").
(iii) In lieu of issuing any shares of Preferred
Stock in accordance with Section 11(a)(ii) hereof, the
Company, acting by resolution of the Board of Directors of the
Company, may, and in the event that the number of shares of
Preferred Stock which are authorized by the Company's Articles
of Incorporation but not outstanding or reserved for issuance
for purposes other than upon exercise of the Rights is not
sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this
Section 11(a), the Company, acting by resolution of the Board
of Directors of the Company, shall: (A) determine the excess
of (X) the Fair Market Value of the Adjustment Shares issuable
upon the exercise of a Right (the "Current Value") over (Y)
the Exercise Price attributable to each Right (such excess
being referred to as the "Spread") and (B) with respect to all
or a portion of each Right (subject to Section 7(e) hereof),
make adequate provision to substitute for the Adjustment
Shares, upon payment of the applicable Exercise Price, (1)
cash, (2) a reduction in the Exercise Price, (3) Preferred
Stock Equivalents which the Board of Directors of the Company
has deemed to have the same value as shares of Common Stock of
the Company, (4) debt securities of the Company, (5) other
assets of the Company or (6) any combination of the foregoing
which, when added to any shares of Preferred Stock issued upon
such exercise, has an aggregate value equal to the Current
Value, where such aggregate value has been determined by the
Board of Directors of the Company based upon the advice of a
nationally recognized investment banking firm selected by the
Board of Directors of the Company; provided, however, that if
the Company shall not have made adequate provision to deliver
value pursuant to clause (B) above within 30 days following
the later of (x) the first occurrence of a Section 11(a)(ii)
Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x)
and (y) being referred to herein as the "Section 11(a)(ii)
Trigger Date"), then the Company shall be obligated to
deliver, upon the surrender for exercise of a Right and
without requiring payment of the Exercise Price, shares of
Preferred Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate
value equal to the Spread. If the Board of Directors of the
Company shall determine in good faith that it is likely that
sufficient additional shares of
18
<PAGE> 22
Preferred Stock could be authorized for issuance upon exercise
in full of the Rights, the 30-day period set forth above may
be extended to the extent necessary, but not more than 90 days
after the Section 11(a)(ii) Trigger Date, in order that the
Company may seek stockholder approval for the authorization of
such additional shares (such period, as it may be extended,
being referred to herein as the "Substitution Period"). To the
extent that the Company determines that some action need be
taken pursuant to the first and/or second sentences of this
Section 11(a)(iii), the Company (x) shall provide, subject to
Section 7(e) hereof, that such action shall apply uniformly to
all outstanding Rights and (y) may suspend the exercisability
of the Rights until the expiration of the Substitution Period
in order to seek any authorization of additional shares and/or
to decide the appropriate form of distribution to be made
pursuant to such first sentence and to determine the value
thereof. In the event of any such suspension, the Company
shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended
and a public announcement at such time as the suspension is no
longer in effect. For purposes of this Section 11(a)(iii), the
value of the Preferred Stock shall be the Fair Market Value
(as determined pursuant to Section 11(d) hereof) per share of
the Preferred Stock on the Section 11(a)(ii) Trigger Date and
the value of any Preferred Stock Equivalent shall be deemed to
have the same value as the Preferred Stock on such date.
(b) If the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Stock (or securities having the same or more
favorable rights, privileges and preferences as the shares of Preferred Stock
("Preferred Stock Equivalents")) or securities convertible into Preferred Stock
or Preferred Stock Equivalents at a price per share of Preferred Stock or per
share of Preferred Stock Equivalents (or having a conversion price per share, if
a security convertible into Preferred Stock or Preferred Stock Equivalents) less
than the Fair Market Value (as determined pursuant to Section 11(d) hereof) per
share of Preferred Stock on such record date, the Exercise Price to be in effect
after such record date shall be determined by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of shares of Preferred Stock outstanding on such
record date, plus the number of shares of Preferred Stock which the aggregate
offering price of the total number of shares of Preferred Stock and/or Preferred
Stock Equivalents to be offered (and the aggregate initial conversion price of
the convertible securities so to be offered) would purchase at such Fair Market
Value and the denominator of which shall be the number of shares of Preferred
Stock outstanding on such record date, plus the number of additional shares of
Preferred Stock and Preferred Stock Equivalents to be offered for subscription
or purchase (or into which the convertible securities so to be offered are
initially convertible); provided, however, that in no event shall the
consideration to be paid upon the exercise of a Right be less than the aggregate
par value of the shares of capital stock of the Company issuable upon
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<PAGE> 23
exercise of a Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be the Fair Market Value thereof determined in
accordance with Section 11(d) hereof. Shares of Preferred Stock owned by or held
for the account of the Company shall not be deemed outstanding for the purpose
of any such computation. Such adjustments shall be made successively whenever
such a record date is fixed; and in the event that such rights or warrants are
not so issued, the Exercise Price shall be adjusted to be the Exercise Price
which would then be in effect if such record date had not been fixed.
(c) If the Company shall fix a record date for the making of a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of indebtedness, cash (other
than a regular periodic cash dividend out of the earnings or retained earnings
of the Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
convertible securities, subscription rights or warrants (excluding those
referred to in Section 11(b)), the Exercise Price to be in effect after such
record date shall be determined by multiplying the Exercise Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the Fair Market Value (as determined pursuant to Section 11(d) hereof)
per one one-thousandth of a share of Preferred Stock on such record date, less
the Fair Market Value (as determined pursuant to Section 11(d) hereof) of the
portion of the cash, assets or evidences of indebtedness so to be distributed or
of such convertible securities, subscription rights or warrants applicable to
one one-thousandth of a share of Preferred Stock and the denominator of which
shall be the Fair Market Value (as determined pursuant to Section 11(d) hereof)
per one one-thousandth of a share of Preferred Stock; provided, however, that in
no event shall the consideration to be paid upon the exercise of a Right be less
than the aggregate par value of the shares of stock of the Company issuable upon
exercise of a Right. Such adjustments shall be made successively whenever such a
record date is fixed; and in the event that such distribution is not so made,
the Exercise Price shall again be adjusted to be the Exercise Price which would
be in effect if such record date had not been fixed.
(d) For the purpose of this Agreement, the "Fair Market Value"
of any share of Preferred Stock, Common Stock or any other stock or any Right or
other security or any other property shall be determined as provided in this
Section 11(d).
(i) In the case of a publicly-traded stock or other
security, the Fair Market Value on any date shall be deemed to
be the average of the daily closing prices per share of such
stock or per unit of such other security for the 30
consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; provided, however, that in the
event that the Fair Market Value per share of any share of
stock is determined during a period following the announcement
by the issuer of such stock of (x) a dividend or distribution
20
<PAGE> 24
on such stock payable in shares of such stock or securities
convertible into shares of such stock or (y) any subdivision,
combination or reclassification of such stock, and prior to
the expiration of the 30 Trading Day period after the ex-
dividend date for such dividend or distribution, or the record
date for such subdivision, combination or reclassification,
then, and in each such case, the Fair Market Value shall be
properly adjusted to take into account ex-dividend trading.
The closing price for each day shall be the last sale price,
regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed
or admitted to trading on the New York Stock Exchange or, if
the securities are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to
securities listed on the principal national securities
exchange on which such security is listed or admitted to
trading; or, if not listed or admitted to trading on any
national securities exchange, the last quoted price (or, if
not so quoted, the average of the last quoted high bid and low
asked prices) in the over-the-counter market, as reported by
NASDAQ or such other system then in use; or, if on any such
date no bids for such security are quoted by any such
organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in
such security selected by the Board of Directors of the
Company. If on any such date no market maker is making a
market in such security, the Fair Market Value of such
security on such date shall be determined reasonably and with
utmost good faith to the holders of the Rights by the Board of
Directors of the Company, provided, however, that if at the
time of such determination there is an Acquiring Person, the
Fair Market Value of such security on such date shall be
determined by a nationally recognized investment banking firm
selected by the Board of Directors of the Company, which
determination shall be described in a statement filed with the
Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. The term "Trading Day" shall mean a day
on which the principal national securities exchange on which
such security is listed or admitted to trading is open for the
transaction of business or, if such security is not listed or
admitted to trading on any national securities exchange, a
Business Day.
(ii) If a security is not publicly held or not so
listed or traded, "Fair Market Value" shall mean the fair
value per share of stock or per other unit of such security,
determined reasonably and with utmost good faith to the
holders of the Rights by the Board of Directors of the
Company, provided, however, that if at the time of such
determination there is an Acquiring Person, the Fair Market
Value of such security on such date shall be determined by a
nationally recognized investment banking firm selected by the
Board of Directors of the
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<PAGE> 25
Company, which determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights; provided, however, that
for the purposes of making any adjustment provided for by
Section 11(a)(ii) hereof, the Fair Market Value of a share of
Preferred Stock shall not be less than the product of the then
Fair Market Value of a share of Common Stock multiplied by the
higher of the then Dividend Multiple or Vote Multiple (as both
of such terms are defined in the Articles Supplementary
attached as Exhibit A hereto) applicable to the Preferred
Stock and shall not exceed 105% of the product of the then
Fair Market Value of a share of Common Stock multiplied by the
higher of the then Dividend Multiple or Vote Multiple
applicable to the Preferred Stock.
(iii) In the case of property other than securities,
the Fair Market Value thereof shall be determined reasonably
and with utmost good faith to the holders of Rights by the
Board of Directors of the Company, provided, however, that if
at the time of such determination there is an Acquiring
Person, the Fair Market Value of such property on such date
shall be determined by a nationally recognized investment
banking firm selected by the Board of Directors of the
Company, which determination shall be described in a statement
filed with the Rights Agent and shall be binding upon the
Rights Agent and the holders of the Rights.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Exercise Price shall be required unless such adjustment would
require an increase or decrease of at least 1% in the Exercise Price; provided,
however, that any adjustments which by reason of this Section 11(e) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or to the nearest hundred-thousandth of a share of Common Stock
of the Company or ten-millionth of a share of Preferred Stock, as the case may
be, or to such other figure as the Board of Directors of the Company may deem
appropriate. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three (3) years from the date of the transaction which mandates such
adjustment or (ii) the Expiration Date.
(f) If as a result of any provision of Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Section 11(a), (b), (c), (d), (e),
(g) through (k) and (m), inclusive, and the provisions of Sections 7, 9, 10, 13
and 14 hereof with respect to the Preferred Stock shall apply on like terms to
any such other shares.
22
<PAGE> 26
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of one one-thousandths of a
share of Preferred Stock (or other securities or amount of cash or combination
thereof) purchasable from time to time hereunder upon exercise of the Rights,
all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Exercise Price as a
result of the calculations made in Section 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Exercise Price, that number of one
one-thousandths of a share of Preferred Stock (calculated to the nearest one
ten-millionth) as the Board of Directors of the Company determines is
appropriate to preserve the economic value of the Rights, including, by way of
example, that number obtained by (i) multiplying (x) the number of one
one-thousandths of a share of Preferred Stock for which a Right may be
exercisable immediately prior to this adjustment by (y) the Exercise Price in
effect immediately prior to such adjustment of the Exercise Price and (ii)
dividing the product so obtained by the Exercise Price in effect immediately
after such adjustment of the Exercise Price.
(i) The Company may elect on or after the date of any
adjustment of the Exercise Price to adjust the number of Rights, in substitution
for any adjustment in the number of shares of Preferred Stock purchasable upon
the exercise of a Right. Each of the Rights outstanding after the adjustment in
the number of Rights shall be exercisable for the number of one one-thousandths
of a share of Preferred Stock for which a Right was exercisable immediately
prior to such adjustment. Each Right held of record prior to such adjustment of
the number of Rights shall become that number of Rights (calculated to the
nearest one hundred-thousandth) obtained by dividing the Exercise Price in
effect immediately prior to adjustment of the Exercise Price by the Exercise
Price in effect immediately after adjustment of the Exercise Price. The Company
shall make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Exercise Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least ten (10) days later than the
date of the public announcement. If Right Certificates have been issued, upon
each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Right Certificates on such record date Right Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein (and may bear, at
the option of the
23
<PAGE> 27
Company, the adjusted Exercise Price) and shall be registered in the names of
the holders of record of Right Certificates on the record date specified in the
public announcement.
(j) Irrespective of any adjustment or change in the Exercise
Price or the number of one one-thousandths of a share of Preferred Stock
issuable upon the exercise of the Rights, the Right Certificates theretofore and
thereafter issued may continue to express the Exercise Price per share and the
number of shares which were expressed in the initial Right Certificates issued
hereunder without prejudice to any adjustment or change.
(k) Before taking any action that would cause an adjustment
reducing the Exercise Price below the then stated value, if any, of the number
of one one-thousandths of a share of Preferred Stock issuable upon exercise of
the Rights, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares of Preferred Stock at such
adjusted Exercise Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date
the number of one one-thousandths of a share of Preferred Stock or other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Exercise Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in its good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any
consolidation or subdivision of the Preferred Stock, issuance wholly for cash of
any shares of Preferred Stock at less than the Fair Market Value, issuance
wholly for cash of shares of Preferred Stock or securities which by their terms
are convertible into or exchangeable for shares of Preferred Stock, stock
dividends or issuance of rights, options or warrants referred to hereinabove in
this Section 11, hereafter made by the Company to holders of its Preferred
Stock, shall not be taxable to such shareholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date and so long as the Rights have not been
redeemed pursuant to Section 23 hereof or exchanged pursuant to Section 24
hereof, (i) consolidate with (other than a Subsidiary of the Company in a
transaction which complies with the proviso at the end of this sentence), (ii)
merge with or into, or (iii) sell or transfer (or permit any Subsidiary to sell
or
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transfer), in one transaction or a series of related transactions, assets or
earning power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries taken as a whole, to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with the proviso at the end of this
sentence) if (x) at the time of or immediately after such consolidation, merger
or sale there are any rights, warrants or other instruments outstanding or
agreements or arrangements in effect which would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights, or (y)
prior to, simultaneously with or immediately after such consolidation, merger or
sale the shareholders of a Person who constitutes, or would constitute, the
"Principal Party" for the purposes of Section 13(a) hereof shall have received a
distribution of Rights previously owned by such Person or any of its Affiliates
and Associates; provided, however, that this Section 11(n) shall not affect the
ability of any Subsidiary of the Company to consolidate with, merge with or
into, or sell or transfer assets or earning power to, any other Subsidiary of
the Company. The Company further covenants and agrees that after the
Distribution Date it will not, except as permitted by Section 23 or Section 27
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will substantially
diminish or otherwise eliminate the benefits intended to be afforded by the
Rights.
(o) Notwithstanding anything in this Agreement to the
contrary, in the event the Company shall at any time after the date of this
Agreement and prior to the Distribution Date (i) declare or pay any dividend on
the outstanding Common Stock of the Company payable in shares of Common Stock of
the Company or (ii) effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock of the Company (by reclassification or
otherwise than by payment of dividends in shares of Common Stock of the Company)
into a greater or lesser number of shares of Common Stock of the Company, then
in any such case (A) the number of one one-thousandths of a share of Preferred
Stock purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of one one-thousandths of a share of
Preferred Stock so purchasable immediately prior to such event by a fraction,
the numerator of which is the number of shares of Common Stock of the Company
outstanding immediately prior to such event and the denominator of which is the
number of shares of Common Stock of the Company outstanding immediately after
such event, and (B) each share of Common Stock of the Company outstanding
immediately after such event shall have issued with respect to it that number of
Rights which each share of Common Stock of the Company outstanding immediately
prior to such event had issued with respect to it. The adjustments provided for
in this Section 11(o) shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected.
(p) The exercise of Rights under Section 11(a)(ii) shall only
result in the loss of rights under Section 11(a)(ii) to the extent so exercised
and shall not otherwise affect the rights of holders of Right Certificates under
this Rights Agreement, including rights to purchase securities of the Principal
Party following a Section 13 Event which has occurred or
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may thereafter occur, as set forth in Section 13 hereof. Upon exercise of a
Right Certificate under Section 11(a)(ii), the Rights Agent shall return such
Right Certificate duly marked to indicate that such exercise has occurred.
Section 12. Certificate of Adjusted Exercise Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Preferred Stock and the Common Stock of the Company a copy of such certificate
and (c) mail a brief summary thereof to each holder of a Right Certificate (or,
if prior to the Distribution Date, to each holder of a certificate representing
shares of Common Stock of the Company) in accordance with Section 26 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment contained therein and shall not be deemed to have knowledge of
any such adjustment unless and until it shall have received such certificate.
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Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person (other than a Subsidiary of the Company in a
transaction which is not prohibited by Section 11(n) hereof), and the Company
shall not be the continuing or surviving corporation of such consolidation or
merger, (y) any Person (other than a Subsidiary of the Company in a transaction
which is not prohibited by the proviso at the end of the first sentence of
Section 11(n) hereof) shall consolidate with the Company, or merge with and into
the Company and the Company shall be the continuing or surviving corporation of
such merger and, in connection with such merger, all or part of the shares of
Common Stock of the Company shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property, or (z) the
Company shall sell, mortgage or otherwise transfer (or one or more of its
Subsidiaries shall sell, mortgage or otherwise transfer), in one transaction or
a series of related transactions, assets or earning power aggregating 50% or
more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to any other Person or Persons (other than the Company or any
Subsidiary of the Company in one or more transactions, each of which is not
prohibited by the proviso at the end of the first sentence of Section 11(n)
hereof), then, and in each such case, proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7(e) hereof, shall
have the right to receive, upon the exercise thereof at the then current
Exercise Price in accordance with the terms of this Agreement, such number of
validly authorized and issued, fully paid and nonassessable shares of freely
tradeable Common Stock of the Principal Party (as hereinafter defined in Section
13(b)), free and clear of rights of call or first refusal, liens, encumbrances,
transfer restrictions or other adverse claims, as shall be equal to the result
obtained by (1) multiplying the then current Exercise Price by the number of one
one-thousandths of a share of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event, and dividing
that product by (2) 50% of the Fair Market Value (determined pursuant to Section
11(d) hereof) per share of the Common Stock of such Principal Party on the date
of consummation of such consolidation, merger, sale or transfer; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such consolidation, merger, sale, mortgage or transfer, all the obligations and
duties of the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply to such Principal
Party; and (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common Stock
to permit exercise of all outstanding Rights in accordance with this Section
13(a) and the making of payments in cash and/or other securities in accordance
with Section 11(a)(iii) hereof) in connection with such consummation as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights.
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(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (x) or (y) of the first sentence of Section 13(a), the
Person that is the issuer of any securities into which shares
of Common Stock of the Company are converted in such merger or
consolidation, or, if there is more than one such issuer, the
issuer of Common Stock that has the highest aggregate Fair
Market Value (determined pursuant to Section 11(d)), and if no
securities are so issued, the Person that is the other party
to the merger or consolidation, or, if there is more than one
such Person, the Person the Common Stock of which has the
highest aggregate Fair Market Value (determined pursuant to
Section 11(d)); and
(ii) in the case of any transaction described in
clause (z) of the first sentence of Section 13(a), the Person
that is the party receiving the greatest portion of the assets
or earning power transferred pursuant to such transaction or
transactions, or, if each Person that is a party to such
transaction or transactions receives the same portion of the
assets or earning power transferred pursuant to such
transaction or transactions or if the Person receiving the
largest portion of the assets or earning power cannot be
determined, whichever Person the Common Stock of which has the
highest aggregate Fair Market Value (determined pursuant to
Section 11(d));
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act ("Registered Common
Stock"), or such Person is not a corporation, and such Person is a direct or
indirect Subsidiary or Affiliate of another Person who has Registered Common
Stock outstanding, "Principal Party" shall refer to such other Person; (2) if
the Common Stock of such Person is not Registered Common Stock or such Person is
not a corporation, and such Person is a direct or indirect Subsidiary of another
Person but is not a direct or indirect Subsidiary of another Person which has
Registered Common Stock outstanding, "Principal Party" shall refer to the
ultimate parent entity of such first-mentioned Person; (3) if the Common Stock
of such Person is not Registered Common Stock or such Person is not a
corporation, and such Person is directly or indirectly controlled by more than
one Person, and one or more of such other Persons has Registered Common Stock
outstanding, "Principal Party" shall refer to whichever of such other Persons is
the issuer of the Registered Common Stock having the highest aggregate Fair
Market Value (determined pursuant to Section 11(d)); and (4) if the Common Stock
of such Person is not Registered Common Stock or such Person is not a
corporation, and such Person is directly or indirectly controlled by more than
one Person, and none of such other Persons has Registered Common Stock
outstanding, "Principal Party" shall refer to whichever ultimate parent entity
is the corporation having the greatest stockholders' equity or, if no such
ultimate parent entity is a corporation, "Principal Party" shall refer to
whichever ultimate parent entity is the entity having the greatest net assets.
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(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless prior thereto (x) the Principal Party shall have
a sufficient number of authorized shares of its Common Stock, which have not
been issued or reserved for issuance, to permit the exercise in full of the
Rights in accordance with this Section 13, and (y) the Company and each
Principal Party and each other Person who may become a Principal Party as a
result of such consolidation, merger, sale or transfer shall have executed and
delivered to the Rights Agent a supplemental agreement providing for the terms
set forth in Section 13(a) and (b) and further providing that, as soon as
practicable after the date of any consolidation, merger, sale or transfer of
assets mentioned in Section 13(a), the Principal Party at its own expense will:
(i) prepare and file a registration statement under
the Securities Act with respect to the Rights and the
securities purchasable upon exercise of the Rights on an
appropriate form, cause such registration statement to become
effective as soon as practicable after such filing and cause
such registration statement to remain effective (with a
prospectus that at all times meets the requirements of the
Securities Act) until the Expiration Date;
(ii) qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the
blue sky laws of such jurisdictions as may be necessary or
appropriate;
(iii) list (or continue the listing of) the Rights
and the securities purchasable upon exercise of the Rights on
a national securities exchange or to meet the eligibility
requirements for quotation on NASDAQ; and
(iv) deliver to holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates which comply in all respects with the requirements
for registration on Form 10 under the Exchange Act.
(d) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or By-laws or other
instrument governing its corporate affairs, which provision would have the
effect of (i) causing such Principal Party to issue (other than to holders of
Rights pursuant to this Section 13), in connection with, or as a consequence of,
the consummation of a transaction referred to in this Section 13, shares of
Common Stock of such Principal Party at less than the then current Fair Market
Value (determined pursuant to Section 11(d)) or securities exercisable for, or
convertible into, Common Stock of such Principal Party at less than such Fair
Market Value, or (ii) providing for any special payment, tax or similar
provisions in connection with the issuance of the Common Stock of such Principal
Party pursuant to the provisions of this Section 13, then, in such event, the
Company shall not consummate any such transaction unless prior thereto the
Company and such Principal Party shall have executed and delivered to the Rights
Agent a supplemental
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agreement providing that the provision in question of such Principal Party shall
have been canceled, waived or amended, or that the authorized securities shall
be redeemed, so that the applicable provision will have no effect in connection
with, or as a consequence of, the consummation of the proposed transaction.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(o)
hereof, or to distribute Right Certificates which evidence fractional Rights. If
the Company elects not to issue such fractional Rights, the Company shall pay,
in lieu of such fractional Rights, to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the Fair Market Value
of a whole Right, as determined pursuant to Section 11(d) hereof.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or
to distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock that
are not integral multiples of one one-thousandth of a share of Preferred Stock,
the Company may pay to the registered holders of Right Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the Fair Market Value of one one-thousandth of a share of Preferred
Stock. For purposes of this Section 14(b), the Fair Market Value of one
one-thousandth of a share of Preferred Stock shall be determined pursuant to
Section 11(d) hereof for the Trading Day immediately prior to the date of such
exercise.
(c) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant to
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Right Certificates (or, prior to the Distribution Date, the registered
holders of the Common Stock of the Company); and any registered holder of any
Right Certificate (or, prior to the Distribution Date, of the Common Stock of
the Company), without the consent of the Rights Agent or of the holder of any
other Right Certificate (or, prior to the Distribution Date, of the Common Stock
of the Company), may, in such registered holder's own behalf and for such
registered holder's own benefit,
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<PAGE> 34
enforce, and may institute and maintain any suit, action or proceeding against
the Company to enforce, or otherwise act in respect of, his right to exercise
the Right evidenced by such Right Certificate in the manner provided in such
Right Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Holders of Rights shall be entitled to recover the reasonable costs and
expenses, including attorneys' fees, incurred by them in any action to enforce
the provisions of this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, each Right will be
transferable only simultaneously and together with the transfer of shares of
Common Stock of the Company;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office or offices of the Rights Agent designated for such purpose, duly
endorsed or accompanied by a proper instrument of transfer;
(c) subject to Sections 6(a) and 7(f), the Company and the
Rights Agent may deem and treat the person in whose name a Right Certificate
(or, prior to the Distribution Date, the associated certificate representing
Common Stock of the Company) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of ownership or
writing on the Right Certificates or the associated certificate representing
Common Stock of the Company made by anyone other than the Company or the Rights
Agent) for all purposes whatsoever, and, subject to the last sentence of Section
7(e), neither the Company nor the Rights Agent shall be affected by any notice
to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as the result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligations; provided, however, that the Company must use
its best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
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Section 17. Right Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of Preferred
Stock or any other securities of the Company which may at any time be issuable
on the exercise of the Rights represented thereby, nor shall anything contained
herein or in any Right Certificate be construed to confer upon the holder of any
Right Certificate, as such, any of the rights of a shareholder of the Company or
any right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent such
compensation as shall be agreed to in writing between the Company and the Rights
Agent for all services rendered by it hereunder and, from time to time, on
demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
gross negligence, bad faith or willful misconduct on the part of the Rights
Agent, for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability arising therefrom, directly
or indirectly. The provisions of this Section 18(a) shall survive the expiration
of the Rights and the termination of this Agreement.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Right
Certificate or certificate representing Common Stock of the Company, Preferred
Stock, or other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it in good faith
and without negligence to be genuine and to be signed and executed by the proper
Person or Persons.
(c) The Rights Agent shall not be liable for consequential
damages under any provision of this Agreement or for any consequential damages
arising out of any act or failure to act hereunder.
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Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or shareholder services business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights Agent
under this Agreement without the execution or filing of any paper or any further
act on the part of any of the parties hereto, provided that such corporation
would be eligible for appointment as a successor Rights Agent under the
provisions of Section 21 hereof. In case at the time such successor Rights Agent
shall succeed to the agency created by this Agreement, any of the Right
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Right Certificates so countersigned; and in case at that time any
of the Right Certificates shall not have been countersigned, any successor
Rights Agent may countersign such Right Certificates either in the name of the
predecessor or in the name of the successor Rights Agent; and in all such cases
such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations expressly imposed by this Agreement upon the following
terms and conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel selected
by it (who may be legal counsel for the Company), and the opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in accordance
with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "Fair Market Value") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof shall be herein
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<PAGE> 37
specifically prescribed) may be deemed to be conclusively proved and established
by a certificate signed by a person believed by the Rights Agent to be the
Chairman of the Board of Directors, a Vice Chairman of the Board of Directors,
the President, a Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or an Assistant Secretary of the Company and delivered to the Rights
Agent. Any such certificate shall be full authorization to the Rights Agent for
any action taken or suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own gross negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 7(e) hereof) or any
adjustment required under the provisions of Sections 11, 13 or 23(c) hereof or
responsible for the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by Right Certificates
after receipt of a certificate describing any such adjustment furnished in
accordance with Section 12 hereof), nor shall it be responsible for any
determination by the Board of Directors of the Company of the Fair Market Value
of the Rights or Preferred Stock pursuant to the provisions of Section 14
hereof; nor shall it by any act hereunder be deemed to make any representation
or warranty as to the authorization or reservation of any shares of Common Stock
of the Company or Preferred Stock to be issued pursuant to this Agreement or any
Right Certificate or as to whether any shares of Common Stock of the Company or
Preferred Stock will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder and
certificates delivered
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pursuant to any provision hereof from any person believed by the Rights Agent to
be the Chairman of the Board of Directors, any Vice Chairman of the Board of
Directors, the President, a Vice President, the Secretary, an Assistant
Secretary, the Treasurer or an Assistant Treasurer of the Company, and is
authorized to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken or suffered to
be taken by it in good faith in accordance with instructions of any such
officer. Any application by the Rights Agent for written instructions from the
Company may, at the option of the Rights Agent, set forth in writing any action
proposed to be taken or omitted by the Rights Agent under this Agreement and the
date on or after which such action shall be taken or such omission shall be
effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in such
application on or after the date specified in such application (which date shall
not be less than five (5) Business Days after the date any officer of the
Company actually receives such application, unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such action
(or the effective date in the case of an omission), the Rights Agent shall have
received written instructions in response to such application specifying the
action to be taken or omitted.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not the Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Right Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause (1) or clause
(2) thereof, the Rights Agent shall not take any further action with respect to
such requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days'
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notice in writing mailed to the Company by first class mail. The Company may
remove the Rights Agent or any successor Rights Agent (with or without cause)
upon thirty (30) days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Stock of the Company and Preferred Stock by registered or certified mail,
and to the holders of the Right Certificates by first-class mail. If the Rights
Agent shall resign or be removed or shall otherwise become incapable of acting,
the Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of thirty (30) days after giving
notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Right Certificate (who shall, with such notice, submit his Right
Certificate for inspection by the Company), then the incumbent Rights Agent or
the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be (a)
a corporation organized and doing business under the laws of the United States
or of the State of New York (or of any other state of the United States so long
as such corporation is authorized to do business as a banking institution in the
State of New York), in good standing, which is authorized under such laws to
exercise stock transfer or corporate trust powers and is subject to supervision
or examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$100,000,000 or (b) an Affiliate of a corporation described in clause (a) of
this sentence. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock of the Company and the Preferred Stock, and mail a notice
thereof in writing to the registered holders of the Right Certificates. Failure
to give any notice provided for in this Section 21, however, or any defect
therein, shall not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by the Board of Directors of the Company to reflect any
adjustment or change in the Exercise Price per share and the number or kind or
class of shares of stock or other securities or property purchasable under the
Right Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock of
the Company following the Distribution Date and prior to the redemption or
expiration of the Rights, the Company (a) shall, with respect to shares of
Common Stock of the Company so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, or upon
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<PAGE> 40
the exercise, conversion or exchange of securities hereafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Right Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
however, that (i) no such Right Certificate shall be issued if, and to the
extent that, the Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to the Company or
the person to whom such Right Certificate would be issued, and (ii) no such
Right Certificate shall be issued if, and to the extent that, appropriate
adjustments shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option,
redeem all but not less than all of the then outstanding Rights at a redemption
price of $0.01 per Right, appropriately adjusted to reflect any dividend
declared or paid on the Common Stock of the Company in shares of Common Stock of
the Company or any subdivision or combination of the outstanding shares of
Common Stock of the Company or similar event occurring after the date of this
Agreement (such redemption price, as adjusted from time to time, being
hereinafter referred to as the "Redemption Price"). The Rights may be redeemed
only until the earliest to occur of (i) the time at which any Person becomes an
Acquiring Person or (ii) the Final Expiration Date.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights in accordance with Section 23
hereof, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each Right so held.
Promptly after the action of the Board of Directors of the Company ordering the
redemption of the Rights in accordance with Section 23 hereof, the Company shall
give notice of such redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to the Rights Agent and to all such
holders at their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
Transfer Agent for the Common Stock of the Company. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. The Company promptly shall mail a notice of any such
exchange to all of the holders of such Rights at their last addresses as they
appear upon the registry books of the Rights Agent. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of redemption will state the method by
which the payment of the Redemption Price will be made. Neither the Company nor
any of its Affiliates or Associates may redeem, acquire or purchase for value
any Rights at any time in any manner other than that specifically set forth in
this Section 23 or Section 24 hereof or in connection with the purchase of
shares of Common Stock of the Company prior to the Distribution Date.
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<PAGE> 41
(c) The Company may, at its option, pay the Redemption Price
in cash, shares of Common Stock of the Company (based on the Fair Market Value
of the Common Stock of the Company as of the time of redemption) or any other
form of consideration deemed appropriate by the Board of Directors of the
Company.
Section 24. Exchange.
(a) (i) The Board of Directors of the Company may, at its
option, at any time after any Person becomes an Acquiring
Person, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 7(e) hereof)
for shares of Common Stock of the Company at an exchange ratio
of one share of Common Stock of the Company per Right,
appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date
hereof (such exchange ratio being hereinafter referred to as
the "Section 24(a)(i) Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors of the Company shall not be
empowered to effect such exchange at any time after any Person
(other than an Exempt Person), together with all Affiliates
and Associates of such Person, becomes the Beneficial Owner of
50% or more of the Common Stock of the Company.
(ii) Notwithstanding the foregoing, the Board of
Directors of the Company may, at its option, at any time after
any Person becomes an Acquiring Person, exchange all or part
of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to the
provisions of Section 7(e) hereof) for shares of Common Stock
of the Company at an exchange ratio specified in the following
sentence, as appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after
the date of this Agreement. Subject to the adjustment
described in the foregoing sentence, each Right may be
exchanged for that number of shares of Common Stock of the
Company obtained by dividing the Spread (as defined in Section
11(a)(iii)) by the then Fair Market Value per one
one-thousandth of a share of Preferred Stock on the earlier of
(x) the date on which any person becomes an Acquiring Person
or (y) the date on which a tender or exchange offer by any
Person (other than an Exempt Person) is first published or
sent or given within the meaning of Rule 14d-4(a) of the
Exchange Act or any successor rule, if upon consummation
thereof such Person would be the Beneficial Owner of 10% or
more of the shares of Common Stock of the Company then
outstanding (such exchange ratio being referred to herein as
the "Section 24(a)(ii) Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors of the Company shall not be
empowered to effect such exchange at any time after any Person
(other than an Exempt Person), together with all
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<PAGE> 42
Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Stock of the
Company.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Common Stock
of the Company equal to the number of such Rights held by such holder multiplied
by the Section 24(a)(i) Exchange Ratio or the Section 24(a)(ii) Exchange Ratio,
as applicable. The Company shall promptly give notice of any such exchange in
accordance with Section 26 hereof; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such exchange.
The Company promptly shall mail a notice of any such exchange to all of the
holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
shares of Common Stock of the Company for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will be exchanged. Any
partial exchange shall be effected pro rata based on the number of Rights (other
than Rights which have become void pursuant to the provisions of Section 7(e)
hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company,
at its option, may substitute Preferred Stock (or Preferred Stock Equivalent, as
such term is defined in Section 11(b) hereof) for Common Stock of the Company
exchangeable for Rights, at the initial rate of one one-thousandth of a share of
Preferred Stock (or Preferred Stock Equivalent) for each share of Common Stock
of the Company, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred Stock pursuant to the terms thereof, so that the
fraction of a share of Preferred Stock delivered in lieu of each share of Common
Stock of the Company shall have the same voting rights as one share of Common
Stock of the Company.
(d) In the event that there shall not be sufficient shares of
Common Stock of the Company or Preferred Stock (or Preferred Stock Equivalent)
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional shares of
Common Stock of the Company or Preferred Stock (or Preferred Stock Equivalent)
for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of
Common Stock of the Company or to distribute certificates which evidence
fractional shares of Common Stock of the Company. If the Company elects not to
issue such fractional shares of Common Stock of the Company, the Company shall
pay, in lieu of such fractional shares of Common Stock of the Company, to the
registered holders of the Right Certificates with regard to which such
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<PAGE> 43
fractional shares of Common Stock of the Company would otherwise be issuable, an
amount in cash equal to the same fraction of the Fair Market Value of a whole
share of Common Stock of the Company. For the purposes of this paragraph (e),
the Fair Market Value of a whole share of Common Stock of the Company shall be
the closing price of a share of Common Stock of the Company (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of exchange pursuant to this Section 24.
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<PAGE> 44
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular periodic cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with, or to effect any sale, mortgage or other transfer (or to
permit one or more of its Subsidiaries to effect any sale, mortgage or other
transfer), in one transaction or a series of related transactions, of 50% or
more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to, any other Person (other than a Subsidiary of the Company in one
or more transactions each of which is not prohibited by the proviso at the end
of the first sentence of Section 11(n) hereof, and other than pursuant to the
Merger Agreement, (v) to effect the liquidation, dissolution or winding up of
the Company, or (vi) to declare or pay any dividend on the Common Stock of the
Company payable in Common Stock of the Company or to effect a subdivision,
combination or consolidation of the Common Stock of the Company (by
reclassification or otherwise than by payment of dividends in Common Stock of
the Company) then in each such case, the Company shall give to each holder of a
Right Certificate and to the Rights Agent, in accordance with Section 26 hereof,
a notice of such proposed action, which shall specify the record date for the
purposes of such stock dividend, distribution of rights or warrants, or the date
on which such reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of the shares of Common Stock of the
Company and/or Preferred Stock, if any such date is to be fixed, and such notice
shall be so given in the case of any action covered by clause (i) or (ii) above
at least twenty (20) days prior to the record date for determining holders of
the shares of Preferred Stock for purposes of such action, and in the case of
any such other action, at least twenty (20) days prior to the date of the taking
of such proposed action or the date of participation therein by the holders of
the shares of Common Stock of the Company and/or Preferred Stock, whichever
shall be the earlier; provided, however, no such notice shall be required
pursuant to this Section 25 as a result of any Subsidiary of the Company
effecting a consolidation or merger with or into, or effecting a sale or other
transfer of assets or earnings power to, any other Subsidiary of the Company in
a manner not inconsistent with the provisions of this Agreement.
(b) In case any Section 11(a)(ii) Event shall occur, then, in
any such case, the Company shall as soon as practicable thereafter give to each
registered holder of a Right Certificate and to the Rights Agent, in accordance
with Section 26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 11(a)(ii) hereof.
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<PAGE> 45
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, by facsimile transmission or by nationally recognized
overnight courier addressed (until another address is filed in writing with the
Rights Agent) as follows:
Interstate Hotels Management, Inc.
680 Andersen Drive, Foster Plaza Ten
Pittsburgh, Pennsylvania 15220
Attention: Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Right
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, by facsimile transmission or by
nationally-recognized overnight courier addressed (until another address is
filed in writing with the Company) as follows:
[TRANSFER AGENT]
-------------------------
-------------------------
Attention: Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate (or, prior to
the Distribution Date, to the holder of any certificate representing shares of
Common Stock of the Company) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Prior to the time at which any
Person becomes an Acquiring Person, the Company and the Rights Agent shall, if
the Board of Directors of the Company so directs, supplement or amend any
provision of this Agreement as the Board of Directors of the Company may deem
necessary or desirable without the approval of any holders of certificates
representing shares of Common Stock of the Company. From and after the time at
which any Person becomes an Acquiring Person, the Company and the Rights Agent
shall, if the Board of Directors of the Company so directs, supplement or amend
this Agreement without the approval of any holder of Right Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder, or (iv) to change or
supplement the provisions hereof in any manner which the Board of Directors of
the Company may deem necessary or desirable and which shall not adversely affect
the interests of the holders of Right Certificates (other than an Acquiring
Person or any Affiliate or Associate of an Acquiring Person); provided, however,
that from and after the time at which any Person becomes an Acquiring Person
this Agreement may not
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<PAGE> 46
be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and the benefits to, the holders of Rights (other than an Acquiring
Person or any Affiliate or Associate of an Acquiring Person). Upon the delivery
of such certificate from an appropriate officer of the Company which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or amendment. Prior
to the time at which any Person becomes an Acquiring Person, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock of the Company. Notwithstanding any other provision
hereof, the Rights Agent's consent must be obtained regarding any amendment or
supplement pursuant to this Section 27 which alters the Rights Agent's rights or
duties.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors.
(a) For all purposes of this Agreement, any calculation of the
number of shares of Common Stock of the Company outstanding at any particular
time, including for purposes of determining the particular percentage of such
outstanding shares of Common Stock of the Company of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the Rules under the Exchange Act as in effect on the date
hereof.
(b) The Board of Directors of the Company, acting pursuant to
a resolution adopted by the affirmative vote of a majority of the Board of
Directors in accordance with the Bylaws of the Company, shall have the exclusive
power and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board of Directors of the Company or the
Company pursuant to this Agreement, or as may be necessary or advisable in the
administration of this Agreement, including without limitation the right and
power to (i) interpret the provisions of this Agreement, (ii) make all
adjustments, calculations and determinations required or permitted to be made in
accordance with the terms of this Agreement, (iii) take any and all actions
required or permitted to be taken in accordance with the terms of this
Agreement, and (iv) make any and all other determinations deemed necessary or
desirable for the administration of this Agreement. All such actions,
calculations, adjustments, interpretations and determinations (including for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board of Directors of the Company in good faith shall
(x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other parties, and (y) not subject the Board of
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<PAGE> 47
Directors of the Company or any member thereof to any liability to the holders
of the Rights or to any other person.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Stock of the Company) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock of the Company).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from the Agreement would adversely affect the purpose or effect
of the Agreement, the right of redemption set forth in Section 23 hereof shall
be reinstated and shall not expire until the Close of Business on the tenth day
following the date of such determination by the Board of Directors of the
Company.
Section 32. Governing Law. This Agreement, each Right and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Maryland and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and to be performed entirely within Maryland.
Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as an instrument under seal and attested, all as of the day and
year first above written.
ATTEST: INTERSTATE HOTELS MANAGEMENT, INC.
By: By:
---------------------------- -------------------------------
Name:
Title:
ATTEST: [TRANSFER AGENT], as Rights Agent
By: By:
---------------------------- -------------------------------
Name:
Title:
<PAGE> 1
Exhibit 10.4
FINAL DATED MAY 26, 1998
FORM OF
OWNER AGREEMENT
THIS OWNER AGREEMENT (this "Agreement") is dated as of ________ ___,
1998, by and between [PATRIOT AMERICAN HOSPITALITY PARTNERSHIP, L.P., a Virginia
limited partnership with an address of 1950 Stemmons Freeway, Suite 6001,
Dallas, Texas 75207 or the name of the joint venture ownership entity for those
properties not owned solely by Patriot ] (together with its successors and/or
assigns, "Owner"), PATRIOT AMERICAN HOSPITALITY OPERATING PARTNERSHIP, L.P., a
Delaware limited partnership with an address of 1950 Stemmons Freeway, Suite
6001, Dallas, Texas 75207(together with its successors and/or assigns,
"Lessee"), and IHC II, LLC, a [Delaware] limited liability company with an
address of ___________ (together with its successors and/or assigns, "Primary
Manager"), and [MARRIOTT INTERNATIONAL, INC./MARRIOTT HOTEL SERVICES, INC.], a
Delaware corporation, having an address at 10400 Fernwood Road, Bethesda, MD
20817 (together with its successors and/or assigns, "Submanager" or "Marriott")
WITNESSETH:
WHEREAS, Owner represents and warrants that it holds fee title
[leasehold interest for Atlanta North Marriott] to the parcel of real property
described or shown on Exhibit A attached to this Agreement containing a hotel
building or buildings and certain related facilities (collectively, the
"Hotel");
WHEREAS, simultaneously with the execution of this Agreement, Owner and
Lessee have entered into a lease (the "Lease") of the Hotel to Lessee;
WHEREAS, simultaneously with the execution of this Agreement, Lessee
has entered into a management agreement (the "Primary Management Agreement")
with Primary Manager for the management of the Hotel by Primary Manager;
WHEREAS, simultaneously with the execution of this Agreement, Primary
Manager and Marriott have entered into a Submanagement Agreement (the
"Submanagement Agreement") for the management of the Hotel by Marriott on behalf
of Primary Manager;
WHEREAS, the management of the Hotel pursuant to the Primary Management
Agreement and the Submanagement Agreement is of material benefit to Lessee and
Owner, and Lessee and Owner desire that the Hotel be so managed;
<PAGE> 2
WHEREAS, Primary Manager and Submanager would not enter into the
management arrangements provided for in the Primary Management Agreement and the
Submanagement Agreement without Owner and Lessee entering into this Owner
Agreement, and Owner and Lessee desire to so enter into this Owner Agreement;
WHEREAS, all of the above transactions are being entered into pursuant
to a Settlement Agreement dated as of __________ by and among Patriot American
Hospitality, Inc., Lessee, Marriott and others relating to litigation involving
matters relating to the Hotel and other properties (the "Settlement Agreement");
and
WHEREAS, Owner, Lessee, Primary Manager and Marriott desire to set
forth certain obligations of the parties with respect to the operation of the
Hotel.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency which is hereby acknowledged by the parties, the parties hereto
agree as follows:
1. TERMINATION OF THE LEASE. If the Lease is terminated for any reason
(a "Lease Termination"), Owner shall at the time of or prior to such Lease
Termination either (i) designate another party to succeed to and assume Lessee's
rights and obligations under the Lease, the Primary Management Agreement and
this Agreement, or (ii) enter into a new Lease with such designated party, and
in each such case shall require that such designated party expressly succeed to
and assume the rights and obligations of Lessee under the Primary Management
Agreement and this Agreement. Notwithstanding the foregoing, any such successor
to Lessee shall be subject to Marriott's approval (Primary Manager hereby
agreeing that as long as the Submanagement Agreement remains in effect, Primary
Manager shall have no approval right with respect to such successor to Lessee),
which approval shall not be unreasonably withheld or delayed if such successor
to Lessee meets the criteria set forth below. Such approval or disapproval will
be made within ten (10) business days of request by Owner, provided Owner has
previously provided to Marriott all information reasonably necessary (or as
reasonably requested by Marriott) in order for Marriott to make its decision.
Such successor shall (x) have the financial capability to provide adequate
financial support for the Hotel (Marriott hereby agreeing that a successor which
has the same financial capability as Lessee as of the date of this Agreement
shall be deemed to have such financial capability), (y) be of good character and
reputation, and (z) agree to assume in writing the obligations of Lessee under
the Primary Management Agreement. Marriott's failure to approve or disapprove
such successor to Lessee within ten (10) business days shall be deemed to
constitute Marriott's approval of such replacement to Lessee. If such successor
to Lessee is disapproved by Marriott, Owner shall within thirty (30) days after
such disapproval designate another successor to Lessee, subject to Marriott's
approval rights as stated above. Until such time as a new successor Lessee is
approved and in place as such successor, the disapproved successor shall
continue as successor to Lessee and such continuation shall not constitute a
2
<PAGE> 3
default under this Agreement, the Primary Management Agreement or the
Submanagement Agreement; so long as Owner is diligently continuing to exercise
Owner's reasonable best efforts to designate a successor which is acceptable to
Submanager. If required by Primary Manager, any such successor shall enter into
a new management agreement on the same terms and conditions as the Primary
Management Agreement for the unexpired term of the Primary Management Agreement.
Any replacement of Lessee or any new Lease pursuant to this Section 1 shall be
effected without any interruption or disturbance of rights of Primary Manager
under the Primary Management Agreement or Marriott under the Submanagement
Agreement, respectively, as long as at such time the applicable agreement has
not been terminated in accordance with its terms.
2. TERMINATION OF PRIMARY MANAGEMENT AGREEMENT. If the Primary
Management Agreement is terminated for any reason other than as a result of
termination of the Submanagement Agreement (a "Primary Management Agreement
Termination"), Lessee shall at the time of or prior to such Primary Management
Agreement Termination either (i) designate a third party to succeed to and
assume the rights and obligations of Primary Manager under the Primary
Management Agreement, the Submanagement Agreement and this Agreement or (ii)
designate another third party to enter into a new management agreement in the
form of the Primary Management Agreement. Notwithstanding the foregoing, if a
Primary Management Agreement Termination has occurred and, for reasons beyond
the reasonable control of Lessee, the Lessee has not, notwithstanding the
exercise of its reasonable best efforts, been able to designate a successor to
Primary Manager to assume the Primary Management Agreement, the Submanagement
Agreement, and this Agreement or a successor Primary Manager has not entered
into a new management agreement prior to such Primary Management Agreement
Termination as set forth above, then Lessee shall automatically succeed to and
assume the rights and obligations of Primary Manager under the Submanagement
Agreement, and Lessee hereby accepts assignment of Primary Manager's rights and
obligations under the Submanagement Agreement. In such circumstances, it shall
not be a default of Lessee hereunder so long as Lessee, while acting as
successor to Primary Manager, diligently continues to exercise its reasonable
best efforts to designate a third party to succeed to and assume the rights and
obligations of Primary Manager under this Agreement, the Primary Management
Agreement and the Submanagement Agreement or enter into a new management
agreement consistent with the provisions hereof. In addition, Marriott shall
have the right to direct Lessee to cause a Primary Management Agreement
Termination and to cause lessee to designate a successor to the Primary Manager
as set forth above if a change of control of Primary Manager or its parent
occurs which would entitle Lessee to terminate Primary Manager under Section
10.03 of the Primary Management Agreement, and Lessee and Marriott agree to
cooperate to accomplish the completion of the designation and acceptance of a
successor to Primary Manager hereunder if the Primary Manager is so terminated
pursuant to such Section 10.03 of the Primary Management Agreement.
Notwithstanding anything to the contrary set forth above, any successor to
Primary Manager shall be subject to Marriott's approval, which approval shall
not be unreasonably withheld or
3
<PAGE> 4
delayed if such replacement to Primary Manager meets the criteria set forth
below. Such approval or disapproval will be made within ten (10) business days
of a request by Lessee, provided Lessee has previously provided to Marriott all
information reasonably necessary (or as reasonably requested by Marriott) in
order for Marriott to make its decision. Such successor shall (v) have at least
the same level of financial and managerial independence as Primary Manager
currently has from Owner, Lessee and Marriott and Marriott shall have or been
given the opportunity to have, at nominal cost, the same level of ownership
interest and control as Marriott has directly with respect to Primary Manager as
of the date of the Primary Management Agreement Termination, (w) have the
operational capability to perform its obligations under the Primary
Submanagement Agreement, (x) be of good character and reputation, (y) be a
person in good standing as an operator of Marriott-brand hotels of the brand for
which the Hotel is currently operated, or approved to enter into franchise or
license agreements with Marriott, as determined in accordance with Marriott's
then existing standards, and (z) agree to assume in writing the obligations of
Primary Manager under the Submanagement Agreement. Marriott shall be deemed to
have approved such successor to Primary Manager if it fails to approve or
disapprove such successor within ten (10) business days. If and when Marriott
approves such successor to Primary Manager, Lessee shall (subject to the
occurrence of a subsequent Primary Management Agreement Termination), cause such
approved successor to become the successor to Primary Manager under the
Submanagement Agreement. If despite reasonable best efforts Lessee has failed to
designate a third party to succeed to and assume the rights and obligations of
Primary Manager which has been approved by Marriott within sixty (60) days of a
Primary Management Agreement Termination, then Owner and Marriott shall act
reasonably and in good faith to organize a new entity to act as successor to
Primary Manager which is independent from Owner and Marriott but with respect to
which Owner and Marriott will own equity interests and have control rights
commensurate with their respective ownership interests and control rights in
Primary Manager as of the date of this Agreement. If required by Marriott, any
successor to Primary Manager shall enter into a new submanagement agreement on
the same terms and conditions as the Submanagement Agreement for the unexpired
term of the Submanagement Agreement.
Notwithstanding anything to the contrary set forth above in this
Section 2, as long as [NEWCO] does not itself engage in the business of
operating, franchising or managing its own hotel brand, or the functional
equivalent of a hotel brand, and there is not hereafter a change in control of
Primary Manager or its parent which would entitle Lessee to terminate Primary
Manager under Section 10.03 of the Primary Management Agreement, Marriott shall
approve a subsidiary of [NEWCO] (in which Marriott otherwise has the same level
of control or ownership as it owns directly in the Primary Manager as of the
date of any designation of the subsidiary as a successor Primary Manager) as a
successor Primary Manager.
Without limiting the provisions set forth in Sections 1 and 2 of this
Agreement, the parties acknowledge that the intent of the provisions in such
Sections is that the Submanagment Agreement and the rights and benefits of the
Submanager thereunder shall not be terminated or
4
<PAGE> 5
disturbed in any respect except upon termination of the Submanagment Agreement
in accordance with the terms of the Submanagment Agreement, and not as a result
of any default, termination, action or failure to act by or with respect to any
of the parties to or under the Lease or the Primary Management Agreement.
3. OWNER'S OPTION TO CURE LESSEE'S DEFAULT. Subject to the provisions
of this Agreement, including Section 1 above, Owner shall have the option,
within a reasonable time, but not less than thirty (30) days in the case of
monetary defaults and ninety (90) days in the case of non-monetary defaults
following receipt by Owner of notice from Primary Manager or Submanager of a
default under the Primary Management Agreement by Lessee, to cure any such
breach or default of Lessee under the Primary Management Agreement, including,
if necessary, the commencement and prosecution of eviction proceedings and the
replacement of Lessee as tenant, and Primary Manager agrees to accept the
performance of Owner in lieu of the performance of Lessee and to keep the
Primary Management Agreement in full force and effect. Any default which is not,
by its nature, susceptible of being cured by Owner irrespective of having
possession of the Hotel shall be deemed cured by Owner terminating the Lease and
assuming all of the rights and obligations of the Lessee thereunder and under
the Primary Management Agreement. Primary Manager shall not exercise any right
to terminate the Primary Management Agreement or any other rights or remedies
available under the Primary Management Agreement or at law or in equity for
breach of the Primary Management Agreement unless and until Primary Manager has
notified Owner of such breach or default and given Owner the time described
above to cure such breach or default.
4. LESSEE'S OPTION TO CURE PRIMARY MANAGER'S DEFAULT. Lessee shall have
the option to cure any breach or default of Primary Manager under the
Submanagement Agreement, including if necessary, the commencement and
prosecution of termination proceedings and replacement of Primary Manager under
the Primary Management Agreement, and Marriott agrees to accept the performance
of Lessee in lieu of the performance of Primary Manager and to keep the
Submanagement Agreement in full force and effect if such performance occurs
within the applicable grace period provided for in the Submanagement Agreement,
subject, however, to the provisions of Section 2 above. Any breach or default
which is not, by its nature, susceptible of being cured by Lessee irrespective
of having terminated the Primary Management Agreement shall be deemed cured by
Lessee terminating the Primary Management Agreement and replacing the Primary
Manager as permitted under Section 2 above. Marriott shall provide Lessee with a
copy of any notice of such breach or default at the time any such notice is
given to the Primary Manager, and if Lessee shall thereafter (but prior to the
expiration of any applicable grace period under the Primary Management
Agreement) give Submanager written notice of Lessee's intent to take curative
action, Submanager shall not exercise any right to terminate or any other rights
or remedies available under the Submanagement Agreement, the Settlement
Agreement or at law or in equity for breach of the Submanagement Agreement until
the expiration of the applicable cure period under the Submanagement Agreement
plus five (5) business days.
5
<PAGE> 6
5. LEASE MODIFICATION. Primary Manager and Marriott agree that the
Lease may be amended, restated, replaced, renewed, extended and/or modified from
time to time by agreement between Owner and Lessee, and Owner may exercise any
one or more of its rights under the Lease from time to time at Owner's
discretion, all without consent of Primary Manager or Marriott, and this
Agreement shall continue in full force and effect as to all such renewals,
extensions and/or modifications and all such exercise of rights; provided,
however, that the prior consent of Primary Manager and Marriott shall be
required for any amendment or modification to the Lease with respect to (a) any
provisions which require the Lessee or the Owner to provide funds or to pay any
obligations with respect to the operation, improvement or repairs to the Hotel
(including reimbursement of costs, capital expenditures, funding of FF&E
reserves, paying costs incurred in connection with the operation of the Hotel
for which Primary Manager is obligated to pay or fund under the Submanagement
Agreement, or the provision of working capital), or (b) any provisions which
require performance by Lessee under the Primary Management Agreement or
hereunder, or (c) any provision which, if amended, would be inconsistent with
the obligations of the Owner or Lessee hereunder. Lessee agrees to deliver
copies of any amendments or modifications of the Lease promptly following the
execution and delivery thereof to Primary Manager and Marriott.
6. PRIMARY MANAGEMENT AGREEMENT AND SUBMANAGEMENT AGREEMENT
MODIFICATION. (a) Any amendment, modification, waiver, replacement, extension or
renewal of the Primary Management Agreement shall not be effective without the
prior written consent of Marriott, except that no such consent will be required
to (a) extend the term of the Primary Management Agreement, or (b) to modify the
provisions relating to the payment of fees to be retained by the Primary
Manager. Lessee may exercise any one or more of its rights under the Primary
Management Agreement from time to time at Lessee's discretion, and without
notice to or consent of Marriott except as required under this Agreement;
provided Lessee shall not terminate the Primary Management Agreement without the
consent of Marriott, which consent shall not be unreasonably withheld and which
consent shall in any event be granted if an acceptable successor has been
approved under Section 2 hereof. Lessee agrees to deliver copies of any
amendments, modifications, waivers, replacements or extensions of the Primary
Management Agreement following the execution and delivery thereof to Marriott
which do not require the consent of Marriott.
(b) Any amendment, replacement, extension, renewal,
termination, surrender or other modification of the Submanagement Agreement
(other than a termination by Marriott in accordance with the provisions of the
Submanagement Agreement) shall not be effective without the prior written
consent of Owner.
(c) Marriott acknowledges and agrees that Owner is a
third-party beneficiary of the provisions of Section 11.22 of the Submanagement
Agreement. Without limiting the foregoing, if Primary Manager fails to terminate
the Submanagement Agreement pursuant to
6
<PAGE> 7
such Section 11.22 notwithstanding notice by Owner or Lessee to Primary Manager
to so terminate the Submanagement Agreement, then Owner shall have the right to
cause the termination of the Submanagement Agreement directly by notice to such
effect to Marriott and to bring an action directly against Marriott to cause
such termination; provided notice of such termination is delivered within sixty
(60) days after receipt by Primary Manager (and Owner pursuant to this
Agreement) of written notice from Marriott under Section 11.22 of the
Submanagement Agreement.
7. OBLIGATIONS OF OWNER AND LESSEE; TITLE; PROVISIONS ON MORTGAGES;
LIENS AND OTHER ENCUMBRANCES; RECORDATION. Owner or Lessee shall maintain and
comply with all obligations which are contemplated or provided to be maintained
or performed by Owner or Lessee under Sections 8.01, 8.02, 8.03, 8.04, 8.05 and
11.05 of the Submanagement Agreement.
8. APPROVAL RIGHTS. The parties hereto acknowledge that the Lessee has
retained Primary Manager to be solely responsible for providing all instructions
and approvals to Submanager and monitoring the performance of Submanager under
the Submanagement Agreement, including the making of any elections which Primary
Manager may be entitled to make under the Primary Management Agreement, subject
to the following provisions for participation by Owner. Primary Manager has
personnel with experience in the management of hotels and is familiar with the
Hotel. Lessee hereby delegates and appoints Primary Manager as Lessee's agent to
exercise all rights of Lessee under the Lease in circumstances in which the
Lessee is required to obtain the approval or decision of the Owner under the
Lease or consult with Owner with respect to any matter related to the Hotel,
which delegation and appointment shall not be revoked and shall remain in place
so long as the Primary Management Agreement (or a successor Primary Management
Agreement) remains in force. It is the intent of the parties that pursuant to
such delegation and appointment all Owner approval, consent rights and
consultations which are set forth in the Lease and all elections to be made
under the Lease, the Primary Management Agreement and the Submanagement
Agreement shall be given or made by Primary Manager, with the approval or
participation of the Owner if required under the Lease, but without the
participation of Lessee or any person who reports to a person employed by
Lessee. Owner agrees to designate an individual employed by Owner as the person
responsible for processing and granting all such approvals and with respect to
any consultation with Primary Manager. Such representative shall in no event be
employed by Lessee or report to, or be supervised by, an employee of Lessee.
Owner and Primary Manager shall process all decisions (whether for the granting
of approvals, the making of elections, giving instructions or otherwise) based
on their respective good faith judgment as to the best interests of the Hotel
(i.e. the maximization of the long term operating profit of the Hotel). Without
limiting the foregoing, Primary Manager may consult with or shall obtain the
approval of Owner, if required under the terms of the Lease but Lessee will not
be involved in any review, approval or consent process on the following matters:
(a) Business Plans
7
<PAGE> 8
(b) Building Estimates
(c) FF&E Estimates
(d) Capital Expenditures in excess of amounts in the
FF&E Reserve
(e) Increases in deposits to FF&E Reserve
(f) Changes to 5-Year Plans
(g) Designation of arbitrators or Experts and submittals
made to any arbitrator or Expert
(h) Decision to restore or terminate in the event of
Casualty
(i) Approval of insurance companies
(j) Decision of Owner to obtain property insurance
(k) Consent to Assignment or transfer of Primary
Manager's or Submanager's interest
(l) Audits of Annual Operating Statements
(m) Agreement on any alternative "Competitive Set" or
source of information regarding the same under the
Submanagement Agreement.
The parties hereto understand and agree that Submanager shall,
in any event, be entitled to rely and act on all approvals obtained or received
from, or elections made by, Primary Manager without any obligation to confirm
the granting of any approval or consent by Owner or to obtain the signature of
any representative of Owner and that, notwithstanding the above, the Submanager
shall not be required to grant any additional time for Owner to instruct Primary
Manager with respect to such matters. Lessee acknowledges and agrees that
pursuant to its delegation of authority to the Primary Manager, it will not
participate in any approval, consent or election process and will rely on the
experience and judgment of the Owner and the Primary Manager. In connection with
any dispute resolution procedures under the Submanagement Agreement, Submanager
shall be entitled to rely upon, and act on, decisions and selections made by
Primary Manager, but Submanager shall not be required to permit Lessee to
participate in any such dispute resolution procedures. Submanager shall permit
Owner to participate in any such dispute resolution procedures for which the
Owner has a right of approval or consultation under the Lease.
8
<PAGE> 9
9. NOTICES OF DEFAULT. From and after the date hereof, (i) Primary
Manager shall send a copy of any notice of default on the Primary Management
Agreement or any notices of any intention to terminate the Primary Management
Agreement to each of Owner and Submanager (i. e., in addition to Lessee) in
accordance with the notice provisions set forth herein, and (ii) Marriott shall
send a copy of any notice of default under the Submanagement Agreement or any
notices of any intention to cancel or terminate the Submanagement Agreement or
any notice to Primary Manager pursuant to Section 11.22 of the Submanagement
Agreement to each of Owner and Lessee (i.e. in addition to Primary Manager) in
accordance with the notice provisions set forth herein.
10. LIMITATION OF ACTIONS AGAINST SUBMANAGER. The parties hereto
recognize that this Agreement has been entered into to provide certain
assurances to Marriott and to provide for certain obligations of Primary Manager
to Owner and Lessee. In addition, Marriott has executed this Agreement to
acknowledge certain matters, subject to the understanding that Marriott's
obligations with respect to the management of the Hotel are governed solely by
the Submanagement Agreement and that except as provided in Section 6(c) of this
Agreement nothing in the Submanagement Agreement or this Agreement is intended
to give rise to any right, claim, action, causes of action, suit, proceeding,
damages, demand or any other liability, of any kind or nature of or against
Marriott in favor of the Owner or Lessee. To that end, Owner and Lessee
acknowledge and agree that except as provided in Section 6(c) of this Agreement
they release, acquit, exonerate and forever discharge Marriott and its current
and future parents, subsidiaries, affiliates, assigns, trustees, directors,
officers, partners, stockholders, agents, representatives and employees of any
of the foregoing from any right, claim, action, causes of action, suit,
proceeding, damages, demand or any other liability, of any kind or nature,
hereafter arising, which Owner or Lessee may have the right to bring directly,
whether as a third party beneficiary or otherwise, against any of the foregoing
for breach of fiduciary duty, mismanagement, failure to comply with the terms of
the Submanagement Agreement with respect to Marriott's duties as Submanager.
Notwithstanding the above, nothing contained herein shall in any way or manner
affect the rights of Primary Manager to maintain any cause of action Primary
Manager may have against Marriott under or related to Marriott's performance
under the Submanagement Agreement, including any right of contribution or
indemnification or any right or obligation of Marriott to Owner or Lessee under
the Settlement Agreement, or affect the rights of Owner or Lessee to maintain
any cause of action Owner or Lessee may have against the Primary Manager.
11. LIMITATION OF RECOURSE AGAINST OWNER AND LESSEE. In the event of
any default by Owner or Lessee pursuant to the terms of this Agreement, the
aggregate liability of the Owner and Lessee, jointly and severally, shall be
limited to an amount which is the greater of (a) thirty percent (30%) of the
fair market value of the Hotel, or (b) the fair market value of their respective
interest (whether fee simple or leasehold, or both) in the Hotel. Fair market
value shall be determined in accordance with the process set forth on Exhibit B
hereto.
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<PAGE> 10
Nothing set forth in this Section shall in any way limit, prevent or affect any
right of Marriott to seek any remedy other than money damages.
12. CONTROL OF RESTORATION AND CAPITAL EXPENDITURES. Lessee, Primary
Manager and Submanager acknowledge and agree that any restoration of Hotel
following a casualty pursuant to the provisions of Section 6.03 of the
Submanagement Agreement and any Capital Expenditures (other than replacements,
renewals and additions to FF&E (as defined in the Submanagement Agreement) at
the Hotel) shall be performed by and under the direction of Owner; provided,
however, that unless otherwise agreed by Marriott, Marriott shall be retained to
provide technical services in order to assure that the restoration or such
expenditures are in accordance with the current System Standards. Marriott shall
be paid a reasonable technical services fee for such services.
13. PUBLICITY. Each party agrees that in the event of any press release
or any public announcement concerning the Hotel which is material and out of the
ordinary course (e.g. in connection with a major casualty or accident at the
Hotel), the parties shall consult with each other and act in good faith to agree
on such press release or announcement; provided, however, that any party shall
have the right to make such announcement as it reasonably deems necessary in
order to comply with applicable securities laws.
14. GENERAL
A. MULTIPLE COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original.
B. MODIFICATION. This Agreement may not be modified orally or
in any other manner other by an agreement in writing signed by the
parties hereto or their respective successors in interest. This
Agreement shall inure to the benefit of and be binding upon the parties
hereto, and their respective heirs, successors and assigns.
C. NOTICES. Notices under this Agreement shall be delivered
via prepaid, nationally recognized overnight courier or U.S. Certified
Mail, return receipt requested, to the parties as follows:
if to Owner:
1950 Stemmons Freeway
Suite 6001
Dallas, Texas 75297
Attention: General Counsel
if to Lessee:
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<PAGE> 11
1950 Stemmons Freeway
Suite 6001
Dallas, Texas 75297
Attention: General Counsel
If to Primary Manager:
IHC II, LLC
--------------------
--------------------
--------------------
if to Marriott:
Marriott Hotel Services, Inc.
10400 Fernwood Road
Bethesda, MD 20817
ATTN: Law Department (Hotel Operations)
and shall be effective on the earlier to occur, the first business day after
having been deposited with the said overnight courier or three business days
after being deposited with the U.S. Postal Service. Any party may change its
address for notices in the manner for giving notice under this paragraph.
15. ENVIRONMENTAL REPRESENTATIONS. Lessee and Owner hereby each
represent and warrant to Submanager that, to the best of their respective
knowledge and except as set forth in any environmental assessment reports
provided by Owner, Lessee or Primary Manager to Submanager, as of the Effective
Date, there are no Hazardous Materials on any portion of the Site or the Hotel,
nor have any Hazardous Materials been released or discharged on any portion of
the Site or the Hotel. In addition, Owner or Lessee each hereby represent and
warrant to have delivered to Submanager copies of all reports concerning
environmental conditions which have been received by Owner or Lessee or any of
its Affiliates.
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<PAGE> 12
16. CONFIDENTIALITY
(a) The parties hereto agree that the matters set forth in
this Agreement and the Submanagement Agreement and all statements, reports,
projections, and other information relating to the operation of the Hotel are
strictly confidential and each party will make every effort to ensure that the
information is not disclosed to any outside person or entities (including the
press) without the prior written consent of the other parties except as may be
required by law and as may be reasonably necessary to obtain licenses, permits,
and other public approvals necessary for the refurbishment or operation of the
Hotel, or in connection with Owner's or Lessee's financing of the Hotel, a Sale
of the Hotel, or a sale of a controlling interest in Owner, Lessee, Submanager,
or Marriott (except any financing or sale involving a private or public offering
of securities).
(b) Owner and Lessee shall not include any reference to
Submanager or to any Affiliate of Submanager in any prospectus, private
placement memorandum, offering circular or offering documentation related
thereto (collectively referred to as the "Lessee and Owner Prospectus"), issued
by Owner or Lessee or by one of their respective Affiliates or by one or more
Mortgagees, which is designated to interest potential investors in debt or
equity securities related to the Hotel, unless Submanager has previously
received a copy of all such references. However, regardless of whether
Submanager does or does not so receive a copy of all such references, neither
Submanager nor any Affiliate of Submanager will be deemed a sponsor of the
offering described in the Owner and Lessee Prospectus, nor will it have any
responsibility for the Owner and Lessee Prospectus. Unless Submanager agrees in
advance, the Owner and Lessee Prospectus will not include any Marriott Trade
Names or Marriott Trademarks. Owner and Lessee shall indemnify, defend and hold
Submanager harmless from and against all loss, costs, liability and damage
(including attorneys' fees and expenses, and the cost of litigation) arising out
of any Owner and Lessee Prospectus or the offering described therein; and this
obligation of Owner and Lessee shall survive Termination of this Agreement.
17. PROJECTIONS. Owner and Lessee acknowledge that any written or oral
projections, proformas, or other similar information that has been (prior to
execution of this Agreement) or will (during the Term of this Agreement) be
provided by Submanager or Marriott (or any Affiliate of either) to Primary
Manager is for information purposes only, and that Submanager, Marriott, and any
such Affiliate do not guarantee that the Hotel will achieve the results set
forth in any such projections, proformas, or other similar information. Any such
projections, proformas, or other similar information are based on assumptions
and estimates. Unanticipated events may occur subsequent to the date of
preparation of such projections, proformas, and other similar information.
Therefore, the actual results achieved by the Hotel are likely to vary from the
estimates contained in any such projections, proformas, or other similar
information and such variations might be material.
12
<PAGE> 13
18. TRADEMARKS, TRADE NAMES AND INTELLECTUAL PROPERTY. Owner and Lessee
agree and acknowledge that the provisions of Section 11.12 of the Submanagement
Agreement shall apply to Lessee and Owner and that Owner and Lessee shall comply
with the provisions thereof.
19. DEFAULTS
(a) Each of the following shall constitute a "Default" by
Owner or Lessee, as applicable, under this Agreement.
(i) The filing of a voluntary petition in bankruptcy
or insolvency or a petition for reorganization under any bankruptcy law by Owner
or Lessee, or the admission by either party that it is unable to pay its debts
as they become due. Upon the occurrence of any Default by Owner or Lessee
(referred to as the "defaulting party") as described under this subsection (I),
said Default shall be deemed an "Event of Default" under this Agreement.
(ii). The consent to an involuntary petition in
bankruptcy or the failure to vacate, within ninety (90) days from the date of
entry thereof, any order approving an involuntary petition by Owner or Lessee.
Upon the occurrence of any Default by either party as described under this
subsection (ii), said Default shall be deemed an "Event of Default" under this
Agreement.
(iii). The entering of an order, judgment or decree
by any court of competent jurisdiction, on the application of a creditor,
adjudicating either party as bankrupt or insolvent or approving a petition
seeking reorganization or appointing a receiver, trustee, or liquidator of all
or a substantial part of either the Lessee's and Owner's assets, and such order,
judgment or decree's continuing unstayed and in effect for an aggregate of sixty
(60) days (whether or not consecutive). Upon the occurrence of any Default Owner
or Lessee as described under this subsection (iii), said Default shall be deemed
an "Event of Default".
(iv). The failure of Lessee or Owner to perform, keep
or fulfill any of the other covenants, undertakings, obligations or conditions
set forth in this Agreement, and the continuance of such default for a period of
thirty (30) days after the defaulting party's receipt of written notice from a
non-defaulting party of said failure. Upon the occurrence of any Default by
either party as described under this subsection (iv), said Default shall be
deemed an "Event of Default" under this Agreement if the defaulting party fails
to cure the Default within thirty (30) days after receipt of written notice from
the non-defaulting party demanding such cure, or, if the Default is such that it
cannot reasonably be cured within said thirty (30) day period of time, if the
defaulting party fails to commence the cure of such Default within said thirty
(30) day period of time or thereafter fails to diligently pursue such efforts to
completion.
13
<PAGE> 14
(b) Upon the occurrence of an Event of Default of the Owner or
Lessee hereunder, the non-defaulting party shall be entitled to specific
enforcement of the obligations hereunder and to injunctive relief and to any
other right or remedy available at law or under the terms of the Primary
Management Agreement or the Submanagement Agreement, as applicable, and the
provisions hereunder shall survive a termination of the Submanagement Agreement
and the Primary Management Agreement, as applicable.
20. GENERAL
(a) The term of this Agreement shall commence on the dates set
forth above and shall terminate on the date of termination of the Submanagment
Agreement in accordance with its terms.
(b) Except as otherwise expressly provided in this Agreement
,whenever in this Agreement the consent or approval of any party is required,
such consent or approval shall not be unreasonably withheld, delayed or
conditioned, shall be in writing, and shall be executed by a duly authorized
officer or agent of the party granting such consent or approval, and if a party
fails to respond to such request within thirty (30) days, such consent of
approval shall be deemed to have been given.
21. DEFINITIONS. All capitalized terms used herein and not otherwise
defined herein shall have the meaning set forth in the Submanagement Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
14
<PAGE> 15
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the date first above written.
OWNER:
_______________________
_______________________
By:
____________________________ By: ____________________________
Name: Name:
Title: Title:
LESSEE: PATRIOT AMERICAN HOSPITALITY
PARTNERSHIP, L.P.
WITNESS:
____________________________ By: ____________________________
Name: Name:
Title: Title:
PRIMARY MANAGER
IHC II, LLC
By:
____________________________ By: ____________________________
Name: Name:
Title: Title:
15
<PAGE> 16
MARRIOTT:
MARRIOTT HOTEL SERVICES, INC.
[Marriott International, Inc.]
ATTEST:
____________________________ By: ____________________________
Name: Name:
Title: Title: Vice President
16
<PAGE> 17
EXHIBIT A - PROPERTY DESCRIPTION
17
<PAGE> 18
EXHIBIT B - DETERMINATION OF FAIR MARKET VALUE
The Owner and Marriott may agree to a fair market value for the Hotel.
In the event that pursuant to such negotiations, the parties hereto do not agree
upon the fair market value of the Hotel, Marriott and Owner each shall, at its
own expense and within thirty (30) days thereafter, obtain an appraisal of the
fair market value of such Hotel from a nationally recognized appraiser of hotel
properties comparable to such hotel. In determining the fair market value of
such hotel, the appraisers shall be instructed to assume that the Hotel is not
subject to a management agreement but is subject to the existing Franchise
Agreement. If such appraisals differ, then the determination of the purchase
price for such Hotel shall be submitted to arbitration in Washington, D.C. in
accordance with the arbitration rules of the American Arbitration Association
then in effect. The parties shall jointly select a single arbitrator. If the
parties are unable to agree upon an arbitrator within ten (10) days following
the 30-day period during which the appraisals were obtained, the arbitrator
shall be selected by the respective appraisers selected by each party within ten
(10) days of such initial 10-day period. Such arbitrator whether selected by the
parties or by their appraisers, shall be knowledgeable with respect to the
appraisal of hotel properties and shall be instructed and obligated to decide,
within thirty (30) days after such submission, whether the appraisal submitted
by Marriott or the appraisal submitted by Owner most accurately reflects the
fair market value of the Hotel, and the written decision of the arbitrator shall
be conclusive and binding on the parties and enforceable by a court of competent
jurisdiction. The expenses of the arbitration shall be borne equally by the
parties to the arbitration.
18
<PAGE> 1
Exhibit 10.5
FORM OF
LEASE AGREEMENT
DATED AS OF _____________________
BETWEEN
-----------------------------------------------
AS LESSOR
AND
-----------------------------------------------
AS LESSEE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
LEASE....................................................................................................1
1.1 Leased Property........................................................................1
1.2 Term...................................................................................2
1.3 Initial Transition.....................................................................3
ARTICLE II
DEFINITIONS..............................................................................................3
2.1 Definitions............................................................................3
ARTICLE III
RENT....................................................................................................16
3.1 Rent..................................................................................16
3.2 Confirmation of Percentage Rent.......................................................22
3.3 Additional Charges....................................................................23
3.4 No Set Off............................................................................23
3.5 Annual Budget.........................................................................23
3.6 Books and Records.....................................................................25
3.7 Changes in Operations.................................................................25
3.8 Allocation of Revenues................................................................26
ARTICLE IV
IMPOSITIONS.............................................................................................26
4.1 Payment of Impositions................................................................26
4.2 Notice of Impositions.................................................................27
4.3 Adjustment of Impositions.............................................................27
4.4 Utility Charges.......................................................................27
ARTICLE V
NO TERMINATION, ABATEMENT...............................................................................28
5.1 No Termination, Abatement.............................................................28
ARTICLE VI
PROPERTY OWNERSHIP......................................................................................28
6.1 Ownership of the Leased Property......................................................28
6.2 Lessee's Personal Property............................................................28
6.3 Equipment Lease Property..............................................................29
ARTICLE VII
CONDITION, USE..........................................................................................29
7.1 Condition of the Leased Property......................................................29
7.2 Use of the Leased Property............................................................30
ARTICLE VIII
LEGAL REQUIREMENTS......................................................................................32
8.1 Compliance with Legal and Insurance Requirements......................................32
8.2 Legal Requirement Covenants...........................................................32
8.3 Environmental Covenants...............................................................32
ARTICLE IX
MAINTENANCE AND REPAIRS.................................................................................35
9.1 Maintenance and Repair................................................................35
</TABLE>
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<TABLE>
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ARTICLE X
ALTERATIONS.............................................................................................37
10.1 Alterations...........................................................................37
10.2 Salvage...............................................................................37
10.3 Lessor Alterations....................................................................37
ARTICLE XI
LIENS...................................................................................................38
11.1 Liens.................................................................................38
ARTICLE XII
PERMITTED CONTESTS......................................................................................38
12.1 Permitted Contests....................................................................38
ARTICLE XIII
INSURANCE...............................................................................................39
13.1 General Insurance Requirements........................................................39
13.2 Replacement Cost......................................................................42
13.3 Waiver of Subrogation.................................................................42
13.4 Form Satisfactory, etc................................................................42
13.5 Increase in Limits....................................................................43
13.6 Blanket Policy........................................................................43
13.7 Separate Insurance....................................................................43
13.8 Reports On Insurance Claims...........................................................43
13.9 Alternate Provisions for Insurance....................................................44
ARTICLE XIV
DAMAGE AND RECONSTRUCTION...............................................................................44
14.1 Insurance Proceeds....................................................................44
14.2 Reconstruction in the Event of Damage or Destruction Covered by
Insurance.............................................................................44
14.3 Reconstruction in the Event of Damage or Destruction Not Covered by
Insurance.............................................................................45
14.4 Lessee's Property and Business Interruption Insurance.................................46
14.5 Abatement of Rent.....................................................................46
ARTICLE XV
CONDEMNATION............................................................................................46
15.1 Definitions...........................................................................46
15.2 Parties' Rights and Obligations.......................................................47
15.3 Total Taking..........................................................................47
15.4 Allocation of Award...................................................................47
15.5 Partial Taking........................................................................47
15.6 Temporary Taking......................................................................48
ARTICLE XVI
DEFAULTS................................................................................................49
16.1 Events of Default.....................................................................49
16.2 Remedies..............................................................................51
16.3 Waiver................................................................................52
16.4 Application of Funds..................................................................52
</TABLE>
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<TABLE>
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ARTICLE XVII
LESSOR'S RIGHT TO CURE..................................................................................52
17.1 Lessor's Right to Cure Lessee's Default...............................................52
ARTICLE XVIII
LIMITATIONS.............................................................................................52
18.1 Personal Property Limitation..........................................................52
18.2 Sublease Rent Limitation..............................................................53
18.3 Sublease Lessee Limitation............................................................53
18.4 Lessee Ownership Limitation...........................................................53
ARTICLE XIX
HOLDING OVER............................................................................................54
19.1 Holding Over..........................................................................54
ARTICLE XX
INDEMNITIES.............................................................................................54
20.1 Indemnification.......................................................................54
ARTICLE XXI
SUBLETTING AND ASSIGNMENT...............................................................................56
21.1 Subletting and Assignment.............................................................56
21.2 Management Agreement..................................................................56
21.3 Primary Manager and Submanager........................................................56
ARTICLE XXII
ESTOPPEL CERTIFICATES...................................................................................57
22.1 Officer's Certificates; Financial Statements; Lessor's Estoppel Certificates
and Covenants.........................................................................57
ARTICLE XXIII
INSPECTIONS.............................................................................................59
23.1 Regular Meetings; Lessor's Right to Inspect...........................................59
ARTICLE XXIV
NO WAIVER...............................................................................................59
24.1 No Waiver.............................................................................59
ARTICLE XXV
CUMULATIVE REMEDIES.....................................................................................60
25.1 Remedies Cumulative...................................................................60
ARTICLE XXVI
SURRENDER...............................................................................................60
26.1 Acceptance of Surrender...............................................................60
ARTICLE XXVII
NO MERGER...............................................................................................60
27.1 No Merger of Title....................................................................60
ARTICLE XXVIII
CONVEYANCE BY LESSOR....................................................................................60
28.1 Conveyance by Lessor..................................................................60
28.2 Lessor May Grant Liens................................................................61
ARTICLE XXIX
QUIET ENJOYMENT.........................................................................................62
29.1 Quiet Enjoyment.......................................................................62
ARTICLE XXX
NOTICES.................................................................................................62
30.1 Notices...............................................................................62
</TABLE>
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<TABLE>
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ARTICLE XXXI
INTENTIONALLY DELETED...................................................................................63
ARTICLE XXXII
LESSEE CAPITALIZATION REQUIREMENTS......................................................................63
32.1 Lessee's Net Worth....................................................................63
32.2 Verification of Net Worth.............................................................63
ARTICLE XXXIII
TERMINATION OF LEASE DUE TO SALE OF LEASED PROPERTY.....................................................63
33.1 Termination of Lease Due to Sale of Leased Property...................................63
ARTICLE XXXIV
FRANCHISE AGREEMENT, BRAND STANDARDS, AND GROUND LEASES.................................................64
34.1 Compliance............................................................................64
ARTICLE XXXV
CAPITAL EXPENDITURES....................................................................................65
35.1 Capital Expenditures..................................................................65
ARTICLE XXXVI
LESSOR'S DEFAULT........................................................................................66
36.1 Lessor's Default......................................................................66
ARTICLE XXXVII
ARBITRATION.............................................................................................67
37.1 Arbitration...........................................................................67
37.2 Alternative Arbitration...............................................................67
37.3 Arbitration Procedures................................................................67
ARTICLE XXXVIII
TRADE-OUTS..............................................................................................68
ARTICLE XXXIX
MISCELLANEOUS...........................................................................................68
39.1 Miscellaneous.........................................................................68
39.2 Transition Procedures.................................................................69
39.3 Waiver of Presentment, etc............................................................70
39.4 Standard of Discretion................................................................70
39.5 Action for Damages....................................................................70
</TABLE>
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<TABLE>
<CAPTION>
Exhibits:
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Exhibit A - Property Description
Exhibit B - Base Rent Revenue Percentages and Breakdowns
Exhibit C - Capital Expenditures Policy
Exhibit D - Additional Provisions
</TABLE>
(v)
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LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter called "LEASE") is made as of the
_____ day of __________________, 1998, by and between
____________________________, a ___________________ (hereinafter called
"LESSOR"), and ____________________________________________________, a
__________________________ (hereinafter called "LESSEE"):
R E C I T A L S
A. The Leased Property is presently operated as a Marriott Hotel
pursuant to a franchise agreement (the "Franchise Agreement") between Marriott
International, Inc., or one or its Affiliates, as franchisor and Interstate
Hotels Corporation, or one of its Affiliates, as franchisee, which franchisee
interest will be assumed by IHC II, LLC ("Primary Manager") in connection with
the execution of this Lease pursuant to an agreement by and between Lessee and
Primary Manager (the "Primary Management Agreement").
B. Patriot American Hospitality Partnership, L.P. ("REIT OP"), Lessee,
Marriott International, Inc. and Interstate Hotel Company have previously
entered into a settlement agreement (the "Settlement Agreement") concerning the
resolution of disputes among the parties, pursuant to which this Agreement is
being executed.
C. REIT OP, Lessee, Primary Manager and [Marriott Hotel Services, Inc.
or Marriott International, Inc.] ("Submanager"), simultaneously with the
execution of this Agreement and effective as of the date on which Submanager
will assume management of the Leased Property (as hereinafter defined), have
entered into an Owner's Agreement (the "Owner's Agreement") which sets forth
certain rights and responsibilities among REIT OP, Lessee and Submanager.
D. Lessor desires to lease the Leased Property to Lessee and approve
the terms on which the Leased Property will be managed by Primary Manager and
Submanager, and Lessee desires to lease the Leased Property from Lessor and
engage the Primary Manager and Submanager to manage the Leased Property.
NOW, THEREFORE, Lessor, in consideration of the payment of rent by
Lessee to Lessor, the covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property.
ARTICLE I
LEASE
1.1 Leased Property. The Leased Property (herein so called) is
comprised of Lessor's interest in the following:
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(a) the land described in EXHIBIT A attached hereto and by
reference incorporated herein (the "LAND");
(b) all buildings, structures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels, sidewalks,
utility pipes, conduits and lines (on-site and off-site), parking areas and
roadways appurtenant to such buildings and structures presently or hereafter
situated upon the Land (collectively, the "LEASED IMPROVEMENTS");
(c) all easements, rights and appurtenances relating to the
Land and the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of
property required for or incidental to the use of the Leased Improvements as a
hotel, including all components thereof, now and hereafter permanently affixed
to or incorporated into the Leased Improvements, including, without limitation,
all furnaces, boilers, heaters, electrical equipment, heating, plumbing,
lighting, ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and apparatus,
sprinkler systems and fire and theft protection equipment, all of which to the
greatest extent permitted by law are hereby deemed by the parties hereto to
constitute real estate, together with all replacements, modifications,
alterations and additions thereto (collectively, the "FIXTURES");
(e) all furniture and furnishings and all other items of
personal property (excluding Inventory and personal property owned by Lessee)
located on, and used in connection with, the operation of the Leased
Improvements as a hotel, together with all replacements, modifications,
alterations and additions thereto; and
(f) all existing occupancy leases of the Leased Property
(including any security deposits or collateral held by Lessor pursuant thereto).
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF
PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL
COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD
INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS AND MATTERS WHICH WOULD BE DISCLOSED
BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.
1.2 Term. The term of this Lease (the "TERM") shall commence on
________________________ (the "Commencement Date") and shall end on the day
which is three (3) years thereafter, unless sooner terminated in accordance with
the provisions hereof.
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1.3 Initial Transition.
(a) Lessee has assumed or shall assume all occupancy
agreements and operating agreements to which the Leased Property remains subject
on the Commencement Date.
(b) All Inventory is or shall be owned by Lessee, Primary
Manager or Submanager. SCHEDULE 1.3 contains provisions relating to the terms on
which any Inventory transferred to Lessee by Lessor was acquired by Lessee and
certain other accounting issues with respect thereto.
(c) Rights and obligations with respect to accrued revenues,
expenses, cash on hand and similar items have been allocated between Lessor and
Lessee as of the Commencement Date, as agreed to by, and reflected in the books
and records of, Lessor and Lessee.
(d) Lessor shall lend to Lessee an amount of cash equal to the
Initial Working Capital. Such loan shall bear interest at the [Base Rate], shall
amortize over the [Term], and shall in any event be due and payable in full upon
the termination of the Lease for any reason. Interest shall accrue, and payments
of interest and principal shall be payable as an Additional Charge, on each date
on which Base Rent is due and payable hereunder.
(e) Lessor shall also provide to Lessee, as an additional
capital expenditure obligation of Lessor, any amounts required to be paid by
Lessee for computer systems as provided in SECTION 1.02B of the Primary
Management Agreement and for additional Fixed Asset Supplies as provided in
SECTION 4.07 of the Primary Management Agreement.
ARTICLE II
DEFINITIONS
2.1 Definitions. For all purposes of this Lease, except as otherwise
expressly provided or unless the context otherwise requires, (a) the terms
defined in this Article have the meanings assigned to them in this Article and
include the plural as well as the singular, (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
GAAP, (c) all references in this Lease to designated "Articles", "Sections" and
other subdivisions are to the designated Articles, Sections and other
subdivisions of this Lease and (d) the words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Lease as a whole and not to any
particular Article, Section or other subdivision:
Additional Charges: As defined in SECTION 3.3.
Affiliate: As used in this Lease the term "Affiliate" of a person shall
mean (a) any person that, directly or indirectly, controls or is controlled by
or is under common control with such person, (b) any other person that owns,
beneficially, directly or indirectly, ten percent or more of the outstanding
capital stock, shares or equity interests of such person, or
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(c) any officer, director, employee, partner or trustee of such person or any
person controlling, controlled by or under common control with such person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of such person). The term "person" means and includes
individuals, corporations, general and limited partnerships, limited liability
companies, stock companies or associations, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts, or
other entities and governments and agencies and political subdivisions thereof.
For the purposes of this definition, "control" (including the correlative
meanings of the terms "controlled by" and "under common control with"), as used
with respect to any person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership interests
or other equity interests, by contract or otherwise.
Annual Budget: As used in this Lease, the term "Annual Budget" shall
mean an operating budget and a capital budget prepared by or on behalf of Lessee
and approved by Lessor in accordance with SECTION 3.5(a). For purposes of
Section 22.1, Annual Budget shall also mean the Business Plan, the FF&E Estimate
and the Building Estimate to the extent that such items substitute for an Annual
Budget pursuant to SECTION 3.5(b).
Annual Food Sales Break Point: As defined in SECTION 3.1(b)(ii) and
EXHIBIT B.
Annual Room Revenues Break Point(s): As defined in SECTION 3.1(b)(ii)
and EXHIBIT B.
Annual Room Revenues First Break Point: As defined in SECTION
3.1(b)(ii) and EXHIBIT B.
Annual Room Revenues Second Break Point: As defined in SECTION
3.1(b)(ii) and EXHIBIT B.
Approval: As defined in SECTION 39.4.
Award: As defined in SECTION 15.1(c).
Base Rent: As defined in SECTION 3.1.
Base Rate: The "base rate" of interest announced from time to time by
Bankers Trust Company, New York, New York or any successor thereto.
Beverage Sales: Shall mean gross revenue from the sale of (i) wine,
beer, liquor or other alcoholic beverages, whether sold in a bar or lounge,
delivered to or available in a guest room, sold at meetings or banquets or at
any other location at the Leased Property and (ii) nonalcoholic beverages sold
in a bar or lounge. Such gross revenue constituting Beverage Sales shall include
sales by Lessee and its permitted subtenants, licensees and concessionaires, but
revenues from subleases, licenses or similar arrangements for alcoholic beverage
sales
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which are entered into by Lessor, by any prior owner of the Leased Property, or
by Lessee (but as to Lessee, only such subleases, licenses or similar
arrangements entered into in compliance, but only in compliance, with SECTION
21.1 with parties who are not Affiliates of Lessee) shall be classified as Other
Income and shall only include rents received by Lessee under such existing
subleases, licenses or similar arrangements, which must comply with SECTION 18.2
hereof. Such revenue shall be determined in a manner consistent with the Uniform
System and shall not include the following:
(a) Any gratuity or service charge added to a customer's bill
or statement in lieu of a gratuity which is paid directly to an employee;
(b) Credits, rebates or refunds; and
(c) Sales taxes or taxes of any other kind imposed on the sale
of alcoholic or other beverages.
Brand Standards: Shall mean either (or both, as the context requires)
of the following two (2) categories of standards: (i) the operational standards
(for example, services offered to guests, quality of food and beverages,
cleanliness, staffing and employee compensation and benefits, Chain Services,
the Marriott Rewards Program and other similar programs, etc.); and (ii) the
physical standards (for example, quality of the Leased Improvements, Fixtures,
Furniture and Equipment, Fixed Asset Supplies and frequency of replacements of
Fixtures, Furniture and Equipment, etc.); each of such standards shall be the
standard which is generally prevailing or in the process of being implemented at
other hotels in the Marriott System, including all services and facilities in
connection therewith that are customary and usual at comparable hotels in the
Marriott System.
Break Points: As defined in SECTION 3.1(b).
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which national banks in the City of Dallas, Texas or in the
municipality wherein the Leased Property is located are closed.
Capital Budget: As defined in SECTION 3.5.
Capital Expenditures: Amounts advanced to pay the costs of Capital
Improvements.
Capital Expenditures Reserve: An amount equal to 4% of Gross Revenues
for each Lease Year, to be accrued by Lessor in accordance with the provisions
of ARTICLE XXXV hereof.
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<PAGE> 12
Capital Impositions: Taxes, assessments or similar charges imposed upon
or levied against the Leased Property for the costs of public improvements,
including, without limitation, roads, sidewalks, public lighting fixtures,
utility lines, storm sewers drainage facilities, and similar improvements; and
assessments or charges in the nature of rent for the use of any easement or
facility. Notwithstanding the foregoing, while the Submanagement Agreement is in
effect, Capital Impositions shall also include each of the items referenced in
SECTIONS 7.01 B(2), (3) AND (4) of the Submanagement Agreement.
Capital Improvements: Subject to EXHIBIT C attached hereto,
improvements to (a) the external walls and internal load bearing walls (other
than windows and plate glass), (b) the roof of the Facility, (c) private
roadways, parking areas, sidewalks and curbs appurtenant thereto that are under
Lessee's control (other than cleaning, patching and striping), (d) mechanical,
electrical and plumbing systems that service common areas, entire wings of the
Facility or the entire Facility, including conduit and ductware connected
thereto, and (e) items of the types described on EXHIBIT C attached hereto as
"capital". Any dispute as to whether an improvement is a capital or non-capital
improvement shall be resolved by arbitration pursuant to SECTION 37.2.
CERCLA: The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
Chain Services: Services that are furnished generally on a central,
regional or other group basis to other hotels in the Marriott System and which
benefit such hotels.
CPI Factor: As defined in SECTION 3.5.
Claims: As defined in SECTION 12.1.
COBRA: The Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: As defined in SECTION 1.2.
Company: Patriot American Hospitality, Inc., a Delaware corporation.
Condemnation, Condemnor: As defined in SECTION 15.1.
Consolidated Financials: For any fiscal year or other accounting period
for Lessee and its consolidated Subsidiaries, statements of operations,
partners' capital and cash flow (or, in the case of a corporation, statements of
operations, retained earnings and cash flow) for such period and for the period
from the beginning of the respective fiscal year to the end of such period and
the related balance sheet as at the end of such period, together with the notes
to any such yearly statement, all in such detail as may be required by the SEC
with respect to filings made by the Company, and setting forth in comparative
form the corresponding figures for the
6
<PAGE> 13
corresponding period in the preceding fiscal year, and prepared in accordance
with GAAP and audited annually (and quarterly if required by the SEC with
respect to filings made by the Company) by Ernst & Young or another so called
"Big Six" firm of independent certified public accountants designated by Lessee
and approved by Lessor, such approval not to be unreasonably withheld or
delayed. Consolidated Financials shall be prepared on the basis of a December 31
fiscal year of Lessee.
Consumable Supplies: Office supplies, cleaning supplies, uniforms,
laundry and valet supplies, engineering supplies, fuel, stationery, soap,
matches, toilet and facial tissues, and such other supplies as are consumed
customarily on a recurring basis in the operation of the Facility, together with
food and beverages that are to be offered for sale to guests and to the public.
Consumer Price Index: The "Consumer Price Index" published by the
Bureau of Labor Statistics of the United States Department of Labor, U.S. City
Average, All Item for Urban Wage Earners and Clerical Workers (1982-1984=100).
Cumulative Monthly Portion: As defined in SECTION 3.1(b)(ii).
Date of Taking: As defined in SECTION 15.1(b).
Emergency Expenditures: Expenditures required to take necessary or
appropriate actions to respond to Emergency Situations.
Emergency Situations: An emergency threatening the Facility, its
guests, invitees or employees or any other circumstances or conditions
(including, without limitation, those involving Hazardous Materials) which, if
continued, would subject Lessor, Lessee, Primary Manager and/or Submanager to
civil or criminal liability.
Environmental Authority: Any department, agency or other body or
component of any Government that exercises any form of jurisdiction or authority
under any Environmental Law.
Environmental Authorization: Any license, permit, order, approval,
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
Environmental Laws: (1) CERCLA; (2) the regulations promulgated
thereunder, from time to time; (3) all federal, state and local laws, rules and
regulations (now or hereafter in effect) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials; and (4) the
regulations promulgated thereunder from time to time.
Environmental Liabilities: Any and all obligations to pay the amount of
any judgment or settlement, the cost of complying with any settlement, judgment
or order for injunctive or other equitable relief, the cost of compliance or
corrective action in response to any notice, demand or request from an
Environmental Authority, the amount of any civil penalty or
7
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criminal fine, and any court costs and reasonable amounts for attorney's fees,
fees for witnesses and experts, and costs of investigation and preparation for
defense of any claim or any Proceeding, regardless of whether such Proceeding is
threatened, pending or completed, that may be or have been asserted against or
imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any
property used therein and arising out of:
(a) the failure to comply at any time with all Environmental
Laws applicable to the Leased Property;
(b) the presence of any Hazardous Materials on, in, under, at
or in any way affecting the Leased Property;
(c) a Release or threatened Release of any Hazardous Materials
on, in, at, under or in any way affecting the Leased Property;
(d) the identification of Lessee, Lessor or any Predecessor as
a potentially responsible party under CERCLA or under any other Environmental
Law;
(e) the presence at any time of any above-ground and/or
underground storage tanks, as defined in RCRA or in any applicable Environmental
Law on, in, at or under the Leased Property or any adjacent site or facility; or
(f) any and all claims for injury or damage to persons or
property arising out of exposure to Hazardous Materials originating or located
at the Leased Property, or resulting from operation thereof or any adjoining
property.
Event of Default: As defined in SECTION 16.1.
Executive Committee: Shall mean the general manager, resident manager,
director of marketing, controller, food and beverage director, human resources
director and chief engineer, or similar titled positions.
Executive Person and/or Executive Personnel: Shall mean a member of the
Executive Committee or a supervisory or executive member of the home office or
regional staff of Manager.
Facility: The hotel and/or other facility offering lodging and other
services or amenities being operated or proposed to be operated on the Leased
Property.
First Tier Food Sales Percentage: As defined in SECTION 3.1(b)(ii) and
EXHIBIT B.
First Tier Room Revenue Percentage: As defined in SECTION 3.1(b)(ii)
and EXHIBIT B.
Fixed Asset Supplies: Shall mean items included within "Property and
Equipment" under the Uniform System including, but not limited to, linen, china,
glassware, tableware, uniforms, and similar items, whether used in connection
with public space or guest rooms.
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Fixtures: As defined in SECTION 1.1.
Food Sales: Shall mean (i) gross revenue from the sale of food and
non-alcoholic beverages that are prepared at the Facility and sold or delivered
on or off the Facility by Lessee, its permitted subtenants, licensees, or
concessionaires whether for cash or for credit, including in respect of guest
rooms, banquet rooms, meeting rooms and other similar rooms, and (ii) gross
revenue from the rental of banquet, meeting and other similar rooms. Such gross
revenue constituting Food Sales shall include sales by Lessee and its permitted
subtenants, licensees and concessionaires, but revenues from subleases, licenses
or similar arrangements for food and non-alcoholic beverage sales which are
entered into by Lessor, by any prior owner of the Leased Property, or by Lessee,
(but as to Lessee, only such subleases, licenses or similar arrangements entered
into in compliance, but only in compliance with SECTION 21.1 with parties who
are not Affiliates of Lessee) shall be classified as Other Income and shall only
include rents received by Lessee under such existing subleases, licenses or
similar arrangements, which must comply with SECTION 18.2 hereof. Such revenue
shall be determined in a manner consistent with the Uniform System and shall not
include the following:
(a) Vending machine sales;
(b) Any gratuities or service charges added to a customer's
bill or statement in lieu of a gratuity which is paid directly to an employee;
(c) Non-alcoholic beverages sold from a bar or lounge;
(d) Credits, rebates or refunds; and
(e) Sales taxes or taxes of any other kind imposed on the sale
of food or non-alcoholic beverages.
Franchise Agreement: Any franchise agreement, license agreement or
other agreement pursuant to which the Facility is operated under, or entitled to
use a brand or other name, identifying trademarks and/or tradenames and
reservations system (including those portions of the Primary Management
Agreement and Submanagement Agreement relating thereto).
Furniture and Equipment: For purposes of this Lease, the terms
"furniture and equipment" shall mean collectively all furniture, furnishings,
wall coverings, fixtures and hotel equipment and systems owned by Lessor and
located at, or used in connection with, the Facility, together with all
replacements therefor and additions thereto, including, without limitation, (i)
all equipment and systems required for the operation of kitchens, bars and
restaurants, and laundry and dry cleaning facilities, (ii) office equipment,
(iii) dining room wagons, materials handling equipment, and cleaning and
engineering equipment, (iv) telephone and computerized accounting systems, and
(v) vehicles.
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GAAP: Generally accepted accounting principles as are at the time
applicable and otherwise consistently applied.
GDP Deflator: As defined in the Submanagement Agreement.
Government: The United States of America, any city, county, state,
district or territory thereof, any foreign nation, any city, county, state,
province, dominion, district, department, territory or other political division
thereof, or any political subdivision of any of the foregoing, in any case
having jurisdiction over the Facility, the Leased Property, Lessor or Lessee.
Gross Revenues: All revenues, receipts, and income of any kind derived
directly or indirectly by Lessee from or in connection with the Facility whether
on a cash basis or credit, paid or collected, determined in accordance with GAAP
and the Uniform System, including but not limited to golf course membership
fees, greens fees and other revenues arising out of the operation of any golf
courses on the Facility, but excluding, however: (i) funds furnished by Lessor,
(ii) federal, state and municipal excise, sales, and use taxes collected
directly from patrons and guests or as a part of the sales price of any goods,
services or displays, such as gross receipts, admissions, cabaret or similar or
equivalent taxes and paid over to federal, state or municipal governments, (iii)
gratuities, (iv) proceeds of insurance and condemnation, (v) proceeds from sales
other than sales in the ordinary course of business, (vi) all loan proceeds from
financing or refinancings of the Facility or interests therein or components
thereof, (vii) judgments and awards, except any portion thereof arising from
normal business operations of the Facility, and (viii) items constituting
"allowances" under the Uniform System.
Hazardous Materials: Any substance or material containing one or more
of any of the following: "hazardous material", "hazardous waste", "hazardous
substance", "regulated substance", "petroleum", "pollutant", "contaminant",
"polychlorinated biphenyls", "lead or lead-based paint" or "asbestos" as such
terms are defined in any applicable Environmental Law in such concentration(s)
or amount(s) as may impose clean-up, removal, monitoring or other responsibility
under the Environmental Laws, as the same may be amended from time to time, or
which may present a significant risk of harm to guests, invitees or employees of
the Facility.
Holder: Any holder of any indebtedness of the Lessor, or of the
Company, the REIT OP or any of their Affiliates, any holder of a Mortgage, any
purchaser of the Leased Property or any portion thereof at a foreclosure sale or
any sale in lieu thereof, or any designee of any of the foregoing.
Impositions: Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, occupancy, single business, gross receipts,
transaction privilege, rent or similar taxes as the same relate to or are
imposed upon Lessee or Lessor or Lessee's business conducted upon the Leased
Property), assessments (including, without limitation, all assessments for
public improvements or benefit, whether or not commenced or completed prior to
the date
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<PAGE> 17
hereof and whether or not to be completed within the Term), ground rents, water,
sewer or other rents and charges, excises, tax inspection, authorization and
similar fees and all other governmental charges, as well as financial
obligations with respect to any covenants, conditions or restrictions, including
reciprocal easement agreements or cost-sharing arrangements affecting the Leased
Property, in each case whether general or special, ordinary or extraordinary, or
foreseen or unforeseen, of every character in respect of the Leased Property or
the business conducted thereon by Lessee (including all interest and penalties
thereon caused by any failure in payment by Lessee), which at any time prior to,
during or with respect to the Term hereof may be assessed or imposed on or with
respect to or be a lien upon (a) Lessor's interest in the Leased Property, (b)
the Leased Property, or any part thereof or any rent therefrom or any estate,
right, title or interest therein, or (c) any occupancy, operation, use or
possession of, or sales from, or activity conducted on or in connection with the
Leased Property, or the leasing or use of the Leased Property or any part
thereof by Lessee. Nothing contained in this definition of Impositions shall be
construed to require Lessee to pay (1) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on Lessor or
any other person, or (2) any net revenue tax of Lessor or any other person, or
(3) any tax imposed with respect to the sale, exchange or other disposition by
Lessor of any Leased Property or the proceeds thereof.
Indemnified Party: Either of a Lessee Indemnified Party or a Lessor
Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an Indemnified
Party pursuant to any provision of this Lease.
Initial Working Capital: An amount equal to One Thousand Two Hundred
Fifty Dollars ($1,250) per guest room, adjusted by the GDP Deflator, less cash
on hand at the Facility as of the Take-Over Date (and as defined Primary
Agreement), plus the Initial FF&E Reserve Balance (as that term is defined in
the Primary Management Agreement).
Insurance Requirements: All terms of any insurance policy required by
this Lease and all requirements of the issuer of any such policy.
Inventory: All "Inventories of Merchandise" and "Inventories of
Supplies" as defined in the Uniform System, including, but not limited to,
linens, china, silver, glassware and other non-depreciable personal property,
and any property of the type described in Section 1221(1) of the Code.
Land: As defined in ARTICLE I.
Lease: This Lease.
Lease Year: Any twelve-month period from January 1 to December 31
during the Term; provided that the initial Lease Year shall be the period
beginning on the Commencement Date and ending on December 31st of the calendar
year which includes the Commencement Date, and the last Lease Year shall be the
period beginning on January 1 of
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<PAGE> 18
the calendar year in which the Term expires or terminates and ending on the
expiration or termination date (to the extent any computation or other provision
hereof provides for an action to be taken on a Lease Year basis, an appropriate
proration or other adjustment shall be made in respect of the initial and final
Lease Years to reflect that such periods are less than full calendar year
periods).
Leased Improvements; Leased Property: Each as defined in ARTICLE I.
Legal Requirements: Any federal, state or local law, code, rule,
ordinance, regulation or order of any governmental authority or agency having
jurisdiction over the business or operation of the Facility or the matters which
are the subject of this Agreement, including, without limitation, the following:
(i) any building, zoning or use laws, ordinances, regulations or orders; and
(ii) Environmental Laws.
Lessee: The Lessee designated on this Lease and its permitted
successors and assigns.
Lessee Indemnified Party: Lessee, any Affiliate of Lessee (other than
the Company and its direct and indirect subsidiaries, including Lessor), any
other Person against whom any claim for indemnification may be asserted
hereunder as a result of a direct or indirect ownership interest in Lessee, the
officers, directors, stockholders, partners, members, employees, agents and
representatives of any of the foregoing Persons and any corporate stockholder,
agent, or representative of any of the foregoing Persons, and the respective
heirs, personal representatives, successors and assigns of any such officer,
director, stockholder, employee, agent or representative.
Lessee's Personal Property: As defined in SECTION 6.2.
Lessor: The Lessor designated on this Lease and its respective
successors and assigns.
Lessor Impositions: With respect to each Lease Year, an amount equal to
the aggregate amount of ground rents, if any, Capital Impositions, Real Estate
Taxes and Personal Property Taxes due and payable for such Lease Year.
Lessor Indemnified Party: The Company and its direct and indirect
subsidiaries, including Lessor, and any other Person against whom any claim for
indemnification may be asserted hereunder as a result of a direct or indirect
ownership interest in Lessor, the officers, directors, stockholders, partners,
members, employees, agents and representatives of any of the foregoing Persons
and of any stockholder, partner, member, agent, or representative of any of the
foregoing Persons, and the respective heirs, personal representatives,
successors and assigns of any such officer, director, partner, stockholder,
employee, agent or representative.
Lessor Insurance Costs: The costs to be borne by Lessor for insurance
coverages contemplated by ARTICLE XIII hereof.
Lessor's Audit: An audit by Lessor's independent certified public
accountants of the operation of the Leased Property during any Lease Year, which
audit may, at Lessor's
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<PAGE> 19
election, be either a complete audit of the Leased Property's operations or an
audit of Room Revenues, Food Sales, Beverage Sales and Other Income realized
from the operation of the Leased Property during such Lease Year.
Management Agreement: The Primary Management Agreement and the
Submanagement Agreement, taken together, or, following the termination of the
Primary Management Agreement and the Submanagement Agreement, shall have the
meaning set forth in SECTION 21.2.
Manager: Primary Manager, as defined in the recitals hereto, or the
Submanager, to the extent that the rights and obligations of Primary Manager
with respect to this Lease have been assigned to and/or assumed by Submanager
pursuant to the Submanagement Agreement. Following termination of the Primary
Management Agreement and the Submanagement Agreement for any reason, Manager
shall have the meaning set forth in SECTION 21.2.
Marriott System: The chain of full-service hotels in the United States
which are operated by Submanager (or one of its Affiliates) under the Trade Name
of "Marriott".
Measurement Date: As defined in SECTION 3.1(d).
Minimum Net Worth: As defined in SECTION 32.1.
Monthly Revenues Computation: As defined in SECTION 3.1(b).
Mortgage: As defined in SECTION 28.2.
Net Worth: As defined in SECTION 32.1.
Notice: A notice given pursuant to ARTICLE XXX.
Officer's Certificate: A certificate of Lessee reasonably acceptable to
Lessor, signed by the chief financial officer or another officer duly authorized
so to sign by Lessee or a general partner of Lessee, or any other person whose
power and authority to act has been authorized by delegation in writing by any
such officer.
Operating Budget: As defined in SECTION 3.5.
Other Income: All revenues, receipts, and income of any kind derived
directly or indirectly from or in connection with the Facility and included in
Gross Revenues other than Room Revenues, Food Sales or Beverage Sales.
Other Income Percentage: As defined in SECTION 3.1(b)(ii) and EXHIBIT
B.
Overdue Rate: On any date, a rate equal to the Base Rate plus 4% per
annum, but in no event greater than the maximum rate then permitted under
applicable law.
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<PAGE> 20
Payment Date: Any due date for the payment of any installment of Rent.
Percentage Rent: As defined in SECTION 3.1(b).
Person: Any Government, natural person, corporation, partnership or
other legal entity.
Personal Property Limitation: As defined in SECTION 18.1.
Personal Property Taxes: All personal property taxes imposed on the
furniture, furnishings or other items of personal property located on, and used
in connection with, the operation of the Leased Improvements as a hotel (other
than Inventory and other personal property owned by the Lessee and/or its
tenants, licensees, concessionaires, agents or contractors), together with all
replacements, modifications, alterations and additions thereto.
Predecessor: Any Person whose liabilities arising under any
Environmental Law have or may have been retained or assumed by Lessor or Lessee
pursuant to the provisions of this Lease.
Primary Intended Use: As defined in SECTION 7.2(b).
Primary Manager and Primary Management Agreement: As defined in the
recitals hereto.
Proceeding: Any judicial action, suit or proceeding (whether civil or
criminal), any administrative proceeding (whether formal or informal), any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
RCRA: The Resource Conservation and Recovery Act, as amended.
Real Estate Taxes: All real estate and other ad valorem taxes,
including general and special assessments (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not completed within the
Term), if any, which are imposed upon the Land, the Leased Improvements, the
Fixtures and Lessor's and Lessee's estates in any easements, rights and
appurtenances relating to the Land and the Leased Improvements, in each case
whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, in every character (including all interest and penalties thereon
caused by any failure in payment by Lessor). Real Estate Taxes shall also
include all other taxes imposed in lieu of real estate taxes as described in the
preceding sentence. Real Estate Taxes shall not include taxes on the property of
Lessee or its tenants, licensees, concessionaires, agents or contractors,
including, without limitation, on Inventory.
REIT OP: Patriot American Hospitality Partnership, L.P., a Virginia
limited partnership.
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<PAGE> 21
Reasonable Amount of Working Capital: As defined in the Submanagement
Agreement.
Release: A "Release" as defined in CERCLA or in any Environmental Law,
unless such Release has been properly authorized and permitted in writing by all
applicable Environmental Authorities or is allowed by such Environmental Law
without authorizations or permits.
Rent: Collectively, the Base Rent, Percentage Rent and Additional
Charges.
Revenues Computation: As defined in SECTION 3.1(b).
Room Revenues: Gross revenue from the rental of guest rooms, whether to
individuals, groups or transients, at the Facility, determined in a manner
consistent with the Uniform System, excluding the following:
(a) The amount of all credits, rebates or refunds to
customers, guests or patrons; and
(b) All sales taxes or any other taxes imposed on the rental
of such guest rooms; and
(c) any fees collected for amenities including, but not
limited to, telephone, laundry, movies or concessions.
SEC: The U.S. Securities and Exchange Commission or any successor
agency.
Second Tier Food Sales Percentage: As defined in SECTION 3.1(b)(ii)
and EXHIBIT B.
Second Tier Room Revenue Percentage: As defined in SECTION 3.1(b)(ii)
and EXHIBIT B.
State: The State or Commonwealth of the United States in which the
Leased Property is located, or, if the Leased Property is located outside of the
United States, the state, province, dominion or other similar jurisdiction in
which the Leased Property is located.
Submanager and Submanagement Agreement: As defined in the recitals
hereto.
Subsidiaries: Corporations or other entities in which Lessee owns,
directly or indirectly, 50% or more of the voting rights or control, as
applicable (individually, a "SUBSIDIARY").
Taking: A permanent or temporary taking or voluntary conveyance during
the Term hereof of all or part of the Leased Property, or any interest therein
or right accruing thereto or use thereof, as the result of, or in settlement of,
any Condemnation or other eminent domain
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<PAGE> 22
proceeding affecting the Leased Property whether or not the same shall have
actually been commenced.
Term: As defined in SECTION 1.2.
Termination Fee: As defined in SECTION 33.1(c).
Third Tier Room Revenue Percentage: As defined in SECTION 3.1(b)(ii)
and EXHIBIT B.
Unavoidable Delay: Delay due to strikes, lock-outs, labor unrest,
inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty,
condemnation or other similar causes beyond the reasonable control of the party
responsible for performing an obligation hereunder, provided that lack of funds
shall not be deemed a cause beyond the reasonable control of either party hereto
unless such lack of funds is caused by the breach of the other party's
obligation to perform any obligations of such other party under this Lease.
Unavoidable Occurrence: The occurrence of strikes, lockouts, labor
unrest, inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, casualty, condemnation or
other similar causes beyond the reasonable control of Lessee, provided, that any
such occurrence is an extraordinary (as opposed to a routine or cyclical)
material event.
Uneconomic for its Primary Intended Use: A state or condition of the
Facility such that in the good faith judgment of Lessee or Lessor, exercised
reasonably, the Facility cannot be reconstructed or repaired within a reasonable
period of time after the damage or loss, so as to be capable of being operated
on a commercially practicable basis for its Primary Intended Use.
Uniform System: The Uniform System of Accounts for the Lodging Industry
(9th Revised Edition, 1996) as published by the Hotel Association of New York
City, Inc.
Unsuitable for its Primary Intended Use: A state or condition of the
Facility such that in the good faith judgment of Lessee or Lessor, exercised
reasonably, the Facility cannot be reconstructed or repaired within a reasonable
period of time after the damage or loss, so as to be capable of functioning as
an integrated hotel facility consistent with standards applicable to a well
maintained and operated hotel comparable in quality and function to that of the
Facility prior to the damage or loss.
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<PAGE> 23
ARTICLE III
RENT
3.1 Rent. Lessee will pay to Lessor in lawful money of the United
States of America which shall be legal tender for the payment of public and
private debts, at Lessor's address set forth in ARTICLE XXX hereof or at such
other place or to such other Person, as Lessor from time to time may designate
in a Notice, all Rent contemplated hereby during the Term on the basis
hereinafter set forth. If there is a dispute as to the amount of Rent to be paid
by Lessee, either party may submit the dispute to arbitration pursuant to
SECTION 37.2. However, Lessee shall be required to pay, as and when Rent is due
and payable hereunder, the amount of Rent calculated by Lessor to be due and
payable until such time as the dispute is resolved by agreement between the
parties or by arbitration pursuant to SECTION 37.2:
(a) Base Rent: During the Term, Lessee shall pay to Lessor as
Base Rent (herein so called) the annual sum set forth on EXHIBIT B attached
hereto, which shall be payable in arrears in equal monthly installments in the
amount set forth on EXHIBIT B attached hereto on or before the first day of the
calendar month following the calendar month in which the Commencement Date
occurs and on or before the first day of each calendar month thereafter;
provided, however, the monthly payment of Base Rent shall be prorated as to any
partial month.
(b) Percentage Rent: In addition to the sums payable pursuant
to subparagraph (a) above, Lessee shall, within ten (10) days after the last day
of each month during the Term hereof, pay to Lessor an amount equal to the
Percentage Rent (herein so called) payable in accordance with the provisions of
this subparagraph (b). Percentage Rent shall be calculated by the following
formula (the "REVENUES COMPUTATION"):
(i) For any calendar month, Percentage Rent shall
equal:
(1) An amount equal to the Monthly
Revenues Computation (defined
below), for the Lease Year in
question
less
(2) An amount equal to the Base Rent
paid by Lessee to Lessor for the
Lease Year to date
less
(3) An amount equal to the Percentage
Rent theretofore paid for the Lease
Year in question to date.
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<PAGE> 24
(ii) "MONTHLY REVENUES COMPUTATION" shall be computed
utilizing the following definitions:
(1) "CUMULATIVE MONTHLY PORTION" shall mean
a fraction having as its numerator the total number
of calendar months (including partial months) in a
Lease Year which have elapsed prior to the month in
which a monthly payment of Percentage Rent is due,
and having as its denominator the total number of
calendar months (including partial months) in the
Lease Year. For example, the Cumulative Monthly
Portion in a 12-month Lease Year for the January
Percentage Rent payment due February 10 will be 1/12
and for the February Percentage Rent payment due
March 10 will be 2/12, and such progression shall
continue for each successive calendar month so that
the Cumulative Monthly Portion for the December
Percentage Rent payment due January 10 of the next
Lease Year will be 12/12 or 100%.
(2) "FIRST TIER ROOM REVENUE PERCENTAGE,"
"SECOND TIER ROOM REVENUE PERCENTAGE," "THIRD TIER
ROOM REVENUE PERCENTAGE," "FIRST TIER FOOD SALES
PERCENTAGE," "SECOND TIER FOOD SALES PERCENTAGE" and
"OTHER INCOME PERCENTAGE" shall mean the percentages
corresponding to each of such terms as set forth on
EXHIBIT B.
(3) "ANNUAL ROOM REVENUES FIRST BREAK POINT"
and "ANNUAL ROOM REVENUES SECOND BREAK POINT" shall
mean the amount of annual Room Revenues corresponding
to each of such terms as set forth on EXHIBIT B.
(4) "ANNUAL FOOD SALES BREAK POINT" shall
mean the amount of annual Food Sales and Beverage
Sales corresponding to such term as set forth on
EXHIBIT B.
(iii) The Monthly Revenues Computation shall be the
amount obtained by adding, for the applicable Lease Year the
following sums:
(1) an amount equal to the First Tier Room
Revenue Percentage of all year to date Room Revenues
up to (but not exceeding) the Cumulative Monthly
Portion of the Annual Room Revenues First Break
Point,
(2) an amount equal to the Second Tier Room
Revenue Percentage of all year to date Room Revenues
in excess of the Cumulative Monthly Portion of the
Annual Room Revenues First Break Point up to (but not
exceeding) the Cumulative Monthly Portion of the
Annual Room Revenues Second Break Point,
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<PAGE> 25
(3) an amount equal to the Third Tier Room
Revenue Percentage of all year to date Room Revenues
in excess of the Cumulative Monthly Portion of the
Annual Room Revenues Second Break Point,
(4) an amount equal to the First Tier Food
Sales Percentage of the Cumulative Monthly Portion of
all year to date Food Sales and Beverage Sales up to
(but not exceeding) the Cumulative Monthly Portion of
the Annual Food Sales Break Point,
(5) an amount equal to the Second Tier Food
Sales Percentage of all year to date Food Sales and
Beverage Sales in excess of the Cumulative Monthly
Portion of the Annual Food Sales Break Point, and
(6) an amount equal to the Other Income
Percentage of year to date revenues from Other
Income.
(iv) If the Term begins or ends in the middle of a
calendar year, then the number of months falling within the
Term during such calendar year shall constitute a separate
Lease Year. In that event, the Annual Room Revenues First
Break Point, the Annual Room Revenues Second Break Point, and
the Annual Food Sales Break Point (collectively, the "BREAK
POINTS") shall each be multiplied by a fraction equal to (A)
the number of months (including partial months) in the Lease
Year divided by (B) twelve (12), and the Cumulative Monthly
Portion for each of the months in such Lease Year shall be
determined as set forth in the definition of Cumulative
Monthly Portion above.
(v) The obligation to pay Percentage Rent accrued
through the expiration or earlier termination of the Term
shall survive such expiration or termination, and a final
reconciliation, taking into account, among other relevant
adjustments, any adjustments which are accrued after such
expiration or termination date but which related to Percentage
Rent accrued prior to such termination date, shall be made not
later than sixty (60) days after such expiration or
termination date.
(c) Officer's Certificates. An Officer's Certificate shall be
delivered to Lessor monthly setting forth the calculation of the
Percentage Rent payment for the most recently completed month within 10
days after each month of each Lease Year during the Term. There shall
be no reduction in Base Rent regardless of the results of the Monthly
or Annual Revenues Computation. Percentage Rent shall be subject to
confirmation and adjustment, if applicable, as set forth in SECTION
3.2. Notwithstanding the amounts of Percentage Rent paid monthly
pursuant to the formula set forth above, for each Lease Year during the
Term commencing with the Lease Year in which the Commencement Date
occurs, the Percentage Rent payable under this Lease shall be equal to
the amount determined by the following formula:
The amount equal to the Annual Revenues Computation
(as defined below) for the Lease Year in question
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<PAGE> 26
less
An amount equal to the Base Rent paid for the
applicable Lease Year
equals
Percentage Rent for the applicable Lease Year.
The Annual Revenues Computation (herein so called) shall be the amount obtained
by adding, for the applicable Lease Year, the following sums:
(1) an amount equal to the First Tier Room Revenue
Percentage of Room Revenues for the applicable Lease Year up
to (but not exceeding) the Annual Room Revenues First Break
Point,
(2) an amount equal to the Second Tier Room Revenue
Percentage of Room Revenues for the applicable Lease Year in
excess of the Annual Room Revenues First Break Point up to
(but not exceeding) the Annual Room Revenues Second Break
Point,
(3) an amount equal to the Third Tier Room Revenue
Percentage of Room Revenues for the applicable Lease Year in
excess of the Annual Room Revenues Second Break Point,
(4) an amount equal to the First Tier Food Sales
Percentage of Food Sales and Beverage Sales for the applicable
Lease Year up to (but not exceeding) the Annual Food Sales
Break Point,
(5) an amount equal to the Second Tier Food Sales
Percentage of Food Sales and Beverage Sales for the applicable
Lease Year in excess of the Annual Food Sales Break Point, and
(6) an amount equal to the Other Income Percentage of
revenues from Other Income for the applicable Lease Year.
If the annual Percentage Rent due and payable for any Lease Year (as shown in
the applicable Officer's Certificate) exceeds the amount actually paid as
Percentage Rent by Lessee for such year, Lessee also shall pay such excess to
Lessor within sixty (60) days after the end of the applicable Lease Year. If the
Percentage Rent actually due and payable for such Lease Year is shown by such
certificate to be less than the amount actually paid as Percentage Rent for the
applicable Lease Year, Lessee shall be entitled to a credit in the amount of
such overpayment against the next ensuing payment of Base Rent and/or Percentage
Rent, provided, however, if such overpayment is greater than a monthly payment
of Base Rent, Lessor shall pay the amount which is over and above the monthly
payment of Base Rent to Lessee within thirty (30) days of such determination.
Notwithstanding the foregoing, if the Annual Revenues
20
<PAGE> 27
Computation is less than the Base Rent for the applicable Lease Year, Lessee
shall not be entitled to any credit or refund.
(d) CPI Adjustments.
(i) For the Lease Year commencing January 1, 1999,
and for each Lease Year thereafter during the Term, the Base Rent then in effect
shall be increased in the following manner:
(a) The Base Rent for the Lease Year in
question shall be an amount equal to (1) the prior year's Base Rent, plus (2)
the product of (aa) an amount equal to (x) the prior year's Base Rent multiplied
by the CPI Factor, less (y) the prior year's Base Rent, times (bb) the Fixed
Rent Factor.
(b) The term "CPI Factor" shall mean a
percentage computed by dividing the Consumer Price Index for the day before the
day that the new Lease Year commences ("Measurement Date") by the Consumer Price
Index for the day that is twelve months preceding the Measurement Date.
(c) The term "Fixed Rent Factor" shall mean
a percentage computed by dividing the actual Lessor Impositions (on an
annualized basis) plus the Lessor Insurance Costs (on an annualized basis) for
Lease Year 1998 by the Base Rent for Lease Year 1999.
(d) For example, if the prior years' Base
Rent was $500,000.00, the CPI Factor was 1.03 and the Fixed Rent Factor is .20,
then the Base Rent for the Lease Year in question would be $503,000.00: $500,000
+ [($500,000 X 1.03 - $500,000) X .2)].
(ii) For each Lease Year during the Term beginning
with the Lease Year commencing January 1, 1999, the Annual Room Revenues First
Break Point and the Annual Room Revenues Second Break Point (together, the
"Annual Room Revenues Break Points"), and the Annual Food Sales Break Point then
included in the Revenues Computation set forth above, shall be increased as
follows:
(a) The new Annual Room Revenues Break
Points in the Revenues Computation described above for the Lease Year commencing
January 1, 1999, and for each Lease Year thereafter shall be the product of (i)
the Annual Room Revenues Break Points in effect in the most recently ended Lease
Year times (ii) the CPI Factor plus the percentage amount set forth on EXHIBIT
B; and
(b) The new Annual Food Sales Break Point in
the Revenues Computation described above for the Lease Year commencing January
1, 1999, and for each Lease Year thereafter during the Term, shall be the
product of (i) the Annual Food Sales Break Point in effect in the most recently
ended Lease Year times (ii) the CPI Factor plus the percentage amount set forth
on EXHIBIT B.
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<PAGE> 28
(iii) In no event shall the Base Rent, the Annual
Room Revenues Break Points or the Annual Food Sales Break Point then in effect
be reduced as a result of any changes in the Consumer Price Index or any
calculations made pursuant to this Subparagraph (d).
(iv) Adjustments calculated as set forth above in the
Base Rent, Annual Room Revenues Break Points and the Annual Food Sales Break
Point shall be effective on the first day of each calendar Lease Year to which
such adjusted amounts apply. If Base Rent or Percentage Rent is paid prior to
the determination of the amount of any adjustment to Base Rent, Percentage Rent,
the Annual Room Revenues Break Points or the Annual Food Sales Break Point
applicable for such period, whether because of a delay in the publication of the
Consumer Price Index for the Measurement Date or because of any other reason,
payment adjustments for any shortfall in or overpayment of Percentage Rent paid
shall be made with first Base Rent and Percentage Rent payments due after the
amount of the adjustments are determined.
(v) If (a) a significant change is made in the number
or nature (or both) of items used in determining the Consumer Price Index, or
(b) the Consumer Price Index shall be discontinued for any reason, the Bureau of
Labor Statistics shall be requested to furnish a new index comparable to the
Consumer Price Index, together with information which will make possible a
conversion to the new index in computing the adjusted Base Rent, Annual Room
Revenues Break Points and Annual Food Sales Break Point hereunder. If for any
reason the Bureau of Labor Statistics does not furnish such an index and such
information, the parties will instead mutually select, accept and use such other
index or comparable statistics on the cost of living in various U.S. cities that
is computed and published by an agency of the United States or a responsible
financial periodical of recognized authority.
(vi) To the extent that, at the end of any Lease
Year, Percentage Rent has been overpaid, Lessee shall be entitled to a credit
against the next ensuing payments of Base Rent and/or Percentage Rent.
3.2 Confirmation of Percentage Rent.
(a) Lessee shall utilize, or cause to be utilized, an
accounting system for the Leased Property in accordance with its usual and
customary practices, and in accordance with GAAP and the Uniform System, that
will accurately record all data necessary to compute Percentage Rent, and Lessee
shall retain, for at least three (3) years after the expiration of each Lease
Year, reasonably adequate records conforming to such accounting system showing
all data necessary to conduct Lessor's Audit and to compute Percentage Rent for
the applicable Lease Years.
(b) Lessor shall have the right from time to time by its
accountants or representatives to audit such information in connection with
Lessor's Audit, and to examine all Lessee's records (including supporting data
and sales and excise tax returns) reasonably required to complete Lessor's Audit
and to verify Percentage Rent, subject to any prohibitions
22
<PAGE> 29
or limitations on disclosure of any such data under Legal Requirements. For this
purpose, Lessee's records shall include all records maintained with respect to
the Leased Property on Lessee's behalf by Manager. If any Lessor's Audit
discloses a deficiency in the payment of Percentage Rent, and either Lessee
agrees with the result of Lessor's Audit or the matter is otherwise determined
or compromised, Lessee shall forthwith pay to Lessor the amount of the
deficiency, as finally agreed or determined, together with interest at the
Overdue Rate from the date when said payment should have been made to the date
of payment thereof; provided, however, that as to any Lessor's Audit that is
commenced more than one (1) year after the end of any Lease Year, the
deficiency, if any, with respect to such Percentage Rent shall bear interest at
the Overdue Rate only from the date such determination of deficiency is made
unless such deficiency is the result of the gross negligence or willful
misconduct of the Lessee, in which case interest at the Overdue Rate will accrue
from the date such payment should have been made to the date of payment thereof.
In the event the Revenue Audit discloses an overpayment by Lessee, Lessee shall
be entitled to a credit in the amount of such overpayment against the next
ensuing payment of Percentage Rent. In no event shall Lessor undertake a
Lessor's Audit more than three (3) years after the last day of the Lease Year
for which such audit is requested.
(c) Any proprietary information obtained by Lessor pursuant to
the provisions of this Section shall be treated as confidential, except that
such information may be used, subject to appropriate confidentiality safeguards,
in any litigation between the parties and except further that Lessor may
disclose such information to prospective lenders and investors and to any other
persons to whom disclosure is necessary to comply with applicable laws,
regulations and government requirements.
(d) The obligations of Lessee and Lessor contained in this
Section shall survive the expiration or earlier termination of this Lease. Any
dispute as to the existence or amount of any deficiency in the payment of
Percentage Rent as disclosed by Lessor's Audit shall, if not otherwise settled
by the parties, be submitted to arbitration pursuant to the provisions of
SECTION 37.2.
3.3 Additional Charges. In addition to the Base Rent and Percentage
Rent, Lessee also will pay and discharge as and when due and payable the
following: (a) all other amounts, liabilities, obligations and Impositions that
Lessee assumes or agrees to pay under this Lease, and (b) in the event of any
failure on the part of Lessee to pay any of those items referred to in clause
(a) of this SECTION 3.3, Lessee also will promptly pay and discharge every fine,
penalty, interest and cost that may be added for non-payment or late payment of
such items. The items referred to in clauses (a) and (b) of this SECTION 3.3
shall be additional rent hereunder and shall be referred to herein collectively
as the "ADDITIONAL CHARGES". Lessor shall have all legal, equitable and
contractual rights, powers and remedies provided either in this Lease or by
statute or otherwise in the case of non-payment of the Additional Charges as in
the case of non-payment of the Base Rent. If any installment of Base Rent,
Percentage Rent or Additional Charges (but only as to those Additional Charges
that are payable directly to Lessor) shall not be paid on its due date, Lessee
will pay Lessor within ten (10) days of demand, as Additional Charges, a late
charge (to the extent permitted by law) equal to the greater of (i) interest
computed at the Overdue Rate on the amount of such installment, from the due
date of such
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installment to the date of payment thereof, or, (ii) in the event Lessee has
failed to pay the amount of such installment, within ten (10) days after receipt
by the Lessee of Notice from Lessor (provided, however, that after Lessor has
given one (1) such Notice in a Lease Year, the ten (10) days' Notice and cure
period shall not be required for the remainder of such Lease Year), five percent
(5%) of such amount. To the extent that Lessee pays any Additional Charges to
Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of
its obligation to pay such Additional Charges to the entity to which they would
otherwise be due and Lessor shall pay the same from monies received from Lessee.
3.4 No Set Off. Rent shall be paid to Lessor without set off, deduction
or counterclaim; provided, however, that Lessee shall have the right of offset
to the extent specifically provided in SECTION 36.1 and the right to assert any
claim or counterclaim in a separate action brought by Lessee under this Lease or
to assert any mandatory counterclaim in any action brought by Lessor under this
Lease.
3.5 Annual Budget.
(a) Not later than sixty (60) days prior to the commencement
of each Lease Year, Lessee shall prepare and submit to Lessor an operating
budget (the "OPERATING BUDGET") and a capital budget (the "CAPITAL BUDGET")
prepared in accordance with the requirements of this SECTION 3.5. The Operating
Budget and the Capital Budget (together, the "ANNUAL BUDGET") shall be prepared
in accordance with the Uniform System to the extent applicable and show by month
and quarter and for the year as a whole in the degree of detail specified by the
Uniform System for monthly statements, and in accordance with the detail level
of monthly financial statements, the following:
(i) Lessee's reasonable estimate of Gross Revenues
(including room rates and Room Revenues) for the forthcoming Lease Year itemized
on schedules on a monthly and quarterly basis as approved by Lessor and Lessee,
together with the assumptions, in narrative form, forming the basis of such
schedules.
(ii) An estimate of any amounts Lessor will be
requested to provide for Capital Improvements during the current and the next
four (4) Lease Years, subject to the limitations set forth in ARTICLE XXXV.
(iii) A cash flow projection.
(iv) A narrative description of the program for
marketing and managing the Facility for the forthcoming Lease Year and
containing a detailed budget itemization of proposed expenditures by category.
(v) Lessee's reasonable estimate for each month of
the Lease Year of Percentage Rent, including Room Revenues, Food Sales, Beverage
Sales and Other Income.
Lessor shall have thirty (30) days after the date on which it
receives the Annual Budget to review, approve, disapprove or request changes to
the Annual Budget. If the parties
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are not able to reach agreement on the Annual Budget for any Lease Year during
Lessor's thirty (30) day review period, the parties shall attempt in good faith
during the subsequent thirty (30) day period to resolve any disputes, which
attempt shall include, if requested by either party, at least one (1) meeting of
executive-level officers of Lessor and Lessee. In the event the parties are
still not able to reach agreement on the Annual Budget for any particular Lease
Year after complying with the foregoing requirements of this SECTION 3.5, the
parties shall adopt such portions of the Operating Budget and the Capital Budget
as they may have agreed upon and any matters not agreed upon shall be referred
to arbitration as provided for in SECTION 37.2 hereof.. Pending the results of
such arbitration or the agreement of the parties, (i) if the Operating Budget
has not been agreed upon, the Leased Property will be operated in a manner
consistent with the prior Lease Year's Operating Budget without adjustment until
a new Operating Budget is adopted, and (ii) if the Capital Budget has not been
agreed upon, no Capital Expenditures shall be made unless the same are set forth
in a previously approved Capital Budget or are agreed to by Lessor and Lessee or
are otherwise required to comply with Legal Requirements, the Franchise
Agreement or Brand Standards, as applicable, or to make Emergency Expenditures.
Lessee shall operate the Leased Property consistent with the
Annual Budget and shall promptly report to Lessor in writing any actual or
anticipated deviation from the Operating Budget or Capital Budget of any
material or long-term consequence.
(b) Notwithstanding the foregoing, while the Submanagement
Agreement is in effect, Lessor agrees that the provisions for the preparation,
approval and implementation of a Business Plan, an FF&E Estimate (including the
Five-Year Plan) and a Building Estimate and compliance therewith pursuant to
SECTIONS 4.05, 5.02 AND 5.03 of the Primary Management Agreement and the
Submanagement Agreement (including by reference the related provisions of the
Primary Management Agreement and the Submanagement Agreement regarding approval
of excess expenditures, dispute resolution, choice of law and similar
provisions) shall substitute for the foregoing provisions regarding the
preparation and approval of the Annual Budget, reading such Sections, mutatis
mutandis, so that Lessor shall have all of the rights and obligations of Lessee
under such Sections, and Lessee shall have all of the rights and obligations of
Primary Manager under such Sections. Lessor agrees and acknowledges that Lessee
may delegate such rights and obligations to Primary Manager, which Primary
Manager may delegate to Submanager.
(c) Lessee agrees that it shall consult with Lessor prior to
hiring, or consenting to the hiring of, any General Manager of the Facility.
3.6 Books and Records. Lessee shall keep full and adequate books of
account and other records reflecting the results of operation of the Facility on
an accrual basis, all in accordance with the Uniform System and GAAP and the
obligations of Lessee under this Lease. The books of account and all other
records relating to or reflecting the operation of the Facility shall be kept
either at the Facility or at Lessee's offices in Dallas, Texas or Pittsburgh,
Pennsylvania and shall be available to Lessor and its representatives and its
auditors or accountants, at all reasonable times for examination, audit,
inspection, and transcription. All of such books and records pertaining to the
Facility including, without limitation, books of
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account, guest records and front office records, at all times shall be the
property of Lessee and shall not be removed from the Facility or Lessee's
offices without Lessee's prior written approval, provided, however, Lessor shall
be entitled to make copies of any or all such books and records for its own
files. The obligations under this SECTION 3.6 shall survive termination of this
Lease for any reason. Lessor acknowledges that while the Primary Management
Agreement and Submanagement Agreement are in effect, Lessee's ability to provide
access to books of account and records may be limited by the provisions of such
agreements.
3.7 Changes in Operations. Without Lessor's prior written consent,
Lessee shall not (i) provide food and/or beverage operations at the Facility if
not presently provided, (ii) discontinue any food and/or beverage operations
which are presently provided, or (iii) convert a subtenant, licensee or
concessionaire to an operating department of the Facility or vice-versa.
Notwithstanding the foregoing, while the Submanagement Agreement is in effect,
Lessor acknowledges that Primary Manager and/or Submanager may have the
authority to make such changes in operations without Lessee's consent. Lessee
agrees that it will not exercise any consent, approval or consultation rights it
may have under such agreements with respect to such matters without Lessor's
consent. [The parties agree that in the event of one or more changes in
operations that are (separately or together) reasonably likely to change the
amount of rent payable hereunder by more than [5%], the calculation of
Percentage Rent shall be equitably amended to leave the parties in approximately
the same economic position as they would have been in the absence of such
change(s).]
3.8 Allocation of Revenues. In the event that individuals or groups
purchase rooms, food and beverage and/or the use of other hotel facilities or
services together or as part of a package, Lessee agrees that revenues shall be
allocated among Room Revenues, Food Sales, Beverage Sales and/or other revenue
categories, as applicable, in a reasonable manner consistent with the historical
allocation of such revenues.
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ARTICLE IV
IMPOSITIONS
4.1 Payment of Impositions.
(a) Subject to ARTICLE XII relating to permitted contests,
Lessee will pay, or cause to be paid, all Impositions (other than Lessor
Impositions, which shall be paid by Lessor) before any fine, penalty, interest
or cost may be added for non-payment, such payments to be made directly to the
taxing or other authorities where feasible, and will promptly furnish to Lessor
copies of official receipts or other satisfactory proof evidencing such
payments. Lessee's obligation to pay such Impositions shall be deemed absolutely
fixed upon the date such Impositions become a lien upon the Leased Property or
any part thereof, subject to Lessee's right of contest pursuant to the
provisions of ARTICLE XII. If any such Imposition may, at the option of the
taxpayer, lawfully be paid in installments (whether or not interest shall accrue
on the unpaid balance of such Imposition), Lessee may exercise the option to pay
the same (and any accrued interest on the unpaid balance of such Imposition) in
installments payable during the Term and in such event, shall pay such
installments and any unpaid balance of such Impositions prior to the expiration
or earlier termination of the Term hereof and before any fine, penalty, premium,
further interest or cost may be added thereto.
(b) Lessor, at its expense, shall, to the extent required or
permitted by applicable law, prepare and file all tax returns in respect of
Lessor's net income, gross receipts, sales and use, single business, transaction
privilege, rent, ad valorem, franchise taxes, Real Estate Taxes, Personal
Property Taxes, taxes on its capital stock and Lessor Impositions, and Lessee,
at its expense, shall, to the extent required or permitted by applicable laws
and regulations, prepare and file all other tax returns and reports in respect
of any Imposition as may be required by governmental authorities.
(c) If any refund shall be due from any taxing authority in
respect of any Imposition paid by Lessee, the same shall be paid over to or
retained by Lessee if no Event of Default shall have occurred hereunder and be
continuing. If an Event of Default shall have been declared by Lessor and be
continuing, any such refund shall be paid over to or retained by Lessor. Any
such funds retained by Lessor due to an Event of Default shall be applied as
provided in ARTICLE XVI.
(d) Lessor and Lessee shall, upon request of the other,
cooperate with the other party and otherwise provide such data as is maintained
by the party to whom the request is made with respect to the Leased Property as
may be necessary to prepare any required returns and reports. Lessor, to the
extent it possesses the same, and Lessee, to the extent it possesses the same,
will provide the other party, upon request, with cost and depreciation records
necessary for filing returns for any property classified as personal property.
(e) Lessor may, upon notice to Lessee, at Lessor's option and
at Lessor's sole expense, protest, appeal, or institute such other proceedings
(in its or Lessee's name) as Lessor may deem appropriate to effect a reduction
of real estate or personal property assessments for those Impositions to be paid
by Lessor, and Lessee, at Lessor's expense as
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aforesaid, shall fully cooperate with Lessor in such protest, appeal, or other
action. Lessor hereby agrees to indemnify, defend, and hold harmless Lessee from
and against any claims, obligations, and liabilities against or incurred by
Lessee in connection with such cooperation. Lessor, however, reserves the right
to effect any such protest, appeal or other action and, upon notice to Lessee,
shall control any such activity, which shall then proceed at Lessor's sole
expense. Upon such notice, Lessee, at Lessor's expense, shall cooperate fully
with such activities.
(f) To the extent received by it, Lessee shall furnish Lessor
with copies of all assessment notices for Real Estate Taxes and Personal
Property Taxes in sufficient time for Lessor to file a protest and pay such
taxes without penalty. Lessor shall within thirty (30) days after making such
payment furnish Lessee with evidence of payment of Capital Impositions, Real
Estate Taxes and Personal Property Taxes.
4.2 Notice of Impositions. Lessor shall give prompt Notice to Lessee of
all Impositions payable by Lessee hereunder of which Lessor at any time has
knowledge, provided that Lessor's failure to give any such Notice shall in no
way diminish Lessee's obligations hereunder to pay such Impositions, but if
Lessee did not otherwise have knowledge of such Imposition sufficient to permit
it to pay same, such failure shall obviate any default hereunder for a
reasonable time after Lessee receives Notice of any Imposition which it is
obligated to pay during the first taxing period applicable thereto.
4.3 Adjustment of Impositions. Impositions payable by Lessee which are
imposed in respect of the tax-fiscal period during which the Term terminates
shall be adjusted and prorated between Lessor and Lessee, whether or not such
Imposition is imposed before or after such termination, and the parties'
obligations to pay their respective prorated share thereof after termination
shall survive such termination.
4.4 Utility Charges. Lessee will be solely responsible for obtaining
and maintaining utility services to the Leased Property and will pay or cause to
be paid all charges for electricity, gas, oil, water, sewer and other utilities
used in the Leased Property during the Term.
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ARTICLE V
NO TERMINATION, ABATEMENT
5.1 No Termination, Abatement. Except as otherwise specifically
provided in this Lease, Lessee, to the extent permitted by law, shall remain
bound by this Lease in accordance with its terms and shall neither take any
action without the written consent of Lessor to modify, surrender or terminate
the same, nor seek nor be entitled to any abatement, deduction, deferment or
reduction of the Rent, or setoff against the Rent, nor shall the obligations of
Lessee be otherwise affected by reason of (a) any damage to, or destruction of,
any Leased Property or any portion thereof from whatever cause or any Taking of
the Leased Property or any portion thereof, (b) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceedings affecting Lessor or any assignee or transferee of Lessor,
or (c) for any other cause whether similar or dissimilar to any of the foregoing
other than a discharge of Lessee from any such obligations as a matter of law.
Lessee hereby specifically waives all rights, arising from any default under
this Lease by Lessor which may now or hereafter be conferred upon it by law to
(1) modify, surrender or terminate this Lease or quit or surrender the Leased
Property or any portion thereof, or (2) entitle Lessee to any abatement,
reduction, suspension or deferment of or set off against the Rent or other sums
payable by Lessee hereunder, except as otherwise specifically provided in this
Lease. The obligations of Lessee hereunder shall be separate and independent
covenants and agreements and the Rent and all other sums payable by Lessee
hereunder shall continue to be payable in all events unless the obligations to
pay the same shall be terminated pursuant to the express provisions of this
Lease or by termination of this Lease other than by reason of an Event of
Default provided, however, nothing in this SECTION 5.1 shall preclude Lessee
from exercising its remedies pursuant to SECTION 36.1.
ARTICLE VI
PROPERTY OWNERSHIP
6.1 Ownership of the Leased Property. Lessee acknowledges that the
Leased Property is the property of Lessor and that Lessee has only the right to
the possession and use of the Leased Property upon the terms and conditions of
this Lease.
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6.2 Lessee's Personal Property. At all times during the Term, Lessee,
Manager or Submanager shall maintain Inventory consistent with the amount of
inventory which is customarily maintained in a hotel of the type and character
of the Facility and is otherwise required to operate the Leased Property in the
manner contemplated by this Lease and in compliance with the Franchise Agreement
and all Legal Requirements. All Inventory shall be the property of Lessee,
Manager or Submanager, as the case may be. Lessee may (and shall as provided
hereinbelow), at its expense, install, affix or assemble or place on any parcels
of the Land or in any of the Leased Improvements, any items of personal property
(including Inventory) owned by Lessee (collectively, the "LESSEE'S PERSONAL
PROPERTY"). Lessee may, subject to the first sentence of this SECTION 6.2,
remove any of Lessee's Personal Property at any time during the Term or upon the
expiration or any prior termination of the Term. All of Lessee's Personal
Property, other than Inventory, not removed by Lessee within thirty (30) days
following the expiration or earlier termination of the Term shall be considered
abandoned by Lessee and may be appropriated, sold, destroyed or otherwise
disposed of by Lessor without first giving Notice thereof to Lessee, without any
payment to Lessee and without any obligation to account therefor. Lessee will,
at its expense, restore the Leased Property to the condition required by SECTION
9.1(D), including repair of all damage to the Leased Property caused by the
removal of Lessee's Personal Property, whether effected by Lessee or Lessor.
6.3 Equipment Lease Property. Personal property utilized at the
Facility which is leased pursuant to equipment leases in effect on the
Commencement Date and which expire on or before the termination of this Lease
shall, at the option of Lessor, become the property of Lessor without the
payment of additional consideration by Lessor except for any consideration which
must be paid to the equipment lessor on expiration of the equipment lease to
acquire title thereto. Lessee shall cooperate with Lessor to effect the transfer
of title to such leased property to Lessor and shall give Notice to Lessor of
any such leases and of the expiration dates thereof. Lessor shall, at Lessor's
cost, acquire title to or replace such leased property with funds other than the
Capital Expenditures Reserve when the leases for such leased property expire and
make such property or replacement property available to Lessee hereunder during
the Term of this Lease.
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ARTICLE VII
CONDITION, USE
7.1 Condition of the Leased Property. Lessee acknowledges receipt and
delivery of possession of the Leased Property. Lessee has examined and otherwise
has knowledge of the condition of the Leased Property and has found the same to
be satisfactory for its purposes hereunder. Lessee is leasing the Leased
Property "as is", "with all faults", and in its present condition. Except as
otherwise specifically provided herein, Lessee waives any claim or action
against Lessor in respect of the condition of the Leased Property. LESSOR MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF
THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL
SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED
PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Lessor shall
have the right to proceed against any predecessor in title for breaches of
warranties or representations or for latent defects in the Leased Property, and
Lessor shall, if requested by Lessee, assign any such right to Lessee if and to
the extent Lessor determines not to exercise such right. If either party
determines to exercise such right, the other party shall fully cooperate in the
prosecution of any such claim, in Lessor's or Lessee's name, all at the cost and
expense of the prosecuting party, who hereby agrees to indemnify, defend and
hold harmless the other party from and against any claims, obligations and
liabilities against or incurred by such other party in connection with such
cooperation, and who further agrees to apply all amounts realized from the
prosecution of such claim, less its expenses in connection therewith, to remedy
such breach or cure such defect. Lessor agrees to use its reasonable efforts to
cooperate with Lessee in Lessee's obtaining and maintaining such permits,
licenses and approvals.
7.2 Use of the Leased Property.
(a) Lessee covenants that it will proceed with all due
diligence to obtain, and will obtain and maintain, all permits, licenses and
approvals, including, without limitation, liquor licenses, needed to use and
operate the Leased Property and the Facility under applicable Legal
Requirements.
(b) Lessee shall use or cause to be used the Leased Property
only as a hotel facility, and for such other uses as may be necessary or
incidental to such use, including but not limited to golf course or casino use,
if applicable, or such other use as otherwise approved by Lessor (the "PRIMARY
INTENDED USE"). Lessee shall not use the Leased Property or any portion thereof
for any other use without the prior written consent of Lessor. No use shall be
made or permitted to be made of the Leased Property, and no acts shall be done,
which will cause the cancellation of any insurance policy covering the Leased
Property or any part thereof (unless another adequate policy satisfactory to
Lessor is available and Lessee pays any premium increase), nor shall Lessee sell
or permit to be kept, used or sold in or about the Leased Property any article
which is prohibited by law or fire underwriter's regulations. Lessee shall
comply with all of the requirements pertaining to the Leased Property of any
insurance board, association, organization or company necessary for the
maintenance of insurance, as herein provided, covering the Leased Property and
Lessee's Personal Property,
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which compliance shall be performed at Lessee's sole cost except to the extent
that such compliance requires the performance of a Capital Improvement or the
payment of a Capital Imposition.
(c) Subject to the provisions of ARTICLES XIV and XV, Lessee
covenants and agrees that during the Term it will either directly or through an
approved manager (1) operate continuously the Leased Property as a hotel
facility, (2) keep in full force and effect and comply in all material respects
with all the provisions of the Franchise Agreement, (3) not enter into,
terminate or amend in any respect any Franchise Agreement without the consent of
Lessor, (4) maintain appropriate certifications and licenses for such use and
(5) keep Lessor advised of the status of any material litigation affecting the
Leased Property.
(d) Subject to Lessor's obligations hereunder with respect to
Capital Improvements and Capital Expenditures, Lessee shall not commit or suffer
to be committed any waste on the Leased Property, or in the Facility, nor shall
Lessee cause or permit any nuisance thereon.
(e) Lessee shall neither suffer nor permit the Leased Property
or any portion thereof, or Lessee's Personal Property, to be used in such a
manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as the case
may be) title thereto or to any portion thereof, or (2) may reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or of implied dedication of the Leased Property or any portion thereof.
(f) Lessee acknowledges and agrees that as long Submanagement
Agreement is in effect all employees involved in the operation of Leased
Property shall be employees of Submanager, and in any event all employees
involved in the use and operation of the Leased Property shall be employees of
Lessee, Manager, or one of their direct or indirect subsidiaries and not of
Lessor, the Company or any of the Company's direct or indirect subsidiaries.
Lessee, Manager, and their applicable Affiliates shall (subject to Lessor's
obligations with respect to Capital Improvements and Capital Expenditures)
comply in all material respects with all Legal Requirements and all collective
bargaining and other agreements applicable to such employees. Upon the
expiration or earlier termination of this Lease, or upon any termination of this
Lease due to an Event of Default by Lessee or an election by Lessee to terminate
for reasons other than Lessor's default, all such employees shall be terminated
or retained by Lessee, Manager or their Affiliate, as applicable, and Lessee,
Manager or their Affiliate, as applicable, shall (i) provide any required
notices to such employees, including WARN Act and COBRA Notices; and (ii) pay
costs and expenses associated with accrued but unpaid salary, earned but unpaid
vacation pay, accrued but unearned vacation pay, pension and welfare benefits,
COBRA benefits, employee fringe benefits, employee termination payments or any
other employee benefits due to such employees. Except as otherwise provided
herein, Lessee shall indemnify, defend and hold harmless Lessor from and against
any and all claims, causes of action, proceedings, judgments, damages,
penalties, liabilities, costs and expenses (including reasonable attorney's fees
and disbursements) arising out of the employment or termination of employment of
or failure to offer employment to any employee or prospective employee by
Lessee, Manager or their Affiliates, including, without limitation, claims of
discrimination, sexual harassment, breaches of employment or collective
bargaining agreements, or (ii) the failure of Lessee, Manager or any of their
Affiliates to comply with the
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provisions of this section dealing with the obligations of Lessee under this
Section upon the expiration or termination of this Lease. Upon the early
termination of this Lease by Lessor (other than for an Event of Default by
Lessee or by Lessee due to a Lessor Default), Lessor shall, as an additional
Termination Fee and obligation on account of such early termination, fully
comply with all Legal Requirements and all collective bargaining and other
agreements applicable to such employees, including, without limitation,
providing all required notices, paying (or reimbursing Lessee for) all costs and
expenses associated with accrued but unpaid salary, earned but unpaid vacation
pay, accrued but unearned vacation pay, pension and welfare benefits, COBRA
benefits, employee fringe benefits, employee termination payments or any other
employee benefits due to such employees (to the extent not delinquent or past
due, all delinquent or past due salaries and benefits being the obligation of
Lessee, Manager or their Affiliates, as applicable). Lessor shall indemnify,
defend and hold harmless Lessee, any Lessee Indemnified Parties and Manager,
from and against any and all claims, causes of action, proceedings, judgments,
damages, penalties, liabilities, costs and expenses (including reasonable
attorneys' fees and expenses) arising out of the failure of Lessor to comply
with the provisions of this Section. Lessee, Lessor and Manager and their
applicable Affiliates shall cooperate reasonably to permit each to comply with
their obligations under this Section upon expiration of the stated Term of this
Lease or the early termination of this Lease. The indemnification rights and
obligations provided for in this section shall survive the termination of this
Lease.
(g) If the Facility includes a golf course, tennis courts, spa
and/or other facilities in which nonequity memberships representing rights of
use of such facilities have been granted, the existing membership contracts have
been or shall be assigned to and assumed by Lessee; and during the Term, Lessee
may enter into new membership contracts on terms and conditions approved by
Lessor for the use of the golf course and other facilities presently covered by
the existing membership contracts. Upon termination of this Lease, Lessee shall
assign to Lessor any such membership contracts entered into by Lessee during the
Term, and Lessor agrees to assume the obligations of Lessee under any such
membership contracts arising from and after the date of termination of this
Lease.
ARTICLE VIII
LEGAL REQUIREMENTS
8.1 Compliance with Legal and Insurance Requirements. Subject to
SECTIONS 8.2 AND 8.3 and ARTICLE XII relating to permitted contests, and
Lessor's obligations with respect to Capital Improvements and Capital
Expenditures, Lessee, at its expense, will promptly (a) comply with all
applicable Legal Requirements and Insurance Requirements in respect of the use,
operation, maintenance, repair and restoration of the Leased Property, and (b)
procure, maintain and comply with all appropriate licenses and other
authorizations required for any use of the Leased Property and Lessee's Personal
Property then being made, and for the proper erection, installation, operation
and maintenance of the Leased Property or any part thereof.
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8.2 Legal Requirement Covenants. Subject to SECTION 8.3, Lessee
covenants and agrees that (i) the Leased Property and Lessee's Personal Property
shall not be used for any unlawful purpose, and that Lessee shall not permit or
suffer to exist any unlawful use of the Leased Property by others, (ii) Lessee
shall acquire and maintain all appropriate licenses, certifications, permits and
other authorizations and approvals needed to operate the Leased Property in its
customary manner for the Primary Intended Use, and any other lawful use
conducted on the Leased Property as may be permitted from time to time hereunder
and (iii) Lessee's use of the Leased Property and maintenance, alteration, and
operation of the same, and all parts thereof, shall at all times, subject to
Lessor providing the necessary Capital Expenditures, conform in all material
respects to all Legal Requirements, unless the same are finally determined by a
court of competent jurisdiction to be unlawful (and Lessee shall cause all such
sub-tenants, invitees or others to so comply with all Legal Requirements).
8.3 Environmental Covenants. Lessor and Lessee (in addition to, and not
in diminution of, Lessee's covenants and undertakings in SECTIONS 8.1 AND 8.2
hereof) covenant and agree as follows:
(a) At all times hereafter until Lessee completely vacates the
Leased Property and surrenders possession of the same to Lessor and subject to
Lessor's obligations regarding Capital Expenditures, Lessee shall fully comply
with all Environmental Laws applicable to the Leased Property and the operations
thereon, except to the extent that such compliance would require the remediation
of Environmental Liabilities for which Lessee has no indemnity obligations under
SECTION 8.3(b). Lessee agrees to give Lessor prompt written notice of (1) all
Environmental Liabilities of which Lessee has been notified in writing or of
which an Executive Person is aware; (2) all pending or overtly threatened
Proceedings, and all notices, demands, requests or investigations, relating to
any Environmental Liability or relating to the issuance, revocation or change in
any Environmental Authorization required for operation of the Leased Property of
which Lessee has been notified in writing or of which an Executive Person is
aware; (3) all Releases of which Lessee has been notified in writing or of which
an Executive Person is aware, in amounts required to be reported or remediated
under Environmental Laws at, on, in, under or in any way affecting the Leased
Property, or any Release at, on, in or under any property adjacent to the Leased
Property of which Lessee has been notified in writing or of which an Executive
Person is aware; and (4) all facts, events or conditions of which Lessee has
been notified in writing or of which an Executive Person is aware, which notice
indicates or which an Executive Person is aware could reasonably lead to the
occurrence of any of the above-referenced matters.
(b) LESSEE WILL PROTECT, INDEMNIFY, HOLD HARMLESS AND DEFEND
LESSOR INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL ENVIRONMENTAL
LIABILITIES TO THE EXTENT PERMITTED BY LAW WHICH RESULT FROM THE WRONGFUL ACTS
OR NEGLIGENT ACTS OR FAILURES TO ACT OF LESSEE OR ITS AGENTS, INCLUDING ANY
MANAGER OR SUBMANAGER OF THE FACILITY, AND WHICH ARISE OR ACCRUE DURING THE
PERIOD BETWEEN THE COMMENCEMENT DATE AND THE DATE LESSEE COMPLETELY VACATES THE
LEASED PROPERTY.
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(c) Lessor hereby agrees to defend, indemnify and save
harmless any and all Lessee Indemnified Parties from and against any and all
Environmental Liabilities to the extent permitted by law, except to the extent
that the same are caused by wrongful acts or negligent acts or failures to act
of Lessee.
(d) If any Proceeding is brought against any Indemnified Party
in respect of an Environmental Liability with respect to which such Indemnified
Party may claim indemnification under either SECTION 8.3(b) or (c), the
Indemnifying Party, upon request, shall at its sole expense resist and defend
such Proceeding, or cause the same to be resisted and defended by counsel
designated by the Indemnifying Party and approved by the Indemnified Party,
which approval shall not be unreasonably withheld; provided, however, that such
approval shall not be required in the case of defense by counsel designated by
any insurance company undertaking such defense pursuant to any applicable policy
of insurance. Each Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel will be at the sole expense of such
Indemnified Party unless a conflict of interest prevents representation of such
Indemnified Party by the counsel selected by the Indemnifying Party and such
separate counsel has been approved by the Indemnifying Party, which approval
shall not be unreasonably withheld. The Indemnifying Party shall not be liable
for any settlement of any such Proceeding made without its consent, which shall
not be unreasonably withheld, but if settled with the consent of the
Indemnifying Party, or if settled without its consent (if its consent shall be
unreasonably withheld), or if there be a final, nonappealable judgment for an
adversary party in any such Proceeding, the Indemnifying Party shall indemnify
and hold harmless the Indemnified Parties from and against any liabilities
incurred by such Indemnified Parties by reason of such settlement or judgement.
(e) At any time any Indemnified Party has reason to believe
circumstances exist which could reasonably result in an Environmental Liability,
upon reasonable prior written notice to Lessee stating such Indemnified Party's
basis for such belief, an Indemnified Party shall be given immediate access to
the Leased Property (including, but not limited to, the right to enter upon,
investigate, drill wells, take soil borings, excavate, monitor, test, cap and
use available land for the testing of remedial technologies), Lessee's
employees, and to all relevant documents and records regarding the matter as to
which a responsibility, liability or obligation is asserted or which is the
subject of any Proceeding; provided that such access may be conditioned or
restricted as may be reasonably necessary to ensure compliance with law and the
safety of personnel and facilities or to protect confidential or privileged
information. All Indemnified Parties requesting such immediate access and
cooperation shall endeavor to coordinate such efforts to result in as minimal
interruption of the operation of the Leased Property as practicable.
(f) The indemnification rights and obligations provided for in
this ARTICLE VIII shall be in addition to any indemnification rights and
obligations provided for elsewhere in this Lease.
(g) The indemnification rights and obligations provided for in
this ARTICLE VIII shall survive the termination of this Lease.
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For purposes of this SECTION 8.3, all amounts for which any
Indemnified Party seeks indemnification shall be computed net of (a) any actual
income tax benefit resulting therefrom to such Indemnified Party, (b) any
insurance proceeds received (net of tax effects) with respect thereto, and (c)
any amounts recovered (net of tax effects) from any third parties based on
claims the Indemnified Party has against such third parties which reduce the
damages that would otherwise be sustained; provided that in all cases, the
timing of the receipt or realization of insurance proceeds or income tax
benefits or recoveries from third parties shall be taken into account in
determining the amount of reduction of damages. Each Indemnified Party agrees to
use its reasonable efforts to pursue, or assign to Lessee or Lessor, as the case
may be, any claims or rights it may have against any third party which would
materially reduce the amount of damages otherwise incurred by such Indemnified
Party.
8.4 Special Environmental Representations, Covenants and Indemnities.
The following provisions of this Section 8.4 shall be in effect only during such
period as the Submanagement Agreement is in effect:
(a) Lessor hereby represents and warrants to Lessee that, to the best
of its knowledge except as set forth in any environmental assessment reports
provided by Lessor to Lessee, as of the Commencement Date, there are no
Hazardous Materials on any portion of the Land or the Facility, nor have any
Hazardous Materials been released or discharged on any portion of the Land or
the Facility. In addition, Lessor hereby represents and warrants that it has
previously delivered to Lessee copies of all reports concerning environmental
conditions which have been received by Lessor or any of its Affiliates.
(b) In the event of the discovery of Hazardous Materials (as defined
below) on any portion of the Land or in the Facility during the Term, Lessor
shall (except as otherwise set forth to the contrary in paragraph (c) below)
promptly remove such Hazardous Materials, together with all contaminated soil
and containers, and shall otherwise remedy the problem in accordance with
Environmental Laws. Lessor shall (except as otherwise set forth to the contrary
in paragraph (c) below) indemnify, defend and hold Lessee, Primary Manager and
Submanager harmless from and against all loss, costs, liability and damage
(including, without limitation, engineers' and attorneys' fees and expenses, and
the cost of litigation) arising from the presence of Hazardous Materials on the
Land or in the Facility; and this obligation of Lessor shall survive termination
of this Lease.
(c) In the event that Hazardous Materials are released on any portion
of the Land or in the Facility during the Term as a result of the actions of
Lessee's, Manager's, Primary Manager's or Submanager's employees or agents, then
Lessee shall promptly remove such Hazardous Materials, together with all
contaminated soil and containers, and shall otherwise remedy the problem in
accordance with all Environmental Laws. All costs and expenses of the removal by
Lessee (pursuant to this paragraph (c)) of Hazardous Materials, and of the
aforesaid compliance with Environmental Laws shall be paid from Lessee's own
funds, and Lessee shall indemnify, defend and hold Lessor and any Mortgagee
harmless from and against all loss, costs, liability and damage (including,
without limitation, engineers' and attorneys' fees and expenses, and the cost of
litigation) arising from the actions described in this
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paragraph (c). Lessee shall be able to retain in the Facility reasonable
quantities of cleansers, solvents and other materials used in the ordinary
course of Facility operations, notwithstanding that such materials may contain
or be Hazardous Materials, provided that Lessee complies with all Environmental
Laws with regard to the storage, use and disposal thereof.
(d) Except as otherwise set forth to the contrary in paragraph (c)
above, all costs and expenses of the aforesaid removal of Hazardous Materials
from the Land or the Facility, and of the aforesaid compliance with all
Environmental Laws, and any amounts paid to Lessee pursuant to the indemnity set
forth in paragraph (b) above, shall be paid by Lessor, and shall not be subject
to the limitation on Capital Expenditures set forth in ARTICLE XXXV.
ARTICLE IX
MAINTENANCE AND REPAIRS
9.1 Maintenance and Repair.
(a) Except as provided in SECTION 9.1(b), Lessee will keep the
Leased Property and all parts thereof, including without limitation, all private
roadways, sidewalks, curbs and other appurtenances thereto that are under
Lessee's control, and including without limitation windows and plate glass,
parking lots, HVAC, mechanical, electrical and plumbing systems and equipment
(including conduit and ductware), in good order and repair and in compliance
with the standards of the Franchise Agreement (whether or not the need for such
repairs occurred as a result of Lessee's use, any prior use, the elements or the
age of the Leased Property or any portion thereof) ordinary wear and tear
excepted except for the obligation to make necessary and appropriate repairs,
replacements and improvements as provided in this SECTION 9.1(a), and, except as
otherwise provided in SECTION 9.1(b), ARTICLE XIV or ARTICLE XV, with reasonable
promptness, make all necessary and appropriate repairs, replacements and
improvements thereto of every kind and nature, whether interior or exterior
ordinary or extraordinary, foreseen or unforeseen or arising by reason of a
condition existing prior to the commencement of the Term of this Lease
(concealed or otherwise), or required by any governmental agency having
jurisdiction over the Leased Property. All repairs shall, to the extent
reasonably achievable, be at least equivalent in quality to the original work.
Lessee will not take or omit to take any action, the taking or omission of which
might materially impair the value or the usefulness of the Leased Property or
any part thereof for its Primary Intended Use. If Lessee fails to make any
required repairs or replacements after fifteen (15) days notice from Lessor, or
after such longer period as may be reasonably required provided that Lessee at
all times diligently proceeds with such repair or replacement, then Lessor shall
have the right, but shall not be obligated, to make such repairs or replacements
on behalf of and for the account of Lessee. In such event, such work shall be
paid for in full by Lessee as Additional Charges.
(b) Notwithstanding Lessee's obligations under SECTION 9.1(a)
above, but subject to the limitations on Lessor's obligations for Capital
Expenditures set forth in ARTICLE XXXV, except to the extent such Capital
Expenditures are caused by the gross
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negligence or willful misconduct of Executive Personnel (but subject to Section
13.4), Lessor shall be required to make all Capital Expenditures. Lessor's
obligations under SECTION 35.1(d) shall not, however, be affected by the gross
negligence or willful misconduct of Executive Personnel. Lessee hereby waives,
to the extent permitted by law, the right to make repairs at the expense of
Lessor pursuant to any law in effect at the time of the execution of this Lease
or hereafter enacted; but Lessee does not waive any of its rights under ARTICLE
XXXVI hereof, and such waiver shall not relieve Lessor of its obligations under
this SECTION 9.1(b) and ARTICLE XXXV hereof.
(c) Lessee will, upon the expiration or prior termination of
the Term, vacate and surrender the Leased Property to Lessor in the condition in
which the Leased Property was originally received from Lessor, except as
repaired, rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear (subject to the
obligation of Lessee to maintain the Leased Property in good order and repair in
accordance with SECTION 9.1(a) above, as would a prudent owner of comparable
property, during the entire Term) or damage by casualty or Condemnation.
ARTICLE X
ALTERATIONS
10.1 Alterations. Subject to first obtaining the written approval of
Lessor, which approval shall not be unreasonably withheld, and to first
obtaining any required written approval from a Holder, Lessee may, but shall not
be obligated to, make such additions, modifications or improvements to the
Leased Property from time to time as Lessee deems desirable for its permitted
uses and purposes, provided that such action will not alter the character or
purposes of the Leased Property or detract from the value or operating
efficiency thereof and will not impair the revenue-producing capability of the
Leased Property or adversely affect the ability of the Lessee or Lessor to
comply with the provisions of this Lease or of any mortgage, ground lease or
other material agreement affecting the Leased Property. All such work shall be
performed in a first class manner in accordance with all applicable governmental
rules and regulations and after receipt of all required permits and licenses. If
reasonably required by Lessor all such work shall be covered by performance
bonds issued by bonding companies reasonably acceptable to Lessor. The cost of
such additions, modifications or improvements to the Leased Property shall be
paid by Lessee, and all such additions, modifications and improvements shall,
without payment by Lessor at any time, be included under the terms of this Lease
and upon expiration or earlier termination of this Lease shall pass to and
become the property of Lessor.
10.2 Salvage. All materials which are scrapped or removed in connection
with the making of repairs required by ARTICLES IX or X shall be or become the
property of Lessor or Lessee depending on which party is paying for or providing
the financing for such work.
10.3 Lessor Alterations. Lessor shall have the right, without Lessee's
consent, to make or cause to be made alterations and additions to the Leased
Property required in connection with (i) Emergency Situations, (ii) Legal
Requirements, (iii) maintenance of the
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Franchise Agreement and compliance with the standards established thereby, or
with Brand Standards, as applicable, and (iv) the performance by Lessor of its
obligations under this Lease. Lessor shall further have the right, but not the
obligation, to make such other additions to the Leased Property as it may
reasonably deem appropriate during the Term of this Lease, subject to Lessee's
consent, but such consent shall not be withheld if such alterations or additions
will not violate Legal Requirements, or the Franchise Agreement or Brand
Standards, as applicable, and will not materially and adversely impair the
operating efficiency or revenue producing capability of the Leased Property or
the ability of Lessee to comply with the provisions of this Lease. All such
work, unless otherwise required to be performed by Lessee under this Lease (in
which event work shall be paid for by Lessee) shall be performed at Lessor's
expense, in compliance with all Legal Requirements, in a good and workmanlike
manner and shall be done after reasonable notice to and coordination with
Lessee, so as to minimize any disruptions or interference with the operation of
the Facility.
ARTICLE XI
LIENS
11.1 Liens. Subject to the provision of ARTICLE XII relating to
permitted contests, Lessee will not directly or indirectly create or allow to
remain and will promptly discharge at its expense any lien, encumbrance,
attachment, title retention agreement or claim upon the Leased Property
resulting from the action or inaction of Lessee, or any attachment, levy, claim
or encumbrance in respect of the Rent resulting from the action or inaction of
Lessee, excluding, however, (a) this Lease, (b) the matters, if any, included as
exceptions or insured against in the title policy insuring Lessor's interest in
the Leased Property, (c) restrictions, liens and other encumbrances resulting
from the action or inaction of Lessor or which are consented to in writing by
Lessor, (d) liens for those taxes which Lessee is not required to pay hereunder,
(e) subleases permitted by ARTICLE XXI hereof, (f) liens for Impositions or for
sums resulting from noncompliance with Legal Requirements to the extent Lessee
is responsible hereunder for such compliance so long as (l) the same are not yet
delinquent or (2) such liens are in the process of being contested as permitted
by ARTICLE XII, (g) liens of mechanics, laborers, suppliers or vendors for sums
either disputed or not yet due provided that any such liens for disputed sums
are in the process of being contested as permitted by ARTICLE XII hereof, and
(h) any liens which are the responsibility of Lessor pursuant to the provisions
of this Lease.
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ARTICLE XII
PERMITTED CONTESTS
12.1 Permitted Contests. Lessee shall have the right to contest the
amount or validity of any Imposition to be paid by Lessee or any Legal
Requirement to be satisfied by Lessee hereunder or any lien, attachment, levy,
encumbrance, charge or claim (any such Imposition, Legal Requirement, lien,
attachment, levy, encumbrance, charge or claim herein referred to as "CLAIMS")
not otherwise permitted by ARTICLE XI, by appropriate legal proceedings in good
faith and with due diligence (but this shall not be deemed or construed in any
way to relieve, modify or extend Lessee's covenants to pay or its covenants to
cause to be paid any such charges at the time and in the manner as in this
Article provided), on condition, however, that such legal proceedings shall not
operate to relieve Lessee from its obligations hereunder and shall not cause the
sale or risk the loss of any portion of the Leased Property, or any part
thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of
trust, security deed or other agreement encumbering the Leased Property or any
interest therein. Upon the request of Lessor, as security for the payment of
such Claims, Lessee shall either (a) provide a bond or other assurance
reasonably satisfactory to Lessor (and satisfactory to any Holder, if approval
thereof is required by such Holder's Mortgage) that all Claims which may be
assessed against the Leased Property together with interest and penalties, if
any, thereon and legal fees anticipated to be incurred in connection therewith
will be paid, or (b) deposit within the time otherwise required for payment with
a bank or trust company designated by Lessor as trustee upon terms reasonably
satisfactory to Lessor, or with any Holder upon terms satisfactory to such
Holder, money in an amount sufficient to pay the same, together with interest
and penalties thereon and legal fees anticipated to be incurred in connection
therewith, as to all Claims which may be assessed against or become a Claim on
the Leased Property, or any part thereof, in said legal proceedings. Lessee
shall furnish Lessor and any Holder with reasonable evidence of such deposit
within five days of the same. Lessor agrees to join in any such proceedings if
the same be required to legally prosecute such contest of the validity of such
Claims; provided, however, that Lessor shall not thereby be subjected to any
liability for the payment of any costs or expenses in connection with any
proceedings brought by Lessee; and Lessee covenants to indemnify and save
harmless Lessor from any such costs or expenses. Lessee shall be entitled to any
refund of any Claims and such charges and penalties or interest thereon which
have been paid by Lessee or paid by Lessor and for which Lessor has been fully
reimbursed. In the event that Lessee fails to pay any Claims when due or to
provide the security therefor as provided in this paragraph and to diligently
prosecute any contest of the same, Lessor may, upon ten days advance Notice to
Lessee, pay such charges together with any interest and penalties and the same
shall be repayable by Lessee to Lessor as Additional Charges at the next Payment
Date provided for in this Lease; provided, however, that should Lessor
reasonably determine that the giving of such Notice would risk loss to the
Leased Property or cause damage to Lessor, then Lessor shall only give such
Notice as is practical under the circumstances. Lessor reserves the right to
contest any of the Claims at its expense not pursued by Lessee. Lessor and
Lessee agree to cooperate in coordinating the contest of any Claims.
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ARTICLE XIII
INSURANCE
13.1 General Insurance Requirements.
(a) Coverages. During the Term of this Lease, the Leased
Property shall at all times be insured with the kinds and amounts of insurance
described below. This insurance shall be written by companies authorized to
issue insurance in the State. The policies must name the party obtaining the
policy as the insured and the other party as an additional named insured, and
the Manager (including the Submanager) shall also be named as an additional
insured under the coverages described in SECTIONS 13.1(a)(iv) through (xi).
Losses shall be payable to Lessor or Lessee as provided in this Lease. Any loss
adjustment for coverages insuring both parties shall require the written consent
of Lessor and Lessee, each acting reasonably and in good faith. Evidence of
insurance shall be deposited with Lessor. The policies on the Leased Property,
including the Leased Improvements, Fixtures and Lessee's Personal Property,
shall at all times satisfy the requirements of the Franchise Agreement and of
any ground lease, mortgage, security agreement or other financing lien affecting
the Leased Property (provided, however, Lessee shall not be required to obtain
insurance to satisfy such requirements except to the extent such insurance is
reasonably obtainable, and Lessor shall pay the costs of any insurance required
thereby which exceeds that required pursuant to (iv) through (xi) below), and at
a minimum shall include:
(i) Building insurance on the "Special Form"
(formerly "All Risk" form) (including earthquake and flood in
reasonable amounts if and as determined by Lessor) in an
amount not less than 100% of the then full replacement cost
thereof (as defined in SECTION 13.2) or such other amount
which is acceptable to Lessor, and personal property insurance
on the "Special Form" in the full amount of the replacement
cost thereof;
(ii) Insurance for loss or damage (direct and
indirect) from steam boilers, pressure vessels or similar
apparatus, air conditioning systems, piping and machinery, and
sprinklers, if any, now or hereafter installed in the
Facility, in the minimum amount of $5,000,000 or in such
greater amounts as are then customary or as may be reasonably
requested by Lessor from time to time;
(iii) Loss of income insurance on the "Special Form",
in the amount of one year of the greater of (a) Base Rent, or
(b) Percentage Rent (based on the last Lease Year of operation
or, to the extent the Leased Property has not been operated
for an entire 12-month Lease Year, based on prorated
Percentage Rent) for the benefit of Lessor, and business
interruption insurance on the "Special Form" in the amount of
one year of gross profit, for the benefit of Lessee;
(iv) Commercial general liability insurance, with
contractual indemnity endorsement, with amounts not less than
$1,000,000 combined single
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limit for each occurrence and $2,000,000 for the aggregate of
all occurrences within each policy year, as well as excess
liability (umbrella) insurance with limits of at least
$50,000,000 per occurrence, covering each of the following:
bodily injury, death, or property damage liability per
occurrence, personal injury, general aggregate, products and
completed operations with respect to Lessee, and "all risk
legal liability" (including liquor law or "dram shop"
liability, if liquor or alcoholic beverages are served on the
Leased Property) with respect to Lessor and Lessee;
(v) Fidelity bonds or blanket crime policies with
limits and deductibles as may be reasonably determined by
Lessor, covering Lessee's employees in job classifications
normally bonded under prudent hotel management practices in
the United States or otherwise required by law;
(vi) Workers' compensation insurance to the extent
necessary to protect Lessor, Lessee and the Leased Property
against Lessee's workman's compensation claims to the extent
required by applicable state laws and employee's liability
insurance in an amount not less than $500,000 covering against
liability in respect of employees, agents and servants not
covered by workers' compensation insurance and against
occupational disease benefits;
(vii) Comprehensive form vehicle liability insurance
for owned, non-owned, and hired vehicles, in the amount of
$1,000,000;
(viii) Garagekeeper's legal liability insurance
covering both comprehensive and collision-type losses with a
limit of liability of $3,000,000 for any one occurrence, of
which coverage in excess of $1,000,000 may be provided by way
of an excess liability policy;
(ix) Innkeeper's legal liability insurance covering
property of guests while on the Leased Property for which
Lessor is legally responsible with a limit of not less than
$5,000 in any one occurrence or $25,000 annual aggregate;
(x) Safe deposit box legal liability insurance
covering property of guests while in a safe deposit box on the
Leased Property for which Lessor is legally responsible with a
limit of not less than $100,000 in any one occurrence; and
(xi) Insurance covering such other hazards (such as
plate glass or other common risks) and in such amounts as may
be customary for comparable properties in the area of the
Leased Property and is available from insurance companies,
insurance pools or other appropriate companies authorized to
do business in the State at rates which are economically
practicable in relation to the risks covered.
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(b) Responsibility for Insurance. Lessee shall obtain the
insurance and pay the premiums for the coverages described in SECTIONS
13.1(a)(iv) through (x), and Lessor shall obtain the insurance and pay the
premiums for the coverages described in SECTIONS 13.1(a)(i) through (iii),
provided that Lessee shall reimburse Lessor immediately after demand therefor
for any premiums paid by Lessor for the coverages required under SECTION
13.1(a)(i) to the extent that the premiums relate to coverages for property
owned by Lessee or coverages which benefit Lessee. Insurance required by SECTION
13.1(a)(xi) shall be obtained and paid for by Lessor to the extent that it
relates to risks of the type covered by the insurance obtained pursuant to
SECTIONS 13.1(a)(i) through (iii), and obtained and paid for by Lessee if it
relates to risks of the type covered by the insurance obtained pursuant to
SECTIONS 13.1(a)(iv) through (x). The party responsible for the premium for any
insurance coverage shall also be responsible for any and all deductibles and
self-insured retentions in connection with such coverages. In the event that
either party can obtain comparable insurance coverage required to be carried by
the other party from comparable insurers and at a cost significantly less than
that at which such other party can obtain such coverage, the parties shall
cooperate in good faith to obtain such coverage at the lower cost and shall
allocate the premiums therefor in accordance with the provisions of the first
sentence of this SECTION 13.1(b). In addition to the rights set forth in
SECTIONS 17.1 AND 36.1, if any party responsible for obtaining and maintaining
the insurance required under this Lease fails to do so or fails to obtain
renewals or substitutions therefor at least fifteen (15) days before such
insurance will lapse, the other party may obtain such insurance and the
defaulting party shall reimburse the party obtaining such insurance for the cost
thereof promptly upon demand, together with interest thereon at the Overdue Rate
until such cost is repaid by the defaulting party.
13.2 Replacement Cost. The term "FULL REPLACEMENT COST" as used herein
shall mean the actual replacement cost of the Leased Property requiring
replacement from time to time including an increased cost of construction
endorsement, if available, and the cost of debris removal. In the event either
party believes that full replacement cost has increased or decreased at any time
during the Term, it shall have the right to have such full replacement cost
redetermined.
13.3 Waiver of Subrogation. Lessor and Lessee each waive any and all
rights of recovery against the other (and against the partners, officers,
employees and agents of the other party) for loss of or damage to such waiving
party or its property or the property of others under its control, to the extent
such loss or damage is covered by, or in the event the responsible party fails
to maintain the required insurance hereunder, would have been covered by, the
insurance required to be obtained by such waiving party under SECTIONS 13.1(a)
through (iii); provided, however, that this waiver does not apply to any rights
that either party may have to insurance proceeds from their respective insurance
policies at the time of such loss or damage. In obtaining policies of property
insurance on their respective interests in the personal property and
improvements located in the Leased Property, Lessor and Lessee shall give notice
to their respective insurance carriers that the foregoing mutual waiver of
subrogation is contained in this Lease; and Lessor and Lessee shall each obtain
from their insurance carriers a consent to such waiver.
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13.4 Form Satisfactory, etc. All of the policies of insurance referred
to in this ARTICLE XIII shall be written in a form, with deductibles and by
insurance companies reasonably satisfactory to Lessor and shall satisfy the
requirements of any ground lease, mortgage, security agreement or other
financing lien on the Leased Property and of the Franchise Agreement; (provided,
however, Lessee shall not be required to obtain insurance to satisfy such
requirements except to the extent such insurance is reasonably obtainable, and
Lessor shall pay the costs of any insurance required thereby which exceeds that
required pursuant to (iv) through (xi) above). The party responsible for
obtaining any policy shall pay all of the premiums therefor, and deliver copies
of such policies or certificates thereof to the other party prior to their
effective date (and, with respect to any renewal policy, thirty (30) days prior
to the expiration of the existing policy), and in the event of the failure of
the responsible party either to effect such insurance as herein called for or to
pay the premiums therefor, or to deliver such policies or certificates thereof
to the other party at the times required, such other party shall be entitled,
but shall have no obligation, after ten (10) days' Notice to the responsible
party (or after less than ten (10) days' Notice if required to prevent the
expiration of any existing policy), to effect such insurance and pay the
premiums therefor, and to be reimbursed for any such premiums upon written
demand therefor. Each insurer mentioned in this ARTICLE XIII shall agree, by
endorsement to the policy or policies issued by it, or by independent instrument
furnished to the party not responsible hereunder for obtaining such policy, that
it will give to such party thirty (30) days' written notice before the policy or
policies in question shall be materially altered, allowed to expire or canceled.
13.5 Increase in Limits. If either Lessor or Lessee at any time
reasonably deems the limits of the personal injury or property damage under the
comprehensive public liability insurance then carried to be either excessive or
insufficient, Lessor and Lessee shall endeavor in good faith to agree on the
proper and reasonable limits for such insurance to be carried and such insurance
shall thereafter be carried with the limits thus agreed on until further change
pursuant to the provisions of this Section. If the parties fail to agree on such
limits, the matter shall be referred to arbitration as provided for in SECTION
37.1. In no event shall such limits fail to satisfy the requirements of the
Franchise Agreement and of any ground lease, Mortgage, security agreement or
other financing lien affecting the Leased Property, provided, however, Lessee
shall not be required to obtain insurance to satisfy such requirements except to
the extent such insurance is reasonably obtainable, and Lessor shall pay the
costs of any insurance required thereby which exceeds that required pursuant to
(iv) through (xi) above.
13.6 Blanket Policy. Notwithstanding anything to the contrary contained
in this ARTICLE XIII, Lessee or Lessor may bring the insurance provided for
herein within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Lessee, Lessor, Manager or Submanager;
provided, however, that the coverage afforded to Lessor and Lessee will not be
reduced or diminished or otherwise be different from that which would exist
under a separate policy meeting all other requirements of this Lease by reason
of the use of such blanket policy of insurance, and provided further that the
requirements of this ARTICLE XIII are otherwise satisfied.
13.7 Separate Insurance. Neither Lessor nor Lessee shall on its own
initiative or pursuant to the request or requirement of any third party, take
out separate insurance
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concurrent in form or contributing in the event of loss with that required in
this Article to be furnished, or increase the amount of any then existing
insurance by securing an additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Lessor, are included therein as additional insureds, and
the loss is payable under such additional separate insurance in the same manner
as losses are payable under this Lease. Each party shall immediately notify the
other party that it has obtained any such separate insurance or of the
increasing of any of the amounts of the then existing insurance.
13.8 Reports On Insurance Claims. Lessee shall promptly investigate and
make a complete and timely written report to the appropriate insurance company
as to all accidents, all claims for damage relating to the ownership, operation,
and maintenance of the Facility, and any damage or destruction to the Facility
and the estimated cost of repair thereof and shall prepare any and all reports
required by any insurance company in connection therewith. All such reports
shall be timely filed with the insurance company as required under the terms of
the insurance policy involved, and a copy of all such reports shall be furnished
to Lessor.
13.9 Alternate Provisions for Insurance. Notwithstanding the foregoing
provisions of this ARTICLE XIII, Lessor and Lessee agree that the amounts and
types of insurance procured by the Manager in compliance with SECTION 6.01 of
the Submanagement Agreement, or by Lessor or Lessee as contemplated by SECTION
6.02 of the Submanagement Agreement, shall satisfy the minimum obligations of
Lessor and Lessee to provide insurance under SECTION 13.1(a); provided that
Lessee shall not approve the selection of any insurance company under the
Primary Management Agreement without Lessor's consent. SECTIONS 13.1(a) and 13.5
shall continue to apply to the extent that additional insurance is required to
satisfy the requirements of any ground lease, mortgage, security agreement or
other financing lien affecting the Leased Property and to the extent that
additional insurance is agreed to be desirable under SECTION 13.5. The costs of
insurance procured under this SECTION 13.9 shall be borne by Lessee and Lessor
in accordance with the principles of SECTIONS 13.1(a), (b) and 13.5 (so that,
for example, Lessor shall bear the cost of the insurance coverage called for by
SECTIONS 6.01 A(2) and A(3) of the Primary Management Agreement and an
appropriate portion of the cost of insurance coverage called for by SECTIONS
6.01 A(1), A(8) and 6.02 of the Primary Management Agreement).
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ARTICLE XIV
DAMAGE AND RECONSTRUCTION
14.1 Insurance Proceeds. All proceeds of the insurance contemplated by
SECTIONS 13.1(a)(i) and (ii) payable by reason of any loss or damage to the
Leased Property, or any portion thereof, and insured under any policy of
insurance required by ARTICLE XIII of this Lease shall be paid to Lessor and
made available, if applicable, for reconstruction or repair, as the case may be,
of any damage to or destruction of the Leased Property or any portion thereof,
and, if applicable, shall be paid out by Lessor from time to time for the
reasonable costs of such reconstruction or repair upon satisfaction of
reasonable terms and conditions specified by Lessor. Any excess proceeds of
insurance remaining after the completion of the restoration or reconstruction of
the Leased Property shall be paid to Lessor. If neither Lessor nor Lessee is
required or elects to repair and restore, and the Lease is terminated as
described in SECTION 14.2, all such insurance proceeds shall be retained by
Lessor except for any amount thereof paid with respect to Lessee's Personal
Property and Lessor shall pay to Lessee a Termination Fee determined in
accordance with SECTION 33.1(c) as of the date immediately prior to such damage
or destruction; provided that there shall be credited against such Termination
Fee an amount equal to any business interruption proceeds received by Lessee.
The Termination Fee shall be paid on the later of the date the Lease is
terminated or the date the Termination Fee is determined pursuant to SECTION
33.1(c). All salvage resulting from any risk covered by insurance shall belong
to Lessor, except to the extent of salvage relating to Lessee's Personal
Property. The provisions of this SECTION 14.1 shall survive the expiration or
earlier termination of this Lease.
14.2 Reconstruction in the Event of Damage or Destruction Covered by
Insurance.
(a) If during the Term the Leased Property is totally or
partially destroyed by a risk covered by the insurance described in ARTICLE XIII
and the Facility thereby is rendered Unsuitable or Uneconomic for its Primary
Intended Use, this Lease shall terminate as of the date of the casualty and
neither Lessor nor Lessee shall have any further liability hereunder except for
any liabilities which have arisen prior to or which survive such termination;
provided, however, that the Lease shall not terminate pursuant to this SECTION
14.2(a) while the Submanagement Agreement is in effect unless the Facility
suffers a Total Casualty (as that term is defined in the Submanagement
Agreement) and pursuant thereto the Primary Management Agreement and
Submanagement Agreement are terminated. Upon termination of the Lease pursuant
to this SECTION 14.2(a), Lessor shall be entitled to retain all insurance
proceeds except for any amount thereof paid with respect to Lessee's Personal
Property and Lessor shall pay to Lessee a Termination Fee determined in
accordance with SECTION 33.1(c) as of the date immediately prior to the
destruction; provided that there shall be credited against such Termination Fee
an amount equal to any business interruption proceeds received by Lessee. The
Termination Fee shall be paid on the later of the date the Lease is terminated
or the date the Termination Fee is determined pursuant to SECTION 33.1(c). The
provisions of this SECTION 14.2(a) shall survive the expiration or earlier
termination of this Lease.
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(b) If during the Term the Leased Property is partially
destroyed by a risk covered by the insurance described in ARTICLE XIII, but the
Facility is not thereby rendered Unsuitable or Uneconomic for its Primary
Intended Use or, so long as the Submanagement Agreement is in effect, the
Facility does not suffer a Total Casualty. Lessor shall with all reasonable
dispatch, following payment of the insurance proceeds, restore the Leased
Property to substantially the same condition as existed immediately before the
damage or destruction and otherwise in accordance with the terms of the Lease,
and this Lease shall not terminate as a result of such damage or destruction.
Not withstanding anything of the contrary contained in this Section 14.2, if the
Facility suffers a minor Casualty (as defined in the Submanagement Agreement),
then Submanager shall process the applicable claim and restore the Leased
Property pursuant Section 6.03.A of the Submanagement Agreement.
(c) If the Facility is to be restored in accordance with the
provisions of SECTION 14.2(b) and if the cost of the repair or restoration
exceeds the amount of proceeds received by Lessor from the insurance required
under ARTICLE XIII, Lessor shall pay any excess amounts needed to restore the
Leased Property.
14.3 Reconstruction in the Event of Damage or Destruction Not Covered
by Insurance. If during the Term the Facility is totally or materially damaged
or destroyed by a risk not covered by the insurance described in ARTICLE XIII,
or if the Holder or any ground lessor(s) will not make the proceeds of such
insurance available to Lessor for restoration of the Facility, unless in either
event such damage or destruction renders the Facility Unsuitable or Uneconomic
for its Primary Intended Use, Lessor at its option shall either, (a) at Lessor's
sole cost and expense, restore the Facility to substantially the same condition
it was in immediately before such damage or destruction and this Lease shall not
terminate as a result of such damage or destruction, or (b) terminate this
Lease; provided, however, that while the Submanagement Agreement is in effect
Lessor shall proceed under clause (a) above unless the Facility suffers a Total
Casualty (as that term is defined in the Submanagement Agreement) and as a
result thereof the Primary Management Agreement and Submanagement Agreement are
terminated. Upon termination of the Lease under this SECTION 14.3, neither
Lessor nor Lessee shall have any further liability thereunder except for any
liabilities which have arisen or occurred prior to such termination and those
which expressly survive termination of this Lease and Lessor shall pay to Lessee
a Termination Fee determined in accordance with SECTION 33.1(c) as of the date
immediately prior to the damage or destruction. The Termination Fee shall be
paid on the later of the date the Lease is terminated or the date the
Termination Fee is determined pursuant to SECTION 33.1(c). If such damage or
destruction is determined by Lessor not to be material, Lessor shall, at
Lessor's sole cost and expense, restore the Facility to substantially the same
condition as existed immediately before the damage or destruction and otherwise
in accordance with the terms of the Lease, and this Lease shall not terminate as
a result of such damage or destruction. The provisions of this SECTION 14.3
shall survive the expiration or earlier termination of this Lease.
14.4 Lessee's Property and Business Interruption Insurance. All
insurance proceeds payable by reason of any loss of or damage to any of Lessee's
Personal Property and the
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business interruption insurance maintained for the benefit of Lessee shall be
paid to Lessee. If Lessor restores the Facility as provided in this Lease,
Lessee shall replace and restore any of Lessee's Personal Property to the same
condition as existed immediately before the damage or destruction and otherwise
in accordance with the terms of this Lease, to the extent of the insurance
proceeds received by Lessee therefor.
14.5 Abatement of Rent. Any damage or destruction due to casualty
notwithstanding, this Lease shall remain in full force and effect; Lessee's Base
Rent shall be abated until the damage or destruction is fully repaired and
restored; and Lessee's obligation to pay Percentage Rent required by this Lease
shall remain unabated by any damage or destruction which does not result in a
reduction of Gross Revenues. If and to the extent that any damage or destruction
results in a loss of Rent or reduction of Gross Revenues which would otherwise
be realizable from the operation of the Facility, then Lessor shall receive all
loss of income insurance and Lessee shall receive all business interruption
insurance and Lessee shall have no obligation to pay Rent in excess of the
amount of Percentage Rent, if any, realizable from Gross Revenues generated by
the operation of the Leased Property during the existence of such damage or
destruction.
ARTICLE XV
CONDEMNATION
15.1 Definitions.
(a) "CONDEMNATION" means a Taking resulting from (1) the
exercise of any governmental power, whether by legal proceedings or otherwise,
by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
(b) "DATE OF TAKING" means the date the Condemnor has the
right to possession of the property being condemned.
(c) "AWARD" means all compensation, sums or anything of value
awarded, paid or received on a total or partial Condemnation.
(d) "CONDEMNOR" means any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
15.2 Parties' Rights and Obligations. If during the Term there is any
Condemnation of all or any part of the Leased Property or any interest in this
Lease, the rights and obligations of Lessor and Lessee shall be determined by
this ARTICLE XV.
15.3 Total Taking. If title to the fee of the whole of the Leased
Property is condemned by any Condemnor, this Lease shall cease and terminate as
of the Date of Taking by the Condemnor and Lessor shall pay to Lessee a
Termination Fee determined as of the date of the taking in accordance with
SECTION 33.1(c). If title to the fee of less than the whole of the Leased
Property is so taken or condemned, which nevertheless renders the Leased
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Property Unsuitable or Uneconomic for its Primary Intended Use, then either
Lessee or Lessor shall have the option to terminate this Lease as of the Date of
Taking; provided that while the Submanagement Agreement is in effect, neither
Lessor nor Lessee shall have the option to terminate the Lease unless it is
unreasonable to continue to operate the Leased Property in accordance with Brand
Standards. Upon termination of the Lease pursuant to this SECTION 15.3, if such
Notice has been given, this Lease shall thereupon cease and terminate as of the
Date of Taking and Lessor shall pay to Lessee a Termination Fee determined as of
the date of the taking in accordance with SECTION 33.1(c). All Base Rent,
Percentage Rent and Additional Charges paid or payable by Lessee hereunder shall
be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor
such amounts. The Termination Fee shall be paid on the later of the date the
Lease is terminated or the date the Termination Fee is determined pursuant to
SECTION 33.1(c). The provisions of this SECTION 15.3 shall survive the
expiration or earlier termination of this Lease.
15.4 Allocation of Award. The total Award made with respect to the
Leased Property or for loss of rent, or for Lessor's loss of business beyond the
Term, shall be solely the property of and payable to Lessor. Any Award made for
loss of Lessee's business during the remaining Term, if any, for the taking of
Lessee's Personal Property or for removal and relocation expenses of Lessee in
any such proceedings shall be the sole property of and payable to Lessee. In any
Condemnation proceedings Lessor and Lessee shall each seek its Award in
conformity herewith, at its respective expense; provided, however, neither
Lessor nor Lessee shall initiate, prosecute or acquiesce in any proceedings that
may result in a diminution of any Award payable to the other. Any Award made for
loss of Lessee's business during the remaining Term in any such proceedings
shall be credited against the Termination Fee payable by Lessor to Lessee under
SECTION 15.3.
15.5 Partial Taking.
(a) If title to less than the whole of the Leased Property is
condemned, and the Leased Property is not Unsuitable or Uneconomic for its
Primary Intended Use, or if Lessor and Lessee are entitled but elect not to
terminate this Lease as provided in SECTION 15.3, then Lessor or, at Lessor's
election, Lessee shall, with all reasonable dispatch and to the extent that the
Holder permits the application of the Award therefor and the Award is sufficient
therefor, restore the untaken portion of any Leased Improvements so that such
Leased Improvements constitute a complete architectural unit of the same general
character and condition (as nearly as may be possible under the circumstances)
as the Leased Improvements existing immediately prior to the Condemnation.
Lessor and Lessee shall each contribute to the cost of restoration that part of
its Award specifically allocated to such restoration, if any, together with
severance and other damages awarded for the taken Leased Improvements; provided,
however, that the amount of such contribution shall not exceed such cost.
(b) In the event of a partial Taking as described in SECTION
15.5(a) which does not result in a termination of this Lease by Lessor, the Base
Rent shall be abated in the manner and to the extent that is fair, just and
equitable to both Lessee and Lessor, taking into consideration, among other
relevant factors, the number of usable rooms, the amount of square
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footage, or the revenues affected by such partial Taking. If Lessor and Lessee
are unable to agree upon the amount of such abatement within thirty (30) days
after such partial Taking, the matter shall be submitted to Arbitration as
provided for in SECTION 37.2 hereof. If the Award is insufficient to complete
any required restoration, then Lessor shall pay any excess amounts required to
restore the Leased property.
(c) Notwithstanding anything to the contrary contained in this
SECTION 15.5, Lessor and Lessee agree that as long as the Submanagement
Agreement is in effect any conflict between the provisions of this SECTION 15.5
and SECTION 6.04 of the Submanagement Agreement shall be controlled by the
provisions of such SECTION 6.04 of the Submanagement Agreement.
15.6 Temporary Taking. If the whole or any part of the Leased Property
or of Lessee's interest under this Lease is condemned by any Condemnor for its
temporary use or occupancy, this Lease shall not terminate by reason thereof,
but Base Rent shall be abated (unless required to be paid pursuant to the second
sentence of this SECTION 15.6) and Lessee shall pay Additional Charges and
Percentage Rent in the manner and at the times specified herein, and the Award
payable to Lessee on a monthly basis as hereinafter provided shall constitute
Gross Revenues as long as doing so would not cause the Rent paid to Lessor
hereunder to fail to qualify as "rents from real property" within the meaning of
Section 856(d) of the Code or any similar or successor provision thereto. If
doing so would cause the Rent to fail to qualify then Lessee will pay Base Rent
and Additional Charges to the extent of the Award to Lessee and Percentage Rent
(after payment of Base Rent and Additional Charges and only to the extent of the
balance of the Award made to Lessee) at a rate equal to the average Percentage
Rent during the last three preceding 12 month Lease Years (or, if three 12 month
Lease Years have not elapsed, the average during the preceding 12 month Lease
Year. Except only to the extent that Lessee may be prevented from so doing as a
result of the condemnation, Lessee shall continue to perform and observe all of
the other terms, covenants, conditions and obligations hereof on the part of the
Lessee to be performed and observed, as though such Condemnation had not
occurred. In the event of any Condemnation as in this SECTION 15.6 described,
the entire amount of any Award made for such Condemnation allocable to the Term
of this Lease, whether paid by way of damages, rent or otherwise, except such
portion as is specifically allocable to restoration or Capital Expenditures
which are obligations of Lessor under this Lease, shall be paid (a) directly to
Lessee if the Award is payable by the Condemnor on a monthly basis, or (b) if
payable by the Condemnor less frequently than on a monthly basis, the Award
shall be paid to an institutional trustee designated by Lessor or to an
institutional Holder of a Mortgage and made available to Lessee on a monthly
basis for application pursuant to the provisions of this SECTION 15.6. Lessor
covenants that upon the termination of any such period of temporary use or
occupancy it will, to the extent of the portion of the Award specifically
allocable to restoration or Capital Expenditures which are the obligations of
Lessor under this Lease and subject to Lessee's contribution as set forth below,
restore the Leased Property as nearly as may be reasonably possible to the
condition in which the same was immediately prior to such Condemnation, unless
such period of temporary use or occupancy extends beyond the expiration of the
Term, in which case Lessor shall not be required to make such restoration. If
restoration is required hereunder, Lessee shall contribute
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to the cost of such restoration that portion of its entire Award that is
specifically allocable to such restoration, if any.
ARTICLE XVI
DEFAULTS
16.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default (herein so called) hereunder:
(a) if Lessee fails to make any payment of Base Rent or
Percentage Rent within ten (10) days after receipt by the Lessee of Notice from
Lessor that the same has become due and payable, provided that Lessor shall not
be required to give any such Notice more than once in any Lease Year and that
any second or subsequent failure by Lessee during such Lease Year to make any
payment of Base Rent or Percentage Rent on the date the same becomes due and
payable shall constitute an immediate Event of Default; or
(b) if Lessee fails to make any payment of Additional Charges
within ten (10) days after receipt by Lessee of Notice from Lessor that the same
has become due and payable; or
(c) if Lessee fails to observe or perform any other term,
covenant or condition of this Lease and such failure is not curable, or if
curable is not cured by Lessee within a period of thirty (30) days after receipt
by the Lessee of Notice thereof from Lessor, unless such failure is curable but
cannot with due diligence be cured within a period of thirty (30) days, in which
case it shall not be deemed an Event of Default if Lessee, within such thirty
(30) day period, proceeds with due diligence to cure the failure and thereafter
diligently completes the curing thereof within 120 days of Lessor's Notice to
Lessee, which 120-day period shall cease to run during any period that a cure of
such failure is prevented by an Unavoidable Delay and shall resume running upon
the cessation of such Unavoidable Delay; or
(d) if Lessee or any Manager which is an Affiliate of Lessee
shall (i) be generally not paying its debts as they become due, (ii) file, or
consent by answer or otherwise to the filing against it of, a petition for
relief or reorganization or arrangement or any other petition in bankruptcy, for
liquidation or to take advantage of any bankruptcy or insolvency law of any
jurisdiction, (iii) make an assignment for the benefit of its creditors, (iv)
consent to the appointment of a custodian, receiver, trustee or other officer
with similar powers with respect to it or with respect to any substantial part
of its assets, (v) be adjudicated insolvent, or (vi) take corporate action for
the purpose of any of the foregoing; or if a court or governmental authority of
competent jurisdiction shall enter an order appointing, without consent by
Lessee, a custodian, receiver, trustee or other officer with similar powers with
respect to it or with respect to any substantial part of its assets, or if an
order for relief shall be entered in any case or proceeding for liquidation or
reorganization or otherwise to take advantage of any bankruptcy or insolvency
law of any jurisdiction, or ordering the dissolution,
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winding-up or liquidation of Lessee, or if any petition for any such relief
shall be filed against Lessee and such petition shall not be dismissed within
sixty (60) days; or
(e) if the estate or interest of Lessee in the Leased Property
or any part thereof is voluntarily or involuntarily transferred, assigned,
conveyed, levied upon or attached in any Proceeding; or
(f) if, except as a result of and to the extent required by
damage, destruction, Condemnation or Unavoidable Delay, Lessee ceases operations
on the Leased Property; or
(g) if notice of a default or an event of default has been
given by the franchisor or licensor under the Franchise Agreement or any ground
lessor(s) with respect to the Facility on the Leased Property as a result of any
action or failure to act by the Lessee or any Person with whom the Lessee
contracts for management services at the Facility, which default or event of
default is not cured within applicable cure periods and does not arise from
Lessor's breach of any of its obligations under this Lease which are required to
maintain the Franchise Agreement or any ground lease in effect; or
(h) if Lessee breaches the provisions of SECTION 32.1 and such
default continues for a period of thirty (30) days after Notice thereof from
Lessor.
Notwithstanding anything to the contrary contained in SECTION
16.1(c), the cure periods set forth in SECTION 16.1(c) shall not apply to any
failure by Lessee to perform any term, covenant or condition for which a
different grace or cure period is expressly set forth in any other provision of
this Lease, and such failure shall, after the expiration of any other grace or
cure period expressly set forth elsewhere herein, constitute an immediate Event
of Default.
If litigation is commenced with respect to any alleged default
under this Lease, the prevailing party in such litigation shall receive, in
addition to its damages incurred, such sum as the court shall determine as its
reasonable attorneys' fees, and all costs and expenses incurred in connection
therewith.
16.2 Remedies. Upon the occurrence of an Event of Default, Lessor shall
have the right, at Lessor's option, to elect to do any one or more of the
following without further notice or demand to Lessee: (a) terminate this Lease,
in which event Lessee shall immediately surrender the Leased Property to Lessor,
and, if Lessee fails to so surrender, Lessor shall have the right, without
notice, to enter upon and take possession of the Leased Property and to expel or
remove Lessee and its effects without being liable for prosecution or any claim
for damages therefor; and Lessee shall, and hereby agrees to, indemnify Lessor
for all loss and damage which Lessor suffers by reason of such termination,
including without limitation, damages in an amount equal to the total of (1) the
reasonable costs of recovering the Leased Property in the event that Lessee does
not promptly surrender the Leased Property, and all other reasonable expenses
incurred by Lessor in connection with Lessee's default; (2) the unpaid Rent
earned as of the date of termination, plus interest at the Overdue Rate accruing
after the due date until such sums are paid by Lessee to Lessor; (3) the total
Rent (including
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Percentage Rent as determined below) which Lessor would have received under this
Lease for the remainder of the Term, but discounted to the then present value at
a rate of fifteen percent (15%) per annum, less the fair market rental value of
the balance of the Term as of the time of such default discounted to the then
present value at a rate of fifteen percent (15%) per annum; and (4) all other
sums of money and damages owing by Lessee to Lessor; or (b) enter upon and take
possession of the Leased Property without terminating this Lease and without
being liable for prosecution or any claim for damages therefor, and, if Lessor
elects, relet the Leased Property on such terms as Lessor deems advisable, in
which event Lessee shall pay to Lessor on demand the reasonable costs of
repossessing and reletting the Leased Property and any deficiency between the
Rent payable hereunder (including Percentage Rent as determined below) and the
rent paid under such reletting; provided, however, that Lessee shall not be
entitled to any excess payments received by Lessor from such reletting and
Lessor's failure to relet the Leased Property shall not release or affect
Lessee's liability for Rent or for damages; or (c) enter the Leased Property
without terminating this Lease and without being liable for prosecution or any
claim for damages therefor and maintain the Leased Property and repair or
replace any damage thereto or do anything for which Lessee is responsible
hereunder. Lessee shall reimburse Lessor immediately upon demand for any expense
which Lessor incurs in thus effecting Lessee's compliance under this Lease, and
Lessor shall not be liable to Lessee for any damages with respect thereto.
Notwithstanding anything herein to the contrary, Lessee shall not be liable to
Lessor for consequential, punitive or exemplary damages.
The rights granted to Lessor in this SECTION 16.2 shall be cumulative
of every other right or remedy provided in this Lease or which Lessor may
otherwise have at law or in equity or by statute, and the exercise of one or
more rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of other rights or remedies or constitute a forfeiture or
waiver of Rent or damages accruing to Lessor by reason of any Event of Default
under this Lease.
Percentage Rent for the purposes of this SECTION 16.2 shall be a sum
equal to (i) the average of the annual amounts of the Percentage Rent for the
three 12-month Lease Years immediately preceding the Lease Year in which the
termination, re-entry or repossession takes place, or (ii) if three 12-month
Lease Years shall not have elapsed, the average of the Percentage Rent during
the preceding 12-month Lease Year during which the Lease was in effect, or (iii)
if one Lease Year has not elapsed, the amount derived by annualizing the
Percentage Rent from the effective date of this Lease.
16.3 Waiver. Each party waives, to the extent permitted by applicable
law, any right to a trial by jury in any proceedings brought by either party to
enforce the provisions of this Lease, including, without limitation, proceedings
to enforce the remedies set forth in this ARTICLE XVI, and Lessee waives the
benefit of any laws now or hereafter in force exempting property from liability
for rent or for debt.
16.4 Application of Funds. Any payments received by Lessor under any of
the provisions of this Lease during the existence or continuance of any Event of
Default shall be applied to Lessee's obligations in the order that Lessor may
determine or as may be prescribed by the laws of the State.
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ARTICLE XVII
LESSOR'S RIGHT TO CURE
17.1 Lessor's Right to Cure Lessee's Default. If Lessee fails to make
any payment or to perform any act required to be made or performed under this
Lease including, without limitation, Lessee's failure to comply with the terms
of any Franchise Agreement or any ground lease, and fails to cure the same
within the relevant time periods, if any, provided in SECTION 16.1 or elsewhere
in this Lease, Lessor, without waiving or releasing any obligation of Lessee,
and without waiving or releasing any obligation or default, may (but shall be
under no obligation to) at any time thereafter upon Notice to Lessee make such
payment or perform such act for the account and at the expense of Lessee, and
may, to the extent permitted by law, enter upon the Leased Property for such
purpose and, subject to SECTION 16.2, take all such action thereon as, in
Lessor's opinion, may be necessary or appropriate therefor. No such entry shall
be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses, in each case to the extent permitted by law) so incurred, together
with a late charge thereon (to the extent permitted by law) at the Overdue Rate
from the date on which such sums or expenses are paid or incurred by Lessor
until such sums or expenses are paid by Lessee to Lessor, shall constitute
Additional Charges and shall be paid by Lessee to Lessor on demand. The
obligations of Lessee and rights of Lessor contained in this Article shall
survive the expiration or earlier termination of this Lease.
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ARTICLE XVIII
LIMITATIONS
18.1 Personal Property Limitation. Lessee acknowledges that the Company
is a real estate investment trust and in order for all the Rent to constitute
qualifying "rent from real property" under Section 856 of the Code the average
of the adjusted tax bases of the items of Lessor's personal property that are
leased to the Lessee under this Lease at the beginning and at the end of any
Lease Year shall not exceed 15% of the average of the aggregate adjusted tax
bases of the Leased Property at the beginning and at the end of such Lease Year
(the limitation being referred to herein as the "PERSONAL PROPERTY LIMITATION").
Lessor and Lessee shall at all times cooperate in good faith and use their best
efforts to permit Lessor to comply with the Personal Property Limitation, which
compliance may include, by way of example only and not by way of limitation or
obligation, the purchase by Lessee at fair market value of personal property in
excess of the Personal Property Limitation. All such compliance shall be
effected in a manner which has no material net economic detriment to Lessee and
will not jeopardize the Company's status as a real estate investment trust under
the applicable provisions of the Code. Notwithstanding the foregoing, to the
extent that Lessor is required, under SECTION 35.1(d), to fund expenditures that
do not constitute Capital Expenditures, and such expenditures would cause the
personal property leased to Lessee to exceed the Personal Property Limitation,
Lessee shall be obliged to acquire such excess personal property from Lessor at
its fair market value. This SECTION 18.1 is intended to ensure that the Rent
qualifies as "rents from real property," within the meaning of Section 856(d) of
the Code, or any similar or successor provisions thereto.
18.2 Sublease Rent Limitation. Anything contained in this Lease to the
contrary notwithstanding, Lessee shall not sublet the Leased Property or enter
into any licenses or concessions or enter into any similar arrangement on any
basis such that the rental or other amounts to be paid by the sublessee
thereunder would be based, in whole or in part, on either (a) the net income or
profits derived by the business activities of the sublessee, licensee, or
concessionaire, or (b) any other formula such that any portion of the Rent would
fail to qualify as "rents from real property" within the meaning of Section
856(d) of the Code, or any similar or successor provision thereto.
18.3 Sublease Lessee Limitation. Anything contained in this Lease to
the contrary notwithstanding, Lessee shall not sublease the Leased Property to,
or enter into any license, concession or similar arrangement with, any Person in
which the Company owns, directly or indirectly, a 10% or more interest, within
the meaning of Section 856(d)(2)(B) of the Code.
18.4 Lessee Ownership Limitation. Anything contained in this Lease to
the contrary notwithstanding, Lessor shall not take, or permit an Affiliate of
Lessor to take, any action that would cause the Company to own, directly or
indirectly, a 10% or more interest in the Lessee within the meaning of Section
856(d)(2)(B) of the Code, or any similar or successor provisions thereto.
Anything contained in this Lease to the contrary notwithstanding, Lessee shall
not take, or permit an Affiliate of Lessee to take, any action that would cause
the Company to own, directly or indirectly, a 10% or more interest in the Lessee
within the meaning of Section 856(d)(2)(B) of the Code, or any similar or
successor provisions thereto. Any transfer of interests in the Lessee pursuant
to SECTION 35.4 shall be deemed to be an action of Lessee for purposes of this
SECTION 18.4.
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ARTICLE XIX
HOLDING OVER
19.1 Holding Over. If Lessee for any reason remains in possession of
the Leased Property after the expiration or earlier termination of the Term,
such possession shall be as a tenant at sufferance during which time Lessee
shall pay as rental each month two times the aggregate of (a) one-twelfth of the
aggregate Base Rent and Percentage Rent payable with respect to the last Lease
Year of the Term, (b) all Additional Charges accruing during the applicable
month and (c) all other sums, if any, payable by Lessee under this Lease with
respect to the Leased Property. During such period, Lessee shall be obligated to
perform and observe all of the terms, covenants and conditions of this Lease,
but shall have no rights hereunder other than the right, to the extent given by
law to tenancies at sufferance, to continue its occupancy and use of the Leased
Property. Nothing contained herein shall constitute the consent, express or
implied, of Lessor to the holding over of Lessee after the expiration or earlier
termination of this Lease.
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ARTICLE XX
INDEMNITIES
20.1 Indemnification.
(a) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN OTHER SECTIONS
OF THIS LEASE, LESSEE WILL PROTECT, INDEMNIFY, HOLD HARMLESS AND DEFEND LESSOR
INDEMNIFIED PARTIES FROM AND AGAINST ALL LIABILITIES, OBLIGATIONS, CLAIMS,
DAMAGES, PENALTIES, CAUSES OF ACTION, COSTS AND EXPENSES (INCLUDING, WITHOUT
LIMITATION, REASONABLE ATTORNEYS' FEES AND EXPENSES), TO THE EXTENT PERMITTED BY
LAW, excluding those resulting from a Lessor Indemnified Party's negligence or
misconduct or from Lessor's failure to perform or comply with any of the terms
of this Lease, imposed upon or incurred by or asserted against Lessor
Indemnified Parties by reason of: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, during the Term or while the Leased Property is
in the possession or control of Lessee including without limitation any claims
under liquor liability, "dram shop" or similar laws, (b) any use, misuse,
management, operation, maintenance or repair by Lessee or any of its agents,
employees, contractors or invitees of the Leased Property or Lessee's Personal
Property during the Term or while the Leased Property is in the possession or
control of Lessee, or any litigation, proceeding or claim by governmental
entities or other third parties to which a Lessor Indemnified Party is made a
party or participant related to such use, misuse, management, operation,
maintenance, or repair thereof by Lessee or any of its agents, employees,
contractors or invitees, (c) any Impositions that are the obligations of Lessee
pursuant to the applicable provisions of this Lease, (d) any failure on the part
of Lessee to perform or comply during the Term or while the Leased Property is
in the possession or control of Lessee with any of the terms of this Lease, and
(e) the nonperformance by Lessee or any of its agents, employees or contractors
of any of the terms and provisions of any and all existing and future subleases
of the Leased Property to be performed by the landlord thereunder.
(b) Lessor shall indemnify, save harmless and defend Lessee
Indemnified Parties from and against all liabilities, obligations, claims,
damages, penalties, causes of action, costs and expenses imposed upon or
incurred by or asserted against Lessee Indemnified Parties as a result of (i)
the negligence or misconduct of Lessor arising in connection with this Lease or
(ii) any failure on the part of Lessor to perform or comply with any of the
terms of this Lease. Lessor also agrees to pay to Lessee any damages incurred by
Lessee to Primary Manager pursuant to SECTION 9.03 of the Primary Management
Agreement as a result of Lessor's failure to perform or comply with any of the
terms of this Lease.
(c) Any amounts that become payable by an Indemnifying Party
under this Section or any other indemnity in this Lease shall be paid within ten
(10) days after liability therefor on the part of the Indemnifying Party is
determined by litigation or otherwise, and if not timely paid, shall bear a late
charge (to the extent permitted by law) at the Overdue Rate from the date of
such determination to the date of payment. Any such amounts shall be reduced by
insurance proceeds received and any other recovery (net of costs) obtained by
the Indemnified Party. An Indemnifying Party, upon request, shall at its sole
expense resist and defend any Proceeding, claim or action, or cause the same to
be resisted and defended by counsel designated by the Indemnifying Party and
approved by the Indemnified Party, which approval shall not be unreasonably
withheld; provided, however, that such approval shall not be required in the
case of defense by counsel designated by any insurance company
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undertaking such defense pursuant to any applicable policy of insurance. Each
Indemnified Party shall have the right to employ separate counsel in any such
Proceeding, claim or action and to participate in the defense thereof, but the
fees and expenses of such counsel will be at the sole expense of such
Indemnified Party unless a conflict of interest prevents representation of such
Indemnified Party by the counsel selected by the Indemnified Party and such
separate counsel has been approved by the Indemnifying Party, which approval
shall not be unreasonably withheld. The Indemnifying Party shall not be liable
for any settlement of any such Proceeding, claim or action made without its
consent, which consent shall not be unreasonably withheld, but if settled with
the consent of the Indemnifying Party, or if settled without its consent (if its
consent shall be unreasonably withheld), or if there be a final, non-appealable
judgment for an adversary party in any such Proceeding, claim or action, the
Indemnifying Party shall indemnify and hold harmless the Indemnified Party from
and against any liabilities incurred by such Indemnified Party by reason of such
settlement or judgement. Nothing herein shall be construed as indemnifying a
Lessor Indemnified Party against its own grossly negligent acts or omissions or
willful misconduct.
(d) Lessee's and Lessor's obligations under the provisions of
this Article shall survive any termination of this Lease.
ARTICLE XXI
SUBLETTING AND ASSIGNMENT
21.1 Subletting and Assignment. Subject to the provisions of ARTICLE
XVIII and SECTIONS 21.1 AND 21.2 and any other express consents, conditions,
limitations or other provisions set forth herein, Lessee shall not assign this
Lease or hereafter sublease all or any part of the Leased Property without first
obtaining the written consent of Lessor. Notwithstanding the foregoing, Lessor's
consent shall not be withheld with respect to occupancy leases which (i) are for
less than 1,000 square feet, (ii) do not require Capital Expenditures by Lessor,
(iii) do not affect the classification of Gross Revenues among Room Revenues,
Food Sales, Beverage Sales or Other Income, (iv) do not extend beyond the stated
Term of this Lease, and (v) do not have provisions which could adversely affect
the Company's status as a real estate investment trust. In the case of a
permitted subletting, the sublessee shall comply with the provisions of this
Section and SECTIONS 18.2, 18.3, 18.4 and 21.2, and in the case of a permitted
assignment, the assignee shall assume in writing and agree to keep and perform
all of the terms of this Lease on the part of Lessee to be kept and performed
and shall be, and become, jointly and severally liable with Lessee for the
performance thereof. No assignment or subletting shall release Lessee from, and
Lessee shall remain primarily liable as principal rather than as surety for, the
prompt payment of the Rent and for the performance and observance of all of the
covenants and conditions to be performed by Lessee hereunder. An original
counterpart of each such sublease and assignment and assumption, duly executed
by Lessee and such sublessee or assignee, as the case may be, in form and
substance satisfactory to Lessor, shall be delivered promptly to Lessor. While
the Submanagement Agreement is in effect, subleases entered into on Lessee's
behalf by Primary Manager or Submanager that do not require Lessee's consent
under the terms of the Primary Management Agreement shall not be deemed to
violate the provisions of this Section.
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21.2 Management Agreement. Lessee shall not enter into any management
or agency agreement relating to the management or operation of the Facility or
any modifications to such management or agency agreement (collectively, the
"MANAGEMENT AGREEMENT") without Lessor's prior written approval of the terms and
conditions thereof and of the identity of any manager of the Facility (the
"MANAGER") which is not an Affiliate of Lessee.
21.3 Primary Manager and Submanager.
(a) Lessor acknowledges that Lessee will enter into the
Primary Management Agreement with Primary Manager and that Primary Manager
intends to enter into the Submanagement Agreement. Lessor hereby approves the
terms and conditions thereof as in effect on the date hereof and of the identity
of the Primary Manager and Submanager. Lessor acknowledges that Lessee has
delegated all of Lessee's approval rights under this Lease to Primary Manager
pursuant to SECTION 8 of the Owner Agreement. Lessor's approval rights under
SECTION 21.2 shall apply to any assignment or transfer of the interests of
Primary Manager under the Primary Management Agreement or of Submanager under
the Submanagement Agreement unless such assignment or transfer is permitted to
occur under such agreements without the consent of either Lessee or Primary
Manager.
(b) Lessor further acknowledges that, pursuant to SECTION
5.17.2 of the Settlement Agreement, Primary Manager and Submanager are third
party beneficiaries of certain funding and payment obligations of Lessor under
this Lease, as follows:
(i) Sections 1.3(d) and (e), regarding funding of
initial balances.
(ii) Section 4.1, regarding payment of Lessor
Impositions.
(iii) Section 8.4, regarding indemnification and
remedial action for certain environmental conditions.
(iv) Sections 14.2 and 14.3, regarding restoration of
the Leased Property.
(v) Section 20.1(b)(ii), regarding reimbursement for
damages caused by Lessor's failure to perform or comply with
the terms of this Lease, but only to the extent of any
monetary remedies to which Primary Manager or Submanager may
be entitled under Section 9.03 of the Primary Management
Agreement and Submanagement Agreement, respectively, that are
occasioned by Lessor's failure so to perform or comply.
(vi) Section 33.1(c)(ii), regarding the payment of
certain amounts owed under the Primary Management Agreement
upon termination.
(vii) Sections 35.1(d) and (e), regarding the funding
of certain expenditures.
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ARTICLE XXII
ESTOPPEL CERTIFICATES
22.1 Officer's Certificates; Financial Statements; Lessor's Estoppel
Certificates and Covenants.
(a) At any time and from time to time upon not less than ten
(10) days Notice by Lessor, Lessee will furnish to Lessor an Officer's
Certificate certifying that this Lease is unmodified and in full force and
effect (or that this Lease is in full force and effect as modified and setting
forth the modifications), the date to which the Rent has been paid, whether to
the knowledge of Lessee there is any existing default or Event of Default
hereunder by Lessor or Lessee, and such other information as may be reasonably
requested by Lessor. Any such certificate furnished pursuant to this Section may
be relied upon by Lessor, any lender, any underwriter and any prospective
purchaser of the Leased Property.
(b) Lessee will furnish the following statements and operating
information to Lessor:
(i) the most recent Consolidated Financials of Lessee
within thirty (30) days after each quarter of any fiscal year
(or, in the case of the final quarter in any fiscal year, the
most recent audited Consolidated Financials of Lessee within
sixty (60) days);
(ii) with reasonable promptness, such other
reasonable information respecting the financial condition,
operations and affairs of Lessee or the Leased Property (A) as
the Company may be required or may deem desirable in its
reasonable discretion to file with or provide to the SEC or
any other governmental agency or any other Person, all in the
form, and either audited or unaudited, as the Company may
request in its reasonable discretion, (B) as may be reasonably
necessary to confirm compliance by Lessee and its Affiliates
with the requirements of this Lease, and (C) as may be
reasonably required or requested by any existing, potential or
future Holder;
(iii) on or before the 15th day of each month, a
balance sheet, and detailed profit and loss and cash flow
statements showing the financial position of the Facility as
at the end of the preceding month and the results of operation
of the Facility for such preceding month and the Lease Year to
date (including a comparison to the Operating Budget as
approved);
(iv) on or before the 15th day of each month, the
general manager's written critique of the financial report
submitted pursuant to subsection (3) immediately above,
setting forth in narrative form any variations during the
preceding month from the Annual Budget and including a preview
of the Facility's financial operations during the current
month;
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(v) on or before the 15th day of each April, July and
October during the Term, an updated estimate for each calendar
quarter remaining in the Lease Year of the information
required by SECTIONS 3.5(a) and (e) hereof;
(vi) upon request by Lessor, copies of all licenses,
permits, occupancy agreements, operating agreements, leases,
contracts, inspection reports, studies, appraisals,
assessments, default or other notices and similar materials
and information existing with respect to the Leased Property;
(vii) within five (5) days of Lessee's receipt
thereof, any inspection reports received from the franchisor
under the Franchise Agreement.
(c) At any time and from time to time upon not less than ten
(10) days notice by Lessee, Lessor will furnish to Lessee or to any person
designated by Lessee an estoppel certificate certifying that this Lease is
unmodified and in full force and effect (or that this Lease is in full force and
effect as modified and setting forth the modifications), the date to which Rent
has been paid, whether to the knowledge of Lessor there is any existing default
or Event of Default on Lessee's or Lessor's part hereunder, and such other
information as may be reasonably requested by Lessee. Any such certificate
furnished pursuant to this Section may be relied upon by Lessee, any lender, any
underwriter and any purchaser of the assets of Lessee.
(d) Lessee covenants to cause its officers and employees, its
Manager and its auditors to cooperate reasonably and promptly with the Company
and with the auditors for the Company in connection with the timely preparation
and filing of the Company's filings, reports and returns under applicable
federal, state and other governmental securities, blue sky and tax laws and
regulations.
ARTICLE XXIII
INSPECTIONS
23.1 Regular Meetings; Lessor's Right to Inspect.
(a) Lessee agrees that if requested by Lessor, the general
manager, the controller, the director of marketing, the asset manager and, if
specifically requested by Lessor, the director of food and beverage and the
chief engineer for the Facility will meet at the Facility with Lessor and its
representatives on a monthly basis throughout each Lease Year in order to
discuss all aspects of the management, maintenance and operation of the
Facility.
(b) Lessee shall permit Lessor and its representatives as
frequently as reasonably requested by Lessor to inspect the Leased Property and
Lessee's accounts and records pertaining thereto and make copies thereof, during
usual business hours upon reasonable advance notice, subject only to any
business confidentiality requirements reasonably requested by Lessee. In
conducting such inspections Lessor shall not unreasonably interfere with the
conduct of Lessee's business at the Leased Property.
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[ (c) Subject to availability, Lessee will provide reasonable
gratuitous accommodations, food and beverage, and other services and amenities
to Lessor and its representatives in connection with all such meetings and
inspections.]
ARTICLE XXIV
NO WAIVER
24.1 No Waiver. No failure by Lessor or Lessee to insist upon the
strict performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the extent permitted by law, no waiver
of any breach shall affect or alter this Lease, which shall continue in full
force and effect with respect to any other then existing or subsequent breach.
ARTICLE XXV
CUMULATIVE REMEDIES
25.1 Remedies Cumulative. To the extent permitted by law but subject to
ARTICLE XXXVI and any other provisions of this Lease expressly limiting the
rights, powers and remedies of either Lessor or Lessee, each legal, equitable or
contractual right, power and remedy of Lessor or Lessee now or hereafter
provided either in this Lease or by statute or otherwise shall be cumulative and
concurrent and shall be in addition to every other right, power and remedy and
the exercise or beginning of the exercise by Lessor or Lessee of any one or more
of such rights, powers and remedies shall not preclude the simultaneous or
subsequent exercise by Lessor or Lessee of any or all of such other rights,
powers and remedies.
ARTICLE XXVI
SURRENDER
26.1 Acceptance of Surrender. Other than upon expiration of the Term,
no surrender to Lessor of this Lease or of the Leased Property or any part
thereof, or of any interest therein, shall be valid or effective unless agreed
to and accepted in writing by Lessor and no act by Lessor or any representative
or agent of Lessor, other than such a written acceptance by Lessor, shall
constitute an acceptance of any such surrender.
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ARTICLE XXVII
NO MERGER
27.1 No Merger of Title. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same person
or entity may acquire, own or hold, directly or indirectly: (a) this Lease or
the leasehold estate created hereby or any interest in this Lease or such
leasehold estate and (b) the fee estate in the Leased Property.
ARTICLE XXVIII
CONVEYANCE BY LESSOR
28.1 Conveyance by Lessor. If Lessor transfers or conveys the Leased
Property other than to an Affiliate of the Company, Lessor shall give Lessee
Notice thereof and Lessee may terminate this Lease upon Notice to Lessor given
within ninety (90) days after the later of the date of such conveyance or
transfer and the date Lessee receives Notice of such transfer or conveyance, in
which event, Lessor shall pay to Lessee a Termination Fee determined in
accordance with SECTION 33.1(c) as of the date of such transfer or conveyance.
Any change in the ownership of Lessor that results in the Company (or its wholly
owned subsidiaries) no longer exercising ultimate managerial authority over
Lessor shall be deemed a conveyance for purposes of this SECTION 28.1 AND
SECTION 33.1, in which event, Lessor shall pay to Lessee a Termination Fee
determined in accordance with SECTION 33.1(c) as of the date of such change. The
Termination Fee shall be paid on the later of the date the Lease is terminated
or the date the Termination Fee is determined pursuant to SECTION 33.1(c). The
provisions of this SECTION 28.1 shall survive the expiration or earlier
termination of this Lease.
28.2 Lessor May Grant Liens.
(a) Without the consent of Lessee, Lessor may from time to
time create or otherwise cause to exist any Mortgage (as hereinafter defined)
upon the Leased Property, or any portion thereof or interest therein, or upon
Lessor's interest in this Lease, whether to secure any borrowing or other means
of financing or refinancing or otherwise. This Lease and Lessee's interest
hereunder shall at all times be subject and subordinate to the lien and security
title of any deeds to secure debt, deeds of trust, mortgages, or other interests
heretofore or hereafter granted by Lessor or which otherwise encumber or affect
the Leased Property and to any and all advances to be made thereunder and to all
renewals, modifications, consolidations, replacements, substitutions, and
extensions thereof, and to all security agreements delivered in connection
therewith (all of which are herein called the "MORTGAGE"), provided that the
Mortgage shall be subject to Lessee's rights under this Lease to receive all
Gross Revenues of the Facility prior to the earlier of the occurrence of an
Event of Default hereunder or the date that this Lease is terminated by the
Holder of the Mortgage in the exercise of its remedies thereunder. In
confirmation of such subordination, however, Lessee shall, at Lessor's request,
promptly execute, acknowledge and deliver any instruments which may be
reasonably required to evidence subordination to any Mortgage and to the Holder
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thereof. A foreclosure, transfer in lieu of foreclosure, or other disposition of
the Leased Property pursuant to a Mortgage or collateral assignment shall
constitute a conveyance for purposes of SECTIONS 28.1 AND 33.1 requiring payment
of the Termination Fee by Lessor (but the Holder at a foreclosure sale or the
transferee in lieu of foreclosure shall not be liable for the payment of such
Termination Fee, such payment being the obligation of Lessor). The provisions of
this SECTION 28.2(a) shall survive the expiration or earlier termination of this
Lease.
(b) Lessee shall, upon the request of Lessor or any existing,
potential or future Holder, (i) provide Lessor or such Holder with copies of all
licenses, permits, occupancy agreements, operating agreements, leases,
contracts, inspection reports, studies, appraisals, assessments, default or
other notices and similar materials reasonably requested in connection with any
existing or proposed financing of the Leased Property, and (ii) execute and/or
cause the Manager to execute, as applicable, such estoppel agreements and
collateral assignments with respect to the Facility's liquor license, the
Management Agreement and any of the other aforementioned agreements as Holder
may reasonably request in connection with any such financing, provided that no
such estoppel agreement or collateral assignment shall in any way affect the
Term or affect adversely in any material respect any rights of Lessee under this
Lease or of Manager under the Management Agreement.
(c) Lessee shall deliver by notice delivered in the manner
provided in ARTICLE XXX to any Holder who gives Lessee written notice of its
status as a Holder, at such Holder's address stated in the Holder's written
notice or at such other address as the Holder may designate by later written
notice to Lessee, a duplicate copy of any and all notices regarding any default
which Lessee may from time to time give or serve upon Lessor pursuant to the
provisions of this Lease. Copies of such notices given by Lessee to Lessor shall
be delivered to such Holder simultaneously with delivery to Lessor. No such
notice by Lessee to Lessor hereunder shall be deemed to have been given unless
and until a copy thereof has been mailed to such Holder as provided above.
(d) At any time, and from time to time, upon not less than ten
(10) days' notice by a Holder to Lessee, Lessee shall deliver to such Holder an
estoppel certificate certifying as to the information required in SECTION
22.1(c), and such other information as may be reasonably requested by such
Holder. Any such certificate may be relied upon by such Holder.
(e) Notwithstanding the foregoing provisions of this SECTION
28.2, while the Submanagement Agreement is in effect Lessor shall not encumber
the Facility with any mortgage, deed of trust, or security document, encumbering
the Leased Property or the interest of Lessor therein unless such encumbrance is
a Qualified Mortgage as that term is defined in SECTION 8.02 of the
Submanagement Agreement.
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ARTICLE XXIX
QUIET ENJOYMENT
29.1 Quiet Enjoyment. So long as Lessee pays all Rent as the same
becomes due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace and/or cure
periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the
Leased Property for the Term hereof, free of any claim or other action by Lessor
or anyone claiming by, through or under Lessor and not claiming by, through or
under Lessee, but subject to all liens and encumbrances subject to which the
Leased Property was conveyed to Lessor or hereafter consented to by Lessee.
Lessee shall have the right by separate and independent action to pursue any
claim it may have against Lessor as a result of a breach by Lessor of the
covenant of quiet enjoyment contained in this Section.
ARTICLE XXX
NOTICES
30.1 Notices. All notices, demands, requests, consents approvals and
other communications ("Notice" or "Notices") hereunder shall be in writing and
personally served or mailed (by express mail, courier, or registered or
certified mail, return receipt requested and postage prepaid), (i) if to Lessor
at 1950 Stemmons Freeway, Suite 6001, Dallas, Texas 75207, Attention: Chief
Financial Officer, with a copy to General Counsel and (ii) if to Lessee at 1950
Stemmons Freeway, Suite 6001, Dallas, Texas 75207, Attention: Chief Financial
Officer, with a copy to General Counsel, or to such other address or addresses
as either party may hereafter designate. Personally delivered Notice shall be
effective upon receipt, and Notice given by mail shall be complete at the time
of deposit in the U.S. Mail system, but any prescribed period of Notice and any
right or duty to do any act or make any response within any prescribed period or
on a date certain after the service of such Notice given by mail shall be
extended five days.
ARTICLE XXXI
INTENTIONALLY DELETED
ARTICLE XXXII
LESSEE CAPITALIZATION REQUIREMENTS
32.1 Lessee's Net Worth. Lessee shall be obligated to maintain at all
times during the Term a Net Worth in an amount at least equal to twenty percent
(20%) of the aggregate projected Base Rent and Percentage Rent for the Leased
Property (the "MINIMUM NET WORTH"). As used herein, "Net Worth" shall mean the
excess of total assets over total liabilities, total assets and total
liabilities each to be determined in accordance with GAAP but shall also include
the amount of any guaranty of Lessee's obligations issued by any person
reasonably acceptable to Lessor who agrees to comply with the requirements of
SECTION 32.2.
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32.2 Verification of Net Worth. In addition to the Consolidated
Financials of Lessee to be delivered to Lessor pursuant to SECTION 22.1, Lessee
shall deliver to Lessor, together with such Consolidated Financials of Lessee, a
certificate of Lessee's chief financial officer in form reasonably required by
Lessor (the "FINANCIAL OFFICER'S CERTIFICATE"), certifying the Net Worth and
Cash of Lessee as of the date of the Consolidated Financials of Lessee being
delivered concurrently therewith and stating that Lessee is in compliance with
its obligations under SECTION 32.1 of this Lease, or if not, so stating and
including the reasons therefor. Lessor shall have the right from time to time
and at any time to have an independent certified public accountant selected by
Lessor perform at Lessor's expense an audit or other review of the books and
records of Lessee (or of any guarantor of Lessee's obligations) to verify the
amount of Lessee's Net Worth, and Lessee (or such guarantor) shall cooperate
with Lessor in connection therewith.
ARTICLE XXXIII
TERMINATION OF LEASE DUE TO SALE OF LEASED PROPERTY
33.1 Termination of Lease Due to Sale of Leased Property.
(a) In the event Lessor consummates a sale or other conveyance
of the Leased Property to a bona fide third party, then Lessor may terminate
this Lease by Notice to Lessee (and Lessee may terminate this Lease pursuant to
SECTION 28.1), in which event this Lease shall terminate except as to any
obligations of the parties existing as of such date that survive termination of
this Lease, and all Rent, including Percentage Rent and Additional Charges,
shall be prorated and calculated as of the termination date.
(b) As compensation for the early termination of Lessee's
leasehold estate under this ARTICLE XXXIII, Lessor shall, upon such termination,
pay to Lessee the Termination Fee (herein so called) determined in accordance
with SECTION 33.1(c). In the event Lessor and Lessee are unable to agree upon
the fair market value of Lessee's leasehold estate as defined in (c) below, it
shall be determined by arbitration pursuant to SECTION 37.2.
(c) For the purposes of this Lease, the Termination Fee means
(i) the fair market value of the Lessee's leasehold estate under this Lease plus
(ii) all amounts required to be paid by Lessee to Primary Manager as a result of
such termination if such termination also results in the termination of the
Primary Management Agreement, including, without limitation, any termination
fees payable to the Primary Manager under the Primary Management Agreement and
costs imposed on Lessee pursuant to SECTION 11.12 A of the Primary Management
Agreement, but not costs imposed under SECTION 11.11 thereof. The fair market
value of the Lessee's leasehold estate shall mean the present value, discounted
at the discount rate provided below, of Lessee's projected "profit" or "net cash
flow" for the remaining stated Term of this Lease, i.e., the amount by which
projected Gross Revenues to be collected by Lessee exceed projected Rent and
ordinary operating expenses (including, without limitation, the management fees
under the Management Agreement) to be paid by
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Lessee. In computing fair market value of the leasehold estate, the appraiser
shall discount all future revenues, expenses and fees to the then present value
at a discount rate of fifteen percent (15%) per annum.
(d) Other than the payment of rent and other sums which are
payable under any ground leases, which will be paid by Lessor pursuant to
SECTION 4.1 hereof, Lessee shall comply with all of the terms of any ground
lease.
ARTICLE XXXIV
FRANCHISE AGREEMENT, BRAND STANDARDS, AND GROUND LEASES
34.1 Compliance.
(a) Lessee shall not terminate or enter into any modification
of the Franchise Agreement which could adversely affect Lessor in any material
respect without in each instance first obtaining Lessor's written consent.
Lessor and Lessee agree to cooperate fully with each other in the event it
becomes necessary to obtain a franchise extension or modification or a new
franchise for the Leased Property, and in any transfer of the Franchise
Agreement to Lessor or any Affiliate thereof or any other successor to Lessee
upon the termination of the Lease.
(b) Pursuant to the Management Agreement, Lessee shall, and
shall be entitled to, operate the Facility in accordance with Brand Standards.
(c) Lessor shall promptly furnish to Lessee any default
notices received by Lessor under any ground leases. Without the prior written
consent of Lessee, Lessor shall not modify any ground leases in a manner which
materially increases Lessee's obligations or which materially and adversely
affect Lessee's rights under this Lease.
ARTICLE XXXV
CAPITAL EXPENDITURES
35.1 Capital Expenditures.
(a) Commencing upon the Commencement Date, Lessor shall be
obligated to accrue the Capital Expenditures Reserve: provided, however, that as
long as the Submanagement Agreement is in effect, Lessor shall have no
obligation to accrue the Capital Expenditures Reserve based on the funding of
the F&E Reserve (as defined in the Submanagement Agreement) pursuant to Section
5.02 of the Submanagement Agreement. Upon written request by Lessee to Lessor
stating the specific use to be made and subject to the reasonable approval
thereof by Lessor, such funds shall be made available by Lessor to Lessee for
Capital Expenditures set forth in the Capital Budget; provided, however, that no
Capital Expenditures shall be used to purchase property (other than "real
property" within the meaning of Treasury Regulations Section 1.856-3(d)), to the
extent that doing so would cause the
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Lessor to recognize income other than "rents from real property" as defined in
Section 856(d) of the Code. Lessor's obligation shall be cumulative, but not
compounded, and any amounts that have accrued hereunder shall be payable in
future periods for such uses and in accordance with the procedures set forth
herein. Lessee shall have no interest in any accrued obligation of Lessor under
this SECTION 35.1(a) after the termination of this Lease. All Capital
Improvements shall be owned by Lessor subject to the provisions of this Lease.
(b) Except as specifically provided otherwise in SECTION
8.3(b), Lessor's obligation to make Capital Expenditures in respect to Capital
Improvements and to comply with the provisions of this Lease which may require
the availability of funds for Capital Improvements shall be limited to amounts
available in the Capital Expenditures Reserve and such additional amounts, if
any, as are set forth in the Approved Budget or as Lessor may agree to make
available in Lessor's sole discretion; provided, however, that if additional
Capital Expenditures are required to meet Emergency Situations, to comply with
Legal Requirements, or to comply with the Franchise Agreement or Brand
Standards, as applicable, Lessor shall make such amounts available. No
arbitration resulting from the failure of Lessor and Lessee to agree on the
Capital Budget shall increase Lessor's obligation for Capital Expenditures
beyond the amounts set forth in the immediately preceding sentence. Without
limiting Lessor's obligations under SECTION 35.1(a) with respect to amounts
accrued in the Capital Expenditures Reserve and whether or not reference is made
to this ARTICLE XXXV, to the extent that Lessee's obligations under this Lease
(including, without limitation, the obligations set forth in SECTIONS 7.2, 8.1,
8.2, 8.3 and 9.1 and in ARTICLE XXXV) are dependent upon the availability of
amounts for Capital Expenditures and Lessor fails to make such amounts available
therefor, such obligations of Lessee shall be correspondingly diminished.
(c) Lessor shall have sole authority with respect to the
implementation of all Capital Improvements made pursuant to the requirements of
the Capital Budget. Such authority shall extend both to the plans and
specifications (including matters of design and decor) and to the contracting
and purchasing of all labor, services and materials.
(d) Lessor and Lessee further agree that, while the
Submanagement Agreement is in effect, Lessor shall also be responsible for
funding: (i) to the extent required to be funded from sources other than the
FF&E Reserve, (as defined in the Submanagement Agreement) all expenditures
required to be funded under Section 5.02 of the Primary Management Agreement,
including, without limitation, the items set forth as Exhibit B-1 to the Primary
Management Agreement; and (ii) all expenditures authorized by SECTION 5.03 of
the Primary Management Agreement, including without limitation the items set
forth as Exhibit B-2 to the Primary Management Agreement.
(e) To secure Lessor's obligation to fund certain of the
expenditures referenced in SECTION 35.1(d)(i) above, Lessor agrees to fund a
separate escrow account, at the Commencement Date, as provided in SECTION 3.2.8
of the Settlement Agreement.
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ARTICLE XXXVI
LESSOR'S DEFAULT
36.1 Lessor's Default.
(a) It shall be a breach of this Lease if Lessor fails to
observe or perform any term, covenant or condition of this Lease on its part to
be performed and such failure continues for a period of thirty (30) days after
Notice thereof from Lessee, unless such failure cannot with due diligence be
cured within a period of thirty (30) days, in which case such failure shall not
be deemed a breach if Lessor proceeds within such thirty (30)-day period, with
due diligence, to cure the failure and thereafter diligently completes the
curing thereof. The time within which Lessor shall be obligated to cure any such
failure also shall be subject to extension of time due to the occurrence of any
Unavoidable Delay. If Lessor does not cure any such failure within the
applicable time period as aforesaid, Lessee may declare the existence of a
"LESSOR DEFAULT" by a second Notice to Lessor. Thereafter, subject to the
provisions of the following paragraph, Lessee may (but shall be under no
obligation at any time thereafter to (i) make such payment or perform such act
for the account and at the expense of Lessor or (ii) terminate this Lease and
recover its damages for such early termination. All sums so paid by Lessee and
all costs and expenses (including, without limitation, reasonable attorneys'
fees and court costs) so incurred, together with interest thereon at the Overdue
Rate from the date on which such sums or expenses are paid or incurred by Lessee
until the date paid by Lessor or offset by Lessee as expressly provided herein,
shall be paid by Lessor to Lessee on demand or Lessee may offset or counterclaim
such sums actually paid by Lessee against Rents or Other Charges due hereunder.
Except as expressly provided in this ARTICLE XXXVI or elsewhere in this Lease,
Lessee shall have no right to terminate this Lease for any Lessor Default and no
right, for any such Lessor Default, to offset or counterclaim against any rent
or other Charges due hereunder.
(b) Notwithstanding anything to the contrary contained in this
Lease, for the enforcement of any judgment (or other judicial decree) requiring
the payment of money by Lessor to Lessee by reason of any default by Lessor
under this Lease or otherwise, Lessee shall look solely to the estate and
property of Lessor in the Leased Property and to any proceeds on account of the
disposition thereof, including, without limitation, any sales or condemnation
proceeds, and to any insurance proceeds under any policies of insurance
maintained in accordance with this Lease which are paid on account of the same
circumstances as led to Lessee's judgment, it being intended that no other
assets of Lessor or any of Lessor's Affiliates shall be subject to levy,
execution, attachment or any other legal process for the enforcement or
satisfaction of any judgment (or other judicial decree) obtained by Lessee
against Lessor, except in the following cases: (i) any liability of Lessor for
its own gross negligence, willful misconduct or Environmental Liabilities caused
by affirmative actions of Lessor, (ii) any liability of Lessor for repayment to
Lessee upon the termination of this Lease of any excess payments of Percentage
Rent or Additional Charges for the last Lease Year or part thereof and (iii) any
liability of Lessor for the payment of a Termination Fee.
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ARTICLE XXXVII
ARBITRATION
37.1 Arbitration. Except as set forth in SECTION 37.2, in each case
specified in this Lease in which it shall become necessary to resort to
arbitration, such arbitration shall be determined as provided in this SECTION
37.1. The party desiring such arbitration shall give Notice to that effect to
the other party, and an arbitrator shall be selected by mutual agreement of the
parties, or if they cannot agree within thirty (30) days of such notice, by
appointment made by the American Arbitration Association ("AAA") from among the
members of its panels who are qualified and who have experience in resolving
matters of a nature similar to the matter to be resolved by arbitration.
37.2 Alternative Arbitration. In each case specified in this Lease for
a matter to be submitted to arbitration pursuant to the provisions of this
SECTION 37.2, Lessor shall be entitled to designate any nationally recognized
accounting firm with a hospitality division of which Lessor or an Affiliate of
Lessor is not a significant client to serve as arbitrator of such dispute within
fifteen (15) days after written demand for arbitration is received or sent by
Lessor. In the event Lessor fails to make such designation within such fifteen
(15) day period, Lessee shall be entitled to designate any nationally recognized
accounting firm with a hospitality division of which Lessor or an Affiliate of
Lessor is not a significant client to serve as arbitrator of such dispute within
fifteen (15) days after Lessor fails to timely make such designation. In the
event no nationally recognized accounting firm satisfying such qualifications is
available and willing to serve as arbitrator, and unless Lessor and Lessee
otherwise agree, the arbitration shall instead be administered as set forth in
SECTION 37.1.
37.3 Arbitration Procedures. In any arbitration commenced pursuant to
SECTIONS 37.1 or 37.2, a single arbitrator shall be designated and shall resolve
the dispute. The arbitrator's decision shall be binding on all parties and shall
not be subject to further review or appeal except as otherwise allowed by
applicable law. Upon the failure of either party (the "NON-COMPLYING PARTY") to
comply with his decision, the arbitrator shall be empowered, at the request of
the other party, to order such compliance by the non-complying party and to
supervise or arrange for the supervision of the non-complying party's obligation
to comply with the arbitrator's decision, all at the expense of the
non-complying party. To the maximum extent practicable, the arbitrator and the
parties, and the AAA if applicable, shall take any action necessary to insure
that the arbitration shall be concluded within ninety (90) days of the filing of
such dispute. The fees and expenses of the arbitrator shall be shared equally by
Lessor and Lessee except as otherwise specified above in this SECTION 37.3.
Unless otherwise agreed in writing by the parties or required by the arbitrator
or AAA, if applicable, arbitration proceedings hereunder shall be conducted in
the State. Notwithstanding formal rules of evidence, each party may submit such
evidence as each party deems appropriate to support its position and the
arbitrator shall have access to and right to examine all books and records of
Lessee and Lessor regarding the Facility during the arbitration.
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ARTICLE XXXVIII
TRADE-OUTS
38.1 Trade-outs. Lessee or Manager may arrange for and make trades of
goods or services (including, but not limited to, suite occupancy, food,
beverages, incidental charge items and taxes relating to any of the above)
furnished or to be furnished to others at the Hotel, for other goods or services
(including, but not limited to, advertising, air and ground transportation,
rental vehicles and taxes relating to any thereof) furnished or to be furnished
to or for the benefit of the Hotel. If the goods or services received in a
particular trade are exclusively for the use or benefit of the Hotel (and not
for any other use or benefit of Lessee or Manager or any other hotel or
activity), the usual charges for the goods or services given to the Hotel in
such trade shall be included in Gross Revenues and the same amount shall be
deemed contemporaneously expended as Expenses of the Hotel for such goods or
services received. If the goods or services received in a particular trade are,
to any extent, for the use or benefit of Lessee or the Manager or any other
hotel or activity (and not exclusively for the benefit of the Hotel), the usual
charges for the goods or services given by the Hotel in such trade by Lessee or
Manager shall be included in Gross Revenues, and to the extent the goods or
services so received by Lessee or Manager are used by or for the benefit of the
Hotel, the amount thereof shall be fairly and equitably allocated among the
Hotel and all other hotels or activities benefitting therefrom and the portion
thereof fairly and equitably allocable to the Hotel shall be an expense of the
Hotel. Notwithstanding the foregoing, the goods or services of the Hotel
furnished pursuant to this SECTION 38.1 must not extend beyond the term of this
Lease.
ARTICLE XXXIX
MISCELLANEOUS
39.1 Miscellaneous. Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Lessee or Lessor
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
is invalid or unenforceable, the remainder of this Lease and any other
application of such term or provisions shall not be affected thereby. If any
late charges or any interest rate provided for in any provision of this Lease
are based upon a rate in excess of the maximum rate permitted by applicable law,
the parties agree that such charges shall be fixed at and limited to the maximum
permissible rate. Neither this Lease nor any provision hereof may be changed,
waived, discharged or terminated except by a written instrument in recordable
form signed by Lessor and Lessee. All the terms and provisions of this Lease
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. The headings in this Lease are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Lease shall be governed by and construed in accordance with
the laws of the State, but not including its conflicts of laws rules. If any
payment required to be made pursuant to this Lease shall become due on a day
which is not a Business Day, such payment shall be made on the next succeeding
Business Day.
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39.2 Transition Procedures. Lessee shall, and shall cause Manager to,
cooperate in good faith to provide access and information to any prospective
purchaser or lessee of the Leased Property which may acquire the Leased Property
or lease it upon the expiration or termination of the Term. Upon any expiration
or termination of the Term, Lessor and Lessee shall do the following and, in
general, shall cooperate in good faith to effect an orderly transition of the
management or lease of the Facility. The provisions of this SECTION 39.2 shall
survive the expiration or termination of this Lease until they have been fully
performed. Nothing contained herein shall limit Lessor's or Lessee's (as
applicable) rights and remedies under this Lease if such termination occurs as
the result of an Event of Default or Lessor's Default.
(a) Transfer of Licenses. Upon the expiration or earlier
termination of the Term, Lessee shall use its best efforts to transfer to Lessor
or Lessor's designee all licenses, operating permits and other governmental
authorizations and all contracts, including contracts with governmental or
quasi-governmental entities, that may be necessary for the operation of the
Facility; provided, however, that the costs and expenses of any such transfer or
the processing of any such application shall be paid by Lessor or Lessor's
designee.
(b) Leases and Concessions. Lessee shall assign to Lessor or
Lessor's designee simultaneously with the termination of this Agreement, and the
assignee shall assume all leases, contracts, concession agreements and
agreements in effect with respect to the Facility then in Lessee's name. Lessee
shall assign any membership contracts to Lessor or its designee as provided in
SECTION 7.2(g).
(c) Books and Records. To the extent that Lessor has not
already received copies thereof, a copy of all books and records (including
computer records) for the Facility kept by Lessee pursuant to SECTION 3.6 shall
be promptly delivered to Lessor or Lessor's designee.
(d) Receivables and Payables, etc. Lessee shall be entitled to
retain all cash, bank accounts and house banks, and to collect all Gross
Revenues and accounts receivable accrued through the termination date. Lessee
shall be responsible for the payment of Rent, all operating expenses of the
Facility and all other obligations of Lessee accrued under this Lease as of the
termination date, and Lessor shall be responsible for all operating expenses of
the Facility accruing after the termination date. Lessor, at its option, may
purchase the Inventory from Lessee for its fair market value upon termination of
this Lease.
39.3 Waiver of Presentment, etc. Lessee waives all presentments,
demands for payment and for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance and waives
all notices of the existence, creation, or incurring of new or additional
obligations, except as expressly granted herein.
39.4 Standard of Discretion. In any provision of this Lease requiring
or permitting the exercise by Lessor or Lessee of such party's approval,
election, decision, consent, judgment, determination or words of similar import
(collectively, an "APPROVAL"),
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such Approval may, unless otherwise expressly specified in such provision, be
given or withheld in such party's sole, absolute and unreviewable discretion;
provided, however, that as long as the Submanagement Agreement is in effect and
an Approval relates to a matter which Lessee is required to approve under the
Primary Management Agreement, then such Approval shall not be unreasonably
withheld, delayed or conditioned. Any Approval which by the terms of this Lease
may not be unreasonably withheld shall also not be unreasonably delayed.
39.5 Action for Damages. In any suit or other claim brought by either
party seeking damages against the other party for breach of its obligations
under this Lease, the party against whom such claim is made shall be liable to
the other party only for actual direct damages and not for consequential,
punitive or exemplary damages.
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IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized representatives as of the date first above written.
LESSOR:
By: PATRIOT AMERICAN HOSPITALITY
PARTNERSHIP, L.P., a Delaware limited
partnership
By: PAH GP, Inc., its General Partner
By: ____________________________
Name: __________________________
Title: _________________________
LESSEE:
By: PATRIOT AMERICAN HOSPITALITY
OPERATING PARTNERSHIP, L.P., a Delaware
limited partnership
By: Wyndham International, Inc., a Delaware
corporation, its general partner
By: ____________________________
Name: __________________________
Title: _________________________
74
<PAGE> 81
Exhibit A
PROPERTY DESCRIPTION
EXHIBIT A - Page Solo
<PAGE> 82
Exhibit B
BASE RENT
$___________________ PER ANNUM
$___________________ PER MONTH
CPI: ________%
REVENUE PERCENTAGES AND BREAKDOWNS
FIRST TIER ROOM REVENUE PERCENTAGE: _________%
ANNUAL ROOM REVENUES FIRST BREAK POINT: $_________
SECOND TIER ROOM REVENUE PERCENTAGE: _________%
ANNUAL ROOM REVENUES SECOND BREAK POINT: $_________ (i.e., $_________
plus the Annual Room Revenues
First Break Point)
THIRD TIER ROOM REVENUE PERCENTAGE: _________%
FIRST TIER FOOD SALES PERCENTAGE: _________%
ANNUAL FOOD SALES BREAK POINT: $_________
SECOND TIER FOOD SALES PERCENTAGE: _________%
OTHER INCOME PERCENTAGE: _________%
EXHIBIT B - Page Solo
<PAGE> 83
Exhibit C
CAPITAL EXPENDITURES POLICY
A Capital Improvement for which an expenditure is a Capital Expenditure is an
investment in a readily identifiable facility which (1) is held for use or
income rather than for sale or conversion into goods or cash and (2) has a
useful service life in excess of three (3) years.
Capitalization Policy
If the cost of the capital addition is $2,500 or greater and the items acquired
have an expected service life of more than three (3) years, the expenditure is
capitalized. See "Maintenance and Repairs" for those expenditures which are
expenses without regard to the $2,500 guideline. If the item(s) acquired meet
the more than three (3)-year life criterion, but the total invoice cost is less
than $2,500, the expenditure is considered an expense item.
Replacement - Component Parts
If the estimated job or total invoice cost (including parts and labor) of any
particular item or series of items acquired with respect to one particular job
for replacement of the following major building components is under $2,500, the
expenditure is to be expensed to maintenance and repairs:
Heating Equipment - Pumps, boilers, heat exchangers, thermostats,
pressure gauges, alarm devices piping.
Plumbing Equipment - Pumps, meters, sprinkler and fire alarm system,
piping.
Air Conditioning Equipment - Compressors, condensors, motors, cooling
towers, evaporative coolers, piping.
Fire Prevention Equipment - Major fire system sprinklers, smoke
detectors.
Power - Transformer, conduits and boxes, panel boards, switches and
outlets.
Betterments
If the estimated job or total invoice cost is $2,500 or above, and the
expenditure(s) will enhance the value of and extend by at least three (3) years
the useful life of an asset previously capitalized, then the expenditure should
be capitalized.
Maintenance and Repairs
The following replacement expenditures are considered maintenance and repairs
and are not subject to the total invoice cost guideline of $2,500.
Repainting of Buildings, Pools, Park Areas (1)(5)
EXHIBIT C - Page 1 of 2
<PAGE> 84
Refinishing of Furniture (1)
Glass Replacement
Maintenance Service Contracts, such as Yard, Television, Elevator,
Swimming Pool
Wall Paper Vinyl (1)
Reupholstery of Furniture (1)
Replastering (1)
Replacement of Chain Locks, Key Blanks, Keys, Locks, Locksets. Locks
and locksets installed in new doors or offering substantial security
improvements should be capitalized if the invoice is over $2,500
Patching Parking Lot (2)
Roof Repairs (3)
Waterproofing of Lamp Globes and Lightbulbs
Section Replacement for Neon Signs
Caulking and Sealing
Chrome Fittings such as Faucets, Towel Bars, etc. (1)
Toilet and Toilet Seats
Stolen or Damaged Television
Small Parts for Equipment
Landscaping/Plants (4)
Clocks, Clock-Radios or Similar Small Items
1. Expenditures for exterior and interior painting, including caulking
and sealing of the building, wall paper, refinishing of furniture, replastering,
or reupholstering may be capitalized if:
(a) these expenditures are part of a major refurbishment
project, or
(b) the cost of these expenditures exceed $5,000 with
respect to any particular item or series of items
related to one particular job and enhance the value
of and extend the useful life of the asset by at
least three (3) years.
2. Repairing of parking lots, including resealing and resurfacing, will
be capitalized if the expenditure exceeds $5,000.
3. Replacement of the complete roof or complete section of the roof
(including laying a roof over an existing roof) will be capitalized if total
expenditure exceed $5,000 and it extends the useful life of the roof by at least
three (3) years.
4. If the landscaping is new or replacement of existing interior or
exterior landscaping, exceeds $5,000, is not seasonal landscaping (such as
seasonal flowers) and has a useful life of greater than one (1) year, the cost
of the landscaping can be capitalized.
5. Major overhauls to the pool which exceed $5,000 in cost and extend
the useful life of the asset by at least three (3) years.
All expense items will be expensed to M&R expense line items above GOP.
EXHIBIT C - Page 2 of 2
<PAGE> 1
Exhibit 10.6
FORM OF
MANAGEMENT AGREEMENT
by and between
[PATRIOT AMERICAN HOSPITALITY OPERATING PARTNERSHIP, L.P.]
(as "LESSEE")
and
IHC II, LLC
(as "Manager")
Dated as of __________________, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
MANAGEMENT OF THE HOTEL..................................................................................2
1.01 Acceptance of the Hotel.....................................................................2
1.02 Conversion of the Hotel.....................................................................2
1.03 Management Responsibilities.................................................................4
1.04 Chain Services..............................................................................8
1.05 Employees...................................................................................8
1.06 Lessee's Right to Inspect...................................................................9
1.07 Conditions to Take-Over of Hotel............................................................9
ARTICLE II
TERM....................................................................................................10
2.01 Term.......................................................................................10
2.02 Performance Termination....................................................................10
ARTICLE III
COMPENSATION OF MANAGER.................................................................................12
3.01 Management Fees............................................................................12
3.02 Operating Profit...........................................................................12
ARTICLE IV
ACCOUNTING MATTERS......................................................................................12
4.01 Accounting, Distributions and Annual Reconciliation........................................12
4.02 Books and Records..........................................................................13
4.03 Accounts, Expenditures.....................................................................14
4.04 Accounting for Conversion of Hotel.........................................................15
4.05 Business Plan..............................................................................15
4.06 Working Capital............................................................................17
4.07 Fixed Asset Supplies.......................................................................18
ARTICLE V
REPAIRS, MAINTENANCE AND REPLACEMENTS...................................................................18
5.01 Repairs and Maintenance Costs Which Are Expensed...........................................18
5.02 FF&E Reserve...............................................................................19
5.03 Capital Expenditures.......................................................................21
5.04 Ownership of Replacements..................................................................22
ARTICLE VI
INSURANCE, DAMAGE, CONDEMNATION, AND FORCE MAJEURE......................................................23
6.01 Insurance..................................................................................23
6.02 Owner's Option to Obtain Property Insurance................................................25
6.03 Damage and Repair..........................................................................26
6.04 Condemnation...............................................................................27
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
ARTICLE VII
TAXES...................................................................................................28
7.01 Real Estate and Personal Property Taxes....................................................28
ARTICLE VIII
MANAGEMENT OF THE HOTEL.................................................................................29
8.01 Ownership of the Hotel.....................................................................29
8.02 Mortgages..................................................................................30
8.03 Subordination, Non-Disturbance and Attornment..............................................30
8.04 No Covenants, Conditions or Restrictions...................................................32
8.05 Liens; Credit..............................................................................32
8.06 Amendments Requested by Mortgagee..........................................................33
ARTICLE IX
DEFAULTS................................................................................................34
9.01 Events of Default..........................................................................34
9.02 Remedies...................................................................................35
9.03 Additional Remedies........................................................................35
ARTICLE X
ASSIGNMENT AND SALE.....................................................................................36
10.01 Assignment.................................................................................36
ARTICLE XI
MISCELLANEOUS...........................................................................................37
11.01 Right to Make Agreement....................................................................37
11.02 Consents and Cooperation...................................................................37
11.03 Relationship...............................................................................38
11.04 Applicable Law.............................................................................38
11.05 [Intentionally Omitted]
11.06 Headings...................................................................................38
11.07 Notices....................................................................................38
11.08 Environmental Matters......................................................................39
11.09 Confidentiality............................................................................41
11.10 Projections................................................................................42
11.11 Actions to be Taken Upon Termination.......................................................42
11.12 Trademarks, Trade Names and Intellectual Property..........................................45
11.13 [Intentionally Omitted]
11.14 Waiver.....................................................................................46
11.15 Partial Invalidity.........................................................................46
11.16 Survival...................................................................................47
11.17 [Intentionally Omitted]....................................................................47
11.18 Negotiation of Agreement...................................................................47
11.19 Estoppel Certificates......................................................................47
11.20 System Standards...........................................................................47
11.21 Arbitration................................................................................48
11.22 Marriott Restricted Area Right of Termination
Manager agrees to exercise its rights under Section
11.22 of the Submanagement Agreement including, without
limitation, as to any termination of the Submanagement
Agreement pursuant to such Section 11.22, only as directed
from time to time by Lessee..............................................................49
11.23 Entire Agreement...........................................................................49
11.24 Expert Resolution Process..................................................................49
</TABLE>
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<TABLE>
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<S> <C>
ARTICLE XII
DEFINITION OF TERMS.....................................................................................50
12.01 Definition of Terms........................................................................50
</TABLE>
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Exhibit "A-1" Name and Location of Hotel
Manager
Take-Over Date
Term Expiration Date
Base Management Fee
Initial FF&E Reserve Balance
FF&E Reserve Contribution
Exhibit "B-1" Five-Year Plan
Exhibit "B-2" Additional Capital Expenditures
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MANAGEMENT AGREEMENT
This Management Agreement ("Agreement") is executed as of the ____ day
of __________, 1998 ("Effective Date"), by Patriot American Hospitality
Operating Partnership, L.P., a Delaware limited partnership with a mailing
address at 1950 Stemmons Freeway, Suite 6001, Dallas, Texas 75207 ("Lessee"),
and IHC II, LLC ("Manager"), a _________ limited liability company with a
mailing address at ________________________________.
R E C I T A L S :
A. Patriot American Hospitality Partnership, L.P., an Affiliate
thereof, or an entity in which Patriot American Hospitality Partnership, L.P. or
an Affiliate thereof ("Owner") is the owner of fee title to [ground lessee with
respect to Atlanta] the parcel of real property (the "Site") containing a hotel
building or buildings located at the address as set forth in Exhibit "A-1,"
together with a lobby, restaurants, meeting rooms, administrative offices, and
certain other amenities and related facilities (collectively, the "Hotel
Improvements" or the "Improvements"). The Site and the Hotel Improvements, in
addition to certain other rights, improvements, and personal property as more
particularly described in the definition of "Hotel" in Section 12.01 hereof, are
collectively referred to as the "Hotel."
B. Owner has entered into a lease (the "Lease") of the Hotel to Lessee.
C. The Hotel is presently operated as a Marriott Hotel pursuant to a
franchise agreement (the "Franchise Agreement") between Marriott International,
Inc., or one or its Affiliates, as franchisor and Interstate Hotels Corporation,
or one of its Affiliates, as franchisee, which franchisee interest has been
assumed by Manager.
D. Owner, Lessee, Marriott International, Inc. and Interstate Hotel
Company have previously entered into a settlement agreement (the "Settlement
Agreement") concerning the resolution of disputes among the parties, pursuant to
which this Agreement is being executed .
E. Owner, Lessee, Manager and Marriott (as defined below),
simultaneously with the execution of this Agreement and effective as of the
Take-Over Date, have entered into an Owner Agreement (the "Owner Agreement")
which sets forth certain rights and responsibilities among Owner, Lessee,
Manager and Marriott (as defined below).
F. Lessee desires to engage Manager effective as of the Take-Over Date
to manage and operate the Hotel and Manager desires to accept such engagement
upon the terms and conditions set forth in this Agreement.
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G. Immediately following the execution and delivery of this Agreement,
Manager intends to enter into a Submanagement Agreement with [Marriott Hotel
Services, Inc./Marriott International, Inc.] ("Marriott")pursuant to which
Manager shall delegate all of its rights and obligations with respect to the
management and operation of the Hotel to Marriott, and Lessee has consented to
such delegation pursuant to such Submanagement Agreement .
H. All capitalized terms used in this Agreement shall have the meaning
set forth in Article XII hereof.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and other good and valuable consideration, the receipt of which
is hereby acknowledged, Lessee and Manager agree as follows:
ARTICLE I
MANAGEMENT OF THE HOTEL
1.01 Acceptance of the Hotel
Manager represents that it is familiar with the condition and operation
of the Hotel and, subject to the provisions of the Agreement, Manager accepts
the Hotel "AS IS." Such acceptance is based on the assumption that the Hotel
will continue to be operated by Lessee in accordance with System Standards up to
the Take-Over Date. Such acceptance includes:
A. Manager's agreement to cause Marriott to hire all current
Hotel employees, except as provided in Section 1.02A;
B. Manager's acceptance of all hotel operating systems,
subject to conversion as provided in Section 1.02B;
C. Manager's acceptance of all existing service and supply
contracts and bookings;
D. Manager's acceptance of the Improvements and all FF&E,
Inventories, Fixed Asset Supplies, Softgoods and Case Goods, subject to Section
5.02, Section 5.03 and Exhibit A-1.
1.02 Conversion of the Hotel
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A. Based on interviews conducted prior to the Take-Over Date,
Manager shall cause Marriott to determine which members of the Hotel Executive
Committee will not be accepted by Marriott for employment with Marriott. In
addition, the parties acknowledge that Marriott will perform (i) drug-testing on
all persons applying for employment with Submanager, and (ii) SRI testing on all
managerial applicants. Manager and Marriott will jointly arrange that such
interviewing and such testing will occur on a schedule which will permit
Marriott to give Manager notice, at least thirty (30) days prior to the
Take-Over Date, as to which individuals have not been accepted for employment by
Marriott. In connection with the foregoing, Manager agrees that: (i) Manager
will cause Marriott to hire a sufficient number of the existing employees at the
Hotel to avoid the occurrence of a "closing" under the WARN Act; and (ii)
Manager will cause Marriott to hire at least eighty percent of the existing
managerial staff who apply for positions with Marriott. Lessee shall make
arrangements so that, prior to the Take-Over Date, the employment of all such
employees who are not accepted for employment by Marriott is terminated or that
such employees have been transferred to another location. All severance pay due
to such employees shall be paid by the employer who terminates them; provided,
however, that severance costs required to be paid for employees terminated by
Manager or Marriott will be treated as Deductions in accordance with the terms
of this Agreement. Lessee agrees to indemnify, defend and hold harmless Manager
and Marriott and their Affiliates (and their respective directors, officers,
shareholders, employees and agents) from any and all claims, causes of action,
costs, expenses and liabilities resulting from such termination of employment of
such employees and/or the failure of Manager to hire such employees (including,
without limitation, severance pay, wrongful discharge claims, claims and other
costs under the WARN Act, and claims and/or fines under other applicable Legal
Requirements) and/or resulting from the employment of such individuals prior to
such termination (including, without limitation, disability claims, vacation,
sick leave, wages, salaries and other benefits).
B. Prior to the Take-Over Date, Manager will cause Marriott to
install in the Hotel (at Lessee's cost) the Accounting, Payroll and Human
Resources Systems (both hardware and software) necessary for Marriott to operate
the Hotel. The parties estimate that (assuming that the Hotel has the RS-6000
computer system) the cost of such equipment will be approximately One Hundred
and Six Thousand Dollars ($106,000). Such amount is separate from and in
addition to the Initial FF&E Reserve Balance set forth in Exhibit A-1. Lessee
shall reimburse Manager for such costs within thirty (30) days after being
invoiced by Manager; if Lessee fails to do so, Manager shall have the right to
deduct such amounts from distributions to Lessee under Section 3.02.A.
C. Prior to the Take-Over Date, Manager and Marriott shall
have access to the Hotel at reasonable times in order to inspect Hotel and the
physical plant, to familiarize themselves with the systems and maintenance, to
review maintenance records and otherwise to perform its customary due diligence
prior to a take-over of a hotel; provided, however, that such access shall not
materially interfere with the operation of the Hotel. Lessee shall
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reasonably cooperate in good faith with such diligence activities and otherwise
with respect to the take-over of management of the Hotel.
D. Prior to and after the Take-Over Date, Lessee shall (and
shall cause Owner to) cooperate with Manager and Submanager in obtaining and
transferring such licenses, permits and approvals necessary for the operation of
the Hotel (subject to the provisions contained in Section 1.07.A.1).
1.03 Management Responsibilities
A. From and after the Take-Over Date, Manager shall, and
Lessee hereby authorizes and engages Manager to, supervise, direct and control
the management and operation of the Hotel in accordance with the terms and
conditions of this Agreement; provided, however, that Lessee acknowledges that
such supervision, direction and control will be delegated to and exercised by
Marriott pursuant to the Submanagement Agreement. During the Term, the Hotel
shall be known as a Marriott Hotel, with such additional identification
determined by Marriott as may be necessary to provide local identification.
B. Manager shall cause Marriott to manage the Hotel in
accordance with System Standards and shall, subject to the terms of this
Agreement, perform or cause Marriott to perform each of the following functions
(the costs and expenses of which shall be Deductions) with respect to the Hotel:
1. Recruit, employ, supervise, direct and discharge
the employees at the Hotel.
2. Establish prices, rates and charges for services
provided in the Hotel, including Guest Room rates.
3. Establish and revise, as necessary, administrative
policies and procedures, including policies and procedures for the control of
revenue and expenditures, for the purchasing of supplies and services, for the
control of credit, and for the scheduling of maintenance, and verify that the
foregoing procedures are operating in a sound manner.
4. Make payments on accounts payable and handle
collections of accounts receivable.
5. Arrange for and supervise public relations and
advertising, prepare marketing plans, and make available to the Hotel the
benefits of various marketing programs in use in the Marriott System as they may
exist from time to time, such as the Marriott Rewards Program.
6. Procure all Inventories and replacement of Fixed
Asset Supplies.
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7. Prepare and deliver interim accountings, annual
accountings, Annual Operating Statements, Building Estimates, FF&E Estimates,
Proposed Business Plans, and such other information as is required by this
Agreement and be available at reasonable times to discuss the above-listed items
as well as the operations at the Hotel generally with Owner in connection with
Owner's rights to receive and/or approve such items pursuant to the Lease.
8. Plan, execute and supervise repairs, maintenance,
and FF&E purchases at the Hotel.
9. Provide, or cause to be provided, risk management
services relating to the types of insurance required to be obtained or provided
by Manager under this Agreement.
10. Obtain and keep in full force and effect, either
in Owner's or Lessee's name, as may be required by applicable law, any and all
licenses and permits to the extent same is within the control of Manager (or, if
same is not within the control of Manager, Manager shall use due diligence and
reasonable efforts to obtain and keep same in full force and effect).
C. The operation of the Hotel from and after the Take-Over
Date shall be under the exclusive supervision and control of Manager which,
except as otherwise specifically provided in this Agreement, shall be
responsible for the proper and efficient operation of the Hotel. In fulfilling
its obligations under this Agreement, Manager shall act as a reasonable and
prudent manager of the Hotel, having regard for the status of the Hotel and
maintaining the System Standards. Manager shall have discretion and control in
all matters relating to management and operation of the Hotel, including,
without limitation, the following: charges for Guest Rooms, commercial space,
and services provided by the Hotel; food and beverage services; employment
policies; credit policies; granting of leases, subleases, licenses and
concessions for shops and businesses within the Hotel, provided that (i) the
term of any such lease, sublease, license or concession shall not exceed the
Term of this Agreement and (ii) no such lease, sublease, license or concession
shall be on a basis such that the rental or other amounts payable thereunder
would be based, in whole or in part, on either the net income or profits derived
by the business activities of such Lessee, Sublessee, Licensee or Concessionaire
or any other formula which would cause any portion of the rents payable by
Lessee to Owner under the Lease to fail to qualify as "rents from real property"
within the meaning of Section 856(d) of the Internal Revenue Code, as amended;
receipt, holding and disbursement of funds; maintenance of bank accounts;
procurement of Inventories (including initial Inventories), supplies and
services; payment of costs and expenses specifically provided for in this
Agreement or otherwise reasonably necessary for the proper and efficient
operation of the Hotel; and, generally, all activities necessary for operation
of the Hotel. Notwithstanding the foregoing, Manager agrees that it shall
consult with Lessee prior to the
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hiring of any General Manager of the Hotel by Marriott in connection with
Manager's consultation with Marriott on such hiring decision pursuant to the
Submanagement Agreement.
D. Manager will comply with and abide by or cause Marriott to
comply with and abide by all applicable Legal Requirements (except for certain
Legal Requirements which are Lessee's or Owner's responsibility under Section
5.03 and Section 11.08 hereof) pertaining to its operation of the Hotel,
including in connection with any drug testing or SRI testing of employees and
applicants. Lessee shall comply (or shall cause Owner to comply, as applicable)
with and abide by all applicable Legal Requirements pertaining to the Hotel
Improvements or to Owner's or Lessee's ownership interest in the Hotel
(including, without limitation, Lessee's or Owner's obligations under Sections
5.03 and 11.08 hereof). Either Owner, Lessee or Manager shall have the right,
but not the obligation, in its reasonable discretion, to contest or oppose, by
appropriate proceedings, any such Legal Requirements. The reasonable expenses of
any such contest of a Legal Requirement shall be paid from Gross Revenues as
Deductions.
E. Manager acknowledges that pursuant to the Settlement
Agreement, if the Submanagement Agreement is terminated either by Marriott upon
a default by Manager or by Manager, Owner and/or Lessee may be obligated to pay
to Marriott a Special Fee (as that term is defined in the Settlement Agreement)
and to secure an Approved Operator (as that term is also defined in the
Submanagement Agreement) which will assume the suspended Franchise Agreement.
Manager shall indemnify, defend and hold Owner and Lessee harmless from and
against all claims, loss, cost, liability and damage (including, without
limitation, attorneys' fees and expenses, and the cost of litigation) arising
from (i) any termination of the Submanagement Agreement resulting from a default
by Manager under the Submanagement Agreement other than a default caused by a
default by Lessee under this Agreement or (ii) any other termination of the
Submanagement Agreement by Manager without the prior written consent of Lessee.
In addition, Manager shall indemnify, defend and hold Owner and Lessee harmless
from and against all claims, loss, cost, liability and damage (including,
without limitation, attorneys' fees and expenses, and the cost of litigation)
(x) relating to any matter with respect to which Primary Manager is indemnified
by Marriott under the Submanagement Agreement and (y) any inaccuracy in the
certificate provided by Marriott with respect to Chain Services pursuant to
Section 1.04. Manager's obligations under this Section 1.03.E. shall survive the
termination of this Agreement.
F. Notwithstanding anything to the contrary contained in this
Agreement, Manager shall neither approve or otherwise give its consent nor allow
its approval or consent to be deemed given in any instance in which its approval
or consent is necessary or allowed under any of the following provisions of the
Submanagement Agreement, without first obtaining the approval or consent of
Lessee under this Agreement:
(a) Business Plan (Section 4.05)
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(b) Building Estimates (Section 5.03)
(c) FF&E Estimates (Section 5.02.C)
(d) Capital Expenditures in excess of FF&E Reserve (Section
5.02.D)
(e) Increases in deposits of FF&E Reserve (Section 5.02.E)
(f) Changes to 5-Year Plans (Section 5.02.A)
(g) Designations of arbitrators or Experts (Sections 11.21 and
11.24)
(h) Decision to restore or terminate in the event of Total
Casualty (Section 6.03)
(i) Approval of insurance companies (Section 6.01.A)
(j) Decision to obtain Owner property insurance (Section 6.02)
(k) Consent to Assignment or transfer of Submanager's interest
(Section 10.01)
(l) Audits of Annual Operating Statements (S.4.02)
(m) Agreement on any alternative Competitive Set or source of
information regarding the same received from Marriott
(definition of "Competitive Set" in S. 12.01)
Lessee and Manager acknowledge that (i) pursuant to the Lease Owner's
approval is required with respect to each of the foregoing matters and Lessee is
not entitled to approve or disapprove any of the foregoing matters without the
approval or disapproval of Owner and (ii) pursuant to the Owner Agreement Lessee
has appointed Manager as Lessee's agent for the purpose of obtaining such
approvals (or disapprovals) from Owner.
Lessee and Manager acknowledge that many of Manager's obligations
hereunder have been delegated to Marriott pursuant to a corresponding provision
in the Submanagement Agreement. Except as otherwise provided herein and without
in any way releasing Manager from its duty to perform hereunder, Lessee agrees
that it will accept the performance by Marriott on Manager's behalf of Manager's
obligations hereunder.
G. Manager shall use reasonable best efforts to ensure the
timely performance by Marriott of all of Marriott's obligations under the
Submanagement Agreement and shall not waive or excuse in any manner the timely
performance by Marriott of any material obligation to be performed by Marriott
under the Submanagement Agreement without the prior written consent of Lessee;
provided, however, that where Manager is required under the provisions of
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this Agreement to cause Marriott to take an action or refrain from taking an
action (as opposed to using reasonable best efforts or some other lesser
standard to cause Marriott to take such action or refrain from taking such
action), then the provisions of this sentence shall not modify such provisions
of this Agreement. Manager shall not enter into, and shall not allow, any
amendment, replacement, extension, renewal, termination (other than a
termination by Marriott in accordance with the terms of the Submanagement
Agreement) , surrender or other modification of the Submanagement Agreement
without the prior written consent of Lessee.
1.04 Chain Services
Commencing with the Take-Over Date and thereafter during the Term of
this Agreement, Manager shall cause Marriott to cause to be furnished to the
Hotel certain services (collectively referred to herein as "Chain Services")
that are furnished generally on a central, regional or other group basis to
other hotels in the Marriott System and which benefit such hotels such as: (i)
national sales office services; central training services; career development
and relocation of management personnel; central advertising and promotion
(including direct and image media and advertising administration); the Marriott
national reservations system services and the Marriott computer payroll and
accounting services; benefits administration; gift shop merchandise handling;
and (ii) such additional central, regional or other group services as are or may
be, from time to time, furnished for the benefit of hotels in the Marriott
System or in substitution for services now performed at individual hotels which
may be more efficiently performed on a group basis. The charges for Chain
Services shall include, as applicable, allocation of salaries, wages, and
overhead related to the employees of Marriott, or any Affiliate involved in
providing any of the Chain Services and shall be allocated on a fair basis among
all hotels receiving such services. At the time of the delivery of each Annual
Operating Statement, Manager shall cause Marriott to deliver to Manager a
certification executed by an officer of Marriott that (i) the allocation of
charges for Chain Services is consistent with GAAP and generally accepted hotel
practices, (ii) such charges are allocated among the hotels in the Marriott
System in a fair and equitable manner, and (iii) the method of allocation of
such expenses has not been changed since the date of this Agreement or, if they
have changed, advising Manager of the details of such change. Manager shall
promptly forward a copy of such certificate to Lessee.
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1.05 Employees
All personnel employed at the Hotel shall, at all times from and after
the Take-Over Date, be the employees of Manager or Marriott. Manager and
Marriott, with respect to the respective employees of each, shall have absolute
discretion with respect to all personnel employed at the Hotel, including,
without limitation, decisions regarding hiring, promoting, transferring,
compensating, supervising, terminating, directing and training all employees at
the Hotel, and, generally, establishing and maintaining all policies relating to
employment. Manager shall be permitted to allow Marriott to provide free
accommodations and amenities to its employees and representatives living at or
visiting the Hotel in connection with its management or operation of the Hotel
to the extent such provision of accommodations and amenities is customary with
System Standards. No person shall otherwise be given gratuitous accommodations
or services without prior approval of Lessee, except in accordance with usual
practices of the hotel and travel industry, and Marriott shall not grant such
approval under the Submanagement Agreement without the prior approval of Lessee.
1.06 Lessee's Right to Inspect
Owner and Lessee shall have access to the Hotel at any and all
reasonable times upon prior advance notice to the general manager of the Hotel
for the purpose of showing the Hotel to prospective purchasers, tenants or
Mortgagees.
1.07 Conditions to Take-Over of Hotel
A. The obligation of Manager to assume operation of the Hotel
hereunder shall be conditioned upon each of the following:
1. That Manager or Marriott has received, prior to
the Take-Over Date, all licenses, permits, and all other approvals necessary for
operation of the Hotel by Manager or Marriott (or valid transfers of such
licenses, etc., to Manager or Marriott); provided, however, that to the extent
such licences, permits and other approvals are held by Owner or Lessee and
Manager or Marriott can operate the hotel with such licenses, permits and other
approvals in the name of Owner or Lessee, then such licenses, permits and other
approvals shall remain in the name of Owner or Lessee, as applicable;
2. If required under Article VIII, that Manager,
Marriott and each Mortgagee have executed the "Subordination Agreement"
described in Section 8.03;
3. That the Initial FF&E Reserve Balance, as
described in Section 5.02.A, shall have been deposited in the FF&E Reserve.
4. That the Lessee has provided the necessary initial
Working Capital, as described in Section 4.06.
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B. Notwithstanding any other provision of this Agreement,
Manager shall have the right to terminate this Agreement, on thirty (30) days'
written notice to Lessee, if (i) the conditions to the take-over of the Hotel by
Manager which are listed in Section 1.07.A.1 and 2 have not been satisfied
within thirty (30) days after receipt of notice from Manager that such
conditions remain unsatisfied at the time Manager provides such notice (which
notice may be given by Manager at any time on or after the Take-Over Date), or
(ii) if the conditions to the takeover of the Hotel by Manager which are listed
in Section 1.07.A.3 and 4 have not been satisfied within ten (10) days after
receipt of notice from Manager that such conditions remain unsatisfied at the
time Manager provides such notice (which notice may be given by Manager at any
time on or after the Takeover Date). Any such termination shall not be exclusive
of any other rights or remedies of Manager under this Agreement, the Owner
Agreement or the Settlement Agreement. Notwithstanding the foregoing provisions
of this subsection B, Manager shall have no right to terminate this Agreement
unless Marriott has terminated the Submanagement Agreement.
ARTICLE II
TERM
2.01 Term
The term ("Term") of this Agreement shall begin on the
Take-Over Date and shall continue until the Term Expiration Date. Pursuant to
the terms of the Settlement Agreement, during the Term of the Submanagement
Agreement, the obligations of the parties under the Franchise Agreement shall be
suspended without penalty (except for the royalty fee provisions thereof, and
the royalty fees payable thereunder shall continue to be paid by Manager to
Marriott International, Inc.) and is of no force or effect until such time as
the Franchise Agreement may be reinstated pursuant to the provisions of Section
2.01.B of the Submanagement Agreement. Such royalty fee payments under the
Franchise Agreement shall be paid out of Gross Revenues, and Manager is hereby
authorized and directed to cause Marriott to make such payments, which shall be
treated as Deductions for all purposes.
2.02 Performance Termination
A. Subject to the provisions of Section 2.02.B below, Lessee
shall have the option to terminate this Agreement and to cause Manager to
terminate the Submanagement Agreement, if:
1. With respect to any two (2) Fiscal Years within
any three (3) Fiscal Year period (not including any portion of any Fiscal Year
prior to the expiration of the
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first (1st) full Fiscal Year after the Take-Over Date) Operating Profit is less
than the applicable Performance Termination Threshold; and
2. The Revenue Index of the Hotel during each of such
Fiscal Years (i.e. any two (2) Fiscals Years within three (3) Fiscal Year
period) is less than the Revenue Index Threshold.
Such option to terminate and to cause Manager to terminate the Submanagement
Agreement shall be exercised by serving written notice thereof on Manager no
later than sixty (60) days after the receipt by Lessee of the annual accounting
under Section 4.01.B hereof for the second of the two (2) Fiscal Years referred
to in Section 2.02.A.1. If Manager (and Marriott pursuant to Section 2.02.B of
the Submanagement Agreement) do not elect to avoid such Termination pursuant to
Section 2.02.B below, this Agreement shall terminate (and Manager shall cause
the Submanagement Agreement to terminate) as of the end of the fourth (4th) full
Accounting Period following the date on which Manager receives Lessee's written
notice of its intent to terminate this Agreement; provided that such period of
time shall be extended as required by applicable Legal Requirements pertaining
to the termination of the employment of the employees at the Hotel. Lessee's
failure to exercise its right to terminate this Agreement pursuant to Section
2.02.A with respect to any given Fiscal Year shall not be deemed an estoppel or
waiver of Lessee's right to terminate this Agreement (and to cause Manager to
terminate the Submanagement Agreement) with respect to subsequent Fiscal Years
to which this Section 2.02.A may apply.
B. Upon receipt of Lessee's written notice of Termination
under Section 2.02.A, Manager shall have the option, to be exercised within
sixty (60) days after receipt of said notice, to avoid such Termination by
electing (in a notice to Lessee) to waive the payment of the Base Management Fee
and by obtaining from Marriott a written waiver of the Base Management Fee under
the Submanagement Agreement (and a written waiver of the payment of franchise
fees under the Franchise Agreement) (in each case beginning as of the first day
of the next full Accounting Period after the date of such notice from Manager)
until such time as the total cumulative amount (the "Cumulative Waived Base
Fees") of such waived Base Management Fees and franchise fees equals the total
amount (the "Cure Payment") by which Operating Profit for each of the Fiscal
Years in question (i.e., the Fiscal Years referred to in Section 2.02.A.1) was
less than the Performance Termination Threshold. [In the case of Houston, the
following applies: Upon receipt of Lessee's written notice of Termination under
Section 2.02.A, Manager shall have the option, to be exercised within sixty (60)
days after receipt of said notice, to avoid such Termination by electing (in a
notice to Lessee) to pay an amount equal to the amount (the "Cure Payment") by
which Operating Profit for each of the Fiscal Years in question (i.e., the
Fiscal Years referred to in Section 2.02.A.1) was less than the Performance
Termination Threshold, and shall pay the Cure Payment within thirty (30) days of
providing such notice to Lessee.] In the event Manager makes a Cure Payment
pursuant to this Section 2.02.B, the Fiscal Years with respect to which such
Cure Payment was made shall thereafter not be treated, for purposes of
subsequent elections by Lessee
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pursuant to Section 2.02.A, as Fiscal Years in which the circumstances described
in Section 2.02.A.1 have occurred. If Manager exercises such option to make such
Cure Payment, then the foregoing Lessee's election to terminate this Agreement
under Section 2.02.A shall be canceled and of no force or effect with respect to
the two (2) Fiscal Years in question, and this Agreement shall not terminate.
Such cancellation, however, shall not affect the right of Lessee, as to each
subsequent Fiscal Year to which Section 2.02.A applies, to again elect to
terminate this Agreement pursuant to the provisions of Section 2.02.A. If
Manager does not exercise its option to make a Cure Payment as aforesaid, then
this Agreement and the Submanagement Agreement shall each be terminated as of
the date set forth in Section 2.02.A. Manager may not elect to make a Cure
Payment more than one (1) time during the Term hereof.
2.03 Termination Pursuant to Settlement Agreement; Automatic
Termination Upon Termination of Submanagement Agreement
Manager acknowledges that the Settlement Agreement provides for the
termination of this Agreement by Lessee in certain circumstances and in
connection therewith to cause Manager to terminate the Submanagement Agreement,
and Manager hereby consents to any such termination by Lessee in accordance with
the Settlement Agreement.
Notwithstanding anything to the contrary herein or in any other
document, upon any termination of the Submanagement Agreement for any reason
whatsoever, this Agreement shall automatically and immediately terminate and
neither Lessee nor Manager shall have any further liability hereunder except for
the payment of any outstanding amounts payable through the date of termination
and except for any obligations hereunder which expressly survive the termination
of this Agreement (including, without limitation, Manager's indemnity
obligations under Section 1.03.E).
ARTICLE III
COMPENSATION OF MANAGER
3.01 Management Fees
Manager shall be paid the Base Management Fee, which the parties
acknowledge is the amount payable as Base Management Fee under the Submanagement
Agreement and the franchise or royalty fees payable under the suspended
Franchise Agreement, and such amounts therefore shall be retained by Marriott
from Gross Revenues pursuant to the Submanagement Agreement.
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3.02 Operating Profit
Operating Profit shall be distributed to Lessee in accordance with
Article IV.
ARTICLE IV
ACCOUNTING MATTERS
4.01 Accounting, Distributions and Annual Reconciliation
A. Manager agrees that it shall exercise its rights under the
Submanagement Agreement to cause Marriott to institute (as soon as reasonably
practicable after the Take-Over Date, but in no event more than sixty (60) days
after the Take-Over Date) cash management protocols at the Hotel in order that
Marriott will distribute to an account designated and owned by Primary Manager
on a daily basis (to the extent possible, subject to holidays, banking holidays,
and other days in which account transfers cannot be effected by banks) all
amounts in the Operating Accounts that are in excess of the Reasonable Amount of
Working Capital and amounts due Submanager. During the up to 60 day period when
such daily sweep is being implemented, Manager shall cause Marriott to sweep
weekly to Primary Manager's account on a manual basis. Amounts in such account
of Primary Manager received from Marriott shall be transferred to an account
designated and owned by Lessee within one (1) business day of receipt by Manager
(to the extent possible, subject to holidays, banking holidays, and other days
in which account transfers cannot be effected by banks). Within twenty (20) days
after the close of each Accounting Period, Manager shall deliver an interim
accounting (the "Accounting Period Statement") to Lessee showing Gross Revenues,
Deductions, Operating Profit, and applications and distributions thereof for the
preceding Accounting Period.
B. Calculations and payments of the Base Management Fee, and
distributions of Operating Profit made with respect to each Accounting Period
within a Fiscal Year shall be accounted for cumulatively. Within seventy-five
(75) days after the end of each Fiscal Year, Manager shall deliver to Lessee a
statement (the "Annual Operating Statement") in reasonable detail summarizing
the operations of the Hotel for the immediately preceding Fiscal Year and a
certificate of Manager's chief accounting officer certifying that, to the best
of his or her knowledge, such Annual Operating Statement is true and correct.
The parties shall, within five (5) business days after Lessee's receipt of such
Annual Operating Statement, make any adjustments, by cash payment, in the
amounts paid or retained for such Fiscal Year as are needed because of the final
figures set forth in such Annual Operating Statement. Such Annual Operating
Statement shall be controlling over the preceding Accounting Period Statements.
No adjustments shall be made for any Operating Loss in any preceding Fiscal
Year.
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C. To the extent there is an Operating Loss for any Accounting
Period, additional funds in the amount of any such Operating Loss shall be
provided by Lessee within thirty (30) days after Manager has delivered written
notice thereof to Lessee. If Lessee does not so fund such Operating Loss within
the thirty (30) day time period, Manager shall have the right (without affecting
Manager's other remedies under this Agreement) to withdraw an amount equal to
such Operating Loss from future distributions of funds otherwise due to Lessee.
4.02 Books and Records
Books of control and account pertaining to operations at the Hotel
shall be kept on the accrual basis and in all material respects in accordance
with the Uniform System of Accounts. Upon request of Lessee from time to time,
Manager shall exercise its rights under the Submanagement Agreement to examine
Marriott's records with respect to the operation of the Hotel, including as to
specific matters requested by Lessee, and shall report the results of such
examinations to Lessee. If Lessee desires, at its own expense, to audit,
examine, or review the Annual Operating Statement, Lessee shall notify Manager
in writing within sixty (60) days after receipt of such Annual Operating
Statement of its intention to audit, whereupon such audit shall begin no sooner
than thirty (30) days and no later than sixty (60) days after Manager's receipt
of such notice. Pursuant to the Lease, Owner has the right to conduct such
audit, and Primary Manager shall allow Ower to conduct or otherwise control all
aspects of any such audit of the Annual Operating Statement and Marriott's
records with respect thereto. Such audit shall be completed within ninety (90)
days after commencement thereof. If Lessee does not request such an audit, then
such Annual Operating Statement shall be deemed to be conclusively accepted by
Lessee as being correct, and Lessee shall have no right thereafter, except in
the event of fraud by Manager or Marriott, to question or examine the same. If
any audit discloses an understatement of any amounts due Lessee, Manager shall
promptly pay Lessee such amounts found to be due, plus interest thereon (at the
Prime Rate plus one percent (1%) per annum) from the date such amounts should
originally have been paid. If any audit discloses that Manager has not received
any amounts due it, Lessee shall pay Manager such amounts, plus interest thereon
(at the Prime Rate plus one percent (1%) per annum) from the date such amounts
should originally have been paid. Any dispute concerning the correctness of an
audit shall be settled by arbitration, in accordance with Section 11.21.
Notwithstanding anything to the contrary contained in this Agreement, at the
request of Lessee Manager shall exercise its rights under the Submanagement
Agreement to give the auditors (which may be Owner's auditors) the right upon
reasonable advance notice to conduct preliminary audit procedures prior to the
end of a Fiscal Year in preparation for the annual audit outlined above (e.g.,
such auditors would have the right to audit during the fourth quarter of a
Fiscal Year the first three quarters of such Fiscal Year), and Manager shall
exercise its rights under the Submanagement Agreement to provide access to the
books and control of account for the Hotel for such purpose. Manager agrees to
retain all accounting records for each Fiscal Year for at least three (3) years
after the expiration of such Fiscal Year.
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4.03 Accounts, Expenditures
A. Manager shall exercise its rights under the Submanagement
Agreement to insure that all funds derived from operation of the Hotel shall be
deposited on a daily basis (to the extent possible, subject to holidays, banking
holidays and other days in which deposits to banks cannot be effected) by
Marriott in bank accounts (the "Operating Accounts") in a bank or banks
designated by Marriott, subject to Lessee's reasonable approval. Withdrawals
from said Operating Accounts shall be made solely by representatives of Marriott
whose signatures have been authorized pursuant to the Submanagement Agreement.
Manager shall exercise its rights under the Submanagement Agreement to cause
Marriott to assume the responsibilities of a fiduciary with respect to
Marriott's handling of Lessee's funds which are derived from the operation of
the Hotel. Reasonable petty cash funds shall be maintained at the Hotel.
B. All payments contemplated hereunder or under the
Submanagement Agreement to be made from the Operating Accounts, petty cash
funds, or from the FF&E Reserve (in accordance with Section 5.02) shall be made
in accordance with the terms hereof and the Submanagement Agreement. Manager
shall not be required to make any advance or payment with respect to the Hotel
except out of such funds, and Manager shall not be obligated to incur any
liability or obligation with respect to the Hotel without assurances that the
necessary funds for the discharge thereof will be provided by Lessee. In any
event, if any such liability or obligation is incurred by Manager with respect
to the Hotel, Manager shall have the option to deduct such amounts from Lessee's
share of Operating Profit if Lessee has not fully reimbursed Manager for said
amounts within ten (10) days after Lessee's receipt of notice from Manager that
said amounts are due.
C. Debts and liabilities incurred by Manager as a result of
its operation and management of the Hotel pursuant to the terms hereof, whether
asserted before or after Termination, will be paid by Lessee to the extent funds
are not available for that purpose from Gross Revenues. The provisions of this
Section 4.03 C shall survive Termination.
4.04 Accounting for Conversion of Hotel
A. It shall be a general principle in the accounting for the
Hotel that all liabilities (including, without limitation, all
Previously-Accrued Payables) incurred prior to the Take-Over Date, or properly
allocated to the period prior to the Take-Over Date under generally accepted
accounting principles, shall be paid by Lessee from its own funds, and not from
Gross Revenues nor from the FF&E Reserve. Lessee agrees to indemnify, defend and
hold Manager, Marriott and their respective Affiliates (and their respective
directors, officers, shareholders, employees and agents) harmless from and
against all claims, causes of action, costs, expenses and damages arising from
such liabilities.
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B. As a convenience to the Lessee, Manager agrees to cause
Marriott to apply any Previously-Accrued Receivables which Marriott receives at
the Hotel to pay those Previously-Accrued Payables which Lessee has confirmed in
writing to Manager. Manager shall cause Marriott to use commercially reasonable
procedures to collect such Previously- Accrued Receivables, but neither Manager
nor Marriott shall not be obligated to institute any legal actions with respect
to any Previously-Accrued Receivables. If the Previously-Accrued Payables exceed
the Previously-Accrued Receivables, Lessee shall be responsible for the payment
of such excess. Manager shall exercise its rights under the Submanagement
Agreement to cause any surplus of the Previously-Accrued Receivables received by
Marriott or Manager over such Previously-Accrued Payables to be promptly
remitted by Marriott or Manager to Lessee.
C. As of the Take-Over Date, the cash on hand at the Hotel
shall be deposited in one of the Operating Accounts set up by Marriott in
accordance with Section 4.03, and shall be treated as part of the Working
Capital described in Section 4.06. The term "cash on hand" shall not be deemed
to include amounts remaining in the FF&E Reserve which was maintained by Lessee.
4.05 Business Plan
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A. Manager shall submit to Lessee for its approval (which
shall not be unreasonably withheld or delayed), at least forty-five (45) days
prior to the beginning of each Fiscal Year which begins after the Take-Over
Date, a preliminary draft (the "Proposed Business Plan") of the budget of the
estimated financial results of the operation of the Hotel during the next Fiscal
Year as prepared by Marriott pursuant to the Submanagement Agreement. Lessee's
approval shall be deemed to have been given if Manager has received no notice
from Lessee to the contrary within forty-five (45) days after Lessee's receipt
of such Proposed Business Plan. Such Proposed Business Plan shall project the
estimated Gross Revenues, departmental profits, Deductions, and Operating Profit
for the forthcoming Fiscal Year for the Hotel. Manager shall exercise its rights
under the Submanagement Agreement to insure that in preparing the Proposed
Business Plan for each Fiscal Year, Marriott's goal will be the maximization of
the long-term Operating Profit of the Hotel, in keeping with System Standards
and the general standards of the hotel industry for similar properties. If there
are material items in any given Proposed Business Plan which have been budgeted
at significantly different amounts from the amounts actually experienced (or
projected) for the same items in the preceding Fiscal Year, Manager agrees to
take reasonable steps to ensure that, at Lessee's request, qualified personnel
from Marriott's staff are available at the Hotel to explain these differences to
Manager and Owner (pursuant to Owner's rights under the Lease and the Owner
Agreement). A meeting (or meetings) for such purpose shall be held, at the
Hotel, at Lessee's request, within a reasonable period of time after the
submission to Lessee of the Proposed Business Plan. Pursuant to Owner's right to
approve the Proposed Business Plan pursuant to the Lease, Owner shall have the
right to participate in such meeting. Manager will exercise its rights under the
Submanagement Agreement to insure that Marriott will at all times give good
faith consideration to Manager's and Owner's suggestions regarding any Proposed
Business Plan, and in any event each Proposed Business Plan is subject to the
approval of Lessee as set forth in Section 4.05.B.
B. Lessee shall not be entitled to withhold its approval of
any Proposed Business Plan based on its objection to: (i) Marriott's reasonable
projections of either Gross Revenues or the components thereof; (ii) projected
costs and expenses which are "system charges" ( that is, costs and expenses
which are generally uniform throughout the Marriott System, such as: the charges
for Chain Services; the costs of the Marriott frequent guest program or, if
applicable, the "Marriott Rewards Program" and other chain-wide marketing
programs; employee benefits and other compensation programs); (iii) costs and
expenses which are not within the control of either Owner, Lessee, Manager or
Marriott such as Impositions and the cost of utilities; or (iv) increases in
projected costs and expenses of operating the Hotel, which increases are
primarily caused by projected increases in Gross Revenues. The approval of
Lessee (as set forth in the first sentence of Section 4.05.A) shall not be
required if, and to the extent that, the Proposed Business Plan for a given
Fiscal Year is, in all material respects, the same as the Proposed Business Plan
for the preceding Fiscal Year, as adjusted by the GDP Deflator; provided,
however, that in any event (x) the FF&E Reserve expenditures and Capital
Expenditures components of such Proposed Business Plan shall be subject to
Lessee's approval and (y) if there were, in the prior Fiscal Year,
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expenditures from the FF&E Reserve or Capital Expenditures which affect
operating costs or revenues, then the Proposed Business Plan shall be subject to
the approval of the Lessee as set forth in Section 4.05.A. If Lessee and Manager
fail to mutually agree on the Proposed Business Plan within sixty (60) days
after the submission to Lessee of the Proposed Business Plan, as described in
the first sentence of Section 4.05.A, either party shall have the right to cause
to be submitted to the Expert Resolution Process under the Submanagement
Agreement the issue of whether or not the Proposed Business Plan prepared by
Marriott is unreasonable, given the goals which are set forth in the fourth
sentence of Section 4.05.A. Based on Owner's right to approve any Proposed
Business Plan pursuant to the Lease, Owner shall have the right to participate
in such Expert Resolution Process, and the result of such Expert Resolution
Process shall be binding on Lessee and Owner. While such determination by the
Expert is pending, Manager shall cause Marriott to operate the Hotel, in all
material respects, based on the Business Plan for the preceding Fiscal Year (as
adjusted by the GDP Deflator), with adjustments for those items over which there
is no disagreement between Lessee and Manager and Marriott, and with adjustments
for those items listed in clauses (i), (ii), (iii), and (iv) above. The Proposed
Business Plan, as approved by Lessee (or deemed approved pursuant to the Expert
Resolution Process), is herein referred to as the "Business Plan".
C. With respect to the "stub year" (if any) immediately
following the TakeOver Date, Manager shall submit the Proposed Business Plan to
Lessee by no later than thirty (30) days prior to the Take-Over Date.
D. Manager shall exercise its rights under the Submanagement
Agreement to cause Marriott to diligently operate the Hotel in accordance with
the Business Plan. It is understood, however, that the Business Plan is an
estimate only and that unforeseen circumstances such as the costs of labor,
material, services and supplies, casualty, operation of law, or economic and
market conditions, may make adherence to the Business Plan impracticable, and
Manager shall be entitled to depart therefrom due to causes of the foregoing
nature. In the event that Manager determines that circumstances require that
there will be material changes in the Business Plan, Manager shall so notify
Lessee, and, as to any components of a Business Plan over which Lessee has
approval rights under this Agreement, Lessee shall have the right to reasonably
approve such proposed material changes. Lessee's approval shall be deemed to
have been given if Manager has received no notice from Lessee to the contrary
within twenty (20) days after Lessee's receipt of such notice of proposed
material changes in the Business Plan.
E. Manager shall provide to Lessee with fifteen (15) days
after the expiration of each fiscal quarter a reforecast of the Business Plan
for such Fiscal Year prepared by Marriott pursuant to the Submanagement
Agreement.
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4.06 Working Capital
A. On or prior to the Take-Over Date, Lessee shall provide
Manager with initial Working Capital for the Hotel in the amount of One Thousand
Two Hundred Fifty Dollars ($1,250) per guest room, as adjusted by the GDP
Deflator, per Guest Room, less cash on hand at the Hotel as of the Take-Over
Date. If Lessee fails to provide any Working Capital as required under this
Section 4.06.A, Manager shall have the right (after first giving Lessee ten (10)
days written notice thereof) to deduct the required amounts from Gross Revenues.
B. Lessee shall, from time to time during the Term, promptly,
but no later than thirty (30) days after written request by Manager, advance any
additional funds, over and above those required pursuant to Section 4.06.A,
necessary to maintain a Reasonable Amount of Working Capital. If Lessee does not
so fund additional Working Capital within the said thirty (30) day time period,
Manager shall have the right (without affecting Manager's other remedies under
this Agreement) to withdraw an amount equal to the funds required to maintain a
Reasonable Level of Working Capital from future distributions of funds otherwise
due to Lessee or to allow Marriott to withdraw such amount from funds due
Manager under the Submanagement Agreement. All funds so advanced for Working
Capital shall be utilized by Marriott for the purposes set forth in the
Submanagement Agreement pursuant to cash management policies established for the
Marriott System. Upon Termination, Manager shall, except as otherwise provided
in this Agreement, return the outstanding balance of the Working Capital to
Lessee.
4.07 Fixed Asset Supplies
Lessee shall, within thirty (30) days after request by Manager, provide
funds that are necessary to increase the level of Fixed Asset Supplies to levels
determined by Manager, in its good faith judgment, to be necessary to satisfy
the needs of the Hotel as its operation may, from time to time, require. The
cost of Fixed Asset Supplies consumed in the operation of the Hotel shall
constitute a Deduction. Fixed Asset Supplies shall remain the property of Lessee
throughout the term of the Agreement and upon Termination (except for those
Fixed Asset Supplies which are purchased by Marriott pursuant to Section
11.11.E).
4.08 Litigation
Submanager shall give notice to Primary Manager from time to time of
any material litigation affecting the Hotel, together with such additional
information within the possession or control of Submanager or the applicable
insurance carrier as Primary Manager may reasonably request.
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ARTICLE V
REPAIRS, MAINTENANCE AND REPLACEMENTS
5.01 Repairs and Maintenance Costs Which Are Expensed
Manager shall cause Marriott to maintain the Hotel in good repair and
condition, and shall make or cause to be made such routine maintenance, repairs
and minor alterations as it determines are necessary for such purposes. The
phrase "routine maintenance, repairs, and minor alterations" as used in this
Section 5.01 shall include only those which are normally expensed under
generally accepted accounting principles. The cost of such maintenance, repairs
and alterations shall be paid from Gross Revenues (and not from the FF&E
Reserve) and shall be treated as a Deduction in determining Operating Profit.
5.02 FF&E Reserve
A. Manager shall cause Marriott to establish a reserve account
(the "FF&E Reserve"), in a bank or similar institution reasonably acceptable to
both Manager and Lessee, to cover the cost of: (i) replacements, renewals and
additions to the FF&E at the Hotel; and (ii) Special Capital Expenditures.
Withdrawals from the FF&E Reserve shall be made solely by representatives of
Marriott whose signatures have been authorized. Lessee covenants that, as of the
Take-Over Date, the dollar amount in the FF&E Reserve shall be no less than the
Initial FF&E Reserve Balance. If Lessee fails to provide the dollar amount in
the FF&E Reserve in an amount no less than the Initial FF&E Reserve Balance as
required under this Section 5.02.A, Marriott shall have the right (after first
giving Lessee ten (10) days written notice thereof) to deduct the required
amounts from Gross Revenues. In addition, Lessee covenants that the Five-Year
Plan attached hereto as Exhibit "B-1" shall be implemented, subject to any
mutually-approved changes, as Special Capital Expenditures from the FF&E
Reserve.
B. During the Term of this Agreement, subject to the
provisions of subsection E, below, Lessee shall transfer into the FF&E Reserve
an amount set forth on Exhibit "A-1" (except to the extent that the Five-Year
Plan sets forth different percentage(s) applicable to certain periods in the
Term, in which event such percentage(s) in the Five-Year Plan shall be
controlling during such periods) for each such Accounting Period. Transfers into
the FF&E Reserve shall be made at the time of each interim accounting described
in Section 4.01 hereof. All amounts transferred into the FF&E Reserve pursuant
to this Section 5.02.B shall be paid from Gross Revenues as Deductions.
C. Manager shall cause Marriott to prepare an annual estimate
(the "FF&E Estimate") of the expenditures necessary for (1) replacements,
renewals and additions to the FF&E of the Hotel, and (2) Special Capital
Expenditures, during the ensuing Fiscal Year and shall deliver the FF&E Estimate
to Lessee for its approval (which shall not be unreasonably
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withheld or delayed), at the same time as Manager submits the Proposed Business
Plan described in Section 4.05.A. The FF&E Estimate shall also indicate the
estimated time schedule for making such replacements, renewals, and additions.
In preparing the FF&E Estimate for each Fiscal Year, Manager's goal will be to
maintain the Hotel in accordance with System Standards and the general standards
of the hotel industry for similar properties. Lessee shall not be entitled to
withhold its approval of any FF&E Estimate based on its objection to: (i) items
already agreed upon in the Five-Year Plan; (ii) costs and expenses which are
consistent throughout the Marriott System for similarly situated hotels (such as
periodic hard and soft good replacement schedules); (iii) costs and expenses of
items that fall within the "under $25,000" category of expenditures (namely,
that a given order or related series of orders for FF&E purchases is less than
$25,000) that are characterized as such in the FF&E Estimate; or (iv) costs and
expenses of items that are introduced into the Marriott System as part of System
Standards. If Lessee and Manager fail to mutually agree on the FF&E Estimate
within forty-five (45) days after the submission to Lessee, Lessee shall have
the right to cause Manager to submit to the Expert Resolution Process pursuant
to the Submanagement Agreement the issue of whether or not Marriott's proposed
FF&E Estimate is unreasonable, given the goals which are set forth in the third
sentence of this Section 5.02.C. While such determination by the Expert is
pending, Manager shall cause Marriott to operate the Hotel, in all material
respects, based on the FF&E Estimate for the preceding Fiscal Year (as adjusted
by the GDP Deflator), with adjustments for those items over which there is no
disagreement between Lessee and Manager, and for those items listed above over
which Lessee has no right of approval.
D. Manager shall, consistent with the applicable FF&E
Estimate, from time to time cause Marriott to make such (1) replacements,
renewals and additions to the FF&E of the Hotel, and (2) Special Capital
Expenditures, as Manager deems necessary, up to the balance in the FF&E Reserve.
No expenditures will be made that are in excess of the FF&E Reserve without the
approval of Lessee and Manager shall cause Marriott to diligently operate the
Hotel in accordance with the FF&E Estimate approved (or deemed approved through
the Expert Resolution Process) by Lessee, provided that, to the extent not
included in the applicable FF&E Estimate or not otherwise approved by Lessee,
Marriott shall be allowed to use the funds in the FF&E Reserve for expenditures
deemed reasonably necessary by Marriott to repair or correct any condition on or
about the Hotel which (i) constitutes a violation of any applicable Legal
Requirement which imposes liability or potential liability on Marriott, or (ii)
presents a threat to life or property of Marriott or any guest, employee or
invitee on or about the Hotel; provided, however, that Manager shall cause
Marriott to give notice to Manager and Manager shall give notice to Lessee of
any such expenditure made by Marriott reasonably promptly following such
expenditure. At the end of each Fiscal Year, any amounts remaining in the FF&E
Reserve shall be carried forward to the next Fiscal Year. Proceeds from the sale
of FF&E no longer necessary to the operation of the Hotel shall be added to the
FF&E Reserve. The FF&E Reserve will be kept in an interest-bearing account, and
any interest which accrues thereon shall be retained in the FF&E Reserve.
Neither (1) proceeds from the disposition of FF&E, nor (2) interest which
accrues on amounts held in the FF&E Reserve,
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shall (a) result in any reduction in the required transfers to the FF&E Reserve
set forth in subsection B above, nor (b) be included in Gross Revenues.
E. As the Hotel ages, the percentages of Gross Revenues which
are set forth in Section 5.02.B may not be sufficient to keep the FF&E Reserve
at the levels necessary to make the replacements, renewals, and additions to the
FF&E of the Hotel, or to make the Special Capital Expenditures, which are
required to maintain the Hotel in accordance with the System Standards. If
Marriott gives notice to Manager pursuant to the Submanagement Agreement that it
reasonably believes that the funding of the FF&E Reserve (with respect to the
following Fiscal Year or any subsequent Fiscal Year) will not be adequate to
maintain the Hotel in accordance with System Standards, Manager shall give
notice to Lessee of a proposed increase in the annual percentage in Section
5.02.B to provide the additional funds required, which increase in the annual
percentage shall require the approval of Lessee. If Lessee and Manager fail to
agree on a requested increase in the annual percentage Section 5.02.B within
forty-five (45) days after the submission to Lessee, Lessee shall have the right
to cause Manager to submit to the Expert Resolution Process under the
Submanagement Agreement the issue of whether or not Marriott's proposed increase
in the annual percentage is reasonable. Pursuant to the Owner Agreement and
Owner's right to approve any such increase under the Lease, Owner shall have the
right to participate in any such Expert Resolution Process. Until such time as
an increase in the annual percentage in this Section 5.02.B has been approved
(or deemed approved through the Expert Resolution Process) by Lessee, the
reserve set forth in this Section 5.02.B (as the same may have been previously
increased pursuant to the procedures set forth in Section 5.02.E) shall continue
to apply. Notwithstanding the foregoing, in the event, the FF&E Reserve is not
increased through the procedures described in this Section 5.02 E, and such
failure shall result in Marriott being unable to maintain the Hotel in
accordance with the System Standards, Manager may, on sixty (60) days written
notice to Lessee, terminate this Agreement if Marriott terminates the
Submanagement Agreement. Finally, the placing of any restrictions on the
expenditure by Marriott of funds from the FF&E Reserve other than as set forth
in this Section 5.02 (including, without limitation, restrictions resulting from
(i) any Litigation involving Owner, Lessee, Manager, or the Hotel, or (ii) a
Foreclosure) shall entitle Manager, on sixty (60) days written notice to Lessee,
to terminate this Agreement if, as a result thereof, Marriott has terminated the
Submanagement Agreement.
F. Manager covenants that it shall exercise its rights under
the Submanagement Agreement to cause Marriott to utilize amounts in the FF&E
Reserve only for replacements, renewals and additions to the FF&E at the Hotel
and Special Capital Expenditures, as provided in the foregoing provisions of
this Section 5.02, and that such amounts are not subject to setoff for any other
amounts alleged by Submanager to be owed by Primary Manager, Lessee or Owner to
Submanager.
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5.03 Capital Expenditures
A. Manager shall cause Marriott to prepare an annual estimate
(the "Building Estimate") of all Capital Expenditures. Upon receiving the
Building Estimate from Marriott, Manager shall submit the Building Estimate to
Lessee for its approval at the same time as Manager submits the Proposed
Business Plan described in Section 4.05.A. Manager shall not allow Marriott to
make any Capital Expenditures without the prior written Approval of Lessee,
unless otherwise permitted herein. Lessee shall cause Owner to make Capital
Expenditures to allow the completion of the work described on Exhibit "B-2"
hereto at Owner's sole cost and expense and not from Gross Revenues or the FF&E
Reserves.
B. Notwithstanding the provisions of Section 5.03A, Manager
shall cause Marriott to take appropriate remedial action (including making any
necessary Capital Expenditures) without receiving Lessee's prior consent in the
following circumstances: (i) if there is an emergency threatening the Hotel, its
guests, invitees or employees; or (ii) if the continuation of the given
condition would subject Manager and/or Owner and/or Lessee to civil or criminal
liability, and if Lessee has either failed to remedy the situation or has failed
to take appropriate legal action to stay the effectiveness of any applicable
Legal Requirement. Manager shall cooperate with Lessee in the pursuit of any
such action and shall have the right to participate therein. Lessee shall, upon
written request by Manager, promptly reimburse all expenditures made by Marriott
pursuant to this Section 5.03.B.
C. The cost of all Capital Expenditures (including the
expenses incurred by either Lessee, Marriott or Manager in connection with any
civil or criminal proceeding described above) shall be borne solely by Lessee
(or Owner), and shall not be paid from Gross Revenues nor from the FF&E Reserve.
D. Lessee shall not unreasonably withhold its Approval with
respect to Capital Expenditures as are: (i) required, in Manager's reasonable
judgment, to keep the Hotel in a first-class, competitive, efficient and
economical operating condition in accordance with System Standards; or (ii)
required by reason of any Legal Requirement, or otherwise required for the
continued safe and orderly operation of the Hotel. Manager shall be entitled to
terminate this Agreement, on sixty (60) days' notice to Lessee, if: Lessee
either (a) fails to approve any Capital Expenditure described in the preceding
sentence, or (b) fails to provide funding for any such Capital Expenditure
within sixty (60) days after the submission to Lessee of the Building Estimate
requesting such Capital Expenditure, and if Marriott terminates the
Submanagement Agreement pursuant to the comparable provision of the
Submanagement Agreement.
E. Manager will not make a detailed inspection of the ADA
compliance and life-safety elements of the Hotel prior to the Take-Over Date. To
the extent that any of such elements are not in compliance with System
Standards, Lessee shall be obligated (or shall cause Owner)) to fund any
necessary remedial measures promptly after the Take-Over Date in
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accordance with a schedule for such measures and the funding thereof proposed by
Marriott. Manager shall review any such elements and the schedule of compliance
and funding with Lessee, and shall consider in good faith any comments of Lessee
as to methods of compliance with ADA and priority of compliance efforts and
report the same to Marriott.
F. On the Effective Date, Lessee shall fund an escrow account
with Primary Manager as provided in Section 3.2.8 of the Settlement Agreement.
5.04 Ownership of Replacements
All repairs, alterations, improvements, renewals or replacements made
pursuant to Article V, and all amounts kept in the FF&E Reserve, shall, except
as otherwise provided in this Agreement, be the property of Lessee or Owner, as
applicable.
ARTICLE VI
INSURANCE, DAMAGE, CONDEMNATION, AND FORCE MAJEURE
6.01 Insurance
A. Subject to Section 6.02, Manager shall cause Marriott,
commencing with the Take-Over Date and thereafter during the Term of the
Agreement, to procure and maintain, either with insurance companies of
recognized responsibility reasonably approved by Lessee or by legally qualifying
itself as a self insurer, a minimum of the following insurance:
1. Property insurance on the Improvements and
contents against loss or damage by fire, lightning and all other risks covered
by the usual extended coverage endorsement, all in an amount not less than
ninety percent (90%) of the replacement cost thereof;
2. Boiler and machinery insurance against loss or
damage from explosion of boilers or pressure vessels to the extent applicable to
the Hotel;
3. Business interruption insurance covering loss of
profits and necessary continuing expenses for interruptions caused by any
occurrence covered by the insurance referred to in Sections 6.01.A.1 and 2 of a
type and in amounts as are generally established by Marriott at similar hotels
it owns, leases or manages under the Marriott name in the United States;
4. General liability insurance against claims for
bodily injury, death or property damage occurring on, in, or about the Hotel,
and automobile liability insurance on
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vehicles operated in conjunction with the Hotel, with a combined single limit
for each occurrence of not less than One Hundred Million Dollars ($100,000,000);
5. Workers' compensation as may be required under
applicable laws covering all of Marriott's employees at the Hotel;
6. Fidelity bonds, with reasonable limits to be
determined by Marriott, covering its employees in job classifications normally
bonded in other similar hotels it leases or manages under the Marriott name in
the United States or as otherwise required by law, and comprehensive crime
insurance to the extent Manager and Marriott mutually and reasonably agree it is
necessary for the Hotel;
7. Employer's liability insurance in accordance with
Marriott's standard practices and policies (it being agreed that, in the event
Lessee requests an increase in the coverage or limits of such insurance, and
provided that such increased coverage or limit is available, Manager shall cause
Marriott to obtain such increased coverage or limit, with the additional cost
thereof being a Deduction hereunder for all purposes other than the calculation
of Operating Profit for purposes of Section 2.02 hereof).
8. Such other insurance in amounts as Marriott in its
reasonable judgment pursuant to the Submanagement Agreement deems advisable for
protection against claims, liabilities and losses arising out of or connected
with the operation of the Hotel.
B. All insurance described in Section 6.01.A may be obtained
by Marriott by endorsement or equivalent means under its blanket insurance
policies, provided that such blanket policies substantially fulfill the
requirements specified in this Agreement.
C. Manager may allow Marriott to self insure or otherwise
retain such risks or portions thereof as it does with respect to other similar
hotels it owns, leases or manages under the Marriott name in the United States.
D. All policies of insurance required under Section 6.01.A
shall be carried in the name of Marriott. The policies required under Sections
6.01.A.1, 2, 3, and 4 shall include the Owner, Lessee and Manager as an
additional insured. Upon notice by the Lessee, Manager shall cause Marriott to
also have the policies required under Sections 6.01.A.1, 2, and 3 include any
Mortgagee as additional insureds. Any property losses thereunder shall be
payable to the respective parties as their interests may appear. Any Mortgage
encumbering the Hotel shall contain provisions to the effect that proceeds of
the insurance policies required to be carried under Sections 6.01.A.1 and 2
shall be available for repair and restoration of the Hotel, subject to
exceptions customarily included in institutional hotel mortgages.
E. Manager shall deliver to Owner and Lessee certificates of
insurance with respect to all policies so procured and, in the case of insurance
policies about to expire, shall
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deliver certificates with respect to the renewal thereof. All certificates of
insurance provided for under this Section 6.01 shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) days' prior written notice to the certificate holder .
F. Insurance premiums and any other costs or expenses with
respect to the insurance or self-insurance required under Section 6.01.A.,
including any Insurance Retention (as defined below), shall be paid from Gross
Revenues (except as otherwise set forth to the contrary in Section 1.03.E) as
Deductions. Such premiums and costs shall be allocated on an equitable basis to
the hotels participating under Marriott's blanket insurance or self-insurance
programs, as applicable. Except as otherwise set forth in Section 1.03.E and
except for any self-insurance retained by Marriott or any of its Affiliates, any
reserves, losses, costs or expenses which are uninsured shall be treated as a
cost of insurance and shall be Deductions. Upon Termination, a reserve in an
amount which is acceptable to Marriott pursuant to the Submanagement Agreement,
and which is in accordance with generally accepted practices in the insurance
industry, shall be established from Gross Revenues (or, if Gross Revenues are
insufficient, from Working Capital) to cover the amount of any Insurance
Retention and all other costs which will eventually have to be paid by either
Lessee, Manager or Marriott with respect to pending or contingent claims,
including those which arise after Termination for causes arising during the Term
of the Agreement. For purposes of this Section 6.01.F, "Insurance Retention"
shall mean the amount of any loss or reserve under Marriott's blanket insurance
or self-insurance programs which is allocated to the Hotel, not to exceed the
higher of (A) the maximum per occurrence limit established for similar hotels
participating in such programs, or (B) the insurance policy deductible on any
loss which may fall within high hazard classifications as mandated by the
insurer (e.g., earthquake, flood, windstorm on coastal properties, etc.). If the
Hotel is not a participant under Marriott's blanket insurance or self-insurance
programs, "Insurance Retention" shall mean the amount of any loss or reserve
allocated to the Hotel, not to exceed the insurance policy deductible.
G. Manager agrees to exercise its rights under the
Submanagement Agreement to ensure that the charge to the Hotel for insurance
that Marriott obtains pursuant to the foregoing provisions shall not incorporate
a profit to Marriott or any of its Affiliates, or, if a profit is incorporated,
that the charge therefor to the Hotel shall not be in excess of the competitive
market rate for comparable insurance.
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6.02 Owner's Option to Obtain Property Insurance.
At any time, and from time to time, within ten (10) days after receipt
of Lessee's written request, Manager will cause Marriott to provide its best
estimate of the renewal cost of Marriott's blanket insurance as required in
Section 6.01.A.(1), (2) and (3), and Manager shall furnish such estimate to
Lessee. Lessee may, at its option, by written notice to Manager which shall be
delivered no later than ninety (90) days prior to the natural expiration of the
insurance policies which Manager has obtained pursuant to Section 6.01.A(1), (2)
and (3), advise Manager that Owner or Lessee shall procure and maintain the
insurance specified in Section 6.01.A(1), (2) and (3) (in which case Manager
shall cause Marriott to allow such policies obtained by it under Section
6.01.A(1), (2) and (3) to expire), subject to the following terms and
conditions:
A. All such policies of insurance shall be carried in the name
of Owner and/or Lessee as applicable, with Manager and Marriott as additional
insureds. Any property losses thereunder shall be payable to the respective
parties as their interests may appear. The documentation with respect to each
Mortgage shall contain provisions to the effect that proceeds of the insurance
policies required to be carried under Section 6.01.A(1), (2) and (3) shall be
available for repair and restoration of the Hotel, to the extent required
pursuant to Section 6.01.D. However, any Mortgagee shall be entitled to impose
reasonable conditions on the disbursement of insurance proceeds for the repair
and/or restoration of the Hotel, including a demonstration by Owner or Lessee
that the amount of such proceeds (together with other funds Owner or Lessee
agrees to make available) is sufficient for such purpose.
B. Lessee shall deliver to Manager certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent
obtainable, state that the insurance shall not be canceled or materially changed
without at least thirty (30) days' prior written notice to the certificate
holder.
D. Premiums for such insurance coverage shall be treated as
Deductions, provided that if the cost of such insurance procured by Owner or
Lessee exceeds the cost of Marriott's comparable coverage by more than ten
percent (10%), all such excess costs shall be the sole responsibility of Lessee
and shall not be a Deduction.
E. Should Lessee exercise its option to have the insurance
described in this Section 6.02 procured by Owner or Lessee, Lessee hereby waives
and shall cause Owner to waive in writing to Marriott their rights of recovery
from Manager or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Hotel, and any
resultant interruption of business.
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F. All insurance procured by Owner or Lessee shall be obtained
from reputable insurance companies reasonably acceptable to Manager and
Marriott.
G. Should Lessee exercise its right to have Owner or Lessee
obtain the insurance described in this Section 6.02, Lessee acknowledges that
Marriott is under no obligation to thereafter include the Hotel in its blanket
insurance program (with respect to the insurance described in Section 6.01.A(1),
(2) and (3)) for the balance of the Term.
6.03 Damage and Repair
A. If, during the Term, the Hotel is damaged by a Minor
Casualty, Manager shall cause Marriott, with all reasonable diligence to,
proceed to process the claim with the applicable insurance carriers, including
settling such claim, and to make the necessary arrangements with appropriate
contractors and suppliers to repair and/or replace the damaged portion of the
Hotel. Lessee's consent shall not be needed for Marriott to perform any of the
foregoing, all of which shall be performed in accordance with Marriott's
reasonable judgment pursuant to the Submanagement Agreement. Lessee agrees to
sign promptly any documents which are necessary to process and/or adjust the
claim with the insurance carriers, as well as any contracts with such
contractors and/or suppliers.
B. If, during the Term, the Hotel suffers a Total Casualty,
(i) this Agreement shall be terminable by Lessee at its option upon ninety (90)
days' written notice to Manager, where upon Manager shall exercise its rights
under the Submanagement Agreement to terminate the Submanagement Agreement as a
result of such Total Casualty, and (ii) this Agreement shall be terminable by
Manager by ninety (90) days' of written notice to Lessee, if Marriott has
terminated the Submanagement Agreement pursuant to such Total Casualty. Any such
notice pursuant to this Section 6.03.b. must be sent within thirty (30) days
after the date of the Total Casualty.
C. If, during the Term, the Hotel is damaged by fire, casualty
or other cause to a greater extent than a Minor Casualty, but not to the extent
of a Total Casualty, or if the Hotel suffers a Total Casualty but neither party
elects to terminate under Section 6.04.A, Lessee shall (or shall cause Owner, as
applicable), at such party's cost and expense and with all reasonable diligence,
repair and/or replace the damaged portion of the Hotel to the same condition as
existed previously. Marriott shall have the right to discontinue operating the
Hotel to the extent it deems necessary to comply with applicable Legal
Requirements or as necessary for the safe and orderly operation of the Hotel. To
the extent available, proceeds from the insurance described in Section 6.01 of
this Agreement shall be applied to such repairs and/or replacements. If Owner or
Lessee, as applicable, fails to so promptly commence and complete the repairing
and/or replacement of the Hotel so that it shall be substantially the same as it
was prior to such damage or destruction, such failure shall be an Event of
Default by Lessee.
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6.04 Condemnation
A. In the event all or substantially all of the Hotel shall be
taken in any eminent domain, condemnation, compulsory acquisition, or similar
proceeding by any competent authority for any public or quasi-public use or
purpose, or in the event a portion of the Hotel shall be so taken, but the
result is that it is unreasonable to continue to operate the Hotel in accordance
with the standards required by this Agreement, this Agreement shall terminate,
and Manager shall terminate the Submanagement Agreement as a result of such
taking.
B. In the event a portion of the Hotel shall be taken by the
events described in Section 6.03.A, or the entire Hotel is affected but on a
temporary basis, and the result is not to make it unreasonable to continue to
operate the Hotel, this Agreement shall not terminate. However, so much of any
award for any such partial taking or condemnation as shall be necessary to
render the Hotel equivalent to its condition prior to such event shall be used
for such purpose; and Marriott shall have the right to discontinue operating the
Hotel to the extent it deems necessary for the safe and orderly operation of the
Hotel.
ARTICLE VII
TAXES
7.01 Real Estate and Personal Property Taxes
A. Except as specifically set forth in subsection B below,
Manager shall cause Marriott to pay from Gross Revenues all real estate and
personal property taxes, levies, assessments and similar charges on or relating
to the Hotel ("Impositions") during the Term, before any fine, penalty, or
interest is added thereto or lien placed upon the Hotel or upon the Agreement or
the Submanagement Agreement, unless payment thereof is in good faith being
contested and enforcement thereof is stayed. Any such payments shall be
Deductions in determining Operating Profit. Manager shall, within five (5) days
after receipt, furnish Marriott with copies of official tax bills and
assessments which it may receive with respect to the Hotel. Any of Owner, Lessee
or Manager (in which case Lessee agrees to cause Owner to sign the required
applications and otherwise cooperate with Marriott in expediting the matter) may
initiate proceedings to contest any negotiations or proceedings with respect to
any Imposition, and all reasonable costs of any such contest shall be paid from
Gross Revenues and shall be a Deduction in determining Operating Profit. Manager
shall, as part of its contest or negotiation of any Imposition, be entitled, on
Owner's or Lessee's behalf, to permit Marriott to waive any applicable statute
of limitations in order to avoid paying the Imposition during the pendency of
any proceedings or negotiations with applicable authorities.
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B. The word "Impositions" as used in this Agreement shall not
include the following, all of which shall be paid solely by Owner or Lessee, as
applicable, not from Gross Revenues nor from the FF&E Reserve:
1. Any franchise, corporate, estate, inheritance,
succession, capital levy or transfer tax imposed on Owner or Lessee, or any
income tax imposed on any income of Owner or Lessee (including distributions to
Lessee pursuant to Article III hereof);
2. Special assessments (regardless of when due or
whether they are paid as a lump sum or in installments over time) imposed
because of facilities which are constructed by or on behalf of the assessing
jurisdiction (for example, roads, sidewalks, sewers, culverts, etc.) which
directly benefit the Hotel (regardless of whether or not they also benefit other
buildings), which assessments shall be treated as capital costs of construction
and not as Deductions;
3. "Impact Fees" (regardless of when due or whether
they are paid as a lump sum or in installments over time) which are required of
Owner or Lessee as a condition to the issuance of site plan approval, zoning
variances or building permits, which impact fees shall be treated as capital
costs of construction and not as Deductions; or
4. "Tax-increment financing" or similar financing
whereby the municipality or other taxing authority has assisted in financing the
construction of the Hotel by temporarily reducing or abating normal Impositions
in return for substantially higher levels of Impositions at later dates.
ARTICLE VIII
MANAGEMENT OF THE HOTEL
8.01 Ownership of the Hotel
A. Lessee hereby covenants that it will (i) have, keep, and
maintain good and marketable leasehold title to the Hotel pursuant to the Lease,
and (ii) cause Owner to have, keep and maintain good and marketable fee title
[ground lease as to Atlanta] to the Site in each case free and clear of any and
all liens, encumbrances or other charges, except as follows:
1. easements or other encumbrances (other than those
described in subsections 2 and 3 hereof) that do not adversely affect the
operation of the Hotel by Manager and that are not prohibited pursuant to
Section 8.04 of this Agreement;
2. Qualified Mortgages; or
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3. liens for taxes, assessments, levies or other
public charges not yet due or due but not yet payable.
B. Lessee shall (and shall exercise its rights under the Lease
to cause Owner to) pay and discharge, on or before the due date, any and all
payments due under any Mortgage. Lessee shall (and shall exercise its rights
under the Lease to cause Owner to) indemnify, defend, and hold Manager and
Marriott harmless from and against all claims, litigation and damages arising
from the failure of Owner or Lessee, as applicable, to make any such payments as
and when required; and this obligation of Lessee shall survive Termination.
Manager shall have no responsibility for payment of debt service due with
respect to the Hotel, from Gross Revenues or otherwise, and such responsibility
shall be solely that of Owner or Lessee.
C. Lessee covenants and shall exercise its rights under the
Lease to cause Owner to covenant that: (i) so long as Manager is not in Default
under this Agreement or any Subordination Agreement, Manager shall quietly hold,
occupy and enjoy the Hotel throughout the Term hereof free from hindrance,
ejection or molestation by Owner or Lessee or other party claiming under,
through or by right of Owner or Lessee, and (ii) so long as Marriott is not in
Default (as that term is defined in the Submanagement Agreement) under the
Submanagement Agreement or any Subordination Agreement, Submanager shall quietly
hold, occupy and enjoy the Hotel throughout the Term (as that term is defined in
the Submanagement Agreement) hereof free from hindrance, ejection or molestation
by Owner or Lessee or other party claiming under, through or by right of Owner
or Lessee. Lessee shall pay and shall exercise its rights under the Lease to
cause Owner to pay and discharge any payments and charges and, at such party's
expense, to prosecute all appropriate actions, judicial or otherwise, necessary
to assure such free and quiet occupation; provided, however, that Owner or
Lessee, as applicable, shall have the right to contest by appropriate action any
such payments or charges as long as such contest does not disturb such free and
quiet occupation by Manager or Marriott.
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8.02 Mortgages
A. Owner or Lessee shall be permitted to encumber the Hotel
and/or the Site with any Mortgage which is a Qualified Mortgage. Lessee shall
not (and shall exercise its rights under the Lease to ensure that Owner will
not) encumber the Hotel and/or the Site with any Mortgage which is not a
Qualified Mortgage.
B. Any Mortgage which meets all of the following requirements
shall be referred to in this Agreement as a "Qualified Mortgage":
1. The proposed Mortgage is from an Institutional
Lender; and
2. Owner or Lessee (as applicable) and Manager and
Submanager and the holder of such Mortgage shall have entered into a
Subordination Agreement (to be recorded in the real property records in the
jurisdiction where the Site is located) as further described in Section 8.03
below. Manager agrees to enter into (and shall exercise its rights under the
Submanagement Agreement to cause Marriott to enter into) a Subordination
Agreement which satisfies the requirements of Section 8.03 in connection with a
proposed Mortgage which is otherwise a Qualified Mortagage.
In addition, any Mortgage which encumbers the Hotel as of the date of the
Settlement Agreement and which continues to encumber the Hotel as of the
Take-Over Date shall be deemed to constitute a Qualified Mortgage whether or not
it meets the requirements set forth in 1 and 2 above.
8.03 Subordination, Non-Disturbance and Attornment
A. Lessee shall and shall exercise its rights under the Lease
to cause Owner to (i) to use best reasonable efforts to obtain from any
Mortgagee which holds a Mortgage as of the Take-Over Date and (ii) to obtain
from any Mortgagee which is granted a Mortgage after the Take-Over Date an
instrument (the "Subordination Agreement"), reasonably satisfactory in all
respects to Manager, Marriott and such Mortgagee, which shall be recordable in
the jurisdiction where the Hotel is located, pursuant to which:
1. This Agreement and any extensions, renewals,
replacements or modifications thereto, and all right and interest of Marriott
and Manager in and to the Hotel, shall be subject and subordinate to such
Mortgage;
2. Marriott and Manager shall be obligated to each of
the Subsequent Owners (as defined below) to perform all of the terms and
conditions of this Agreement for the balance of the remaining Term hereof, with
the same force and effect as if such Subsequent Owners were the Owner or Lessee,
as applicable; and
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3. In the event that there is a Foreclosure of such
Mortgage (or a deed in lieu of Foreclosure), or other exercise by such Mortgagee
(or its successor) of its remedies in the event of default, in connection with
which title or possession of the Hotel is transferred to the Mortgagee (or its
designee) or to a purchaser at Foreclosure or to a subsequent purchaser from the
Mortgagee (or from its designee) (all of the foregoing shall collectively be
referred to as "Subsequent Owners"), then regardless of whether the Lease is
terminated Marriott shall not be disturbed in its rights under the Submanagement
Agreement and Manager shall not be disturbed in its rights under this Agreement
so long as Marriott is not in default under the Submanagement Agreement and
Manager is not in Default hereunder.
B. In the event that the Subordination Agreement contains
provisions requiring Manager (upon a default under the Mortgage, or upon various
other stipulated conditions) to pay certain amounts which are otherwise due to
Lessee under this Agreement to the Mortgagee or its designee (rather than to
Lessee), Lessee hereby gives its consent to such provisions, which consent shall
be deemed to be irrevocable until the entire debt secured by the Mortgage has
been discharged.
C. Prior to any encumbrance of the Hotel or the Site after the
Take-Over Date with any Mortgage, Lessee shall and shall be obligated to
exercise its rights under the Lease to cause Owner to obtain from the proposed
Mortgagee an executed, recordable Subordination Agreement. Lessee and Manager
agree to execute such Subordination Agreement for the benefit of such proposed
Mortgagee. If Owner or Lessee encumbers the Hotel or the Site with a Mortgage
after the Take-Over Date without first obtaining such a Subordination Agreement
from the Mortgagee: (i) it shall be a Default of Lessee under this Agreement,
entitling Manager to all of the remedies set forth in Article IX; and (ii) in
addition, Manager shall thereafter have a continuing right to terminate this
Agreement upon sixty (60) days' prior written notice to Lessee.
D. Notwithstanding the subordination of this Agreement which
is described in Section 8.03.A.1 (or any subsequent subordination to any other
Mortgage), if, in connection with the exercise by any Mortgagee of its remedies
under any Mortgage, there is a material adverse impact upon the operation of the
Hotel by Manager or Marriott in accordance with the System Standards (such as,
for example, the imposition of restrictions upon expenditures from the FF&E
Reserve by Manager or Marriott, where such restrictions are not set forth in
this Agreement), the foregoing shall be deemed to be an Event of Default by
Lessee entitling Manager to all of the remedies set forth in Article IX.
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8.04 No Covenants, Conditions or Restrictions
A. Lessee covenants that it will not and that it will exercise
its rights under the Lease to cause Owner to not (unless Manager has given its
prior written consent thereto) enter into any covenants, conditions or
restrictions, including reciprocal easement agreements or cost-sharing
arrangements (collectively referred to as "CC&R's") affecting the Site or the
Hotel (i) which would prohibit or limit in any material respect Manager or
Marriott from operating the Hotel in accordance with the System Standards,
including related amenities proposed for the Hotel pursuant to the Five Year
Plan; (ii) which would allow the Hotel facilities (for example, parking spaces)
to be used by persons other than guests, invitees or employees of the Hotel;
(iii) which would allow the Hotel facilities to be used for specified charges or
rates which have not been approved by Manager; or (iv) which would subject the
Hotel to exclusive arrangements regarding food and beverage operation or retail
merchandise. To Lessee's knowledge, any existing CC&R's affecting the Site or
the Hotel are effected in instruments which have been provided by Owner or
Lessee to Manager.
B. Unless otherwise agreed by both Lessee and Manager, all
financial obligations imposed on Owner or Lessee or on the Hotel pursuant to any
CC&R's shall be paid by Lessee (or Lessee shall cause to be paid by Owner) from
its own funds, and not from Gross Revenues or from the FF&E Reserve. Manager's
consent to any such CC&R's shall be conditioned (among other things) on
satisfactory evidence that: (i) the CC&R in question provides a reasonable and
cost-effective benefit to the operation of the Hotel; (ii) the costs incurred
(including administrative expenses) pursuant to such CC&R will be both
reasonable and allocated to the Hotel on a reasonable basis; and (iii) no
capital expenditures incurred pursuant to said CC&R will be paid as a Deduction
(but rather, such capital expenditures will be paid separately by Owner or
Lessee).
8.05 Liens; Credit
Manager and Lessee shall use commercially reasonable efforts, Manager
shall exercise its rights under the Submanagement Agreement to cause Marriott to
use commercially reasonable efforts and Lessee shall exercise its rights under
the Lease to cause Owner to use commercially reasonable efforts to prevent any
liens from being filed against the Hotel which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the Hotel.
Manager and Lessee shall cooperate fully, Manager shall exercise its rights
under the Submanagement Agreement to cause Marriott to cooperate fully, and
Lessee shall exercise its rights under the Lease to cause Owner to cooperate
fully, as applicable) in obtaining the release of any such liens, and the cost
thereof, if the lien was not occasioned by the fault of either party, shall be
treated the same as the cost of the matter to which it relates. If the lien
arises as a result of the fault of either party, then the party at fault shall
bear the cost of obtaining the lien release. In no event shall either party
borrow money in the name of or pledge the credit of the other.
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8.06 Amendments Requested by Mortgagee
A. If requested by any Mortgagee or prospective Mortgagee,
Manager agrees to execute and deliver any amendment of this Agreement and shall
exercise its rights under the Submanagement Agreement to cause Marriott to
execute and deliver any amendment of the Submanagement Agreement that is
reasonably required by such Mortgagee or prospective Mortgagee, provided that
Manager shall be under no obligation to amend this Agreement and shall be under
no obligation to cause Marriott to amend the Submanagement Agreement if the
result of any such amendment would be: (i) to reduce, defer or delay the amount
of any payment to be made to Manager hereunder (or to Marriott under the
Submanagement Agreement); (ii) to materially and adversely increase Manager's
obligations or affect Manager's rights under this Agreement; (iii) to change the
Term of this Agreement or of the Submanagement Agreement; (iv) to cause the
Hotel to be operated other than pursuant to the System Standards and other
provisions hereof; or (v) to amend Section 5.02 or Section 5.03 hereunder or
under the Submanagement Agreement. Any such amendment shall be in effect only
for the period of time in which such Mortgage is outstanding.
B. Notwithstanding the provisions of Section 8.06.A, if a
Mortgagee or prospective Mortgagee requests that Manager enter into an amendment
of this Agreement and/or Marriott enter into an amendment of the Submanagement
Agreement which would impose additional duties (for example, an increase in the
reporting requirements or in the record-keeping requirements, or adding the
obligation to prepare parallel accounting statements using a different fiscal
year) on Manager or Marriott, as applicable, or would otherwise adversely affect
Manager's rights under this Agreement or Marriott's rights under the
Submanagement Agreement, but not to the degree of materiality which would be
prohibited under Section 8.06.A, and with respect to which Manager and/or
Marriott believe, in their respective good faith judgment, that they can be
adequately compensated, Manager hereby agrees that it will execute and deliver
such requested amendment of this Agreement and shall exercise its rights under
the Submanagement Agreement to cause Marriott to execute and deliver such
requested amendment of the Submanagement Agreement, provided that Lessee agrees
to compensate Manager and to allow Manager to compensate Marriott under the
Submanagement Agreement for the additional burden imposed by any such amendment.
It is understood that the word "burden", as used in the preceding sentence,
shall encompass not only additional work to be performed by Manager, but also
the adverse effect on the achievement of the Performance Termination Threshold
which would be caused by requiring increased services to be provided to the
Hotel by third parties and by paying from Gross Revenues any other expenses
incurred by Manager and/or Marriott in meeting such additional obligations. Any
dispute as to the additional compensation to which Manager is entitled pursuant
to this Section 8.06.B. shall be resolved by arbitration pursuant to Section
11.21.
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ARTICLE IX
DEFAULTS
9.01 Events of Default
Each of the following shall constitute a "Default" under this
Agreement.
A. The filing of a voluntary petition in bankruptcy or
insolvency or a petition for reorganization under any bankruptcy law by either
party, or the admission by either party that it is unable to pay its debts as
they become due. Upon the occurrence of any Default by either party (referred to
as the "defaulting party") as described under this subsection A, said Default
shall be deemed an "Event of Default" under this Agreement.
B. The consent to an involuntary petition in bankruptcy or the
failure to vacate, within ninety (90) days from the date of entry thereof, any
order approving an involuntary petition by either party. Upon the occurrence of
any Default by either party as described under this subsection B, said Default
shall be deemed an "Event of Default" under this Agreement.
C. The entering of an order, judgment or decree by any court
of competent jurisdiction, on the application of a creditor, adjudicating either
party as bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for an aggregate of sixty (60) days (whether or not consecutive).
Upon the occurrence of any Default by either party as described under this
subsection C, said Default shall be deemed an "Event of Default" under this
Agreement.
D. The failure of either party to make (or in the case of
Lessee, the failure of Lessee to cause Owner to make) any payment required to be
made in accordance with the terms of this Agreement. Upon the occurrence of any
Default by either party as described under this subsection D, said Default shall
be deemed an "Event of Default" under this Agreement if the defaulting party
fails to cure such Default within ten (10) business days after receipt of
written notice from the non-defaulting party demanding such cure.
E. The failure of either party to perform, keep or fulfill any
of the other covenants, undertakings, obligations or conditions set forth in
this Agreement, and the continuance of such default for a period of thirty (30)
days after the defaulting party's receipt of written notice from the
non-defaulting party of said failure. Upon the occurrence of any Default by
either party as described under this subsection E, said Default shall be deemed
an "Event of Default" under this Agreement if the defaulting party fails to cure
the Default within thirty (30) days after receipt of written notice from the
non-defaulting party demanding such cure, or, if the Default is such that it
cannot reasonably be cured within said thirty (30)
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day period of time, if the defaulting party fails to commence the cure of such
Default within said thirty (30) day period of time or thereafter fails to
diligently pursue such efforts to completion.
9.02 Remedies
Upon the occurrence of an Event of Default, the non-defaulting party
shall have the right to pursue any one or more of the following courses of
action: (1) if the Event of Default has a material adverse impact on the
non-defaulting party, to terminate this Agreement by written notice to the
defaulting party, which termination shall be effective as of the effective date
which is set forth in said notice, provided that said effective date shall be at
least thirty (30) days after the date of said notice and further provided that,
if the defaulting party is Manager, the foregoing period of thirty (30) days
shall be extended to seventy-five (75) days (or such longer period of time as
may be necessary under Legal Requirements pertaining to termination of
employment); (2) to institute forthwith any and all proceedings permitted by law
or equity including, without limitation, actions for specific performance and/or
damages; and/or (3) to avail itself of the remedies described in Section 9.03.
9.03 Additional Remedies
A. Upon the occurrence of a Default by either party under the
provisions of Section 9.01.D, the amount owed to the non-defaulting party shall
accrue interest, at an annual rate equal to the Prime Rate plus three (3)
percentage points, from and after the date on which the Default occurred.
B. Upon the occurrence of an Event of Default by Lessee under
the provisions of Section 9.01.D, Manager shall have the right (without
affecting Manager's other remedies under this Agreement) to withdraw the amount
(plus accrued interest as described in 9.03.A above) owed to Manager by Lessee
from distributions otherwise payable to Lessee pursuant to Sections 3.01 and
4.01 of this Agreement.
C. Manager and/or any Affiliate shall be entitled, in case of
any breach of the covenants of Sections 11.11.E, F, or G or of Section 11.12 by
Lessee or others claiming through it, to injunctive relief and to any other
right or remedy available at law.
D. The remedies granted under Sections 9.02 and 9.03 shall not
be in substitution for, but shall be in addition, to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages) by reason of applicable provisions of law or
equity and shall survive Termination.
9.04 Default under Owner's Agreement
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In the event of a Default by Owner or Lessee under the Owner's
Agreement, Manager shall be entitled to terminate this Agreement, provided that
such Termination shall not be an exclusive remedy and Manager shall be entitled
to pursue any remedies it may have under the Owner's Agreement or under this
Agreement against Lessee. Notwithstanding the foregoing, Manager shall be
entitled to terminate this Agreement pursuant to this section 9.04 only if
Marriott has terminated the Submanagement Agreement.
ARTICLE X
ASSIGNMENT AND SALE
10.01 Assignment
A. Manager shall not directly or indirectly assign or transfer
its interest in this Agreement without the prior written consent of Lessee;
provided, however, that Manager shall have the right, without Lessee's consent,
to (1) assign its interest in this Agreement to any Affiliate (provided such
Affiliate has the right to use the Marriott Trade Names and Marriott Trademark,
and otherwise is of sufficient financial capacity to perform Manager's duties
hereunder), (2) pursuant to the Submanagement Agreement allow Marriott to lease
shops or grant concessions at the Hotel so long as the terms of any such leases
or concessions do not exceed the Term of the Submanagement Agreement, and (3)
assign its interest in this Agreement to any entity into or with which Manager
is merged or consolidated or to which all or substantially all of the assets of
Manager are sold.
B. Lessee shall not assign or transfer its interest in this
Agreement without the prior written consent of Manager; provided, however, that
Lessee shall have the right, without such consent, to (1) cause this Agreement
to be conditionally assigned as security for a Mortgage of the Hotel in
accordance with this Agreement, (2) assign its interest in this Agreement to any
entity into or with which Lessee is merged or consolidated or to which all or
substantially all of the assets of Lessee are sold, and (4) assign its interest
in this Agreement pursuant to or as a result of a Sale of the Hotel which
complies with the provisions of the Settlement Agreement.
C. In the event either party consents to an assignment of this
Agreement by the other, no further assignment shall be made without the express
consent in writing of such party, unless such assignment may otherwise be made
without such consent pursuant to the terms of this Agreement. An assignment by
either Lessee or Manager of its interest in this Agreement shall not relieve
Lessee or Manager, as the case may be, from its respective obligations under
this Agreement, and shall inure to the benefit of, and be binding upon, its
respective successors, heirs, legal representatives, or assigns.
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D. Manager shall have the right to terminate this Agreement,
on thirty (30) days' written notice, if title to or possession of the Hotel is
transferred by judicial or administrative process (including, without
limitation, a foreclosure, or a sale pursuant to an order of a bankruptcy court,
or a sale by a court-appointed receiver) to an individual or entity which would
not qualify as a permitted transferee under the Settlement Agreement, regardless
of whether or not such transfer is the voluntary action of Owner or Lessee (or
successor owner of the Hotel or leasehold interest therein) or whether (under
applicable law) Owner or Lessee (or successor owner of the Hotel or leasehold
interest therein) is in fact the transferor.
10.02 Sale of the Hotel.
With respect to the Owner designated in the Recitals hereof,
and Lessee, the respective rights and obligations of the parties hereto relating
to a Sale of the Hotel are set forth in the Settlement Agreement.
10.03 Change in Control of Manger.
Lessee shall have the right to terminate this Agreement on
thirty (30) days' written notice if at any time there is an "adverse change in
control" in Manager. The term "adverse change in control" shall mean the
assignment, transfer or other disposition, for value or otherwise, voluntary or
involuntary, in a single transaction or a series of transactions, of the direct
or indirect controlling interest in the Manager to a Person which is engaged in
the business of operating, franchising or managing (as distinguished from merely
owning or financing) its own hotel brand or its own lodging system in
competition with Lessee or Marriott. The phrase "controlling interest" shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of Manager.
ARTICLE XI
MISCELLANEOUS
11.01 Right to Make Agreement
Each party warrants, with respect to itself, that neither the execution
of the Agreement nor the finalization of the transactions contemplated hereby
shall violate any provision of law or judgment, writ, injunction, order or
decree of any court or governmental authority having jurisdiction over it;
result in or constitute a breach or default under any indenture, contract, other
commitment or restriction to which it is a party or by which it is bound; or
require any consent, vote or approval which has not been taken, or at the time
of the transaction involved shall not have been given or taken. Each party
covenants that it has and will continue to have throughout the term of the
Agreement and any extensions thereof, the full right to enter into the Agreement
and perform its obligations hereunder.
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11.02 Consents and Cooperation
Wherever in the Agreement the consent or approval of Lessee or Manager
is required, such consent or approval shall not be unreasonably withheld,
delayed or conditioned, shall be in writing and shall be executed by a duly
authorized officer or agent of the party granting such consent or approval
subject, however, to the provisions of the Owner's Agreement. If either Lessee
or Manager fails to respond within thirty (30) days to a request by the other
party for a consent or approval, such consent or approval shall be deemed to
have been given (except as otherwise provided in this Agreement). Additionally,
Lessee shall execute such leases, subleases, licenses, concessions, equipment
leases, service contracts and other agreements negotiated in good faith by
Manager and pertaining to the Hotel that, in Manager's reasonable judgment,
should be made in the name of the lessee of the Hotel.
11.03 Relationship
In the performance of this Agreement, Manager shall act solely as an
independent contractor. Neither this Agreement nor any agreements, instruments,
documents, or transactions contemplated hereby shall in any respect be
interpreted, deemed or construed as making Manager a partner, joint venturer
with, or agent of, Owner or Lessee. Lessee and Manager agree that neither party
will make any contrary assertion, claim or counterclaim in any action, suit,
arbitration or other legal proceedings involving Owner or Lessee and Manager.
11.04 Applicable Law
The Agreement shall be construed under and shall be governed by the
laws of the state in which the Hotel is located.
11.05 [Intentionally Omitted]
11.06 Headings
Headings of articles and sections are inserted only for convenience and
are in no way to be construed as a limitation on the scope of the particular
articles or sections to which they refer.
11.07 Notices
Notices, statements and other communications to be given under the
terms of the Agreement shall be in writing and delivered by hand against receipt
or sent by certified or registered mail, postage prepaid, return receipt
requested or by nationally utilized overnight delivery service, addressed to the
parties as follows:
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To Manager:
IHC II, LLC
---------------------------
---------------------------
FAX: ______________________
with copy to :
---------------------------
---------------------------
---------------------------
FAX: ______________________
To Lessee:
---------------------------
---------------------------
---------------------------
FAX: ______________________
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice that is mailed in accordance herewith
shall be deemed received when delivery is received or refused, as the case may
be. Additionally, notices may be given by telephone facsimile transmission,
provided that an original copy of said transmission shall be delivered to the
addressee by nationally utilized overnight delivery service by no later than the
second business day following such transmission. Telephone facsimiles shall be
deemed delivered on the date of such transmission. Manager agrees to provide to
Lessee a copy of any notice received by Manager from Marriott pursuant to the
Submanagement Agreement.
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11.08 Environmental Matters
A. Lessee hereby represents and warrants to Manager that, to
the best of its knowledge except as set forth in any environmental assessment
reports provided by Owner or Lessee to Manager, as of the Effective Date, there
are no Hazardous Materials on any portion of the Site or the Hotel, nor have any
Hazardous Materials been released or discharged on any portion of the Site or
the Hotel. In addition, Lessee hereby represents and warrants that it has
previously delivered or has caused Owner to have delivered to Manager copies of
all reports concerning environmental conditions which have been received by
Lessee or any of its Affiliates. Prior to the Take-Over Date, Manager shall have
the right to terminate this Agreement, at its option, if Hazardous Materials are
found on the Site and/or the Hotel in quantities sufficient to create a danger
(in Manager's good-faith judgment) of possible adverse legal consequences to
Manager if it were to assume operation of the Hotel, but only if Marriott has
terminated the Submanagement Agreement pursuant to a comparable provision of the
Submanagement Agreement.
B. In the event of the discovery of Hazardous Materials (as
defined below) on any portion of the Site or in the Hotel during the Term of
this Agreement, Lessee shall (except as otherwise set forth to the contrary in
Section 11.08.C) or shall exercise its rights under the Lease to cause Owner to
promptly remove such Hazardous Materials, together with all contaminated soil
and containers, and shall otherwise remedy the problem in accordance with (1)
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq., as amended; (2) the regulations promulgated
thereunder, from time to time; (3) all federal, state and local laws, rules and
regulations (now or hereafter in effect) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials; and (4) the
regulations promulgated thereunder, from time to time (collectively referred to
as "Environmental Laws"). Lessee shall (except as otherwise set forth to the
contrary in Section 11.08.C) and shall exercise its rights under the Lease to
cause Owner to indemnify, defend and hold Manager harmless from and against all
loss, costs, liability and damage (including, without limitation, engineers' and
attorneys' fees and expenses, and the cost of litigation) arising from the
presence of Hazardous Materials on the Site or in the Hotel; and this obligation
of Lessee shall survive Termination of this Agreement. "Hazardous Materials"
shall mean and include any substance or material containing one or more of any
of the following: "hazardous material", "hazardous waste", "hazardous
substance", "regulated substance", "petroleum", "pollutant", "contaminant",
"polychlorinated biphenyls", "lead or lead-based paint" or "asbestos" as such
terms are defined in any applicable Environmental Law in such concentration(s)
or amount(s) as may impose clean-up, removal, monitoring or other responsibility
under the Environmental Laws, as the same may be amended from time to time, or
which may present a significant risk of harm to guests, invitees or employees of
the Hotel.
C. In the event that Hazardous Materials are released on any
portion of the Site or in the Hotel during the Term of this Agreement as a
result of the actions of Manager's
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or Marriott's employees, then Manager shall or shall cause Marriott to promptly
remove such Hazardous Materials, together with all contaminated soil and
containers, and shall otherwise remedy the problem in accordance with all
Environmental Laws. All costs and expenses of the removal by Manager or Marriott
(pursuant to this Section 11.08.C) of Hazardous Materials, and of the aforesaid
compliance with Environmental Laws shall (to the extent such costs exceed Ten
Thousand Dollars ($10,000), as adjusted by the GDP Deflator, with respect to any
given incident or related series of incidents in which such a release occurred)
be paid from Manager's or Marriott's own funds and not as a Deduction, and
Manager shall and shall cause Marriott to indemnify, defend and hold Owner,
Lessee and any Mortgagee harmless from and against all loss, costs, liability
and damage (including, without limitation, engineers' and attorneys' fees and
expenses, and the cost of litigation) arising from the actions described in this
Section 11.08.C. In the event that the costs and expenses of said removal by
Manager and/or Marriott, and of the aforesaid compliance, are less than Ten
Thousand Dollars ($10,000), as adjusted by the GDP Deflator, with respect to any
such incident, said costs and expenses shall be paid from Gross Revenues as a
Deduction, and the foregoing indemnity by Manager and Marriott shall not apply.
Manager and Marriott shall be able to retain in the Hotel reasonable quantities
of cleansers, solvents and other materials used in the ordinary course of hotel
operations, notwithstanding that such materials may contain or be Hazardous
Materials, provided that Manager complies and causes Marriott to comply with all
Environmental Laws with regard to the storage, use and disposal thereof.
D. Except as otherwise set forth to the contrary in Section
11.08.C, all costs and expenses of the aforesaid removal of Hazardous Materials
from the Site or the Hotel, and of the aforesaid compliance with all
Environmental Laws, and any amounts paid to Manager pursuant to the indemnity
set forth in Section 11.08.B, shall be paid by Lessee from its own funds, not as
a Deduction nor from the FF&E Reserve, and shall be treated as an expenditure by
Lessee pursuant to Section 5.03.
11.09 Confidentiality
A. The parties hereto agree that the matters set forth in this
Agreement and all statements, reports, projections, and other information
relating to the operation of the Hotel are strictly confidential and each party
will make every effort to ensure (including, in the case of Lessee, exercising
its rights under the Lease) that the information is not disclosed to any outside
person or entities (including the press) without the prior written consent of
the other party except as may be required by law and as may be reasonably
necessary to obtain licenses, permits, and other public approvals necessary for
the refurbishment or operation of the Hotel, or in connection with Owner's or
Lessee's financing of the Hotel, a Sale of the Hotel, or a sale of a controlling
interest in Owner, Lessee or Manager (except any financing or sale involving a
private or public offering of securities).
B. Lessee shall not include and shall exercise its rights
under the Lease to cause Owner not to include any reference to Manager or to any
Affiliate of Manager in any prospectus, private placement memorandum, offering
circular or offering documentation
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related thereto (collectively referred to as the "Lessee Prospectus"), issued by
Owner or Lessee or by one of their respective Affiliates or by one or more
Mortgagees, which is designated to interest potential investors in debt or
equity securities related to the Hotel, unless Manager has previously received a
copy of all such references. However, regardless of whether Manager does or does
not so receive a copy of all such references, neither Manager nor any Affiliate
of Manager will be deemed a sponsor of the offering described in the Lessee
Prospectus, nor will it have any responsibility for the Lessee Prospectus.
Unless Marriott agrees in advance, the Lessee Prospectus will not include any
Marriott Trade Names or Marriott Trademarks. Lessee shall indemnify, defend and
hold Manager harmless from and against all loss, costs, liability and damage
(including attorneys' fees and expenses, and the cost of litigation) arising out
of any Lessee Prospectus or the offering described therein; and this obligation
of Lessee shall survive Termination of this Agreement.
C. No reference to Owner or Lessee or to any Affiliate of any
of them will be made in any prospectus, private placement memorandum, offering
circular or offering documentation related thereto (collectively referred to as
the "Manager Prospectus"), issued by Manager, one of Manager's Affiliates,
Marriott, or one of Marriott's Affiliates, which is designated to interest
potential investors in debt or equity securities, unless Owner or Lessee, as
applicable, has previously received a copy of all such references. However,
regardless of whether Owner or Lessee does or does not so receive a copy of all
such references, neither Owner, Lessee nor any Affiliate of any of them will be
deemed a sponsor of the offering described in the Manager Prospectus, nor will
it have any responsibility for the Manager Prospectus. Unless Owner or Lessee,
as applicable, agrees in advance, the Manager Prospectus will not include any
Trade Names or Trademarks of Owner or Lessee. Manager shall, and shall cause
Marriott to, as applicable indemnify, defend and hold Owner and Lessee harmless
from and against all loss, costs, liability and damage (including attorneys'
fees and expenses, and the cost of litigation) arising out of any Manager
Prospectus or the offering described therein; and this obligation of Manager and
Marriott, as applicable shall survive Termination of this Agreement.
11.10 Projections
Lessee acknowledges that any written or oral projections, proformas, or
other similar information that has been (prior to execution of this Agreement)
or will (during the Term of this Agreement) be provided by Manager or Marriott
(or any Affiliate of either) to Lessee is for information purposes only, and
that Manager, Marriott, and any such Affiliate do not guarantee that the Hotel
will achieve the results set forth in any such projections, proformas, or other
similar information. Any such projections, proformas, or other similar
information are based on assumptions and estimates. Unanticipated events may
occur subsequent to the date of preparation of such projections, proformas, and
other similar information. Therefore, the actual results achieved by the Hotel
are likely to vary from the estimates contained in any such projections,
proformas, or other similar information and such variations might be material.
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11.11 Actions to be Taken Upon Termination
Upon a Termination of this Agreement, the following shall be
applicable:
A. Manager shall, within ninety (90) days after Termination of
this Agreement, prepare and deliver to Lessee a final accounting statement with
respect to the Hotel, as more particularly described in Section 4.02 hereof,
along with a statement of any sums due from Lessee to Manager pursuant hereto,
dated as of the date of Termination. Within thirty (30) days of the receipt by
Lessee of such final accounting statement, the parties will make whatever cash
adjustments are necessary pursuant to such final statement. The cost of
preparing such final accounting statement shall be a Deduction, unless the
Termination occurs as a result of a Default by either party, in which case the
defaulting party shall pay such cost. Manager and Lessee acknowledge that there
may be certain adjustments for which the information will not be available at
the time of the final accounting and the parties agree to readjust such amounts
and make the necessary cash adjustments when such information becomes available;
provided, however, that all accounts shall be deemed final as of the first (1st)
anniversary of the effective date of Termination.
B. Manager shall, and shall cause Marriott to, release and
transfer to Lessee (i) any of Lessee's funds which are held or controlled by
Manager or Marriott with respect to the Hotel with the exception of funds to be
held in escrow pursuant to Sections 6.01.F and 11.11.H and otherwise in
accordance herewith and (ii) to the extent not previously provided to Lessee,
the guest history of the Hotel, (including names, addresses and other
information with respect to Hotel guests, but not information as to national or
regional accounts of Manager, Marriott or their Affiliates other than names,
addresses and other information of guests which stayed at the Hotel pursuant to
such accounts.
C. Manager shall, and shall cause Marriott to, make available
to Lessee such books and records respecting the Hotel (including those from
prior years, subject to Manager's or Marriott's, as applicable, reasonable
records retention policies) as will be needed by Lessee to prepare the
accounting statements, in accordance with the Uniform System of Accounts, for
the Hotel for the year in which the Termination occurs and for any subsequent
year.
D. Manager shall, and shall cause Marriott to, (to the extent
permitted by law) assign to Lessee or to the new Manager all operating licenses
and permits for the Hotel which have been issued in Manager's or Marriott's name
(including liquor and restaurant licenses, if any); provided that if Manager has
expended any of its own funds in the acquisition of any of such licenses or
permits, Lessee shall reimburse Manager therefor if it has not done so already.
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E. Lessee acknowledges that pursuant to the Submanagement
Agreement Marriott shall have the option, to be exercised within thirty (30)
days after Termination, to purchase, at their then fair market value, any items
of the Hotel's Inventories and Fixed Asset Supplies as may be marked with any
Marriott Trade Name or any Marriott Trademark. In the event Marriott does not
exercise such option, Lessee agrees that any such items which are not so
purchased shall be used exclusively in connection with the Hotel until they are
consumed.
F. Manager shall cause Marriott to agree that Lessee shall
have the right to operate the improvements on the Site without modifying the
architectural design of same, notwithstanding the fact that such design or
certain features thereof may be proprietary to Marriott and/or protected by
trade marks or service marks held by Marriott or an Affiliate, provided that
such use shall be confined to the Site.
G. All Software used at the Hotel which is owned by any of the
Marriott Companies (or any Affiliates thereof) or the licensor of any of them is
proprietary to such Marriott Company (or such Affiliate) or the licensor of any
of them, and shall in all events remain the exclusive property of such Marriott
Company (or such Affiliate) or the licensor of any of them, as the case may be,
and nothing contained in this Agreement shall confer on Owner or Lessee the
right to use any of such Software. Marriott shall have the right to remove from
the Hotel without compensation to Owner or Lessee any Software (including
upgrades and replacements), including, without limitation, Software in general
use throughout the Marriott System, which is owned by any of the Marriott
Companies (or any Affiliates thereof) or the licensor of any of them.
Furthermore, upon Termination, notwithstanding Section 5.04 hereof, Marriott
shall be entitled to remove from the Hotel any computer equipment which is: (i)
owned by Marriott (without reimbursement to Owner or Lessee); or (ii) owned by
Manager, Owner or Lessee, but utilized as part of a Marriott centralized
reservation or property management system (with reimbursement to Manager, Owner
or Lessee, as applicable, of all previous expenditures made by Manager, Owner or
Lessee (or Marriott) with respect to such equipment, subject to a reasonable
allowance for depreciation).
H. A reserve fund shall be established from Gross Revenues to
reimburse Manager or, as long as Marriott is managing the Hotel pursuant to the
Submanagement Agreement, Marriott, for all costs and expenses incurred by
Manager or Marriott in terminating its employees at the Hotel, such as
reasonable severance pay, unemployment compensation, employment relocation
(however, Manager shall be responsible, and Manager shall cause Marriott to be
responsible, for relocation costs of any executive committee member relocating
to another hotel managed by Manager or its Affiliates (or by Marriott or its
Affiliates), arising from a Termination elected by Manager or Marriott, as
applicable, and in no event shall Manager, or Marriott, be reimbursed for the
cost of relocating any hourly (as opposed to salaried managerial) employees of
the Hotel), and other employee liability costs arising out of the termination of
employment of Manager's, or Marriott's, employees at the Hotel. Manager agrees
and shall cause Marriott to agree to use its reasonable efforts to mitigate such
costs and expenses. If Gross Revenues are insufficient to meet the requirements
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of such reserve fund, then Lessee shall deliver to Manager, within ten (10) days
after receipt of Manager's written request therefor, the sums necessary to
establish such reserve fund; and if Lessee fails to timely deliver such sums to
Manager, Manager shall have the right or shall give Marriott the right (without
affecting Manager's other remedies under this Agreement or Marriott's other
remedies under the Submanagement Agreement) to withdraw the amount of such
expenses from the Operating Accounts or any other funds of Lessee held by or
under the control of Manager or Marriott other than the FF&E Reserve.
Notwithstanding the foregoing, Lessee, Owner and any successor manager shall
have the right to interview and continue the employment of any of Manager's or
Marriott's employees at the Hotel; provided, however, that Lessee, Owner or such
successor manager shall have the right to interview and continue the employment
of members of the Hotel Executive Committee only if such persons will be
terminated by Manager or Marriott, as applicable. If this Agreement is
terminated by reason of Default of Manager hereunder by reason of a default by
Marriott under the Submanagement Agreement, then no such reserve fund shall be
established and Manager or Marriott, as applicable shall pay from its own funds
all costs and expenses incurred by Manager or Marriott in terminating its
employees at the Hotel.
I. Lessee shall cause the entity which shall succeed Manager
as the operator of the Hotel to hire a sufficient number of the employees at the
Hotel to avoid the occurrence, in connection with such Termination, of a
"closing" under the WARN Act.
J. Various other actions shall be taken, as described in this
Agreement, including, but not limited to, the actions described in Sections 4.06
and 6.01.F.
K. In the event of a Termination pursuant to Section 2.02,
Section 11.22, ordinary expiration of the Term or as a result of an Event of
Default by Manager, then (i) Manager shall not transfer and shall exercise its
rights under the Submanagement Agreement to cause Marriott not to transfer any
then existing bookings of rooms or functions at the Hotel to any other hotel of
Manager, Marriott or any Affiliate thereof or otherwise cancel any such
bookings; however, as set forth in the Submanagement Agreement Marriott, acting
in good faith, shall not be prohibited from responding affirmatively to
inquiries or requests by individuals or groups desiring to transfer bookings of
rooms or functions at the Hotel to any other hotel of Marriott or its
affiliates, and (ii) Manager shall act reasonably and in good faith and shall
exercise its rights under the Submanagement Agreement to cause Marriott to act
reasonably and in good faith to allow a transition of management and operations,
including, without limitation, by allowing representatives of Manager and/or any
replacement submanager to market the Hotel to potential guests for a period of
120 days (or such lesser period of time between the applicable notice of
Termination and actual Termination); provided, however, that in accordance with
the Submanagement Agreement such participation by Manager or a replacement
submanager shall not (x) unreasonably interfere with Marriott's operation of the
Hotel and (y) Marriott shall have the right to take such measures they
reasonably deems appropriate to protect its proprietary information with respect
to the Marriott System and its national and regional accounts. In participating
in any marketing of
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the Hotel during a transition period as set forth above, Manager will represent
the interests of Lessee and Owner to the best of its ability.
L. Manager shall peacefully vacate and surrender the Hotel to
Lessee.
The provisions of this Section 11.11 shall survive Termination.
11.12 Trademarks, Trade Names and Intellectual Property
A. All Marriott Trade Names and Marriott Trademarks shall in
all events remain the exclusive property of Marriott (or one of its Affiliates),
and nothing contained in this Agreement shall confer on Owner or Lessee the
right to use any of the Marriott Trade Names or Marriott Trademarks otherwise
than in strict accordance with the terms of this Agreement. Except as provided
in Section 11.11.E, upon Termination, any use of or right to use any of the
Marriott Trade Names or Marriott Trademarks by Owner or Lessee shall cease
forthwith, and Lessee (i) shall immediately, as of the date of such Termination,
place coverings over any signs or similar identification which contain any of
said Marriott Trade Names or Marriott Trademarks, or shall otherwise render such
signs or other similar identification not visible to the public; and (ii) shall
remove any such signs or similar identification from the Hotel by no later than
ten (10) days after the date of Termination. If Lessee has not removed such
signs or similar items within ten (10) days after Termination, Manager shall
have the right to do so (or to allow Marriott to do so pursuant to the
Submanagement Agreement) at Lessee's expense; and if Lessee fails to reimburse
Manager for such expense within ten (10) days after receipt of written notice
thereof from Manager to Lessee, then Manager shall have the right (without
affecting Manager's other remedies under this Agreement) to withdraw (or allow
Marriott to withdraw pursuant to the Submanagement Agreement) the amount of such
expenses from the Operating Accounts or any other funds of Lessee held by or
under the control of Manager other than the FF&E Reserve. For purposes of this
Section 11.12, the term "Marriott Trademarks" shall include, without limitation,
all Trademarks and Trade Names used in conjunction with the Hotel, including but
not limited to restaurant names, lounge names, etc. (other than Trademarks and
Trade Names of third party tenants, licensees or concessionaires at the Hotel),
whether or not the marks contain the "Marriott" name. The right to use or
authorize others to use Marriott Trade Names or Marriott Trademarks belongs
exclusively to Marriott and/or its Affiliates, whether or not the same are
registered and regardless of the source of the same. The provisions of this
Section 11.12 shall survive Termination. Notwithstanding Section 1.02.A, if the
name of the Marriott System is changed, Manager will change or will cause
Marriott to change the name of the Hotel to conform thereto.
B. All Intellectual Property shall at all times be proprietary
to Marriott or its Affiliates, and shall be the exclusive property of Marriott
or its Affiliates. During the Term of this Agreement, Manager shall be entitled
to take all reasonable steps to ensure that the Intellectual Property remains
confidential and is not disclosed to anyone other than
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Manager's employees at the Hotel. Upon Termination, all Intellectual Property
shall be removed from the Hotel by Manager or Marriott, without compensation to
Owner or Lessee, subject to the provisions of Section 11.11.G regarding
Software.
C. Manager and/or its Affiliates shall be entitled, in case of
any breach by Lessee of any of the covenants of this Section 11.12, to
injunctive relief and to any other right or remedy available at law. Section
11.12 shall survive Termination.
11.13 [Intentionally Omitted]
11.14 Waiver
The failure of either party to insist upon a strict performance of any
of the terms or provisions of the Agreement, or to exercise any option, right or
remedy contained in this Agreement, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
11.15 Partial Invalidity
If any portion of the Agreement shall be declared invalid by order,
decree or judgment of a court, the Agreement shall be construed as if such
portion had not been so inserted except when such construction would operate as
an undue hardship on Manager or Lessee or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in the
Agreement.
11.16 Survival
Except as otherwise specifically provided in this Agreement, the rights
and obligations of the parties herein shall not survive any Termination of this
Agreement.
11.17 [Intentionally Omitted]
11.18 Negotiation of Agreement
Lessee and Manager are both business entities having substantial
experience with the subject matter of this Agreement, and each has fully
participated in the negotiation and drafting of this Agreement. Accordingly,
this Agreement shall be construed without regard to the rule that ambiguities in
a document are to be construed against the draftsman. No inferences shall be
drawn from the fact that the final, duly executed Agreement differs in any
respect from any previous draft hereof.
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11.19 Estoppel Certificates
Each party to this Agreement shall at any time and from time to time,
upon not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (a) certifying that this Agreement is
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (b) stating whether or not to the best knowledge of the
certifying party (i) there is a continuing Default or Event of Default by the
non-certifying party in the performance or observance of any covenant, agreement
or condition contained in this Agreement, or (ii) there shall have occurred any
event which, with the giving of notice or passage of time or both, would become
a Default or Event of Default, and, if so, specifying each such Default or Event
of Default or occurrence of which the certifying party may have knowledge; and
(c) stating such other information as the non-certifying party may reasonably
request. Such statement shall be binding upon the certifying party and may be
relied upon by the non-certifying party and/or such third party specified by the
non-certifying party as aforesaid. In addition, upon written request after a
Termination, each party agrees to execute and deliver to the non- certifying
party and to any such third party a statement certifying that this Agreement has
been terminated.
11.20 System Standards
In the event of either (i) a Legal Requirement, including an order,
judgment or directive by a court or administrative body which is issued in
connection with any Litigation involving Owner or Lessee, or (ii) any action
taken by a Mortgagee in connection with a Foreclosure, which in either case
restricts or prevents Manager, in a material and adverse manner, from operating
the Hotel in accordance with System Standards (including without limitation, any
restrictions on expenditures by Manager from the Operating Accounts or from the
FF&E Reserve, other than restrictions which are set forth in this Agreement),
Manager shall be entitled, at its option, to terminate this Agreement upon sixty
(60) days' written notice to Lessee, but only if Marriott has terminated the
Submanagement Agreement pursuant to the comparable provision of the
Submanagement Agreement. The foregoing shall not reduce or otherwise affect the
rights of the parties under either Article IX or Section 11.11.I.
11.21 Arbitration
A. In the event of a dispute between Lessee and Manager with
respect to any issue which is specifically described in this Agreement as a
matter to be decided by arbitration, such dispute shall be determined by
arbitration as provided in this Section 11.21.
B. Disputes shall be resolved in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then
pertaining. The decision of the arbitrators shall be binding, final and
conclusive on the parties.
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C. Lessee and Manager shall each appoint and pay all fees of a
fit and impartial person as arbitrator who shall have had at least ten (10)
years' recent professional experience in the general subject matter of the
dispute. Notice of such appointment shall be sent in writing by each party to
the other, and the arbitrators so appointed, in the event of their failure to
agree upon the resolution of the dispute within thirty (30) days after the
appointment of the second arbitrator, shall appoint a third arbitrator. If
either Lessee or Manager shall fail to appoint an arbitrator, as aforesaid, for
a period of twenty (20) days after written notice from the other party to make
such appointment, then the arbitrator appointed by the party having made such
appointment shall appoint a second arbitrator. The two arbitrators so appointed
shall, in the event of their failure to agree upon resolution of the dispute
within thirty (30) days thereafter, appoint a third arbitrator. If such
arbitrators fail to agree upon a third arbitrator within forty-five (45) days
after the appointment of the second arbitrator, then such third arbitrator shall
be appointed by the American Arbitration Association from its qualified panel of
arbitrators, and shall be a person having at least ten (10) years' recent
professional experience as to the subject matter in question. The fees of the
third arbitrator and the expenses incident to the proceedings shall be borne
equally between Lessee and Manager, unless the arbitrators decide otherwise. The
fees of respective counsel engaged by the parties, and the fees of expert
witnesses and other witnesses called for the parties, shall be paid by the
respective party engaging such counsel or calling or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within
thirty (30) days after appointment of the third arbitrator. Such decision shall
be in writing and in duplicate, one counterpart thereof to be delivered to
Lessee and one to Manager. A judgment of a court of competent jurisdiction may
be entered upon the award of the arbitrators in accordance with the rules and
statutes applicable thereto then obtaining.
11.22 Marriott Restricted Area Right of Termination
Manager agrees to exercise its rights under Section 11.22 of the
Submanagement Agreement including, without limitation, as to any termination of
the Submanagement Agreement pursuant to such Section 11.22, only as directed
from time to time by Lessee.
11.23 Entire Agreement
The Agreement, together with any other writings signed by the parties
expressly stated to be supplemental hereto and together with any instruments to
be executed and delivered pursuant to the Agreement, constitutes the entire
agreement between the parties and supersedes all prior understandings and
writings, and may be changed only by a writing signed by the parties hereto.
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11.24 Expert Resolution Process
If, under the applicable provisions of this Agreement, a matter is to
be referred to an Expert for determination, the following provisions shall
apply:
A. The decision of the Expert shall be final and binding on
the parties and shall not be subject to challenge, whether by arbitration, in
court or otherwise.
B. Each party shall be entitled to make written submissions to
the Expert. If either party makes any submission to the Expert, such party shall
also provide a copy of such submission to the other party, and the other party
shall have the right to comment on such submission. The parties shall make
available to the Expert all books and records relating to the issue in dispute,
and shall render to the Expert any assistance requested of the parties. The
costs of the Expert and of the proceedings shall be borne as directed by the
Expert unless otherwise provided for herein. The Expert may direct that such
costs be treated as Deductions.
C. The terms of engagement of the Expert shall include an
obligation on the part of the Expert to:
1. establish a timetable for the making of
submissions and replies;
2. apply the standards applicable to first-class
hotels in accordance with System Standards; and
3. notify the parties in writing of the Expert's
decision within forty-five (45) days after the date on which
the Expert has been selected (or within such other period as
the parties may mutually agree upon and which is acceptable to
the Expert).
ARTICLE XII
DEFINITION OF TERMS
12.01 Definition of Terms
The following terms when used in the Agreement and the Addendum
attached hereto shall have the meanings indicated:
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"Accounting Period" shall mean the four (4) week accounting periods
having the same beginning and ending dates as Marriott's four (4) week
accounting periods, except that an Accounting Period may occasionally contain
five (5) weeks when necessary to conform Marriott's accounting system to the
calendar.
"Accounting Period Statement" shall have the meaning set forth in
Section 4.01.A.
"Affiliate" shall mean, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For purposes of this definition, the term "control" (including
the terms "controlling", "controlled by" and "under common control with") of a
Person means the possession, directly or indirectly, of the power: (i) to vote
more than fifty percent (50%) of the voting stock of such Person; or (ii) to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting stock, by contract or otherwise.
"Agreement" shall mean this Management Agreement between Lessee and
Manager, including the exhibits attached hereto.
"Annual Operating Statement" shall have the meaning set forth in
Section 4.01.
"Approval" shall mean prior written approval or consent, which, unless
otherwise specified herein, shall not be unreasonably withheld, conditioned or
delayed.
"Base Management Fee" shall mean the total amount payable to Manager
which is set forth on Exhibit "A-1" attached hereto, which the parties hereto
acknowledge is fully payable to Marriott pursuant to the Franchise Agreement and
the Submanagement Agreement
"Building Estimate" shall have the meaning ascribed to it in Section
5.03.
"Business Plan" shall have the meaning set forth in Section 4.05.
"Capital Expenditure" shall mean the expenses necessary for
non-routine, major repairs, alterations, improvements, renewals, replacements,
and additions to the Hotel including, without limitation, to the structure, the
exterior facade and all of the mechanical, electrical, heating, ventilating, air
conditioning, plumbing or vertical transportation elements of the Hotel
building, together with all other expenditures which are classified as "capital
expenditures" under generally-accepted accounting principles.
"Capitalization Multiple" shall mean the number ten (10).
"Case Goods" shall mean furniture and furnishings used in the Hotel,
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, mirrors, pictures, wall decorations and similar items.
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"CC&R's" shall have the meaning ascribed to it in Section 8.04.
"Chain Services" shall have the meaning set forth in Section 1.04.
"Competitive Set" shall mean the five (5) most comparable hotels in the
general trade area of the Hotel as defined in and determined pursuant to the
Submanagement Agreement. If Manager and Marriott fail to agree on either an
alternate competitive set or source with respect to the determination of the
Competitive Set pursuant to the Submanagement Agreement and such matter is to be
resolved by the Expert Resolution Process under the Submanagement Agreement,
then Owner (pursuant to its rights under the Lease and the Owner Agreement)
shall have the right to participate in such Expert Resolution Process. If,
pursuant to the Submanagement Agreement, Manager receives a suggested
alternative competitive set or source of data from Marriott, then Manager shall
not agree on any such alternative competitive set or source, as the case may be,
without the prior approval of Lessee.
"Coverage Ratio" shall mean the number one and four-tenths (1.4).
"Deductions" shall mean the following expenses incurred by Marriott in
operating the Hotel:
1. the cost of sales, including, without limitation,
compensation, fringe benefits, payroll taxes, ERISA-related liabilities,
pension-fund withdrawal liabilities, and other costs related to employees of
Marriott (or one of its Affiliates) who are working for the benefit of the Hotel
(regardless of whether such employees are located at the Hotel or elsewhere);
provided that the foregoing costs shall not include the salary and other
employee costs of Marriott's or any Affiliate's corporate executive staff who
are located at Marriott's or such Affiliate's corporate headquarters, and that
the termination-related costs of regional employees shall only apply in the case
such termination was in connection with the Hotel or as a result of the
termination of this Agreement;
2. departmental expenses incurred at departments
within the Hotel; administrative and general expenses; the cost of marketing
incurred by the Hotel; advertising and business promotion incurred by the Hotel;
heat, light, and power; computer line charges; and routine repairs, maintenance
and minor alterations treated as Deductions under Section 5.01;
3. the cost of Inventories and Fixed Asset Supplies
consumed in the operation of the Hotel;
4. a reasonable reserve for uncollectible accounts
receivable as determined by Marriott;
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5. all costs and fees of independent professionals or
other third parties who are retained by Marriott to perform services required or
permitted under the Submanagement Agreement;
6. all costs and fees of technical consultants,
professionals and operational experts who are retained or employed by Marriott
and Affiliates for specialized services (including, without limitation, quality
assurance inspectors, personnel providing architectural, technical or
procurement services for the Hotel, tax consultants, and personnel providing
legal services in connection with matters directly involving the Hotel) and the
cost of attendance by employees of the Hotel at training and manpower
development programs designated by Marriott;
7. the Base Management Fee (but not including the
portion thereof consisting of the royalty or franchise fees under the Franchise
Agreement);
8. insurance costs and expenses as provided in
Sections 6.01;
9. taxes, if any, payable by or assessed against
Manager related to this Agreement or against Marriott related to the
Submanagement Agreement or to Manager's or Marriott's operation of the Hotel
(exclusive of Manager's or Marriott's income taxes or franchise taxes);
10. all Impositions;
11. the amount of any transfers into the FF&E Reserve
required pursuant to Section 5.02;
12. the Hotel's pro rata share of costs and expenses
incurred in connection with marketing programs developed for the Marriott System
where such expenses are not deducted as either departmental expenses under
paragraph 2 above or as Chain Services under paragraph 12 below, including,
without limitation, the Marriott Rewards Program;
13. the Hotel's pro rata share of the charges for
Chain Services;
14. all costs and expenses of compliance by Marriott
with applicable Legal Requirements pertaining to the operation of the Hotel;
15. such other costs and expenses incurred by
Marriott (either at the Hotel or elsewhere) as are specifically provided for
elsewhere in the Submanagement Agreement or are otherwise reasonably necessary
for the proper and efficient operation of the Hotel; and
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16. royalty fees under the Franchise Agreement.
The term "Deductions" shall not include: (a) debt service payments
pursuant to any Mortgage on the Hotel; (b) payments pursuant to equipment leases
or other forms of financing obtained for the FF&E located in or connected with
the Hotel, unless Manager and Marriott have previously given their written
consent to such equipment lease and/or financing; (c) rental payments pursuant
to any ground lease of the Site; or (d) depreciation on the Hotel or any of its
contents. All of the foregoing items listed in this paragraph shall be paid by
Lessee from its own funds.
"Default" shall have the meaning ascribed to it in Section 9.01.
"Divestiture Date" shall have the meaning set forth in the Settlement
Agreement.
"Effective Date" shall have the meaning ascribed to it in the Preamble.
"Environmental Laws" shall have the meaning ascribed to it in Section
11.08.
"Event of Default" shall have the meaning ascribed to it in Section
9.01.
"Expert" shall mean an independent nationally recognized consulting
firm or individual who is qualified to resolve the issue in question, and who is
appointed in each instance by agreement of the parties. Failing such agreement,
each party shall select one (1) such nationally recognized consulting firm or
individual, and the two (2) respective firms and/or individuals so selected
shall select another such nationally recognized consulting firm or individual to
be the Expert.
"Expert Resolution Process" shall mean the process for Expert
resolution described in Section 11.24 herein.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case
Goods, signage, audio-visual equipment, kitchen appliances, vehicles, carpeting
and equipment, including front desk and back-of-the house computer equipment,
but shall not include Fixed Asset Supplies or Software.
"FF&E Estimate" shall have the meaning ascribed to it in Section
5.02.C.
"FF&E Reserve" shall have the meaning ascribed to it in Section 5.02.A.
"Fiscal Year" shall mean Marriott's Fiscal Year which, as of the
Effective Date, ends at midnight on the Friday closest to December 31 in each
calendar year; the new Fiscal Year begins on the Saturday immediately following
said Friday. Any partial Fiscal Year between the Take-Over Date and the
commencement of the first full Fiscal Year shall constitute a
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separate Fiscal Year. A partial Fiscal Year between the end of the last full
Fiscal Year and the Termination of this Agreement shall also constitute a
separate Fiscal Year. If Marriott's Fiscal Year is changed in the future,
appropriate adjustment to this Agreement's reporting and accounting procedures
shall be made; provided, however, that no such change or adjustment shall alter
the Term of this Agreement or in any way reduce the distributions of Operating
Profit or other payments due hereunder.
"Five-Year Plan" shall mean the "FF&E Budget Approval for 1998-2002"
which is attached hereto as Exhibit "B-1".
"Fixed Asset Supplies" shall mean items included within "Property and
Equipment" under the Uniform System of Accounts including, but not limited to,
linen, china, glassware, tableware, uniforms, and similar items, whether used in
connection with public space or Guest Rooms.
"Food and Beverage Operation" means all of the following Hotel
services, whether performed inside or outside the Hotel: (1) all restaurant,
dining, bar and lounge food and beverage services; (2) all banquet, meeting,
convention, event, catering, and room services food and beverage services; and
(3) any other food, beverage or related services of the Hotel.
"Force Majeure" shall mean acts of God, acts of war, civil disturbance,
governmental action (including the revocation or refusal to grant licenses or
permits, where such revocation or refusal is not due to the fault of the party
whose performance is to be excused for reasons of Force Majeure), strikes,
lockouts, fire, unavoidable casualties or any other causes beyond the reasonable
control of either party (excluding, however, (i) lack of financing, or (ii)
general economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
Mortgagee, upon a default under the Mortgage held by such Mortgagee, which
results in a transfer of title to or possession of the Hotel. The term
"Foreclosure" shall include, without limitation, any one or more of the
following events, if they occur in connection with a default under a Mortgage:
(i) a transfer by judicial foreclosure; (ii) a transfer by deed in lieu of
foreclosure; (iii) the appointment by a court of a receiver to assume possession
of the Hotel; (iv) a transfer of either Owner or Lessee or control of an Owner
or Lessee, by exercise of a stock pledge or otherwise; (v) if title to the Hotel
is held by a tenant under a ground lease, an assignment of the tenant's interest
in such ground lease; or (vi) any similar judicial or non-judicial exercise of
the remedies held by the Mortgagee.
"Franchise Agreement" shall have the meaning ascribed to it in the
Recitals.
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published,
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any comparable index selected by Lessee and reasonably satisfactory to Manager
and Marriott (a "Substitute Index") then prepared and published by an agency of
the Government of the United States, appropriately adjusted for changes in the
manner in which such index is prepared and/or year upon which such index is
based. Any dispute regarding the selection of the Substitute Index or the
adjustments to be made thereto shall be settled by arbitration in accordance
with Section 11.21. Except as otherwise expressly stated herein, whenever a
number or amount is required to be "adjusted by the GDP Deflator", or similar
terminology, such adjustment shall be equal to the percentage increase or
decrease in the GDP Deflator which is issued for the month in which such
adjustment is to be made (or, if the GDP Deflator for such month is not yet
publicly available, the GDP Deflator for the most recent month for which the GDP
Deflator is publicly available) as compared to the GDP Deflator which was issued
for the month in which the Effective Date occurred.
"Gross Food and Beverage Sales" shall mean all sales and receipts of
every kind and nature, including, among other items, credit charges, charge
backs and uncollectible amounts, from the Food and Beverage Operations, but
shall not be deemed to include any sales, hotel, entertainment tax or similar
taxes collected from patrons or guests. Gross Food and Beverage Sales shall be
accounted for on an accrual basis and in accordance with the Uniform System.
"Gross Revenues" shall mean all revenues and receipts of every kind
derived from operating the Hotel and all departments and parts thereof,
including, but not limited to: income (from both cash and credit transactions)
from rental of Guest Rooms, telephone charges, stores, offices, exhibit or sales
space of every kind; license, lease and concession fees and rentals (not
including gross receipts of licensees, lessees and concessionaires); income from
vending machines; income from parking; health club membership fees; food and
beverage sales; wholesale and retail sales of merchandise; service charges; and
proceeds, if any, from business interruption or other loss of income insurance;
provided, however, that Gross Revenues shall not include the following:
gratuities to employees of the Hotel; federal, state or municipal excise, sales
or use taxes or any other taxes collected directly from patrons or guests or
included as part of the sales price of any goods or services; proceeds from the
sale of FF&E; interest received or accrued with respect to the funds in the FF&E
Reserve or the other operating accounts of the Hotel; any refunds, rebates,
discounts and credits of a similar nature, given, paid or returned in the course
of obtaining Gross Revenues or components thereof; insurance proceeds (other
than proceeds from business interruption or other loss of income insurance;
condemnation proceeds (other than for a temporary taking); or any proceeds from
any Sale of the Hotel or from the refinancing of any debt encumbering the Hotel.
"Gross Room Sales" shall mean all sales and receipts of every kind and
nature which accrue from the rental of Guest Rooms including, among other items,
credit charges, charge backs and uncollectible amounts, but shall not be deemed
to include any sales tax, value added tax, or similar taxes collected from
patrons or guests. Gross Room Sales shall be accounted for on an accrual basis
and in accordance with the Uniform System.
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"Guest Profile Data" shall mean personal guest profiles and information
regarding guest preferences.
"Guest Room" shall mean a separately-keyed lodging unit in the Hotel.
"Hazardous Materials" shall have the meaning ascribed to it in Section
11.08.B.
"Hotel" shall mean the Site together with the following: (i) the Hotel
Improvements and all other improvements constructed or to be constructed on the
Site pursuant to this Agreement; (ii) all FF&E, Fixed Asset Supplies and
Inventories installed or located on the Site or in the Hotel Improvements; and
(iii) all easements or other appurtenant rights thereto.
"Hotel Executive Committee" shall mean the following individuals
employed by Marriott at the Hotel: general manager, resident manager,
controller, director of marketing, food and beverage director, the human
resources director, and the chief engineer or, or similar titled positions.
"Hotel Improvements" shall have the meaning set forth in the Recitals.
"Impositions" shall have the meaning set forth in Section 7.01.
"Improvements" shall have the meaning set forth in the Recitals.
"Initial FF&E Reserve Balance" shall mean the dollar amount set forth
on Exhibit "A-1" attached hereto.
"Institutional Lender" shall mean a foreign or domestic commercial
bank, trust company, savings bank, savings and loan association, life insurance
company, real estate investment trust, pension trust, pension plan or pension
fund, a public or privately-held fund engaged in real estate and/or corporate
lending, or any other financial institution commonly known as an institutional
lender (or any Affiliate thereof) having a minimum paid up capital (or net
assets in the case of a pension fund) of One Hundred Million Dollars
($100,000,000).
"Insurance Retention" shall have the meaning ascribed to it in Section
6.01.F.
"Intellectual Property" shall mean: (i) all Software; (ii) all manuals,
brochures and directives issued by Marriott to its employees at the Hotel
regarding the procedures and techniques to be used in operating the Hotel; and
(iii) customer lists and Guest Profile Data.
"Inventories" shall mean "Inventories" as defined in the Uniform System
of Accounts, such as, but not limited to, provisions in storerooms,
refrigerators, pantries and kitchens; beverages in wine cellars and bars; other
merchandise intended for sale; fuel; mechanical supplies; stationery; and other
expensed supplies and similar items.
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"Lease" shall have the meaning ascribed to it in the Recitals.
"Legal Requirement" shall mean any federal, state or local law, code,
rule, ordinance, regulation or order of any governmental authority or agency
having jurisdiction over the business or operation of the Hotel or the matters
which are the subject of this Agreement, including, without limitation, the
following: (i) any building, zoning or use laws, ordinances, regulations or
orders; and (ii) Environmental Laws.
"Lessee" shall have the meaning ascribed to it in the Preamble or shall
mean any successor or permitted assign, as applicable.
"Lessee Prospectus" shall have the meaning set forth in Section 11.09.
"Litigation" shall mean: (i) any cause of action (including, without
limitation, bankruptcy or other debtor/creditor proceedings) commenced in a
federal, state or local court; or (ii) any claim brought before an
administrative agency or body (for example, without limitation, employment
discrimination claims).
"Manager" shall have the meaning ascribed to it in the Preamble hereto
or shall mean any successor or permitted assign, as applicable.
"Manager Prospectus" shall have the meaning set forth in Section 11.09.
"Marriott" shall mean Marriott International, Inc., a Delaware
corporation.
"Marriott Companies" shall mean Marriott and any Affiliate of Marriott.
"Marriott System" shall mean the chain of full-service hotels in the
United States which are operated by Marriott (or one of its Affiliates) under
the Trade Name of "Marriott".
"Marriott Trade Names" shall mean both the name "Marriott" (when used
alone or in connection with another word or words) and any other Trade Names
which contain the word "Marriott".
"Marriott Trademark" shall mean any Trademark which is used in the
operation of hotels in the Marriott System.
"Minor Casualty" shall mean any fire or other casualty which results in
damage to the Hotel and/or its contents, to the extent that the total cost (in
Marriott's reasonable judgment pursuant to the Submanagement Agreement) of
repairing and/or replacing of the damaged portion of the Hotel to the same
condition as existed previously does not exceed the dollar
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amount of Two Hundred Fifty Thousand Dollars ($250,000), said dollar amount to
be adjusted by the GDP Deflator.
"Mortgage" shall mean any mortgage, deed of trust, or security document
encumbering the Hotel and/or the Site or the interest of Owner or Lessee
therein.
"Mortgagee" shall mean the holder of any Mortgage.
"Notice of Proposed Sale" shall have the meaning set forth in Section
10.02.B.
"Operating Accounts" shall have the meaning set forth in Section
4.03.A.
"Operating Loss" shall mean a negative Operating Profit.
"Operating Profit" shall mean, with respect to any given period of
time, the excess of Gross Revenues over Deductions (each calculated in
accordance with this Agreement and the Uniform System).
"Owner's Agreement" shall have the meaning ascribed to it in the
Recitals.
"Performance Termination Period" shall mean the twelve (12) month
period consisting of the six (6) months immediately prior to and including the
month in which the Take-Over Date occurs, and the six (6) months immediately
thereafter.
"Performance Termination Threshold" shall mean the average Operating
Profit over the Performance Termination Period; provided, however, that for the
purpose of calculating the Performance Termination Threshold, the following
adjustments shall be made in calculating the average Operating Profit over the
Performance Termination Period: (i) so-called one-time charges in connection
with Manager's or Marriott's take-over of the Hotel shall not be included as
Deductions, and (ii) costs that would have been incurred during the first six
(6) months of the Performance Termination Period had the Hotel been operating in
accordance with System Standards (i.e. costs of guest complementaries such as
newspapers, front desk staffing and other similar recurring operating costs to
the extent not incurred during such six first (6) month period) shall be
included in Deductions. Within sixty (60) days after the end of the Performance
Termination Period, Manager shall deliver to Lessee a statement prepared by
Marriott of the Performance Termination Threshold, and therein shall describe
any adjustments made pursuant to subsections (i) and/or (ii) above. Any
adjustments made pursuant to subsection (ii) shall be made in good faith by
Marriott as set forth in the Submanagement Agreement and shall reflect the costs
reasonably incurred at similar hotels managed by Marriott. Commencing as of
first day of the fourth (4th) full Fiscal Year during the Term, and for each
Fiscal Year thereafter, the Performance Termination Threshold (as originally
calculated) applicable to such year shall be adjusted by adding (or subtracting)
thereto (or therefrom) an amount equal to the product of (i) 75% of the
percentage change in
61
<PAGE> 67
the GDP Deflator from the Effective Date to the date of adjustment, times (ii)
the Performance Termination Threshold (as originally calculated).
"Person" means an individual (and the heirs, executors, administrators,
or other legal representatives of an individual), a partnership, a corporation,
limited liability company, a government or any department or agency thereof, a
trustee, a trust and any unincorporated organization.
"Previously-Accrued Payables" shall mean all liabilities incurred with
respect to the operation of the Hotel prior to the Take-Over Date (or allocable
to the period prior to the Take-Over Date, under generally accepted accounting
principles). The term "Previously-Accrued Payables" shall include, without
limitation: (i) all accounts payable and accrued liabilities shown on Lessee's
balance sheet (current copies of which, through the Take-Over Date, shall be
delivered to Manager); and (ii) all accrued employee benefits.
"Previously-Accrued Receivables" shall mean all receivables accrued in
connection with the operation of the Hotel prior to the Take-Over Date,
including (i) those accounts receivable which are shown on Lessee's balance
sheet (current copies of which, through the Take-Over Date, shall be delivered
to Manager); and (ii) all other receivables.
"Prime Rate" shall mean the "base rate" of interest announced from time
to time by Bankers Trust Company, New York, New York.
"Proposed Business Plan" shall have the meaning set forth in Section
4.05.
"Qualified Mortgage" shall have the meaning set forth in Section 8.02.
"Reasonable Amount of Working Capital" shall mean an amount equal to
$1,250 times the number of Guest Rooms in the Hotel, plus 1/26 of the annual
payroll costs of the Hotel, such amount to be subject to adjustment after the
first Fiscal Year of operation of the Hotel (either upward or downward) as the
parties may reasonably agree to account for individual characteristics of the
operations of the Hotel, such as seasonality of revenues and expenses. Following
the first Fiscal Year of operation of the Hotel, such amount shall be subject to
adjustment as part of the Proposed Business Plan approval process, provided that
Lessee shall not disapprove a Reasonable Amount of Working Capital that is no
more than the amount arrived at pursuant to the first sentence hereof, as
modified to adjust the amount of $1,250 in proportion to any percentage change
in the Revenue per Room for the Hotel for the previous Fiscal Year.
"Reinstated Franchise Agreement" shall have the meaning set forth in
Section 2.01.B.
"Restricted Area" shall mean the area described in Exhibit "A-1"
attached hereto.
62
<PAGE> 68
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee,
or an alternative source, reasonably satisfactory to both parties, of data
regarding the Revenue Per Room of hotels in the general trade area of the Hotel.
If such Smith's STAR Report is discontinued in the future, or ceases (in the
reasonable opinion of Manager and Marriott) to be a satisfactory source of data
regarding the Revenue Per Room of various hotels in the general trade area of
the Hotel, Manager and Marriott shall select an alternative source pursuant to
the Submanagement Agreement.
"Revenue Index" shall mean that fraction which is equal to (a) the
Revenue Per Room for the Hotel, divided by (b) the average Revenue Per Room for
the hotels in the Competitive Set, as set forth in the Revenue Data Publication.
Appropriate adjustments shall be made in the event of Force Majeure or a major
renovation of the Hotel.
"Revenue Index Threshold" shall mean ninety percent (90%) of the
Revenue Index as calculated over the Performance Termination Period.
"Revenue Per Room" shall mean (i) the term "revenue per room" as
defined by the Revenue Data Publication; or (ii) if the Revenue Data Publication
is no longer being used (as more particularly set forth in the definition of
"Revenue Data Publication"), the aggregate gross room revenues of the hotel in
question for a given period of time divided by the total room nights for such
period. If clause (ii) of the preceding sentence is being used, a "room" shall
be a hotel guestroom which is keyed as a single unit.
"Sale of the Hotel" shall mean any sale, assignment, transfer or other
disposition, for value or otherwise, voluntary or involuntary, of the fee simple
title [leasehold on Atlanta] to the Site and/or the Hotel. For purposes of this
Agreement, a Sale of the Hotel shall also include a lease (or sublease) of all
or substantially all of the Hotel or Site and any sale, assignment, transfer or
other disposition, for value or otherwise, voluntary or involuntary, in a single
transaction or a series of transactions, of the controlling interest in Owner.
If Owner is a corporation, the phrase "controlling interest" shall mean the
right to exercise, directly or indirectly, more than fifty percent (50%) of the
voting rights attributable to the shares of Owner (through ownership of such
shares or by contract). If Owner is not a corporation, the phrase "controlling
interest" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of Owner.
"Settlement Agreement" shall have the meaning ascribed to it in the
Recitals.
"Site" shall have the meaning ascribed to it in Section A of the
Recitals.
"Soft Goods" shall mean all fabric, textile and flexible plastic
products (not including items which are classified as "Fixed Asset Supplies"
under the Uniform System of Accounts)
63
<PAGE> 69
which are used in furnishing the Hotel, including, without limitation:
carpeting, drapes, bedspreads, wall and floor coverings, mats, shower curtains
and similar items.
"Software" shall mean all computer software and accompanying
documentation (including all future upgrades, enhancements, additions,
substitutions and modifications thereof), other than computer software which is
commercially available, which are used by Marriott in connection with the
property management system, the reservation system and all future electronic
systems developed by Marriott for use in the Hotel.
"Special Capital Expenditures" shall mean certain routine, non-major
expenditures which are classified as "capital expenditures" under
generally-accepted accounting principles, but which will be funded from the FF&E
Reserve (pursuant to Section 5.02), rather than pursuant to the provisions of
Section 5.03. Special Capital Expenditures consist of the following types of
expenditures: exterior and interior repainting; resurfacing building walls and
floors; resurfacing parking areas; replacing folding walls; and miscellaneous
similar expenditures.
"Subordination Agreement" shall have the meaning ascribed to it in
Section 8.03.
"Subsequent Owners" shall have the meaning ascribed to it in Section
8.03.
"System Standards" shall mean either (or both, as the context requires)
of the following two (2) categories of standards: (i) the operational standards
(for example, services offered to guests, quality of food and beverages,
cleanliness, staffing and employee compensation and benefits, Chain Services,
the Marriott Rewards Program and other similar programs, etc.); and (ii) the
physical standards (for example, quality of the Improvements, FF&E, and Fixed
Asset Supplies, frequency of FF&E replacements, etc.); each of such standards
shall be the standard which is generally prevailing or in the process of being
implemented at other hotels in the Marriott System, including all services and
facilities in connection therewith that are customary and usual at comparable
hotels in the Marriott System.
"Take-Over Date" shall mean the date which is set forth on Exhibit
"A-1" hereto.
"Term" shall have the meaning ascribed to it in Section 2.01.
"Term Expiration Date" shall mean the date set forth on Exhibit "A-1"
attached hereto; provided, however, that if the Submanagement Agreement is
terminated for any reason in accordance with its terms prior to the Term
Expiration Date set forth in Exhibit "A-1" attached hereto, then the Term
Expiration Date shall be the date of such termination of the Submanagement
Agreement.
"Termination" shall mean the expiration or sooner cessation of this
Agreement.
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<PAGE> 70
"Termination Effective Date" shall have the meaning set forth in
Section 2.01.B.
"Total Casualty" shall mean any fire or other casualty which results in
damage to the Hotel and its contents to the extent that the total cost of
repairing and/or replacing the damaged portion of the Hotel to the same
condition as existed previously would be thirty percent (30%) or more of the
then total replacement cost of the Hotel.
"Trade Area Expiration Date" shall mean the date which is set forth in
Exhibit "A-1" attached hereto.
"Trade Names" shall mean any name, whether informal (such as a
fictitious name or d/b/a) or formal (such as the full legal name of a
corporation or partnership) which is used to identify an entity.
"Trademark" shall mean any word, name, device, symbol, logo, design,
brand, servicemark, other distinctive feature or any combination of the
foregoing which is used to identify or symbolize a party's goods and/or services
and to distinguish them from the goods and/or services of others.
"Uniform System of Accounts" shall mean the Uniform System of Accounts
for the Lodging Industry, Ninth Revised Edition, 1996, as published by the Hotel
Association of New York City, Inc.
"Working Capital" shall mean funds that are used in the day-to-day
operation of the business of the Hotel, including, without limitation, amounts
sufficient for the maintenance of change and petty cash funds, amounts deposited
in operating bank accounts, receivables, amounts deposited in payroll accounts,
prepaid expenses and funds required to maintain Inventories, less accounts
payable and accrued current liabilities.
"WARN Act" shall mean the "Worker Adjustment and Retraining
Notification Act, 29 U.S.C. 2101 et seq.
END OF ARTICLE XII
SIGNATURE PAGE FOLLOWS
65
<PAGE> 71
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed under seal as of the day and year first written above.
MANAGER:
IHC II, LLC
Attest:
By: By:
-------------------------- -----------------------------------
Title: Title:
Lessee:
Attest: PATRIOT AMERICAN HOSPITALITY OPERATING
PARTNERSHIP, L.P.
By: By:
-------------------------- -----------------------------------
Title: Title:
66
<PAGE> 72
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Albany Marriott
189 Wolf Road
Albany, New York 12205
Submanager: Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: February 22, 2009
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $754,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 73
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Atlanta Marriott North Central
2000 Century Boulevard, N.E.
Atlanta, Georgia 30345
Submanager: Marriott Hotel Services, Inc
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: September 1, 2005
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $327,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 74
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Pittsburgh Airport Marriott
100 Aten Road
Pittsburgh, PA 15108
Submanager: Marriott Hotel Services, Inc
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: September 2, 2011
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $18,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 75
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Harrisburg Marriott
4650 Lindle Road
Harrisburg, Pennsylvania 17111
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: March 30, 2004
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $144,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 76
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Houston Marriott North at Greenspoint
255 No. Sam Houston Parkway, East
Houston, Texas 77060
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: One year after Divestiture Date
Term Expiration Date: January 31, 2011
Base Management Fee: Zero (i.e. no Base Management Fee)
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $660,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 77
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Indian River Plantation Marriott Resort
555 N.E. Ocean Boulevard
Stuart, Florida 34996
Submanager: Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: December 31, 2017
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $1,075,000*
FF&E Reserve Contribution: Through December, 1999: Four percent of Gross
Revenues 2000 and thereafter: Five percent of Gross Revenues
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 78
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Philadelphia Marriott West
Matson Ford at Front Street
111 Crawford Avenue
West Conshohocken, Pennsylvania 19428
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: August 28, 2014
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $26,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 79
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: San Diego Marriott Mission Valley
8757 Rio San Diego Drive
San Diego, California 92108
Submanager Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: June 1, 2012
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $451,000
FF&E Reserve Contribution: Through May, 1999: Four percent of Gross
Revenues June 1999 and thereafter: Five percent of Gross
Revenues
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 80
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Minneapolis Marriott Southwest
5801 Opus Parkway
Minnetonka, Minnesota 55343
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: April 22, 2013
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $148,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 81
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Warner Center Marriott Woodland Hills
21850 Oxnard Street
Woodland Hills, California 91367
Submanager: Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: December 15, 2005
Base Management Fee: Two and 85/100 percent (2.85%) of Gross
Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $1,336,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 82
EXHIBIT B-1
5-Year Plan
<PAGE> 83
EXHIBIT B-2
Additional Capital Expenditures
<PAGE> 1
Exhibit 10.7
FORM OF
SUBMANAGEMENT AGREEMENT
by and between
[MARRIOTT INTERNATIONAL, INC./MARRIOTT HOTEL SERVICES, INC.]
(as "SUBMANAGER")
and
IHC II, LLC
--------------------------------------
(as "Primary Manager")
Dated as of _______________________ , 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
MANAGEMENT OF THE HOTEL..................................................................................2
1.01 Acceptance of the Hotel.....................................................................2
1.02 Conversion of the Hotel.....................................................................2
1.03 Management Responsibilities.................................................................3
1.04 Chain Services..............................................................................4
1.05 Employees...................................................................................5
1.06 Primary Manager's Right to Inspect..........................................................5
1.07 Conditions to Take-Over of Hotel............................................................5
ARTICLE II
TERM.....................................................................................................6
2.01 Term........................................................................................6
2.02 Performance Termination.....................................................................6
ARTICLE III
COMPENSATION OF SUBMANAGER...............................................................................7
3.01 Management Fees.............................................................................7
3.02 Operating Profit............................................................................7
ARTICLE IV
ACCOUNTING MATTERS.......................................................................................7
4.01 Accounting, Distributions and Annual Reconciliation.........................................7
4.02 Books and Records...........................................................................8
4.03 Accounts, Expenditures......................................................................9
4.04 Accounting for Conversion of Hotel..........................................................9
4.05 Business Plan...............................................................................9
4.06 Working Capital............................................................................11
4.07 Fixed Asset Supplies.......................................................................11
ARTICLE V
REPAIRS, MAINTENANCE AND REPLACEMENTS...................................................................11
5.01 Repairs and Maintenance Costs Which Are Expensed...........................................11
5.02 FF&E Reserve...............................................................................12
5.03 Capital Expenditures.......................................................................13
5.04 Ownership of Replacements..................................................................14
ARTICLE VI
INSURANCE, DAMAGE, CONDEMNATION, AND FORCE MAJEURE......................................................14
6.01 Insurance..................................................................................14
6.02 Owner's Option to Obtain Property Insurance................................................16
6.03 Damage and Repair..........................................................................17
6.04 Condemnation...............................................................................17
ARTICLE VII
TAXES...................................................................................................18
7.01 Real Estate and Personal Property Taxes....................................................18
ARTICLE VIII
MANAGEMENT OF THE HOTEL ................................................................................18
8.01 Ownership of the Hotel.....................................................................18
8.02 Mortgages..................................................................................19
8.03 Subordination, Non-Disturbance and Attornment..............................................20
8.04 No Covenants, Conditions or Restrictions...................................................21
8.05 Liens; Credit..............................................................................21
8.06 Amendments Requested by Mortgagee..........................................................21
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE IX
<S> <C>
DEFAULTS ...............................................................................................22
9.01 Events of Default..........................................................................22
9.02 Remedies...................................................................................23
9.03 Additional Remedies........................................................................23
ARTICLE X
ASSIGNMENT AND SALE ....................................................................................23
10.01 Assignment.................................................................................23
ARTICLE XI
MISCELLANEOUS...........................................................................................25
11.01 Right to Make Agreement....................................................................25
11.02 Consents and Cooperation...................................................................25
11.03 Relationship...............................................................................25
11.04 Applicable Law.............................................................................25
11.05 Recordation................................................................................25
11.06 Headings...................................................................................26
11.07 Notices....................................................................................26
11.08 Environmental Matters......................................................................27
11.09 Confidentiality............................................................................28
11.10 Projections................................................................................28
11.11 Actions to be Taken Upon Termination.......................................................29
11.12 Trademarks, Trade Names and Intellectual Property..........................................31
11.13 Competing Facilities.......................................................................31
11.14 Waiver.....................................................................................32
11.15 Partial Invalidity.........................................................................32
11.16 Survival...................................................................................32
11.17 Affiliates.................................................................................32
11.18 Negotiation of Agreement...................................................................32
11.19 Estoppel Certificates......................................................................32
11.20 System Standards...........................................................................33
11.21 Arbitration................................................................................33
11.22 Restricted Area Right of Termination.......................................................33
11.23 Entire Agreement...........................................................................34
11.24 Expert Resolution Process..................................................................34
ARTICLE XII
DEFINITION OF TERMS ....................................................................................35
12.01 Definition of Terms........................................................................35
</TABLE>
ii
<PAGE> 4
Exhibit "A-1" Name and Location of Hotel
Manager
Take-Over Date
Term Expiration Date
Base Management Fee
Initial FF&E Reserve Balance
FF&E Reserve Contribution
Restricted Area
Trade Area Expiration Date
Exhibit "A-2" Trade Area Description
Exhibit "B-1" Five-Year Plan
Exhibit "B-2" Additional Capital Expenditures
Exhibit "C" Memorandum of Management Agreement
iii
<PAGE> 5
SUBMANAGEMENT AGREEMENT
This Submanagement Agreement ("Agreement") is executed as of the ____
day of __________, 1998 ("Effective Date"), by IHC II, LLC ("Primary Manager"),
a _________ limited liability company with a mailing address at
________________________________, and [MARRIOTT HOTEL SERVICES, INC or MARRIOTT
INTERNATIONAL, INC.] (as specified on Exhibit "A-1")("Submanager"), a Delaware
corporation, with a mailing address at c/o Marriott International, Inc., 10400
Fernwood Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Patriot American Hospitality Partnership, L.P., an Affiliate
thereof, or an entity in which Patriot American Hospitality Partnership, L.P. or
an Affiliate thereof owns an interest ("Owner") is the owner of fee title
[leasehold title in the case of Atlanta] to the parcel of real property (the
"Site") containing a hotel building or buildings located at the address as set
forth in Exhibit "A-1," together with a lobby, restaurants, meeting rooms,
administrative offices, and certain other amenities and related facilities
(collectively, the "Hotel Improvements" or the "Improvements"). The Site and the
Hotel Improvements, in addition to certain other rights, improvements, and
personal property as more particularly described in the definition of "Hotel" in
Section 12.01 hereof, are collectively referred to as the "Hotel."
B. Owner and Patriot American Hospitality Operating Partnership, L.P.
("Wyndham") have entered into a lease of the Hotel to Wyndham.
C. Wyndham and Primary Manager have entered into a management agreement
(the "Primary Management Agreement") for the management of the Hotel by Primary
Manager.
D. The Hotel is presently (as of the Effective Date) being managed by
Primary Manager (the "Primary Manager").
E. The Hotel is presently operated as a Marriott Hotel pursuant to a
franchise agreement (the "Franchise Agreement") between Marriott International,
Inc., or one or its Affiliates, as franchisor and Interstate Hotels Corporation,
or one of its Affiliates, as franchisee, which franchisee interest has been
assumed by Primary Manager.
F. Owner, Wyndham, Marriott International, Inc. and Interstate Hotel
Company have previously entered into a settlement agreement (the "Settlement
Agreement") concerning the resolution of disputes among the parties, pursuant to
which this Agreement is being executed .
G. Owner, Wyndham, Primary Manager and Submanager, simultaneously with
the execution of this Agreement and effective as of the Take-Over Date, have
entered into an Owner's Agreement (the "Owner's Agreement") which sets forth
certain rights and responsibilities among Owner, Wyndham and Submanager.
H. Primary Manager desires to engage Submanager effective as of the
Take-Over Date to manage and operate the Hotel and Submanager desires to accept
such engagement upon the terms and conditions set forth in this Agreement.
I. All capitalized terms used in this Agreement shall have the meaning
set forth in Article XII hereof.
<PAGE> 6
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and other good and valuable consideration, the receipt of which
is hereby acknowledged, Primary Manager and Submanager agree as follows:
ARTICLE I
MANAGEMENT OF THE HOTEL
1.01 Acceptance of the Hotel
Submanager represents that, due to the fact that the Hotel has been
operated as a Marriott franchised property, it is familiar with the condition
and operation of the Hotel and, subject to the provisions of the Agreement,
Submanager accepts the Hotel "AS IS." Such acceptance is based on the assumption
that the Hotel will continue to be operated by Primary Manager in accordance
with System Standards up to the Take-Over Date. Such acceptance includes:
A. Submanager's agreement to hire all current Hotel employees,
except as provided in Section 1.02A;
B. Submanager's acceptance of all hotel operating systems,
subject to conversion as provided in Section 1.02B;
C. Submanager's acceptance of all existing service and supply
contracts and bookings;
D. Submanager's acceptance of the Improvements and all FF&E,
Inventories, Fixed Asset Supplies, Softgoods and Case Goods, subject to Section
5.02, Section 5.03 and Exhibit A-1.
<PAGE> 7
1.02 Conversion of the Hotel
A. Based on interviews conducted prior to the Take-Over Date,
Submanager shall determine which members of the Hotel Executive Committee will
not be accepted by Submanager for employment with Submanager. In addition,
Submanager will perform (i) drug-testing on all persons applying for employment
with Submanager, and (ii) SRI testing on all managerial applicants. Submanager
and Primary Manager will jointly arrange that such interviewing and such testing
will occur on a schedule which will permit Submanager to give Primary Manager a
notice, at least thirty (30) days prior to the Take-Over Date, as to which
individuals have not been accepted for employment by Submanager. In connection
with the foregoing, Submanager agrees that: (i) Submanager will hire a
sufficient number of the existing employees at the Hotel to avoid the occurrence
of a "closing" under the WARN Act; and (ii) Submanager will hire at least eighty
percent of the existing managerial staff who apply for positions with
Submanager. Primary Manager shall make arrangements so that, prior to the
TakeOver Date, the employment of all such employees who are not accepted for
employment by Submanager is terminated or that such employees have been
transferred to another location. All severance pay due to such employees shall
be paid by the employer who terminates them; provided, however, that severance
costs required to be paid for employees terminated by Submanager will be treated
as Deductions in accordance with the terms of this Agreement. Primary Manager
agrees to indemnify, defend and hold harmless Submanager and its Affiliates (and
their respective directors, officers, shareholders, employees and agents) from
any and all claims, causes of action, costs, expenses and liabilities resulting
from such termination of employment of such employees and/or the failure of
Submanager to hire such employees (including, without limitation, severance pay,
wrongful discharge claims, claims and other costs under the WARN Act, and claims
and/or fines under other applicable Legal Requirements) and/or resulting from
the employment of such individuals prior to such termination (including, without
limitation, disability claims, vacation, sick leave, wages, salaries and other
benefits).
B. Prior to the Take-Over Date, Submanager will install in the
Hotel (at Primary Manager's cost) the Accounting, Payroll and Human Resources
Systems (both hardware and software) necessary for Submanager to operate the
Hotel. The parties estimate that (assuming that the Hotel has the RS-6000
computer system) the cost of such equipment will be approximately One Hundred
and Six Thousand Dollars ($106,000). Such amount is separate from and in
addition to the Initial FF&E Reserve Balance set forth in Exhibit A-1. Primary
Manager shall reimburse Submanager for such costs within thirty (30) days after
being invoiced by Submanager; if Primary Manager fails to do so, Submanager
shall have the right to deduct such amounts from distributions to Primary
Manager under Section 3.02.A.
C. Prior to the Take-Over Date, Submanager shall have access
to the Hotel at reasonable times in order to inspect Hotel and the physical
plant, to familiarize itself with the systems and maintenance, to review
maintenance records and otherwise to perform its customary due diligence prior
to a take-over of a hotel; provided, however, that such access shall not
materially interfere with the operation of the Hotel.
D. Prior to and after the Take-Over Date, Primary Manager
shall (and shall cause Wyndham and Owner to) cooperate with Submanager in
obtaining and transferring such licenses, permits and approvals necessary for
the operation of the Hotel (subject to the provision contained in Section
1.07A.1).
1.03 Management Responsibilities
A. From and after the Take-Over Date, Submanager shall, and
Primary Manager hereby authorizes and engages Submanager to, supervise, direct
and control the management and operation of the Hotel in accordance with the
terms and conditions of this Agreement. During the Term, the Hotel shall be
known as a Marriott Hotel, with such additional identification determined by
Submanager as may be necessary to provide local identification.
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B. Submanager shall manage the Hotel in accordance with System
Standards and shall, subject to the terms of this Agreement, perform each of the
following functions (the costs and expenses of which shall be Deductions) with
respect to the Hotel:
1. Recruit, employ, supervise, direct and discharge
the employees at the Hotel.
2. Establish prices, rates and charges for services
provided in the Hotel, including
Guest Room rates.
3. Establish and revise, as necessary, administrative
policies and procedures, including policies and procedures for the control of
revenue and expenditures, for the purchasing of supplies and services, for the
control of credit, and for the scheduling of maintenance, and verify that the
foregoing procedures are operating in a sound manner.
4. Make payments on accounts payable and handle
collections of accounts receivable.
5. Arrange for and supervise public relations and
advertising, prepare marketing plans, and make available to the Hotel the
benefits of various marketing programs in use in the Marriott System as they may
exist from time to time, such as the Marriott Rewards Program.
6. Procure all Inventories and replacement of Fixed
Asset Supplies.
7. Prepare and deliver interim accountings, annual
accountings, Annual Operating Statements, Building Estimates, FF&E Estimates,
Proposed Business Plans, and such other information as is required by this
Agreement and be available at reasonable times to discuss the above-listed items
as well as the operations at the Hotel generally with Primary Manager.
8. Plan, execute and supervise repairs, maintenance,
and FF&E purchases at the Hotel.
9. Provide, or cause to be provided, risk management
services relating to the types of insurance required to be obtained or provided
by Submanager under this Agreement.
10. Obtain and keep in full force and effect, either
in Owner's or Wyndham's name, as may be required by applicable law, any and all
licenses and permits to the extent same is within the control of Submanager (or,
if same is not within the control of Submanager, Submanager shall use due
diligence and reasonable efforts to obtain and keep same in full force and
effect).
C. The operation of the Hotel from and after the Take-Over
Date shall be under the exclusive supervision and control of Submanager which,
except as otherwise specifically provided in this Agreement, shall be
responsible for the proper and efficient operation of the Hotel. In fulfilling
its obligations under this Agreement, Submanager shall act as a reasonable and
prudent manager of the Hotel, having regard for the status of the Hotel and
maintaining the System Standards. Submanager shall have discretion and control
in all matters relating to management and operation of the Hotel, including,
without limitation, the following: charges for Guest Rooms, commercial space,
and services provided by the Hotel; food and beverage services; employment
policies; credit policies; granting of leases, subleases, licenses and
concessions for shops and businesses within the Hotel, provided that the term of
any such lease, sublease, license or concession shall not exceed the Term of
this Agreement and rent under any such lease or sublease or payments under any
license or concession agreement shall not be computed based upon the net income
or profits derived from the business activities of the tenant or licensee or
concessionaire at the Hotel; receipt, holding and disbursement of funds;
maintenance of bank accounts; procurement of Inventories (including initial
Inventories), supplies and services; payment of costs and expenses specifically
provided for in this Agreement or otherwise reasonably necessary for the proper
and efficient operation
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of the Hotel; and, generally, all activities necessary for operation of the
Hotel. Submanager agrees that it shall consult with Primary Manager prior to the
hiring of any general manager of the Hotel
D. Submanager will comply with and abide by all applicable
Legal Requirements (except for certain Legal Requirements which are Primary
Manager's, Wyndham's or Owner's responsibility under Section 5.03 and Section
11.08 hereof) pertaining to its operation of the Hotel, including in connection
with any drug testing or SRI testing of employees and applicants. Primary
Manager shall cause Wyndham to comply (or shall cause Wyndham to cause Owner to
comply, as applicable) with and abide by all applicable Legal Requirements
pertaining to the Hotel Improvements or to Owner's or Wyndham's ownership
interest in the Hotel (including, without limitation, Primary Manager's,
Wyndham's or Owner's obligations under Sections 5.03 and 11.08 hereof). Either
Owner, Wyndham, Primary Manager or Submanager shall have the right, but not the
obligation, in its reasonable discretion, to contest or oppose, by appropriate
proceedings, any such Legal Requirements. The reasonable expenses of any such
contest of a Legal Requirement shall be paid from Gross Revenues as Deductions.
E. Submanager will indemnify, defend and hold Owner, Wyndham
and Primary Manager harmless from and against all claims, loss, cost, liability
and damage (including, without limitation, attorneys' fees and expenses, and the
cost of litigation) arising from any willful or grossly negligent violation of
any of Submanager's corporate policies by any member of the Hotel Executive
Committee, if said claims, loss, cost, liability or damage is not insured.
1.04 Chain Services
Commencing with the Take-Over Date and thereafter during the Term of
this Agreement, Submanager shall cause to be furnished to the Hotel certain
services (collectively referred to herein as "Chain Services") that are
furnished generally on a central, regional or other group basis to other hotels
in the Marriott System and which benefit such hotels such as: (i) national sales
office services; central training services; career development and relocation of
management personnel; central advertising and promotion (including direct and
image media and advertising administration); the Marriott national reservations
system services and the Marriott computer payroll and accounting services;
benefits administration; gift shop merchandise handling; and (ii) such
additional central, regional or other group services as are or may be, from time
to time, furnished for the benefit of hotels in the Marriott System or in
substitution for services now performed at individual hotels which may be more
efficiently performed on a group basis. The charges for Chain Services shall
include, as applicable, allocation of salaries, wages, and overhead related to
the employees of Submanager, Marriott, or any Affiliate involved in providing
any of the Chain Services and shall be allocated on a fair basis among all
hotels receiving such services. At the time of the delivery of each Annual
Operating Statement, Submanager shall deliver to Primary Manager a certification
executed by an officer of Marriott that (i) the allocation of charges for Chain
Services is consistent with GAAP and generally accepted hotel practices, (ii)
such charges are allocated among the hotels in the Marriott System in a fair and
equitable manner, and (iii) the method of allocation of such expenses has not
been changed since the date of this Agreement or, if they have changed, advising
Primary Manager of the details of such change.
1.05 Employees
All personnel employed at the Hotel shall, at all times from and after
the Take-Over Date, be the employees of Submanager. Submanager shall have
absolute discretion with respect to all personnel employed at the Hotel,
including, without limitation, decisions regarding hiring, promoting,
transferring, compensating, supervising, terminating, directing and training all
employees at the Hotel, and, generally, establishing and maintaining all
policies relating to employment. Submanager shall be permitted to provide free
accommodations and amenities to its employees and representatives living at or
visiting the Hotel in connection with its management or operation of the Hotel
to the extent such provision of accommodations and amenities is customary with
System Standards. No person shall otherwise be given gratuitous accommodations
or services without prior approval of Primary Manager and Submanager, except in
accordance with usual practices of the hotel and travel industry.
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1.06 Primary Manager's Right to Inspect
Primary Manager and its respective agents and Owner and its respective
agents shall have access to the Hotel at any and all reasonable times for the
purpose of inspection. Owner and Wyndham shall have access to the Hotel at any
and all reasonable times upon prior advance notice to the general manager of the
Hotel for the purpose of showing the Hotel to prospective purchasers, tenants or
Mortgagees.
1.07 Conditions to Take-Over of Hotel
A. The obligation of Submanager to assume operation of the
Hotel hereunder shall be conditioned upon each of the following:
1. That Submanager has received, prior to the
Take-Over Date, all licenses, permits, and all other approvals necessary for
operation of the Hotel by Submanager (or valid transfers of such licenses, etc.,
to Submanager); provided, however, that to the extent such licenses, permits and
other approvals are held by Owner, Wyndham or Primary Manager and Submanager can
operate the hotel with such licenses, permits and other approvals in the name of
Owner, Wyndham or Primary Manager, then such licenses, permits and other
approvals shall remain in the name of Owner, Wyndham or Primary Manager, as
applicable;
2. If required under Article VIII, that Submanager
and each Mortgagee have executed the "Subordination Agreement" described in
Section 8.03;
3. That the Initial FF&E Reserve Balance, as
described in Section 5.02.A, shall have been deposited in the FF&E Reserve.
4. That the Primary Manager has provided the
necessary initial Working Capital, as described in Section 4.06.
B. Notwithstanding any other provision of this Agreement,
Submanager shall have the right to terminate this Agreement, on thirty (30)
days' written notice to Primary Manager, if (i) the conditions to the take-over
of the Hotel by Submanager which are listed in Section 1.07.A.1 and 2 have not
been satisfied within thirty (30) days after receipt of notice from Submanager
that such conditions remain unsatisfied at the time Submanager provides such
notice (which notice may be given by Submanager at any time on or after the
Take-Over Date), or (ii) if the conditions to the takeover of the Hotel by
Submanager which are listed in Section 1.07.A.3 and 4 have not been satisfied
within ten (10) days after receipt of notice from Submanager that such
conditions remain unsatisfied at the time Submanager provides such notice (which
notice may be given by Submanager at any time on or after the Takeover Date).
Any such termination shall not be exclusive of any other rights or remedies of
Submanager under this Agreement, the Owners Agreement or the Settlement
Agreement.
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ARTICLE II
TERM
2.01 Term
A. The term ("Term") of this Agreement shall begin on the
Take-Over Date and shall continue until the Term Expiration Date. Pursuant to
the terms of the Settlement Agreement, during the Term of this Agreement, the
Franchise Agreement shall be suspended without penalty (except for the royalty
fee provisions thereof, and the royalty fees payable thereunder shall continue
to be paid to Marriott International, Inc.) and is of no force or effect until
such time as the Franchise Agreement may be reinstated pursuant to the
provisions of Section 2.01.B below. Such royalty fee payments under the
Franchise Agreement shall be paid out of Gross Revenues hereunder, and
Submanager is hereby authorized and directed to make such payments, which shall
be treated as Deductions hereunder for all purposes.
B. In the event of any Termination of this Agreement (but
excluding: (i) natural expiration at the Term Expiration Date, or (ii)
Termination pursuant to Section 11.22), Primary Manager shall, as of the
effective date of said Termination (the "Termination Effective Date") reinstate
the Franchise Agreement (the "Reinstated Franchise Agreement"), modified as
follows: (w) such Reinstated Franchise Agreement shall be in effect from and
after the Termination Effective Date, and shall continue until the Term
Expiration Date, (x) the franchise fees under such Reinstated Franchise
Agreement shall continue until the Term Expiration Date, (y) the restrictions on
Owner, Lessee or Primary Manager from developing, owning, franchising or
operating other hotels within a designated area around the Hotel shall not be
effective, and (z) such other modifications to the Franchise Agreement as are
provided in the Settlement Agreement. In addition, upon such Termination (i.e.
other than a Termination which is excluded in the parenthetical clause in the
first sentence of this Section 2.01.B), Submanager shall be paid the "Special
Fee" as defined herein, which, in the event the lump sum payment option is
selected, shall be paid on or before the effective date of Termination, to the
extent not paid pursuant to the Settlement Agreement. In the event of any
Termination of this Agreement pursuant to Section 11.22, the Franchise Agreement
shall not be reinstated and as of the date of such Termination, no further
royalty fees shall be payable under the Franchise Agreement, and the Franchise
Agreement will not be of any further force or effect.
2.02 Performance Termination
A. Subject to the provisions of Section 2.02.B below, Primary
Manager shall have the option to terminate this Agreement, if:
1. With respect to any two (2) Fiscal Years within
any three (3) Fiscal Year period (not including any portion of any Fiscal Year
prior to the expiration of the first (1st) full Fiscal Year after the TakeOver
Date) Operating Profit is less than the applicable Performance Termination
Threshold; and
2. The Revenue Index of the Hotel during each of such
Fiscal Years (i.e. any two (2) Fiscals Years within three (3) Fiscal Year
period) is less than the Revenue Index Threshold.
Such option to terminate shall be exercised by serving written notice thereof on
Submanager no later than sixty (60) days after the receipt by Primary Manager of
the annual accounting under Section 4.01.B hereof for the second of the two (2)
Fiscal Years referred to in Section 2.02.A.1. If Submanager does not elect to
avoid such Termination pursuant to Section 2.02.B below, this Agreement shall
terminate as of the end of the fourth (4th) full Accounting Period following the
date on which Submanager receives Primary Manager's written notice of its intent
to terminate this Agreement; provided that such period of time shall be extended
as required by applicable Legal Requirements pertaining to the termination of
the employment of the employees at the Hotel. Primary Manager's failure to
exercise its right to terminate this Agreement pursuant to Section 2.02.A with
respect to any given Fiscal Year shall
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not be deemed an estoppel or waiver of Primary Manager's right to terminate this
Agreement with respect to subsequent Fiscal Years to which this Section 2.02.A
may apply.
B. Upon receipt of Primary Manager's written notice of
Termination under Section 2.02.A, Submanager shall have the option, to be
exercised within sixty (60) days after receipt of said notice, to avoid such
Termination by electing (in a notice to Primary Manager) to waive the payment of
the Base Management Fee and the payment of franchise fees under the Franchise
Agreement (beginning as of the first day of the next full Accounting Period
after the date of such notice from Submanager) until such time as the total
cumulative amount (the "Cumulative Waived Base Fees") of such waived Base
Management Fee and franchise fees equals the total amount (the "Cure Payment")
by which Operating Profit for each of the Fiscal Years in question (i.e., the
Fiscal Years referred to in Section 2.02.A.1) was less than the Performance
Termination Threshold. [In the case of the Houston, the following applies: Upon
receipt of Primary Manager's written notice of Termination under Section 2.02.A,
Submanager shall have the option, to be exercised within sixty (60) days after
receipt of said notice, to avoid such Termination by electing (in a notice to
Primary Manager) to pay an amount equal to the amount (the "Cure Payment") by
which Operating Profit for each of the Fiscal Years in question (i.e., the
Fiscal Years referred to in Section 2.02.A.1) was less than the Performance
Termination Threshold, and shall pay the Cure Payment within thirty (30) days of
providing such notice to Primary Manager.] In the event Submanager makes a Cure
Payment pursuant to this Section 2.02.B, the Fiscal Years with respect to which
such Cure Payment was made shall thereafter not be treated, for purposes of
subsequent elections by Primary Manager pursuant to Section 2.02.A, as Fiscal
Years in which the circumstances described in Section 2.02.A.1 have occurred. If
Submanager exercises such option to make such Cure Payment, then the foregoing
Primary Manager's election to terminate this Agreement under Section 2.02.A
shall be canceled and of no force or effect with respect to the two (2) Fiscal
Years in question, and this Agreement shall not terminate. Such cancellation,
however, shall not affect the right of Primary Manager, as to each subsequent
Fiscal Year to which Section 2.02.A applies, to again elect to terminate this
Agreement pursuant to the provisions of Section 2.02.A. If Submanager does not
exercise its option to make a Cure Payment as aforesaid, then this Agreement
shall be terminated as of the date set forth in Section 2.02.A. Submanager may
not elect to make a Cure Payment more than one (1) time during the Term hereof.
ARTICLE III
COMPENSATION OF SUBMANAGER
3.01 Management Fees
Submanager shall be paid the Base Management Fee, which shall be
retained by Submanager from Gross Revenues.
3.02 Operating Profit
Operating Profit shall be distributed to Primary Manager in accordance
with Article IV.
ARTICLE IV
ACCOUNTING MATTERS
4.01 Accounting, Distributions and Annual Reconciliation
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A. Submanager agrees that it shall institute (as soon as
reasonably practicable after the TakeOver Date, but in no event more than sixty
(60) days after the Take-Over Date) cash management protocols at the Hotel in
order to distribute to an account designated and owned by Primary Manager on a
daily basis (to the extent possible, subject to holidays, banking holidays, and
other days in which account transfers cannot be effected by banks) all amounts
in the Operating Accounts that are in excess of the Reasonable Amount of Working
Capital and amounts due Submanager. During the up to 60 day period when such
daily sweep is being implemented, Submanager shall sweep weekly to Primary
Manager's account on a manual basis. Within twenty (20) days after the close of
each Accounting Period (Submanager hereby agreeing to use reasonable best
efforts to deliver reports in fifteen (15) days), Submanager shall deliver an
interim accounting (the "Accounting Period Statement") to Primary Manager
showing Gross Revenues, Deductions, Operating Profit, and applications and
distributions thereof for the preceding Accounting Period.
B. Calculations and payments of the Base Management Fee, and
distributions of Operating Profit made with respect to each Accounting Period
within a Fiscal Year shall be accounted for cumulatively. Within seventy-five
(75) days after the end of each Fiscal Year, Submanager shall deliver to Primary
Manager a statement (the "Annual Operating Statement") in reasonable detail
summarizing the operations of the Hotel for the immediately preceding Fiscal
Year and a certificate of Submanager's chief accounting officer certifying that,
to the best of his or her knowledge, such Annual Operating Statement is true and
correct. The parties shall, within five (5) business days after Primary
Manager's receipt of such Annual Operating Statement, make any adjustments, by
cash payment, in the amounts paid or retained for such Fiscal Year as are needed
because of the final figures set forth in such Annual Operating Statement. Such
Annual Operating Statement shall be controlling over the preceding Accounting
Period Statements. No adjustments shall be made for any Operating Loss in any
preceding Fiscal Year.
C. To the extent there is an Operating Loss for any Accounting
Period, additional funds in the amount of any such Operating Loss shall be
provided by Primary Manager within thirty (30) days after Submanager has
delivered written notice thereof to Primary Manager. If Primary Manager does not
so fund such Operating Loss within the thirty (30) day time period, Submanager
shall have the right (without affecting Submanager's other remedies under this
Agreement) to withdraw an amount equal to such Operating Loss from future
distributions of funds otherwise due to Primary Manager.
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4.02 Books and Records
Books of control and account pertaining to operations at the Hotel
shall be kept on the accrual basis and in all material respects in accordance
with the Uniform System of Accounts. Primary Manager may at reasonable intervals
during Submanager's normal business hours examine such records. If Primary
Manager desires, at its own expense, to audit, examine, or review the Annual
Operating Statement, Primary Manager shall notify Submanager in writing within
sixty (60) days after receipt of such Annual Operating Statement of its
intention to audit and begin such audit no sooner than thirty (30) days and no
later than sixty (60) days after Submanager's receipt of such notice. Primary
Manager shall complete such audit within ninety (90) days after commencement
thereof. If Primary Manager does not make such an audit, then such Annual
Operating Statement shall be deemed to be conclusively accepted by Primary
Manager as being correct, and Primary Manager shall have no right thereafter,
except in the event of fraud by Submanager, to question or examine the same. If
any audit by Primary Manager discloses an understatement of any amounts due
Primary Manager, Submanager shall promptly pay Primary Manager such amounts
found to be due, plus interest thereon (at the Prime Rate plus one percent (1%)
per annum) from the date such amounts should originally have been paid. If any
audit discloses that Submanager has not received any amounts due it, Primary
Manager shall pay Submanager such amounts, plus interest thereon (at the Prime
Rate plus one percent (1%) per annum) from the date such amounts should
originally have been paid. Any dispute concerning the correctness of an audit
shall be settled by arbitration, in accordance with Section 11.21.
Notwithstanding anything to the contrary contained in this Agreement, Primary
Manager's auditors (which may be Owner's auditors) shall have the right upon
reasonable advance notice to conduct preliminary audit procedures prior to the
end of a Fiscal Year in preparation for the annual audit outlined above (e.g. ,
such auditors would have the right to audit during the fourth quarter of a
Fiscal Year the first three quarters of such Fiscal Year), and Submanager shall
provide access to the books and control of account for the Hotel for such
purpose. Submanager also agrees to make available in connection with Primary
Manager's audit such other information as it may have in order that Primary
Manager can prepare or furnish Wyndham with the information for Wyndham to
prepare such reports as may be required under the Lease and so that Owner and
Wyndham can make filings required under any applicable securities laws and
regulations or requirements of any applicable stock exchange. Submanager agrees
to retain all accounting records for each Fiscal Year for at least three (3)
years after the expiration of such Fiscal Year.
4.03 Accounts, Expenditures
A. All funds derived from operation of the Hotel shall be
deposited on a daily basis (to the extent possible, subject to holidays, banking
holidays and other days in which deposits to banks cannot be effected) by
Submanager in bank accounts (the "Operating Accounts") in a bank or banks
designated by Submanager, subject to Primary Manager's reasonable approval.
Withdrawals from said Operating Accounts shall be made solely by representatives
of Submanager whose signatures have been authorized. Submanager shall assume the
responsibilities of a fiduciary with respect to Submanager's handling of Primary
Manager's funds which are derived from the operation of the Hotel. Reasonable
petty cash funds shall be maintained at the Hotel.
B. All payments made by Submanager hereunder shall be made
from the Operating Accounts, petty cash funds, or from the FF&E Reserve (in
accordance with Section 5.02). Submanager shall not be required to make any
advance or payment with respect to the Hotel except out of such funds, and
Submanager shall not be obligated to incur any liability or obligation with
respect to the Hotel without assurances that the necessary funds for the
discharge thereof will be provided by Primary Manager. In any event, if any such
liability or obligation is incurred by Submanager with respect to the Hotel,
Submanager shall have the option to deduct such amounts from Primary Manager's
share of Operating Profit if Primary Manager has not fully reimbursed Submanager
for said amounts within ten (10) days after Primary Manager's receipt of notice
from Submanager that said amounts are due.
C. Debts and liabilities incurred by Submanager as a result of
its operation and management of the Hotel pursuant to the terms hereof, whether
asserted before or after Termination, will be paid by Primary
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Manager to the extent funds are not available for that purpose from Gross
Revenues. The provisions of this Section 4.03 C shall survive Termination.
4.04 Accounting for Conversion of Hotel
A. It shall be a general principle in the accounting for the
Hotel that all liabilities (including, without limitation, all
Previously-Accrued Payables) incurred prior to the Take-Over Date, or properly
allocated to the period prior to the Take-Over Date under generally accepted
accounting principles, shall be paid by Primary Manager from its own funds, and
not from Gross Revenues nor from the FF&E Reserve. Primary Manager agrees to
indemnify, defend and hold Submanager and its Affiliates (and their respective
directors, officers, shareholders, employees and agents) harmless from and
against all claims, causes of action, costs, expenses and damages arising from
such liabilities.
B. As a convenience to the Primary Manager, Submanager agrees
to apply any Previously- Accrued Receivables which Submanager receives at the
Hotel to pay those Previously-Accrued Payables which Primary Manager has
confirmed in writing to Submanager. Submanager shall use commercially reasonable
procedures to collect such Previously-Accrued Receivables, but shall not be
obligated to institute any legal actions with respect to any Previously-Accrued
Receivables. If the Previously-Accrued Payables exceed the Previously- Accrued
Receivables, Primary Manager shall be responsible for the payment of such
excess. Any surplus of the Previously-Accrued Receivables received by Submanager
over such Previously-Accrued Payables shall be promptly remitted by Submanager
to Primary Manager.
C. As of the Take-Over Date, the cash on hand at the Hotel
shall be deposited in one of the Operating Accounts set up by Submanager
pursuant to Section 4.03, and shall be treated as part of the Working Capital
described in Section 4.06. The term "cash on hand" shall not be deemed to
include amounts remaining in the FF&E Reserve which was maintained by Primary
Manager.
4.05 Business Plan
A. Submanager shall submit to Primary Manager for its approval
(which shall not be unreasonably withheld or delayed), at least forty-five (45)
days prior to the beginning of each Fiscal Year which begins after the Take-Over
Date, a preliminary draft (the "Proposed Business Plan") of the budget of the
estimated financial results of the operation of the Hotel during the next Fiscal
Year. Primary Manager's approval shall be deemed to have been given if
Submanager has received no notice from Primary Manager to the contrary within
forty-five (45) days after Primary Manager's receipt of such Proposed Business
Plan. Such Proposed Business Plan shall project the estimated Gross Revenues,
departmental profits, Deductions, and Operating Profit for the forthcoming
Fiscal Year for the Hotel. In preparing the Proposed Business Plan for each
Fiscal Year, Submanager's goal will be the maximization of the long-term
Operating Profit of the Hotel, in keeping with System Standards and the general
standards of the hotel industry for similar properties. If there are material
items in any given Proposed Business Plan which have been budgeted at
significantly different amounts from the amounts actually experienced (or
projected) for the same items in the preceding Fiscal Year, Submanager agrees to
take reasonable steps to ensure that, at Primary Manager's request, qualified
personnel from Submanager's staff are available at the Hotel to explain these
differences to Primary Manager. A meeting (or meetings) for such purpose shall
be held, at the Hotel, at Primary Manager's request, within a reasonable period
of time after the submission to Primary Manager of the Proposed Business Plan.
Submanager will at all times give good faith consideration to Primary Manager's
suggestions regarding any Proposed Business Plan, and in any event each Proposed
Business Plan is subject to the approval of Primary Manager as set forth in
Section 4.05.B.
B. Primary Manager shall not be entitled to withhold its
approval of any Proposed Business Plan based on its objection to: (i)
Submanager's reasonable projections of either Gross Revenues or the components
thereof; (ii) projected costs and expenses which are "system charges" (that is,
costs and expenses which are generally uniform throughout the Marriott System,
such as: the charges for Chain Services; the costs of the Marriott
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frequent guest program or, if applicable, the "Marriott Rewards Program" and
other chain-wide marketing programs; employee benefits and other compensation
programs); (iii) costs and expenses which are not within the control of either
Owner, Wyndham, Primary Manager or Submanager, such as Impositions and the cost
of utilities; or (iv) increases in projected costs and expenses of operating the
Hotel, which increases are primarily caused by projected increases in Gross
Revenues. The approval of Primary Manager (as set forth in the first sentence of
Section 4.05.A) shall not be required if, and to the extent that, the Proposed
Business Plan for a given Fiscal Year is, in all material respects, the same as
the Proposed Business Plan for the preceding Fiscal Year, as adjusted by the GDP
Deflator; provided, however, that in any event (x) the FF&E Reserve expenditures
and Capital Expenditures components of such Proposed Business Plan shall be
subject to Primary Manager's approval and (y) if there were, in the prior Fiscal
Year, expenditures from the FF&E Reserve or Capital Expenditures which affect
operating costs or revenues, then the Proposed Business Plan shall be subject to
the approval of the Primary Manager as set forth in Section 4.05.A. If Primary
Manager and Submanager fail to mutually agree on the Proposed Business Plan
within sixty (60) days after the submission to Primary Manager of the Proposed
Business Plan, as described in the first sentence of Section 4.05.A, either
party shall have the right to submit to the Expert Resolution Process the issue
of whether or not the Proposed Business Plan submitted by Submanager is
unreasonable, given the goals which are set forth in the fourth sentence of
Section 4.05.A. While such determination by the Expert is pending, Submanager
shall operate the Hotel, in all material respects, based on the Business Plan
for the preceding Fiscal Year (as adjusted by the GDP Deflator), with
adjustments for those items over which there is no disagreement between Primary
Manager and Submanager, and with adjustments for those items listed in clauses
(i), (ii), (iii), and (iv) above. The Proposed Business Plan, as approved by
Primary Manager (or deemed approved pursuant to the Expert Resolution Process),
is herein referred to as the "Business Plan".
C. With respect to the "stub year" (if any) immediately
following the Take-Over Date, Submanager shall submit the Proposed Business Plan
to Primary Manager by no later than thirty (30) days prior to the Take-Over
Date.
D. Submanager shall diligently operate the Hotel in accordance
with the Business Plan. It is understood, however, that the Business Plan is an
estimate only and that unforeseen circumstances such as the costs of labor,
material, services and supplies, casualty, operation of law, or economic and
market conditions, may make adherence to the Business Plan impracticable, and
Submanager shall be entitled to depart therefrom due to causes of the foregoing
nature. In the event that Submanager determines that circumstances require that
there will be material changes in the Business Plan, Submanager shall so notify
Primary Manager, and, as to any components of a Business Plan over which Primary
Manager has approval rights under this Agreement, Primary Manager shall have the
right to reasonably approve such proposed material changes. Primary Manager's
approval shall be deemed to have been given if Submanager has received no notice
from Primary Manager to the contrary within twenty (20) days after Primary
Manager's receipt of such notice of proposed material changes in the Business
Plan.
E. Submanager shall provide to Primary Manager with fifteen
(15) days after the expiration of each fiscal quarter a reforecast of the
Business Plan for such Fiscal Year.
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4.06 Working Capital
A. On or prior to the Take-Over Date, Primary Manager shall
provide Submanager with initial Working Capital for the Hotel in the amount of
One Thousand Two Hundred Fifty Dollars ($1,250) per guest room, as adjusted by
the GDP Deflator, per Guest Room, less cash on hand at the Hotel as of the
Take-Over Date. If Primary Manager fails to provide any Working Capital as
required under this Section 4.06.A, Submanager shall have the right (after first
giving Primary Manager ten (10) days written notice thereof) to deduct the
required amounts from Gross Revenues.
B. Primary Manager shall, from time to time during the Term,
promptly, but no later than thirty (30) days after written request by
Submanager, advance any additional funds, over and above those required pursuant
to Section 4.06.A, necessary to maintain a Reasonable Amount of Working Capital.
If Primary Manager does not so fund additional Working Capital within the said
thirty (30) day time period, Submanager shall have the right (without affecting
Submanager's other remedies under this Agreement) to withdraw an amount equal to
the funds requested in order to maintain a Reasonable Amount of Working Capital
from future distributions of funds otherwise due to Primary Manager. All funds
so advanced for Working Capital shall be utilized by Submanager for the purposes
of this Agreement pursuant to cash management policies established for the
Marriott System. Upon Termination, Submanager shall, except as otherwise
provided in this Agreement, return the outstanding balance of the Working
Capital to Primary Manager.
4.07 Fixed Asset Supplies
Primary Manager shall, within thirty (30) days after request by
Submanager, provide funds that are necessary to increase the level of Fixed
Asset Supplies to levels determined by Submanager, in its good faith judgment,
to be necessary to satisfy the needs of the Hotel as its operation may, from
time to time, require. The cost of Fixed Asset Supplies consumed in the
operation of the Hotel shall constitute a Deduction. Fixed Asset Supplies shall
remain the property of Hotel throughout the term of the Agreement and upon
Termination (except for those Fixed Asset Supplies which are purchased by
Submanager pursuant to Section 11.11.E).
4.08 Litigation
Submanager shall give notice to Primary Manager from time to time of
any material litigation affecting the Hotel, together with such additional
information within the possession or control of Submanager or the applicable
insurance carrier as Primary Manager may reasonably request.
ARTICLE V
REPAIRS, MAINTENANCE AND REPLACEMENTS
5.01 Repairs and Maintenance Costs Which Are Expensed
Submanager shall maintain the Hotel in good repair and condition, and
shall make or cause to be made such routine maintenance, repairs and minor
alterations as it determines are necessary for such purposes. The phrase
"routine maintenance, repairs, and minor alterations" as used in this Section
5.01 shall include only those which are normally expensed under generally
accepted accounting principles. The cost of such maintenance, repairs and
alterations shall be paid from Gross Revenues (and not from the FF&E Reserve)
and shall be treated as a Deduction in determining Operating Profit.
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5.02 FF&E Reserve
A. Submanager shall establish a reserve account (the "FF&E
Reserve"), in a bank or similar institution reasonably acceptable to both
Submanager and Primary Manager, to cover the cost of: (i) replacements, renewals
and additions to the FF&E at the Hotel; and (ii) Special Capital Expenditures.
Withdrawals from the FF&E Reserve shall be made solely by representatives of
Submanager whose signatures have been authorized. Primary Manager covenants
that, as of the Take-Over Date, the dollar amount in the FF&E Reserve shall be
no less than the Initial FF&E Reserve Balance. If Primary Manager fails to
provide the dollar amount in the FF&E Reserve in an amount no less than the
Initial FF&E Reserve Balance as required under this Section 5.02.A, Submanager
shall have the right (after first giving Primary Manager ten (10) days written
notice thereof) to deduct the required amounts from Gross Revenues. In addition,
Primary Manager covenants that the Five-Year Plan attached hereto as Exhibit
"B-1" shall be implemented, subject to any mutually-approved changes, as Special
Capital Expenditures from the FF&E Reserve.
B. During the Term of this Agreement, subject to the
provisions of subsection E, below, Submanager shall transfer into the FF&E
Reserve an amount set forth on Exhibit "A-1" (except to the extent that the
Five-Year Plan sets forth different percentage(s) applicable to certain periods
in the Term, in which event such percentage(s) in the Five-Year Plan shall be
controlling during such periods) for each such Accounting Period. Transfers into
the FF&E Reserve shall be made at the time of each interim accounting described
in Section 4.01 hereof. All amounts transferred into the FF&E Reserve pursuant
to this Section 5.02.B shall be paid from Gross Revenues as Deductions.
C. Submanager shall prepare an annual estimate (the "FF&E
Estimate") of the expenditures necessary for (1) replacements, renewals and
additions to the FF&E of the Hotel, and (2) Special Capital Expenditures, during
the ensuing Fiscal Year and shall deliver the FF&E Estimate to Primary Manager
for its approval (which shall not be unreasonably withheld or delayed), at the
same time as Submanager submits the Proposed Business Plan described in Section
4.05.A. The FF&E Estimate shall also indicate the estimated time schedule for
making such replacements, renewals, and additions. In preparing the FF&E
Estimate for each Fiscal Year, Submanager's goal will be to maintain the Hotel
in accordance with System Standards and the general standards of the hotel
industry for similar properties. Primary Manager shall not be entitled to
withhold its approval of any FF&E Estimate based on its objection to: (i) items
already agreed upon in the Five-Year Plan; (ii) costs and expenses which are
consistent throughout the Marriott System for similarly situated hotels (such as
periodic hard and soft good replacement schedules); (iii) costs and expenses of
items that fall within the "under $25,000" category of expenditures (namely,
that a given order or related series of orders for FF&E purchases is less than
$25,000) that are characterized as such in the FF&E Estimate; or (iv) costs and
expenses of items that are introduced into the Marriott System as part of System
Standards. If Primary Manager and Submanager fail to mutually agree on the FF&E
Estimate within forty-five (45) days after the submission to Primary Manager,
either party shall have the right to submit to the Expert Resolution Process the
issue of whether or not Submanager's proposed FF&E Estimate is unreasonable,
given the goals which are set forth in the third sentence of this Section
5.02.C. While such determination by the Expert is pending, Submanager shall
operate the Hotel, in all material respects, based on the FF&E Estimate for the
preceding Fiscal Year (as adjusted by the GDP Deflator), with adjustments for
those items over which there is no disagreement between Primary Manager and
Submanager, and for those items listed above over which Primary Manager has no
right of approval.
D. Submanager shall, consistent with the applicable FF&E
Estimate, from time to time make such (1) replacements, renewals and additions
to the FF&E of the Hotel, and (2) Special Capital Expenditures, as Submanager
deems necessary, up to the balance in the FF&E Reserve. No expenditures will be
made that are in excess of the FF&E Reserve without the approval of Primary
Manager and Submanager shall diligently operate the Hotel in accordance with the
FF&E Estimate approved (or deemed approved through the Expert Resolution
Process) by Primary Manager, provided that, to the extent not included in the
applicable FF&E Estimate or not otherwise approved by Primary Manager,
Submanager shall be allowed to use the funds in the FF&E Reserve for
expenditures deemed reasonably necessary by Submanager to repair or correct any
condition on or about the Hotel
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which (i) constitutes a violation of any applicable Legal Requirement which
imposes liability or potential liability on the Submanager, or (ii) presents a
threat to life or property of Submanager or any guest, employee or invitee on or
about the Hotel; provided, however, that Submanager shall give notice of any
such expenditure made by Submanager reasonably promptly following such
expenditure. At the end of each Fiscal Year, any amounts remaining in the FF&E
Reserve shall be carried forward to the next Fiscal Year. Proceeds from the sale
of FF&E no longer necessary to the operation of the Hotel shall be added to the
FF&E Reserve. The FF&E Reserve will be kept in an interest-bearing account, and
any interest which accrues thereon shall be retained in the FF&E Reserve.
Neither (1) proceeds from the disposition of FF&E, nor (2) interest which
accrues on amounts held in the FF&E Reserve, shall (a) result in any reduction
in the required transfers to the FF&E Reserve set forth in subsection B above,
nor (b) be included in Gross Revenues.
E. As the Hotel ages, the percentages of Gross Revenues which
are set forth in Section 5.02.B may not be sufficient to keep the FF&E Reserve
at the levels necessary to make the replacements, renewals, and additions to the
FF&E of the Hotel, or to make the Special Capital Expenditures, which are
required to maintain the Hotel in accordance with the System Standards. If
Submanager reasonably believes that the funding of the FF&E Reserve (with
respect to the following Fiscal Year or any subsequent Fiscal Year) will not be
adequate to maintain the Hotel in accordance with System Standards, Submanager
shall give notice to Primary Manager of a proposed increase in the annual
percentage in Section 5.02.B to provide the additional funds required, which
increase in the annual percentage shall require the approval of Primary Manager.
If Primary Manager and Submanager fail to agree on a requested increase in the
annual percentage Section 5.02.B within forty-five (45) days after the
submission to Primary Manager, either party shall have the right to submit to
the Expert Resolution Process the issue of whether or not Primary Manager's
proposed increase in the annual percentage is reasonable. Until such time as an
increase in the annual percentage in this Section 5.02.B has been approved (or
deemed approved through the Expert Resolution Process) by Primary Manager, the
reserve set forth in this Section 5.02.B (as the same may have been previously
increased pursuant to the procedures set forth in Section 5.02.E) shall continue
to apply. Notwithstanding the foregoing, in the event the FF&E Reserve is not
increased through the procedures described in this Section 5.02 E, and such
failure shall result in the Submanager being unable to maintain the Hotel in
accordance with the System Standards, Submanager may, on sixty (60) days written
notice to Primary Manager, terminate this Agreement. Finally, the placing of any
restrictions on the expenditure by Submanager of funds from the FF&E Reserve
other than as set forth in this Section 5.02 (including, without limitation,
restrictions resulting from (i) any Litigation involving Owner, Wyndham, Primary
Manager or the Hotel, or (ii) a Foreclosure) shall entitle Submanager, on sixty
(60) days written notice to Primary Manager, to terminate this Agreement.
F. Submanager covenants that it shall utilize amounts in the
FF&E Reserve solely for replacements, renewals and additions to the FF&E at the
Hotel and Special Capital Expenditures, as provided in the foregoing provisions
of this Section 5.02, and shall not be subject to setoff for any other amounts
alleged by Submanager to be owed by Primary Manager to Submanager.
5.03 Capital Expenditures
A. Submanager shall prepare an annual estimate (the "Building
Estimate") of all Capital Expenditures. Submanager shall submit the Building
Estimate to Primary Manager for its approval at the same time as Submanager
submits the Proposed Business Plan described in Section 4.05.A. Submanager shall
not make any Capital Expenditures without the prior written Approval of Primary
Manager, unless otherwise permitted herein. Primary Manager shall (or shall
cause Wyndham under the Primary Management Agreement (or cause Wyndham to cause
Owner, as applicable), to) make Capital Expenditures to allow the completion of
the work described on Exhibit "B-2" hereto at Primary Manager's, or Wyndham's or
Owner's, as applicable, sole cost and expense and not from Gross Revenues or the
FF&E Reserves.
B. Notwithstanding the provisions of Section 5.03A, Submanager
shall be authorized to take appropriate remedial action (including making any
necessary Capital Expenditures) without receiving Primary Manager's prior
consent in the following circumstances: (i) if there is an emergency threatening
the Hotel, its
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guests, invitees or employees; or (ii) if the continuation of the given
condition would subject Submanager and/or Primary Manager and/or Owner and/or
Wyndham to civil or criminal liability, and if Primary Manager has either failed
to remedy the situation or has failed to take appropriate legal action to stay
the effectiveness of any applicable Legal Requirement. Submanager shall
cooperate with Primary Manager in the pursuit of any such action and shall have
the right to participate therein. Primary Manager shall, upon written request by
Submanager, promptly reimburse all expenditures made by Submanager pursuant to
this Section 5.03.B.
C. The cost of all Capital Expenditures (including the
expenses incurred by either Primary Manager or Submanager in connection with any
civil or criminal proceeding described above) shall be borne solely by Primary
Manager, and shall not be paid from Gross Revenues nor from the FF&E Reserve.
D. Primary Manager shall not unreasonably withhold its
Approval with respect to Capital Expenditures as are: (i) required, in
Submanager's reasonable judgment, to keep the Hotel in a first-class,
competitive, efficient and economical operating condition in accordance with
System Standards; or (ii) required by reason of any Legal Requirement, or
otherwise required for the continued safe and orderly operation of the Hotel.
Submanager shall be entitled to terminate this Agreement, on sixty (60) days'
notice to Primary Manager, if: Primary Manager either (a) fails to approve any
Capital Expenditure described in the preceding sentence, or (b) fails to provide
funding for any such Capital Expenditure within sixty (60) days after the
submission to Primary Manager of the Building Estimate requesting such Capital
Expenditure.
E. Submanager will not make a detailed inspection of the ADA
compliance and life-safety elements of the Hotel prior to the Take-Over Date. To
the extent that any of such elements are not in compliance with System
Standards, Primary Manager shall be obligated (or shall cause Wyndham under the
Primary Management Agreement (or cause Wyndham to cause Owner, as applicable))
to fund any necessary remedial measures promptly after the Take-Over Date in
accordance with a schedule for such measures and the funding thereof proposed by
Submanager. Submanager shall review any such elements and the schedule of
compliance and funding with Primary Manager, and shall consider in good faith
any comments of Primary Manager as to methods of compliance with ADA and
priority of compliance efforts.
F. On the Effective Date, Primary Manager shall fund an escrow
account as provided in Section 3.2.8 of the Settlement Agreement.
5.04 Ownership of Replacements
All repairs, alterations, improvements, renewals or replacements made
pursuant to Article V, and all amounts kept in the FF&E Reserve, shall, except
as otherwise provided in this Agreement, be the property of Primary Manager or
Wyndham, as applicable.
ARTICLE VI
INSURANCE, DAMAGE, CONDEMNATION, AND FORCE MAJEURE
6.01 Insurance
A. Subject to Section 6.02, Submanager shall, commencing with
the Take-Over Date and thereafter during the Term of the Agreement, procure and
maintain, either with insurance companies of recognized responsibility
reasonably approved by Primary Manager or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
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1. Property insurance on the Improvements and
contents against loss or damage by fire, lightning and all other risks covered
by the usual extended coverage endorsement, all in an amount not less than
ninety percent (90%) of the replacement cost thereof;
2. Boiler and machinery insurance against loss or
damage from explosion of boilers or pressure vessels to the extent applicable to
the Hotel;
3. Business interruption insurance covering loss of
profits and necessary continuing expenses for interruptions caused by any
occurrence covered by the insurance referred to in Sections 6.01.A.1 and 2 of a
type and in amounts as are generally established by Submanager at similar hotels
it owns, leases or manages under the Marriott name in the United States;
4. General liability insurance against claims for
bodily injury, death or property damage occurring on, in, or about the Hotel,
and automobile liability insurance on vehicles operated in conjunction with the
Hotel, with a combined single limit for each occurrence of not less than One
Hundred Million Dollars ($100,000,000);
5. Workers' compensation as may be required under
applicable laws covering all of Submanager's employees at the Hotel;
6. Fidelity bonds, with reasonable limits to be
determined by Submanager, covering its employees in job classifications normally
bonded in other similar hotels it leases or manages under the Marriott name in
the United States or as otherwise required by law, and comprehensive crime
insurance to the extent Submanager and Primary Manager mutually and reasonably
agree it is necessary for the Hotel;
7. Employer's liability insurance in accordance with
Submanager's standard practices and policies (it being agreed that, in the event
Primary Manager requests an increase in the coverage or limits of such
insurance, and provided that such increased coverage or limit is available,
Submanager shall obtain such increased coverage or limit, with the additional
cost thereof being a Deduction hereunder for all purposes other than the
calculation of Operating Profit for purposes of Section 2.02 hereof).
8. Such other insurance in amounts as Submanager in
its reasonable judgment deems advisable for protection against claims,
liabilities and losses arising out of or connected with the operation of the
Hotel.
B. All insurance described in Section 6.01.A may be obtained
by Submanager by endorsement or equivalent means under its blanket insurance
policies, provided that such blanket policies substantially fulfill the
requirements specified in this Agreement.
C. Submanager may self insure or otherwise retain such risks
or portions thereof as it does with respect to other similar hotels it owns,
leases or manages under the Marriott name in the United States.
D. All policies of insurance required under Section 6.01.A
shall be carried in the name of Submanager. The policies required under Sections
6.01.A.1, 2, 3, and 4 shall include the Owner, Wyndham and Primary Manager as an
additional insured. Upon notice by the Primary Manager, Submanager shall also
have the policies required under Sections 6.01.A.1, 2, and 3 include any
Mortgagee as an additional insured. Any property losses thereunder shall be
payable to the respective parties as their interests may appear. Any Mortgage
encumbering the Hotel shall contain provisions to the effect that proceeds of
the insurance policies required to be carried under Sections 6.01.A.1 and 2
shall be available for repair and restoration of the Hotel, subject to
exceptions customarily included in institutional hotel mortgages.
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E. Submanager shall deliver to Owner, Wyndham and Primary
Manager certificates of insurance with respect to all policies so procured and,
in the case of insurance policies about to expire, shall deliver certificates
with respect to the renewal thereof. All certificates of insurance provided for
under this Section 6.01 shall, to the extent obtainable, state that the
insurance shall not be canceled or materially changed without at least thirty
(30) days' prior written notice to the certificate holder .
F. Insurance premiums and any other costs or expenses with
respect to the insurance or self-insurance required under Section 6.01.A.,
including any Insurance Retention (as defined below), shall be paid from Gross
Revenues (except as otherwise set forth to the contrary in Section 1.03.E) as
Deductions. Such premiums and costs shall be allocated on an equitable basis to
the hotels participating under Submanager's blanket insurance or self-insurance
programs, as applicable. Except as otherwise set forth in Section 1.03.E and
except for any self-insurance retained by Submanager or any of its Affiliates,
any reserves, losses, costs or expenses which are uninsured shall be treated as
a cost of insurance and shall be Deductions. Upon Termination, a reserve in an
amount which is acceptable to Submanager, and which is in accordance with
generally accepted practices in the insurance industry, shall be established
from Gross Revenues (or, if Gross Revenues are insufficient, from Working
Capital) to cover the amount of any Insurance Retention and all other costs
which will eventually have to be paid by either Primary Manager or Submanager
with respect to pending or contingent claims, including those which arise after
Termination for causes arising during the Term of the Agreement. For purposes of
this Section 6.01.F, "Insurance Retention" shall mean the amount of any loss or
reserve under Submanager's blanket insurance or self-insurance programs which is
allocated to the Hotel, not to exceed the higher of (A) the maximum per
occurrence limit established for similar hotels participating in such programs,
or (B) the insurance policy deductible on any loss which may fall within high
hazard classifications as mandated by the insurer (e.g., earthquake, flood,
windstorm on coastal properties, etc.). If the Hotel is not a participant under
Submanager's blanket insurance or self-insurance programs, "Insurance Retention"
shall mean the amount of any loss or reserve allocated to the Hotel, not to
exceed the insurance policy deductible.
G. Submanager agrees that the charge to the Hotel for
insurance that it obtains pursuant to the foregoing provisions shall not
incorporate a profit to Submanager or any of its Affiliates, or, if a profit is
incorporated, that the charge therefor to the Hotel shall not be in excess of
the competitive market rate for comparable insurance.
6.02 Owner's Option to Obtain Property Insurance.
At any time, and from time to time, within ten (10) days after receipt
of Primary Manager's written request, Submanager will provide Primary Manager
with its best estimate of the renewal cost of Submanager's blanket insurance as
required in Section 6.01.A.(1), (2) and (3). Primary Manager may, at its option,
by written notice to Submanager which shall be delivered no later than ninety
(90) days prior to the natural expiration of the insurance policies which
Submanager has obtained pursuant to Section 6.01.A(1), (2) and (3), advise
Submanager that Owner or Wyndham shall procure and maintain the insurance
specified in Section 6.01.A(1), (2) and (3) (in which case Submanager shall
allow such policies obtained by it under Section 6.01.A(1), (2) and (3) to
expire), subject to the following terms and conditions:
A. All such policies of insurance shall be carried in the name
of Owner and/or Wyndham as applicable, with Submanager as additional insureds.
Any property losses thereunder shall be payable to the respective parties as
their interests may appear. The documentation with respect to each Mortgage
shall contain provisions to the effect that proceeds of the insurance policies
required to be carried under Section 6.01.A(1), (2) and (3) shall be available
for repair and restoration of the Hotel, to the extent required pursuant to
Section 6.01.D. However, any Mortgagee shall be entitled to impose reasonable
conditions on the disbursement of insurance proceeds for the repair and/or
restoration of the Hotel, including a demonstration by Owner or Wyndham that the
amount of such proceeds (together with other funds Owner or Wyndham agrees to
make available) is sufficient for such purpose.
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B. Primary Manager shall deliver to Submanager certificates of
insurance with respect to all policies so procured and, in the case of insurance
policies about to expire, shall deliver certificates with respect to the renewal
thereof.
C. All such certificates of insurance shall, to the extent
obtainable, state that the insurance shall not be canceled or materially changed
without at least thirty (30) days' prior written notice to the certificate
holder.
D. Premiums for such insurance coverage shall be treated as
Deductions, provided that if the cost of such insurance procured by Owner or
Wyndham exceeds the cost of Submanager's comparable coverage by more than ten
percent (10%), all such excess costs shall be the sole responsibility of Primary
Manager and shall not be a Deduction.
E. Should Primary Manager exercise its option to have the
insurance described in this Section 6.02 procured by Owner or Wyndham, Primary
Manager hereby waives and shall cause Owner and Wyndham to waive in writing to
Submanager their rights of recovery from Submanager or any of its Affiliates
(and their respective directors, officers, shareholders, agents and employees)
for loss or damage to the Hotel, and any resultant interruption of business.
F. All insurance procured by Owner or Wyndham shall be
obtained from reputable insurance companies reasonably acceptable to Submanager.
G. Should Primary Manager exercise its right to have Owner or
Wyndham obtain the insurance described in this Section 6.02, Primary Manager
acknowledges that Submanager is under no obligation to thereafter include the
Hotel in its blanket insurance program (with respect to the insurance described
in Section 6.01.A(1), (2) and (3)) for the balance of the Term.
6.03 Damage and Repair
A. If, during the Term, the Hotel is damaged by a Minor
Casualty, Submanager shall, with all reasonable diligence, proceed to process
the claim with the applicable insurance carriers, including settling such claim,
and to make the necessary arrangements with appropriate contractors and
suppliers to repair and/or replace the damaged portion of the Hotel. Primary
Manager's consent shall not be needed for Submanager to perform any of the
foregoing, all of which shall be performed in accordance with Submanager's
reasonable judgment. Primary Manager agrees to sign promptly any documents which
are necessary to process and/or adjust the claim with the insurance carriers, as
well as any contracts with such contractors and/or suppliers.
B. If, during the Term, the Hotel suffers a Total Casualty,
this Agreement shall be terminable at the option of either party upon ninety
(90) days' written notice to the other party. Such notice must be sent within
thirty (30) days after the date of the Total Casualty.
C. If, during the Term, the Hotel is damaged by fire, casualty
or other cause to a greater extent than a Minor Casualty, but not to the extent
of a Total Casualty, or if the Hotel suffers a Total Casualty but neither party
elects to terminate under Section 6.04.A, Primary Manager shall cause Wyndham
(or shall cause Wyndham to cause Owner, as applicable), at such party's cost and
expense and with all reasonable diligence, repair and/or replace the damaged
portion of the Hotel to the same condition as existed previously. Submanager
shall have the right to discontinue operating the Hotel to the extent it deems
necessary to comply with applicable Legal Requirements or as necessary for the
safe and orderly operation of the Hotel. To the extent available, proceeds from
the insurance described in Section 6.01 of this Agreement shall be applied to
such repairs and/or replacements. If Owner or Wyndham, as applicable, fails to
so promptly commence and complete the repairing and/or replacement of the Hotel
so that it shall be substantially the same as it was prior to such damage or
destruction, such failure shall be an Event of Default by Primary Manager.
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6.04 Condemnation
A. In the event all or substantially all of the Hotel shall be
taken in any eminent domain, condemnation, compulsory acquisition, or similar
proceeding by any competent authority for any public or quasi-public use or
purpose, or in the event a portion of the Hotel shall be so taken, but the
result is that it is unreasonable to continue to operate the Hotel in accordance
with the standards required by this Agreement, this Agreement shall terminate.
B. In the event a portion of the Hotel shall be taken by the
events described in Section 6.03.A, or the entire Hotel is affected but on a
temporary basis, and the result is not to make it unreasonable to continue to
operate the Hotel, this Agreement shall not terminate. However, so much of any
award for any such partial taking or condemnation as shall be necessary to
render the Hotel equivalent to its condition prior to such event shall be used
for such purpose; and Submanager shall have the right to discontinue operating
the Hotel to the extent it deems necessary for the safe and orderly operation of
the Hotel.
ARTICLE VII
TAXES
7.01 Real Estate and Personal Property Taxes
A. Except as specifically set forth in subsection B below, all
real estate and personal property taxes, levies, assessments and similar charges
on or relating to the Hotel ("Impositions") during the Term shall be paid by
Submanager from Gross Revenues, before any fine, penalty, or interest is added
thereto or lien placed upon the Hotel or upon the Agreement, unless payment
thereof is in good faith being contested and enforcement thereof is stayed. Any
such payments shall be Deductions in determining Operating Profit. Primary
Manager shall, within five (5) days after receipt, furnish Submanager with
copies of official tax bills and assessments which it may receive with respect
to the Hotel. Any of Owner, Wyndham, Primary Manager or Submanager (in which
case Primary Manager agrees to cause Owner or Wyndham to sign, as applicable,
the required applications and otherwise cooperate with Submanager in expediting
the matter) may initiate proceedings to contest any negotiations or proceedings
with respect to any Imposition, and all reasonable costs of any such contest
shall be paid from Gross Revenues and shall be a Deduction in determining
Operating Profit. Submanager shall, as part of its contest or negotiation of any
Imposition, be entitled, on Owner's or Wyndham's behalf, to waive any applicable
statute of limitations in order to avoid paying the Imposition during the
pendency of any proceedings or negotiations with applicable authorities.
B. The word "Impositions" as used in this Agreement shall not
include the following, all of which shall be paid solely by Primary Manager,
Owner or Wyndham, as applicable, not from Gross Revenues nor from the FF&E
Reserve:
1. Any franchise, corporate, estate, inheritance,
succession, capital levy or transfer tax imposed on Owner, Wyndham or Primary
Manager, or any income tax imposed on any income of Owner, Wyndham or Primary
Manager (including distributions to Primary Manager pursuant to Article III
hereof);
2. Special assessments (regardless of when due or
whether they are paid as a lump sum or in installments over time) imposed
because of facilities which are constructed by or on behalf of the assessing
jurisdiction (for example, roads, sidewalks, sewers, culverts, etc.) which
directly benefit the Hotel (regardless of whether or not they also benefit other
buildings), which assessments shall be treated as capital costs of construction
and not as Deductions;
3. "Impact Fees" (regardless of when due or whether
they are paid as a lump sum or in installments over time) which are required of
Owner, Wyndham or Primary Manager as a condition to the
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issuance of site plan approval, zoning variances or building permits, which
impact fees shall be treated as capital costs of construction and not as
Deductions; or
4. "Tax-increment financing" or similar financing
whereby the municipality or other taxing authority has assisted in financing the
construction of the Hotel by temporarily reducing or abating normal Impositions
in return for substantially higher levels of Impositions at later dates.
ARTICLE VIII
MANAGEMENT OF THE HOTEL
8.01 Ownership of the Hotel
A. Primary Manager hereby covenants that it will exercise its
rights under the Primary Management Agreement (i) to cause Wyndham to have,
keep, and maintain good and marketable leasehold title to the Hotel (ii) to
cause Wyndham to cause Owner to have, keep and maintain good and marketable fee
title to the Site, in each case free and clear of any and all liens,
encumbrances or other charges, except as follows:
1. easements or other encumbrances (other than those
described in subsections 2 and 3 hereof) that do not adversely affect the
operation of the Hotel by Submanager and that are not prohibited pursuant to
Section 8.04 of this Agreement;
2. Qualified Mortgages; or
3. liens for taxes, assessments, levies or other
public charges not yet due or due but not yet payable.
B. Primary Manager shall exercise its rights under the Primary
Management Agreement to cause Wyndham (or to cause Wyndham to cause Owner) to
pay and discharge, on or before the due date, any and all payments due under any
Mortgage. Primary Manager shall exercise its rights under the Primary Management
Agreement to cause Wyndham (or to cause Wyndham to cause Owner) to indemnify,
defend, and hold Submanager harmless from and against all claims, litigation and
damages arising from the failure of Owner or Wyndham, as applicable, to make any
such payments as and when required; and this obligation of Primary Manager shall
survive Termination. Submanager shall have no responsibility for payment of debt
service due with respect to the Hotel, from Gross Revenues or otherwise, and
such responsibility shall be solely that of Owner or Wyndham.
C. Primary Manager covenants and shall exercise its rights
under the Primary Management Agreement to cause Wyndham (or to cause Wyndham to
cause Owner) to covenant that, so long as Submanager is not in Default under
this Agreement or any Subordination Agreement, Submanager shall quietly hold,
occupy and enjoy the Hotel throughout the Term hereof free from hindrance,
ejection or molestation by Owner, Wyndham or Primary Manager or other party
claiming under, through or by right of Owner, Wyndham or Primary Manager.
Primary Manager shall exercise its rights under the Primary Management Agreement
to cause Wyndham (or to cause Wyndham to cause Owner) to pay and discharge any
payments and charges and, at such party's expense, to prosecute all appropriate
actions, judicial or otherwise, necessary to assure such free and quiet
occupation; provided, however, that Owner or Wyndham, as applicable, shall have
the right to contest by appropriate action any such payments or charges as long
as such contest does not disturb such free and quiet occupation by Submanager.
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8.02 Mortgages
A. Owner or Wyndham shall be permitted to encumber the Hotel
and/or the Site with any Mortgage which is a Qualified Mortgage. Primary Manager
covenants that it shall exercise its rights under the Primary Management
Agreement to cause Wyndham (or to cause Wyndham to cause Owner) not to encumber
the Hotel and/or the Site with any Mortgage which is not a Qualified Mortgage.
B. Any Mortgage which meets all of the following requirements
shall be referred to in this Agreement as a "Qualified Mortgage":
1. The proposed Mortgage is from an Institutional
Lender; and
2. Owner or Wyndham (as applicable) and Primary
Manager and Submanager and the holder of such Mortgage shall have entered into a
Subordination Agreement (to be recorded in the real property records in the
jurisdiction where the Site is located) as further described in Section 8.03
below. Submanager agrees to enter into a Subordination Agreement which satisfies
the requirements of Section 8.03 in connection with a proposed Mortgage which is
otherwise a Qualified Mortagage.
In addition, any Mortgage which encumbers the Hotel as of the date of the
Settlement Agreement and which continues to encumber the Hotel as of the
Take-Over Date shall be deemed to constitute a Qualified Mortgage whether or not
it meets the requirements set forth in 1 and 2 above.
8.03 Subordination, Non-Disturbance and Attornment
A. Primary Manager shall exercise its rights under the Primary
Management Agreement to cause Wyndham (or to cause Wyndham to cause Owner) (i)
to use best reasonable efforts to obtain from any Mortgagee which holds a
Mortgage as of the Take-Over Date and (ii) to obtain from any Mortgagee which is
granted a Mortgage after the Take-Over Date an instrument (the "Subordination
Agreement"), reasonably satisfactory in all respects to Submanager and such
Mortgagee, which shall be recordable in the jurisdiction where the Hotel is
located, pursuant to which:
1. This Agreement and any extensions, renewals,
replacements or modifications thereto, and all right and interest of Primary
Manager and Submanager in and to the Hotel, shall be subject and subordinate to
such Mortgage;
2. Primary Manager and Submanager shall be obligated
to each of the Subsequent Owners (as defined below) to perform all of the terms
and conditions of this Agreement for the balance of the remaining Term hereof,
with the same force and effect as if such Subsequent Owners were the Owner or
Wyndham, as applicable; and
3. In the event that there is a Foreclosure of such
Mortgage (or a deed in lieu of Foreclosure), or other exercise by such Mortgagee
(or its successor) of its remedies in the event of default, in connection with
which title or possession of the Hotel is transferred to the Mortgagee (or its
designee) or to a purchaser at Foreclosure or to a subsequent purchaser from the
Mortgagee (or from its designee) (all of the foregoing shall collectively be
referred to as "Subsequent Owners"), then regardless of whether the Lease is
terminated or survives such Foreclosure, Primary Manager shall not be disturbed
in its rights under the Primary Management Agreement and Submanager shall not be
disturbed in its rights under this Agreement so long as Primary Manager is not
in default under the Primary Management Agreement and Submanager is not in
Default hereunder.
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B. In the event that the Subordination Agreement contains
provisions requiring Submanager (upon a default under the Mortgage, or upon
various other stipulated conditions) to pay certain amounts which are otherwise
due to Primary Manager under this Agreement to the Mortgagee or its designee
(rather than to Primary Manager), Primary Manager hereby gives its consent to
such provisions, which consent shall be deemed to be irrevocable until the
entire debt secured by the Mortgage has been discharged.
C. Prior to any encumbrance of the Hotel or the Site with any
Mortgage after the Take-Over Date, Primary Manager shall be obligated to
exercise its rights under the Primary Management Agreement to cause Wyndham (or
to cause Wyndham to cause Owner) to obtain from the proposed Mortgagee an
executed, recordable Subordination Agreement. Primary Manager and Submanager
agree to execute such Subordination Agreement for the benefit of such proposed
Mortgagee. If Owner or Wyndham encumbers the Hotel or the Site with a Mortgage
after the Take-Over Date without first obtaining such a Subordination Agreement
from the Mortgagee: (i) it shall be a Default of Primary Manager under this
Agreement, entitling Submanager to all of the remedies set forth in Article IX;
and (ii) in addition, Submanager shall thereafter have a continuing right to
terminate this Agreement upon sixty (60) days' prior written notice to Primary
Manager.
D. Notwithstanding the subordination of this Agreement which
is described in Section 8.03.A.1 (or any subsequent subordination to any other
Mortgage), if, in connection with the exercise by any Mortgagee of its remedies
under any Mortgage, there is a material adverse impact upon the operation of the
Hotel by Submanager in accordance with the System Standards (such as, for
example, the imposition of restrictions upon expenditures from the FF&E Reserve
by Submanager, where such restrictions are not set forth in this Agreement), the
foregoing shall be deemed to be an Event of Default by Primary Manager entitling
Submanager to all of the remedies set forth in Article IX.
8.04 No Covenants, Conditions or Restrictions
A. Primary Manager covenants that it will exercise its rights
under the Primary Management Agreement to cause Wyndham (or to cause Wyndham to
cause Owner) to not (unless Submanager has given its prior written consent
thereto) enter into any covenants, conditions or restrictions, including
reciprocal easement agreements or cost-sharing arrangements (collectively
referred to as "CC&R's") affecting the Site or the Hotel (i) which would
prohibit or limit in any material respect Submanager from operating the Hotel in
accordance with the System Standards, including related amenities proposed for
the Hotel pursuant to the Five Year Plan; (ii) which would allow the Hotel
facilities (for example, parking spaces) to be used by persons other than
guests, invitees or employees of the Hotel; (iii) which would allow the Hotel
facilities to be used for specified charges or rates which have not been
approved by Submanager; or (iv) which would subject the Hotel to exclusive
arrangements regarding food and beverage operation or retail merchandise. To
Primary Manager's knowledge, any existing CC&R's affecting the Site or the Hotel
are effected in instruments which have been provided by Primary Manager, Owner
or Wyndham to Submanager.
B. Unless otherwise agreed by both Primary Manager and
Submanager, all financial obligations imposed on Owner, Wyndham or Primary
Manager or on the Hotel pursuant to any CC&R's shall be paid by Primary Manager
(or Primary Manager shall cause to be paid by Primary Manager or Wyndham) from
its own funds, and not from Gross Revenues or from the FF&E Reserve.
Submanager's consent to any such CC&R's shall be conditioned (among other
things) on satisfactory evidence that: (i) the CC&R in question provides a
reasonable and cost-effective benefit to the operation of the Hotel; (ii) the
costs incurred (including administrative expenses) pursuant to such CC&R will be
both reasonable and allocated to the Hotel on a reasonable basis; and (iii) no
capital expenditures incurred pursuant to said CC&R will be paid as a Deduction
(but rather, such capital expenditures will be paid separately by Primary
Manager or by Owner or Wyndham).
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8.05 Liens; Credit
Submanager and Primary Manager shall use commercially reasonable
efforts, and Primary Manager shall exercise its rights under the Primary
Management Agreement to cause Wyndham (or to cause Wyndham to cause Owner) to
use commercially reasonable efforts to prevent any liens from being filed
against the Hotel which arise from any maintenance, repairs, alterations,
improvements, renewals or replacements in or to the Hotel. Submanager and
Primary Manager shall cooperate fully, and Primary Manager shall exercise its
rights under the Primary Management Agreement to cause Wyndham to cooperate
fully (or to cause Owner to cooperate fully, as applicable) in obtaining the
release of any such liens, and the cost thereof, if the lien was not occasioned
by the fault of either party, shall be treated the same as the cost of the
matter to which it relates. If the lien arises as a result of the fault of
either party, then the party at fault shall bear the cost of obtaining the lien
release. In no event shall either party borrow money in the name of or pledge
the credit of the other.
8.06 Amendments Requested by Mortgagee
A. If requested by any Mortgagee or prospective Mortgagee,
Submanager agrees to execute and deliver any amendment of this Agreement that is
reasonably required by such Mortgagee or prospective Mortgagee, provided that
Submanager shall be under no obligation to amend this Agreement if the result of
such amendment would be: (i) to reduce, defer or delay the amount of any payment
to be made to Submanager hereunder; (ii) to materially and adversely increase
Submanager's obligations or affect Submanager's rights under this Agreement;
(iii) to change the Term of this Agreement; (iv) to cause the Hotel to be
operated other than pursuant to the System Standards and other provisions
hereof; or (v) to amend Section 5.02 or Section 5.03. Any such amendment shall
be in effect only for the period of time in which such Mortgage is outstanding.
B. Notwithstanding the provisions of Section 8.06.A, if a
Mortgagee or prospective Mortgagee requests that Submanager enter into an
amendment of this Agreement which would impose additional duties (for example,
an increase in the reporting requirements or in the record-keeping requirements,
or adding the obligation to prepare parallel accounting statements using a
different fiscal year) on Submanager, or would otherwise adversely affect
Submanager's rights under this Agreement, but not to the degree of materiality
which would be prohibited under Section 8.06.A, and with respect to which
Submanager believes, in its good faith judgment, that it can be adequately
compensated, Submanager hereby agrees that it will execute and deliver such
requested amendment of this Agreement, provided that Primary Manager agrees to
compensate Submanager for the additional burden imposed by such amendment. It is
understood that the word "burden", as used in the preceding sentence, shall
encompass not only additional work to be performed by Submanager, but also the
adverse effect on the achievement of the Performance Termination Threshold which
would be caused by requiring increased services to be provided to the Hotel by
third parties and by paying from Gross Revenues any other expenses incurred by
Submanager in meeting such additional obligations. Any dispute as to the
additional compensation to which Submanager is entitled pursuant to this Section
8.06.B. shall be resolved by arbitration pursuant to Section 11.21.
ARTICLE IX
DEFAULTS
9.01 Events of Default
Each of the following shall constitute a "Default" under this
Agreement.
A. The filing of a voluntary petition in bankruptcy or
insolvency or a petition for reorganization under any bankruptcy law by either
party, or the admission by either party that it is unable to pay its debts as
they become due. Upon the occurrence of any Default by either party (referred to
as the "defaulting party") as described under this subsection A, said Default
shall be deemed an "Event of Default" under this Agreement.
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B. The consent to an involuntary petition in bankruptcy or the
failure to vacate, within ninety (90) days from the date of entry thereof, any
order approving an involuntary petition by either party. Upon the occurrence of
any Default by either party as described under this subsection B, said Default
shall be deemed an "Event of Default" under this Agreement.
C. The entering of an order, judgment or decree by any court
of competent jurisdiction, on the application of a creditor, adjudicating either
party as bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for an aggregate of sixty (60) days (whether or not consecutive).
Upon the occurrence of any Default by either party as described under this
subsection C, said Default shall be deemed an "Event of Default" under this
Agreement. Notwithstanding the foregoing, the Defaults described in subsection
A-C herein, shall not constitute an Event of Default triggering Submanager's
remedies under Section 9.02 in the event that Wyndham and Owner select a
replacement Primary Manager pursuant to the terms of the Owner's Agreement.
D. The failure of either party to make (or in the case of
Primary Manager, the failure of Primary Manager to make or to cause Wyndham, (or
to cause Wyndham to cause Owner, as applicable) to make any payment required to
be made in accordance with the terms of this Agreement. Upon the occurrence of
any Default by either party as described under this subsection D, said Default
shall be deemed an "Event of Default" under this Agreement if the defaulting
party fails to cure such Default within ten (10) business days after receipt of
written notice from the non-defaulting party demanding such cure.
E. The failure of either party to perform, keep or fulfill any
of the other covenants, undertakings, obligations or conditions set forth in
this Agreement, and the continuance of such default for a period of thirty (30)
days after the defaulting party's receipt of written notice from the
non-defaulting party of said failure. Upon the occurrence of any Default by
either party as described under this subsection E, said Default shall be deemed
an "Event of Default" under this Agreement if the defaulting party fails to cure
the Default within thirty (30) days after receipt of written notice from the
non-defaulting party demanding such cure, or, if the Default is such that it
cannot reasonably be cured within said thirty (30) day period of time, if the
defaulting party fails to commence the cure of such Default within said thirty
(30) day period of time or thereafter fails to diligently pursue such efforts to
completion.
9.02 Remedies
Upon the occurrence of an Event of Default, the non-defaulting party
shall have the right to pursue any one or more of the following courses of
action: (1) if the Event of Default has a material adverse impact on the
non-defaulting party, to terminate this Agreement by written notice to the
defaulting party, which termination shall be effective as of the effective date
which is set forth in said notice, provided that said effective date shall be at
least thirty (30) days after the date of said notice and further provided that,
if the defaulting party is Submanager, the foregoing period of thirty (30) days
shall be extended to seventy-five (75) days (or such longer period of time as
may be necessary under Legal Requirements pertaining to termination of
employment); (2) to institute forthwith any and all proceedings permitted by law
or equity including, without limitation, actions for specific performance and/or
damages; and/or (3) to avail itself of the remedies described in Section 9.03.
9.03 Additional Remedies
A. Upon the occurrence of a Default by either party under the
provisions of Section 9.01.D, the amount owed to the non-defaulting party shall
accrue interest, at an annual rate equal to the Prime Rate plus three (3)
percentage points, from and after the date on which the Default occurred.
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B. Upon the occurrence of an Event of Default by Primary
Manager under the provisions of Section 9.01.D, Submanager shall have the right
(without affecting Submanager's other remedies under this Agreement) to withdraw
the amount (plus accrued interest as described in 9.03.A above) owed to
Submanager by Primary Manager from distributions otherwise payable to Primary
Manager pursuant to Sections 3.01 and 4.01 of this Agreement.
C. Submanager and/or any Affiliate shall be entitled, in case
of any breach of the covenants of Sections 11.11.E, F, or G or of Section 11.12
by Primary Manager or others claiming through it, to injunctive relief and to
any other right or remedy available at law.
D. The remedies granted under Sections 9.02 and 9.03 shall not
be in substitution for, but shall be in addition, to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages) by reason of applicable provisions of law or
equity and shall survive Termination.
9.04 Default under Owner's Agreement
In the event of a Default by Owner or Wyndham under the Owner's
Agreement, Submanager shall be entitled to terminate this Agreement, provided
that such Termination shall not be an exclusive remedy and Submanager shall be
entitled to pursue any remedies it may have under the Owner's Agreement or under
this Agreement against Primary Manager.
ARTICLE X
ASSIGNMENT AND SALE
10.01 Assignment
A. Submanager shall not directly or indirectly assign or
transfer its interest in this Agreement without the prior written consent of
Primary Manager; provided, however, that Submanager shall have the right,
without Primary Manager's consent, to (1) assign its interest in this Agreement
to Marriott or any Affiliate (provided such Affiliate has the right to use the
Marriott Trade Names and Marriott Trademark, and otherwise is of sufficient
financial capacity to perform Submanager's duties hereunder), (2) lease shops or
grant concessions at the Hotel so long as the terms of any such leases or
concessions do not exceed the Term of this Agreement, (3) assign its interest in
this Agreement to any entity into or with which Submanager is merged or
consolidated or to which all or substantially all of the assets of Submanager or
Marriott are sold, and (4) assign its interest in this Agreement to any entity
to which there is a sale of all or substantially all of the Marriott System
assets owned by Submanage or Marriott.
B. Primary Manager shall not assign or transfer its interest
in this Agreement without the prior written consent of Submanager; provided,
however, that Primary Manager shall have the right, without such consent, to (1)
cause this Agreement to be conditionally assigned as security for a Mortgage of
the Hotel in accordance with this Agreement, (2) assign its interest in this
Agreement to any Affiliate of Primary Manager (provided such Affiliate is no
less financially sound than Primary Manager at the time of assignment), (3)
assign its interest in this Agreement to any entity into or with which Primary
Manager is merged or consolidated or to which all or substantially all of the
assets of Primary Manager or its parent company are sold, and (4) assign its
interest in this Agreement pursuant to or as a result of a Sale of the Hotel
which complies with the provisions of the Settlement Agreement.
C. In the event either party consents to an assignment of this
Agreement by the other, no further assignment shall be made without the express
consent in writing of such party, unless such assignment may
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otherwise be made without such consent pursuant to the terms of this Agreement.
An assignment by either Primary Manager or Submanager of its interest in this
Agreement shall not relieve Primary Manager or Submanager, as the case may be,
from its respective obligations under this Agreement, and shall inure to the
benefit of, and be binding upon, its respective successors, heirs, legal
representatives, or assigns.
D. Submanager shall have the right to terminate this
Agreement, on thirty (30) days' written notice, if title to or possession of the
Hotel is transferred by judicial or administrative process (including, without
limitation, a foreclosure, or a sale pursuant to an order of a bankruptcy court,
or a sale by a court-appointed receiver) to an individual or entity which is not
a Qualified Person (as defined in Section 10.02A), regardless of whether or not
such transfer is the voluntary action of Owner or Wyndham (or successor owner of
the Hotel or leasehold interest therein) or whether (under applicable law) Owner
or Wyndham (or successor owner of the Hotel or leasehold interest therein) is in
fact the transferor.
E. The foregoing provisions of this Section 10.01 are not
intended to limit or modify the provisions of the Settlement Agreement relating
to an assignment of this Agreement.
10.02 Sale of the Hotel.
A. Primary Manager shall not without the express prior written
consent of Submanager, which consent may be unreasonably withheld or delayed,
enter into a Sale of the Hotel with any Person other than a Qualified Person.
For purposes hereof, "Qualified Person" shall mean a Person that is not, and is
not an Affiliate of, (i) a hotel management entity which is a competitor of
Manager or any of its Affiliates in the management of hotels, (ii) a Person
controlled by, or associated with, organized crime, or (iii) a repeat felon or a
Person convicted of a capital crime.
B. Upon closing of any Sale of the Hotel, except as otherwise
set forth in the Settlement Agreement Primary Manager shall cause the purchaser
of the Hotel to enter into an agreement with Submanager, in form and substance
reasonably satisfactory to Submanager, agreeing that this Agreement continue in
full force and effect after such sale, assignment, transfer or other
disposition; and to assume all of the contractual obligations of Primary Manager
contained in this Agreement and accruing after the date of the Sale of the
Hotel. Except as otherwise provided in the Settlement Agreement, this Agreement
is not terminable due to or in connection with any Sale of the Hotel. In
addition to the assumption of this Agreement, Primary Manager shall cause the
purchaser of the Hotel to assume the Franchise Agreement (which shall remain
suspended absent an event that causes a Reinstated Franchise Agreement to become
effective).
C. The foregoing provisions of this Section 10.02 are not
intended to limit or modify the provisions of the Settlement Agreement relating
to the Sale of the Hotel, including Section 3.2.4 thereof.
ARTICLE XI
MISCELLANEOUS
11.01 Right to Make Agreement
Each party warrants, with respect to itself, that neither the execution
of the Agreement nor the finalization of the transactions contemplated hereby
shall violate any provision of law or judgment, writ, injunction, order or
decree of any court or governmental authority having jurisdiction over it;
result in or constitute a breach or default under any indenture, contract, other
commitment or restriction to which it is a party or by which it is bound; or
require any consent, vote or approval which has not been taken, or at the time
of the transaction involved shall not have been given or taken. Each party
covenants that it has and will continue to have throughout the term of the
Agreement and any extensions thereof, the full right to enter into the Agreement
and perform its obligations hereunder.
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11.02 Consents and Cooperation
Wherever in the Agreement the consent or approval of Primary Manager or
Submanager is required, such consent or approval shall not be unreasonably
withheld, delayed or conditioned, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval
subject, however, to the provisions of the Owner's Agreement. If either Primary
Manager or Submanager fails to respond within thirty (30) days to a request by
the other party for a consent or approval, such consent or approval shall be
deemed to have been given (except as otherwise provided in this Agreement).
Additionally, Primary Manager agrees to cooperate with Submanager by exercising
its rights under the Primary Management Agreement to cause Wyndham to execute
such leases, subleases, licenses, concessions, equipment leases, service
contracts and other agreements negotiated in good faith by Submanager and
pertaining to the Hotel that, in Submanager's reasonable judgment, should be
made in the name of the lessee of the Hotel.
11.03 Relationship
In the performance of this Agreement, Submanager shall act solely as an
independent contractor. Neither this Agreement nor any agreements, instruments,
documents, or transactions contemplated hereby shall in any respect be
interpreted, deemed or construed as making Submanager a partner, joint venturer
with, or agent of, Primary Manager, Owner or Wyndham. Primary Manager and
Submanager agree that neither party will make any contrary assertion, claim or
counterclaim in any action, suit, arbitration or other legal proceedings
involving Primary Manager (or Owner or Wyndham) and Submanager.
11.04 Applicable Law
The Agreement shall be construed under and shall be governed by the
laws of the state in which the Hotel is located.
11.05 Recordation
The terms and provisions of the Agreement shall run with Wyndham's
leasehold and Owner's fee interest in the parcel of land designated as the Site,
and with Wyndham's and Owner's interests therein, and shall be binding upon all
successors to such interest. Simultaneously with the execution of this
Agreement, Primary Manager shall exercise its rights under the Primary
Management Agreement to cause Wyndham to cause Owner to execute a recordable
"Memorandum of Management Agreement", in the form which is attached hereto as
Exhibit "D". The Memorandum shall be recorded or registered promptly following
the Effective Date in the jurisdiction in which the Hotel is located. Any cost
of such recordation shall be reimbursed from Gross Revenues and treated as a
Deduction. Upon a termination of this Agreement in accordance with the
provisions of this Agreement, Submanager agrees to execute a recordable
termination of such Memorandum of Management Agreement in form reasonably agreed
to by Primary Manager (it being acknowledged that pursuant to the Primary
Management Agreement Primary Manager is required to obtain the agreement of
Wyndham to such form).
11.06 Headings
Headings of articles and sections are inserted only for convenience and
are in no way to be construed as a limitation on the scope of the particular
articles or sections to which they refer.
11.07 Notices
Notices, statements and other communications to be given under the
terms of the Agreement shall be in writing and delivered by hand against receipt
or sent by certified or registered mail, postage prepaid, return receipt
requested or by nationally utilized overnight delivery service, addressed to the
parties as follows:
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To Primary Manager:
IHC II, LLC
---------------------------
---------------------------
---------------------------
FAX: ___________________
with copy to :
---------------------------
---------------------------
---------------------------
FAX: ___________________
To Submanager:
Marriott Hotel Services, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department 52/923 -- Hotel Operations
FAX: 301/380-6727
with copy to:
Marriott Hotel Services, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Lodging Financial Analysis Dept. 911.10
FAX: 301/380-3667
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice that is mailed in accordance herewith
shall be deemed received when delivery is received or refused, as the case may
be. Additionally, notices may be given by telephone facsimile transmission,
provided that an original copy of said transmission shall be delivered to the
addressee by nationally utilized overnight delivery service by no later than the
second business day following such transmission. Telephone facsimiles shall be
deemed delivered on the date of such transmission.
11.08 Environmental Matters
A. Primary Manager hereby represents and warrants to
Submanager that, to the best of its knowledge except as set forth in any
environmental assessment reports provided by Owner, Wyndham or Primary Manager
to Submanager, as of the Effective Date, there are no Hazardous Materials on any
portion of the Site or the Hotel, nor have any Hazardous Materials been released
or discharged on any portion of the Site or the Hotel. In addition, Primary
Manager hereby represents and warrants that it has previously delivered or has
caused Owner or Wyndham to have delivered to Submanager copies of all reports
concerning environmental conditions which have been received by Primary Manager
or any of its Affiliates. Prior to the Take-Over Date, Submanager shall have the
right to terminate this Agreement, at its option, if Hazardous Materials are
found on the Site and/or the Hotel in quantities sufficient to create a danger
(in Submanager's good-faith judgment) of possible adverse legal consequences to
Submanager if it were to assume operation of the Hotel.
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B. In the event of the discovery of Hazardous Materials (as
defined below) on any portion of the Site or in the Hotel during the Term of
this Agreement, Primary Manager shall (except as otherwise set forth to the
contrary in Section 11.08.C) exercise its rights under the Primary Management
Agreement to cause Wyndham (or to cause Wyndham to cause Owner) to promptly
remove such Hazardous Materials, together with all contaminated soil and
containers, and shall otherwise remedy the problem in accordance with (1) the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., as amended; (2) the regulations promulgated thereunder,
from time to time; (3) all federal, state and local laws, rules and regulations
(now or hereafter in effect) dealing with the use, generation, treatment,
storage, disposal or abatement of Hazardous Materials; and (4) the regulations
promulgated thereunder, from time to time (collectively referred to as
"Environmental Laws"). Primary Manager shall (except as otherwise set forth to
the contrary in Section 11.08.C) exercise its rights under the Primary
Management Agreement to cause Wyndham (or cause Wyndham to cause Owner) to
indemnify, defend and hold Submanager harmless from and against all loss, costs,
liability and damage (including, without limitation, engineers' and attorneys'
fees and expenses, and the cost of litigation) arising from the presence of
Hazardous Materials on the Site or in the Hotel; and this obligation of Primary
Manager shall survive Termination of this Agreement. "Hazardous Materials" shall
mean and include any substance or material containing one or more of any of the
following: "hazardous material", "hazardous waste", "hazardous substance",
"regulated substance", "petroleum", "pollutant", "contaminant", "polychlorinated
biphenyls", "lead or lead-based paint" or "asbestos" as such terms are defined
in any applicable Environmental Law in such concentration(s) or amount(s) as may
impose clean-up, removal, monitoring or other responsibility under the
Environmental Laws, as the same may be amended from time to time, or which may
present a significant risk of harm to guests, invitees or employees of the
Hotel.
C. In the event that Hazardous Materials are released on any
portion of the Site or in the Hotel during the Term of this Agreement as a
result of the actions of Submanager's employees, then Submanager shall promptly
remove such Hazardous Materials, together with all contaminated soil and
containers, and shall otherwise remedy the problem in accordance with all
Environmental Laws. All costs and expenses of the removal by Submanager
(pursuant to this Section 11.08.C) of Hazardous Materials, and of the aforesaid
compliance with Environmental Laws shall (to the extent such costs exceed Ten
Thousand Dollars ($10,000), as adjusted by the GDP Deflator, with respect to any
given incident or related series of incidents in which such a release occurred)
be paid from Submanager's own funds and not as a Deduction, and Submanager shall
indemnify, defend and hold Owner, Wyndham, Primary Manager and any Mortgagee
harmless from and against all loss, costs, liability and damage (including,
without limitation, engineers' and attorneys' fees and expenses, and the cost of
litigation) arising from the actions described in this Section 11.08.C. In the
event that the costs and expenses of said removal by Submanager, and of the
aforesaid compliance, are less than Ten Thousand Dollars ($10,000), as adjusted
by the GDP Deflator, with respect to any such incident, said costs and expenses
shall be paid from Gross Revenues as a Deduction, and the foregoing indemnity by
Submanager shall not apply. Submanager shall be able to retain in the Hotel
reasonable quantities of cleansers, solvents and other materials used in the
ordinary course of hotel operations, notwithstanding that such materials may
contain or be Hazardous Materials, provided that Submanager complies with all
Environmental Laws with regard to the storage, use and disposal thereof.
D. Except as otherwise set forth to the contrary in Section
11.08.C, all costs and expenses of the aforesaid removal of Hazardous Materials
from the Site or the Hotel, and of the aforesaid compliance with all
Environmental Laws, and any amounts paid to Submanager pursuant to the indemnity
set forth in Section 11.08.B, shall be paid by Primary Manager from its own
funds, not as a Deduction nor from the FF&E Reserve, and shall be treated as an
expenditure by Primary Manager pursuant to Section 5.03.
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11.09 Confidentiality
A. The parties hereto agree that the matters set forth in this
Agreement and all statements, reports, projections, and other information
relating to the operation of the Hotel are strictly confidential and each party
will make every effort to ensure (including, in the case Primary Manager,
exercising its rights under the Primary Management Agreement and causing Wyndham
to exercise its rights under the Lease) that the information is not disclosed to
any outside person or entities (including the press) without the prior written
consent of the other party except as may be required by law and as may be
reasonably necessary to obtain licenses, permits, and other public approvals
necessary for the refurbishment or operation of the Hotel, or in connection with
Owner's or Wyndham's financing of the Hotel, a Sale of the Hotel, or a sale of a
controlling interest in Owner, Wyndham, Submanager, or Marriott (except any
financing or sale involving a private or public offering of securities).
B. Primary Manager shall not include and shall exercise its
rights under the Primary Management Agreement to cause Wyndham (or to cause
Wyndham to cause Owner) not to include any reference to Submanager or to any
Affiliate of Submanager in any prospectus, private placement memorandum,
offering circular or offering documentation related thereto (collectively
referred to as the "Primary Manager Prospectus"), issued by Owner, Wyndham or
Primary Manager or by one of their respective Affiliates or by one or more
Mortgagees, which is designated to interest potential investors in debt or
equity securities related to the Hotel, unless Submanager has previously
received a copy of all such references. However, regardless of whether
Submanager does or does not so receive a copy of all such references, neither
Submanager nor any Affiliate of Submanager will be deemed a sponsor of the
offering described in the Primary Manager Prospectus, nor will it have any
responsibility for the Primary Manager Prospectus. Unless Submanager agrees in
advance, the Primary Manager Prospectus will not include any Marriott Trade
Names or Marriott Trademarks. Primary Manager shall indemnify, defend and hold
Submanager harmless from and against all loss, costs, liability and damage
(including attorneys' fees and expenses, and the cost of litigation) arising out
of any Primary Manager Prospectus or the offering described therein; and this
obligation of Primary Manager shall survive Termination of this Agreement.
C. No reference to Owner, Wyndham or Primary Manager or to any
Affiliate of any of them will be made in any prospectus, private placement
memorandum, offering circular or offering documentation related thereto
(collectively referred to as the "Submanager Prospectus"), issued by Submanager
or by one of Submanager's Affiliates, which is designated to interest potential
investors in debt or equity securities, unless Owner, Wyndham or Primary
Manager, as applicable, has previously received a copy of all such references.
However, regardless of whether Owner, Wyndham or Primary Manager does or does
not so receive a copy of all such references, neither Primary Manager nor any
Affiliate of any of them will be deemed a sponsor of the offering described in
the Submanager Prospectus, nor will it have any responsibility for the
Submanager Prospectus. Unless Owner, Wyndham or Primary Manager, as applicable,
agrees in advance, the Submanager Prospectus will not include any Trade Names or
Trademarks of Owner, Wyndham or Primary Manager. Submanager shall indemnify,
defend and hold Owner, Wyndham and Primary Manager harmless from and against all
loss, costs, liability and damage (including attorneys' fees and expenses, and
the cost of litigation) arising out of any Submanager Prospectus or the offering
described therein; and this obligation of Submanager shall survive Termination
of this Agreement.
11.10 Projections
Primary Manager acknowledges that any written or oral projections,
proformas, or other similar information that has been (prior to execution of
this Agreement) or will (during the Term of this Agreement) be provided by
Submanager or Marriott (or any Affiliate of either) to Primary Manager is for
information purposes only, and that Submanager, Marriott, and any such Affiliate
do not guarantee that the Hotel will achieve the results set forth in any such
projections, proformas, or other similar information. Any such projections,
proformas, or other similar information are based on assumptions and estimates.
Unanticipated events may occur subsequent to the date of preparation of such
projections, proformas, and other similar information. Therefore, the actual
results achieved by the Hotel are likely to vary from the estimates contained in
any such projections, proformas, or other similar information and such
variations might be material.
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11.11 Actions to be Taken Upon Termination
Upon a Termination of this Agreement, the following shall be
applicable:
A. Submanager shall, within ninety (90) days after Termination
of this Agreement, prepare and deliver to Primary Manager a final accounting
statement with respect to the Hotel, as more particularly described in Section
4.02 hereof, along with a statement of any sums due from Primary Manager to
Submanager pursuant hereto, dated as of the date of Termination. Within thirty
(30) days of the receipt by Primary Manager of such final accounting statement,
the parties will make whatever cash adjustments are necessary pursuant to such
final statement. The cost of preparing such final accounting statement shall be
a Deduction, unless the Termination occurs as a result of a Default by either
party, in which case the defaulting party shall pay such cost. Submanager and
Primary Manager acknowledge that there may be certain adjustments for which the
information will not be available at the time of the final accounting and the
parties agree to readjust such amounts and make the necessary cash adjustments
when such information becomes available; provided, however, that all accounts
shall be deemed final as of the first (1st) anniversary of the effective date of
Termination.
B. Submanager shall release and transfer to Primary Manager
(i) any of Primary Manager's funds which are held or controlled by Submanager
with respect to the Hotel with the exception of funds to be held in escrow
pursuant to Sections 6.01.F and 11.11.H and otherwise in accordance herewith and
(ii) to the extent not previously provided to Primary Manager, the guest history
of the Hotel, (including names, addresses and other information with respect to
Hotel guests, but not information as to national or regional accounts of
Submanager, Marriott or their Affiliates other than names, addresses and other
information of guests which stayed at the Hotel pursuant to such accounts.
C. Submanager shall make available to Primary Manager such
books and records respecting the Hotel (including those from prior years,
subject to Submanager's reasonable records retention policies) as will be needed
by Primary Manager to prepare the accounting statements, in accordance with the
Uniform System of Accounts, for the Hotel for the year in which the Termination
occurs and for any subsequent year.
D. Submanager shall (to the extent permitted by law) assign to
Primary Manager or to the new submanager all operating licenses and permits for
the Hotel which have been issued in Submanager's name (including liquor and
restaurant licenses, if any); provided that if Submanager has expended any of
its own funds in the acquisition of any of such licenses or permits, Primary
Manager shall reimburse Submanager therefor if it has not done so already.
E. Submanager shall have the option, to be exercised within
thirty (30) days after Termination, to purchase, at their then fair market
value, any items of the Hotel's Inventories and Fixed Asset Supplies as may be
marked with any Marriott Trade Name or any Marriott Trademark. In the event
Submanager does not exercise such option, Primary Manager agrees that any such
items which are not so purchased shall be used exclusively in connection with
the Hotel until they are consumed.
F. Primary Manager shall have the right to operate the
improvements on the Site without modifying the architectural design of same,
notwithstanding the fact that such design or certain features thereof may be
proprietary to Submanager and/or protected by trade marks or service marks held
by Submanager or an Affiliate, provided that such use shall be confined to the
Site.
G. All Software used at the Hotel which is owned by any of the
Marriott Companies (or any Affiliates thereof) or the licensor of any of them is
proprietary to such Marriott Company (or such Affiliate) or the licensor of any
of them, and shall in all events remain the exclusive property of such Marriott
Company (or such Affiliate) or the licensor of any of them, as the case may be,
and nothing contained in this Agreement shall confer on Primary Manager, Owner
or Wyndham the right to use any of such Software. Submanager shall have the
right to
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remove from the Hotel without compensation to Primary Manager, Owner or Wyndham
any Software (including upgrades and replacements), including, without
limitation, Software in general use throughout the Marriott System, which is
owned by any of the Marriott Companies (or any Affiliates thereof) or the
licensor of any of them. Furthermore, upon Termination, notwithstanding Section
5.04 hereof, Submanager shall be entitled to remove from the Hotel any computer
equipment which is: (i) owned by Submanager (without reimbursement to Primary
Manager, Owner or Wyndham); or (ii) owned by Primary Manager, Owner or Wyndham,
but utilized as part of a Marriott centralized reservation or property
management system (with reimbursement to Primary Manager, Owner or Wyndham, as
applicable, of all previous expenditures made by Primary Manager, Owner or
Wyndham with respect to such equipment, subject to a reasonable allowance for
depreciation).
H. A reserve fund shall be established from Gross Revenues to
reimburse Submanager for all costs and expenses incurred by Submanager in
terminating its employees at the Hotel, such as reasonable severance pay,
unemployment compensation, employment relocation (however, Submanager shall be
responsible for relocation costs of any executive committee member relocating to
another hotel managed by Submanager or its affiliates, arising from a
Termination elected by Submanager, and in no event shall Submanager be
reimbursed for the cost of relocating any hourly (as opposed to salaried
managerial) employees of the Hotel), and other employee liability costs arising
out of the termination of employment of Submanager's employees at the Hotel.
Submanager agrees to use its reasonable efforts to mitigate such costs and
expenses. If Gross Revenues are insufficient to meet the requirements of such
reserve fund, then Primary Manager shall deliver to Submanager, within ten (10)
days after receipt of Submanager's written request therefor, the sums necessary
to establish such reserve fund; and if Primary Manager fails to timely deliver
such sums to Submanager, Submanager shall have the right (without affecting
Submanager's other remedies under this Agreement) to withdraw the amount of such
expenses from the Operating Accounts or any other funds of Primary Manager held
by or under the control of Submanager other than the FF&E Reserve.
Notwithstanding the foregoing, Wyndham, Owner, Primary Manager and any successor
manager shall have the right to interview and continue the employment of any of
Submanager's employees at the Hotel; provided, however, that Wyndham, Owner or
Primary Manager or such successor manager shall have the right to interview and
continue the employment of members of the Hotel Executive Committee only if such
persons will be terminated by Submanager. If this Agreement is terminated by
reason of Default of Submanager hereunder, then no such reserve fund shall be
established and Submanager shall pay from its own funds all costs and expenses
incurred by Submanager in terminating its employees at the Hotel.
I. Primary Manager shall cause the entity which shall succeed
Submanager as the operator of the Hotel to hire a sufficient number of the
employees at the Hotel to avoid the occurrence, in connection with such
Termination, of a "closing" under the WARN Act.
J. Various other actions shall be taken, as described in this
Agreement, including, but not limited to, the actions described in Sections 4.06
and 6.01.F.
K. In the event of a Termination pursuant to Section 2.02,
Section 11.22, ordinary expiration of the Term or as a result of an Event of
Default by Submanager, then (i) Submanager shall not transfer any then existing
bookings of rooms or functions at the Hotel to any other hotel of Submanager,
Marriott or any Affiliate thereof or otherwise cancel any such bookings;
however, Submanager, acting in good faith, shall not be prohibited from
responding affirmatively to inquiries or requests by individuals or groups
desiring to transfer bookings of rooms or functions at the Hotel to any other
hotel of Submanager or its affiliates, and (ii) Submanager shall act reasonably
and in good faith to allow a transition of management and operations, including,
without limitation, by allowing representatives of Primary Manager or
replacement submanager to market the Hotel to potential guests for a period of
120 days (or such lesser period of time between the applicable notice of
Termination and actual Termination); provided, however, that such participation
by Primary Manager or replacement submanager shall not (x) unreasonably
interfere with Submanager's operation of the Hotel and (y) Submanager shall have
the right to take such measures it reasonably deems appropriate to protect its
proprietary information with respect to the Marriott System and its national and
regional accounts.
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L. Submanager shall peacefully vacate and surrender the Hotel
to Primary Manager.
The provisions of this Section 11.11 shall survive Termination.
11.12 Trademarks, Trade Names and Intellectual Property
A. All Marriott Trade Names and Marriott Trademarks shall in
all events remain the exclusive property of Submanager (or one of its
Affiliates), and nothing contained in this Agreement shall confer on Owner,
Wyndham or Primary Manager the right to use any of the Marriott Trade Names or
Marriott Trademarks otherwise than in strict accordance with the terms of this
Agreement. Except as provided in Section 11.11.E, upon Termination, any use of
or right to use any of the Marriott Trade Names or Marriott Trademarks by Owner,
Wyndham or Primary Manager shall cease forthwith, and Primary Manager (i) shall
immediately, as of the date of such Termination, place coverings over any signs
or similar identification which contain any of said Marriott Trade Names or
Marriott Trademarks, or shall otherwise render such signs or other similar
identification not visible to the public; and (ii) shall remove any such signs
or similar identification from the Hotel by no later than ten (10) days after
the date of Termination. If Primary Manager has not removed such signs or
similar items within ten (10) days after Termination, Submanager shall have the
right to do so at Primary Manager's expense; and if Primary Manager fails to
reimburse Submanager for such expense within ten (10) days after receipt of
written notice thereof from Submanager to Primary Manager, then Submanager shall
have the right (without affecting Submanager's other remedies under this
Agreement) to withdraw the amount of such expenses from the Operating Accounts
or any other funds of Primary Manager held by or under the control of Submanager
other than the FF&E Reserve. For purposes of this Section 11.12, the term
"Marriott Trademarks" shall include, without limitation, all Trademarks and
Trade Names used in conjunction with the Hotel, including but not limited to
restaurant names, lounge names, etc. (other than Trademarks and Trade Names of
third party tenants, licensees or concessionaires at the Hotel), whether or not
the marks contain the "Marriott" name. The right to use or authorize others to
use Marriott Trade Names or Marriott Trademarks belongs exclusively to
Submanager and/or its Affiliates, whether or not the same are registered and
regardless of the source of the same. The provisions of this Section 11.12 shall
survive Termination. Notwithstanding Section 1.02.A, if the name of the Marriott
System is changed, Submanager will change the name of the Hotel to conform
thereto.
B. All Intellectual Property shall at all times be proprietary
to Submanager or its Affiliates, and shall be the exclusive property of
Submanager or its Affiliates. During the Term of this Agreement, Submanager
shall be entitled to take all reasonable steps to ensure that the Intellectual
Property remains confidential and is not disclosed to anyone other than
Submanager's employees at the Hotel. Upon Termination, all Intellectual Property
shall be removed from the Hotel by Submanager, without compensation to Owner,
Wyndham or Primary Manager, subject to the provisions of Section 11.11.G
regarding Software.
C. Submanager and/or its Affiliates shall be entitled, in case
of any breach by Primary Manager of any of the covenants of this Section 11.12,
to injunctive relief and to any other right or remedy available at law. Section
11.12 shall survive Termination.
11.13 Competing Facilities
Subject to the parties' rights of termination set forth in Section
11.22, neither this Agreement nor anything implied by the relationship between
Submanager and Primary Manager shall prohibit Submanager or any of the Marriott
Companies from developing, constructing, operating, promoting, and/or
authorizing others to develop, construct, operate, or promote one or more
hotels, or any other lodging products, time-share facilities, restaurants, or
other business operations of any type, using any brand name available to the
Marriott Companies, at any location, including a location proximate to the Site,
and Primary Manager hereby acknowledges and agrees that Submanager and any of
the Marriott Companies have the unconditional right to engage in such
activities.
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11.14 Waiver
The failure of either party to insist upon a strict performance of any
of the terms or provisions of the Agreement, or to exercise any option, right or
remedy contained in this Agreement, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
11.15 Partial Invalidity
If any portion of the Agreement shall be declared invalid by order,
decree or judgment of a court, the Agreement shall be construed as if such
portion had not been so inserted except when such construction would operate as
an undue hardship on Submanager or Primary Manager or constitute a substantial
deviation from the general intent and purpose of said parties as reflected in
the Agreement.
11.16 Survival
Except as otherwise specifically provided in this Agreement, the rights
and obligations of the parties herein shall not survive any Termination of this
Agreement. To the extent not paid pursuant to the Settlement Agreement, any
obligation of Primary Manager to pay the Special Fee, pursuant to Section 2.01
B, shall survive Termination of this Agreement.
11.17 Affiliates
Submanager shall be entitled to contract with one or more of its
Affiliates to provide goods and/or services to the Hotel, provided that the
prices and/or fees paid to any such Affiliate are competitive with the prices
and/or fees which would be charged by reputable and qualified parties which are
not Affiliates of Submanager for similar goods and/or services. The prices
and/or fees paid to Affiliates may include overhead and the allowance of a
reasonable return which is customary for the goods and/or services to be
provided. In determining, pursuant to the foregoing, whether such prices and/or
fees are competitive, the goods and/or services which are being purchased shall
be grouped in reasonable categories, rather than being compared item by item.
11.18 Negotiation of Agreement
Primary Manager and Submanager are both business entities having
substantial experience with the subject matter of this Agreement, and each has
fully participated in the negotiation and drafting of this Agreement.
Accordingly, this Agreement shall be construed without regard to the rule that
ambiguities in a document are to be construed against the draftsman. No
inferences shall be drawn from the fact that the final, duly executed Agreement
differs in any respect from any previous draft hereof.
11.19 Estoppel Certificates
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Each party to this Agreement shall at any time and from time to time,
upon not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (a) certifying that this Agreement is
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (b) stating whether or not to the best knowledge of the
certifying party (i) there is a continuing Default or Event of Default by the
non-certifying party in the performance or observance of any covenant, agreement
or condition contained in this Agreement, or (ii) there shall have occurred any
event which, with the giving of notice or passage of time or both, would become
a Default or Event of Default, and, if so, specifying each such Default or Event
of Default or occurrence of which the certifying party may have knowledge; and
(c) stating such other information as the non-certifying party may reasonably
request. Such statement shall be binding upon the certifying party and may be
relied upon by the non-certifying party and/or such third party specified by the
non-certifying party as aforesaid. In addition, upon written request after a
Termination, each party agrees to execute and deliver to the non-certifying
party and to any such third party a statement certifying that this Agreement has
been terminated.
11.20 System Standards
In the event of either (i) a Legal Requirement, including an order,
judgment or directive by a court or administrative body which is issued in
connection with any Litigation involving Primary Manager, Owner or Wyndham, or
(ii) any action taken by a Mortgagee in connection with a Foreclosure, which in
either case restricts or prevents Submanager, in a material and adverse manner,
from operating the Hotel in accordance with System Standards (including without
limitation, any restrictions on expenditures by Submanager from the Operating
Accounts or from the FF&E Reserve, other than restrictions which are set forth
in this Agreement), Submanager shall be entitled, at its option, to terminate
this Agreement upon sixty (60) days' written notice to Primary Manager. The
foregoing shall not reduce or otherwise affect the rights of the parties under
either Article IX or Section 11.11.I.
11.21 Arbitration
A. In the event of a dispute between Primary Manager and
Submanager with respect to any issue which is specifically described in this
Agreement as a matter to be decided by arbitration, such dispute shall be
determined by arbitration as provided in this Section 11.21.
B. Disputes shall be resolved in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then
pertaining. The decision of the arbitrators shall be binding, final and
conclusive on the parties.
C. Primary Manager and Submanager shall each appoint and pay
all fees of a fit and impartial person as arbitrator who shall have had at least
ten (10) years' recent professional experience in the general subject matter of
the dispute. Notice of such appointment shall be sent in writing by each party
to the other, and the arbitrators so appointed, in the event of their failure to
agree upon the resolution of the dispute within thirty (30) days after the
appointment of the second arbitrator, shall appoint a third arbitrator. If
either Primary Manager or Submanager shall fail to appoint an arbitrator, as
aforesaid, for a period of twenty (20) days after written notice from the other
party to make such appointment, then the arbitrator appointed by the party
having made such appointment shall appoint a second arbitrator. The two
arbitrators so appointed shall, in the event of their failure to agree upon
resolution of the dispute within thirty (30) days thereafter, appoint a third
arbitrator. If such arbitrators fail to agree upon a third arbitrator within
forty-five (45) days after the appointment of the second arbitrator, then such
third arbitrator shall be appointed by the American Arbitration Association from
its qualified panel of arbitrators, and shall be a person having at least ten
(10) years' recent professional experience as to the subject matter in question.
The fees of the third arbitrator and the expenses incident to the proceedings
shall be borne equally between Primary Manager and Submanager, unless the
arbitrators decide otherwise. The fees of respective
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counsel engaged by the parties, and the fees of expert witnesses and other
witnesses called for the parties, shall be paid by the respective party engaging
such counsel or calling or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within
thirty (30) days after appointment of the third arbitrator. Such decision shall
be in writing and in duplicate, one counterpart thereof to be delivered to
Primary Manager and one to Submanager. A judgment of a court of competent
jurisdiction may be entered upon the award of the arbitrators in accordance with
the rules and statutes applicable thereto then obtaining.
11.22 Restricted Area Right of Termination
In the event that Submanager or any of its Affiliates, during the Term,
operates or manages (or franchises another party to operate or manage) a
Restricted MHRS Hotel, within the Restricted Area, Primary Manager and
Submanager shall each have the right to terminate this Agreement as follows:
Submanager shall provide Primary Manager notice upon the earlier to occur of (i)
thirty (30) days following the date on which Submanager or its Affiliate
executes a purchase agreement, management agreement, or license agreement or
franchise agreement, as the case may be, relating to a Restricted MHRS Hotel in
the Restricted Area, or (ii) upon the opening of such Restricted MHRS Hotel
(meaning the date that the Restricted MHRS Hotel first accepts paying
customers). Submanager shall act in good faith with respect to the giving of
such notice, if practicable, at least ninety (90) days prior to the opening of a
Restricted MHRS Hotel. Within sixty (60) days after Primary Manager's receipt of
written notice that it will purchase, manage, license or franchise a Restricted
MHRS Hotel, Primary Manager shall give Submanager (or Submanager shall give to
Primary Manager) written notice (a "Termination Notice") that it elects to
terminate this Agreement, which termination shall be effective upon the opening
of the Restricted MHRS Hotel. Failure to deliver the Termination Notice within
such sixty (60) day period by either party shall constitute a waiver by such
party to exercise such termination right. Such Termination pursuant to this
Section 11.22 shall be without penalty or cost to either party. The preceding
sentence shall not be deemed to affect the accounting and other termination
procedures set forth in Section 11.11. In the event of any Termination of this
Agreement pursuant to this Section 11.22, the related Franchise Agreement shall
not be reinstated and, subject to payment of any royalty fees theretofore
accrued thereunder, shall be of no further force or effect. If indicated on
Exhibit A-1 as "yes" next to "Chain Exception," the foregoing shall not apply to
any hotel, the management or ownership of which Submanager (or an Affiliate)
acquires in connection with the acquisition of, or the right to operate, a chain
or group of three (3) or more hotels, in each case in a single transaction.
11.23 Entire Agreement
The Agreement, together with any other writings signed by the parties
expressly stated to be supplemental hereto and together with any instruments to
be executed and delivered pursuant to the Agreement, constitutes the entire
agreement between the parties and supersedes all prior understandings and
writings, and may be changed only by a writing signed by the parties hereto.
11.24 Expert Resolution Process
If, under the applicable provisions of this Agreement, a matter is to
be referred to an Expert for determination, the following provisions shall
apply:
A. The decision of the Expert shall be final and binding on
the parties and shall not be subject to challenge, whether by arbitration, in
court or otherwise.
B. Each party shall be entitled to make written submissions to
the Expert. If either party makes any submission to the Expert, such party shall
also provide a copy of such submission to the other party, and the other party
shall have the right to comment on such submission. The parties shall make
available to the Expert all books and records relating to the issue in dispute,
and shall render to the Expert any assistance requested of the
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parties. The costs of the Expert and of the proceedings shall be borne as
directed by the Expert unless otherwise provided for herein. The Expert may
direct that such costs be treated as Deductions.
C. The terms of engagement of the Expert shall include an
obligation on the part of the Expert to:
1. establish a timetable for the making of
submissions and replies;
2. apply the standards applicable to first-class
hotels in accordance with System Standards; and
3. notify the parties in writing of the Expert's
decision within forty-five (45) days after the date on which
the Expert has been selected (or within such other period as
the parties may mutually agree upon and which is acceptable to
the Expert).
ARTICLE XII
DEFINITION OF TERMS
12.01 Definition of Terms
The following terms when used in the Agreement and the Addendum
attached hereto shall have the meanings indicated:
"Accounting Period" shall mean the four (4) week accounting periods
having the same beginning and ending dates as Submanager's four (4) week
accounting periods, except that an Accounting Period may occasionally contain
five (5) weeks when necessary to conform Submanager's accounting system to the
calendar.
"Accounting Period Statement" shall have the meaning set forth in
Section 4.01.A.
"Affiliate" shall mean, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For purposes of this definition, the term "control" (including
the terms "controlling", "controlled by" and "under common control with") of a
Person means the possession, directly or indirectly, of the power: (i) to vote
more than fifty percent (50%) of the voting stock of such Person; or (ii) to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting stock, by contract or otherwise.
"Agreement" shall mean this Submanagement Agreement between Primary
Manager and Submanager, including the exhibits attached hereto.
"Annual Operating Statement" shall have the meaning set forth in
Section 4.01.
"Approval" shall mean prior written approval or consent, which, unless
otherwise specified herein, shall not be unreasonably withheld, conditioned or
delayed.
"Base Management Fee" shall mean an amount payable to Submanager (as a
Deduction from Gross Revenues) which is set forth on Exhibit "A-1" attached
hereto.
"Building Estimate" shall have the meaning ascribed to it in Section
5.03.
"Business Plan" shall have the meaning set forth in Section 4.05.
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"Capital Expenditure" shall mean the expenses necessary for
non-routine, major repairs, alterations, improvements, renewals, replacements,
and additions to the Hotel including, without limitation, to the structure, the
exterior facade and all of the mechanical, electrical, heating, ventilating, air
conditioning, plumbing or vertical transportation elements of the Hotel
building, together with all other expenditures which are classified as "capital
expenditures" under generally-accepted accounting principles.
"Capitalization Multiple" shall mean the number ten (10).
"Case Goods" shall mean furniture and furnishings used in the Hotel,
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, mirrors, pictures, wall decorations and similar items.
"CC&R's" shall have the meaning ascribed to it in Section 8.04.
"Chain Services" shall have the meaning set forth in Section 1.04.
"Competitive Set" shall mean the five (5) most comparable hotels in the
general trade area of the Hotel. The term "comparable hotels" shall mean hotels
which have a comparable rating to the Hotel in recognized travel guides (e.g.,
Mobil "star" or AAA "diamond" rating systems). If, in the reasonable opinion of
either Primary Manager or Submanager, such Smith's STAR Report ceases to be a
satisfactory source of data regarding the rooms revenues of various hotels in
the general trade area of the Hotel, or if the "competitive set" requires
adjustment due to changes in the market, then either Primary Manager or
Submanager shall suggest an alternative competitive set or source of data for
the other party's approval. If the parties fail to agree on either such
alternate competitive set or source, as the case may be, within a reasonable
period of time, then at the election of the suggesting party, the matter shall
be resolved by the Expert Resolution Process.
"Coverage Ratio" shall mean the number one and four-tenths (1.4).
"Deductions" shall mean the following expenses incurred by Submanager
in operating the Hotel:
1. the cost of sales, including, without limitation,
compensation, fringe benefits, payroll taxes, ERISA-related liabilities,
pension-fund withdrawal liabilities, and other costs related to employees of
Submanager (or one of its Affiliates) who are working for the benefit of the
Hotel (regardless of whether such employees are located at the Hotel or
elsewhere); provided that the foregoing costs shall not include the salary and
other employee costs of Submanager's or any Affiliate's corporate executive
staff who are located at Submanager's or such Affiliate's corporate
headquarters, and that the termination-related costs of regional employees shall
only apply in the case such termination was in connection with the Hotel or as a
result of the termination of this Agreement;
2. departmental expenses incurred at departments within the
Hotel; administrative and general expenses; the cost of marketing incurred by
the Hotel; advertising and business promotion incurred by the Hotel; heat,
light, and power; computer line charges; and routine repairs, maintenance and
minor alterations treated as Deductions under Section 5.01;
3. the cost of Inventories and Fixed Asset Supplies consumed
in the operation of the Hotel;
4. a reasonable reserve for uncollectible accounts receivable
as determined by Submanager;
5. all costs and fees of independent professionals or other
third parties who are retained by Submanager to perform services required or
permitted hereunder;
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6. all costs and fees of technical consultants, professionals
and operational experts who are retained or employed by Submanager, Marriott,
and Affiliates for specialized services (including, without limitation, quality
assurance inspectors, personnel providing architectural, technical or
procurement services for the Hotel, tax consultants, and personnel providing
legal services in connection with matters directly involving the Hotel) and the
cost of attendance by employees of the Hotel at training and manpower
development programs designated by Submanager;
7. the Base Management Fee;
8. insurance costs and expenses as provided in Sections 6.01;
9. taxes, if any, payable by or assessed against Submanager
related to this Agreement or to Submanager's operation of the Hotel (exclusive
of Submanager's income taxes or franchise taxes);
10. all Impositions;
11. the amount of any transfers into the FF&E Reserve required
pursuant to Section 5.02;
12. the Hotel's pro rata share of costs and expenses incurred
in connection with marketing programs developed for the Marriott System where
such expenses are not deducted as either departmental expenses under paragraph 2
above or as Chain Services under paragraph 12 below, including, without
limitation, the Marriott Rewards Program;
13. the Hotel's pro rata share of the charges for Chain
Services;
14. all costs and expenses of compliance by Submanager with
applicable Legal Requirements pertaining to the operation of the Hotel;
15. such other costs and expenses incurred by Submanager
(either at the Hotel or elsewhere) as are specifically provided for elsewhere in
this Agreement or are otherwise reasonably necessary for the proper and
efficient operation of the Hotel; and
16. royalty or franchise fees under the Franchise Agreement.
The term "Deductions" shall not include: (a) debt service payments
pursuant to any Mortgage on the Hotel; (b) payments pursuant to equipment leases
or other forms of financing obtained for the FF&E located in or connected with
the Hotel, unless Submanager has previously given its written consent to such
equipment lease and/or financing; (c) rental payments pursuant to any ground
lease of the Site; or (d) depreciation on the Hotel or any of its contents. All
of the foregoing items listed in this paragraph shall be paid by Primary Manager
from its own funds.
"Default" shall have the meaning ascribed to it in Section 9.01.
"Divestiture Date" shall have the meaning set forth in the Settlement
Agreement.
"Effective Date" shall have the meaning ascribed to it in the Preamble.
"Environmental Laws" shall have the meaning ascribed to it in Section
11.08.
"Event of Default" shall have the meaning ascribed to it in Section
9.01.
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"Expert" shall mean an independent nationally recognized consulting
firm or individual who is qualified to resolve the issue in question, and who is
appointed in each instance by agreement of the parties. Failing such agreement,
each party shall select one (1) such nationally recognized consulting firm or
individual, and the two (2) respective firms and/or individuals so selected
shall select another such nationally recognized consulting firm or individual to
be the Expert.
"Expert Resolution Process" shall mean the process for Expert
resolution described in Section 11.24 herein.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case
Goods, signage, audio-visual equipment, kitchen appliances, vehicles, carpeting
and equipment, including front desk and back-of-the house computer equipment,
but shall not include Fixed Asset Supplies or Software.
"FF&E Estimate" shall have the meaning ascribed to it in Section
5.02.C.
"FF&E Reserve" shall have the meaning ascribed to it in Section 5.02.A.
"Fiscal Year" shall mean Submanager's Fiscal Year which, as of the
Effective Date, ends at midnight on the Friday closest to December 31 in each
calendar year; the new Fiscal Year begins on the Saturday immediately following
said Friday. Any partial Fiscal Year between the Take-Over Date and the
commencement of the first full Fiscal Year shall constitute a separate Fiscal
Year. A partial Fiscal Year between the end of the last full Fiscal Year and the
Termination of this Agreement shall also constitute a separate Fiscal Year. If
Submanager's Fiscal Year is changed in the future, appropriate adjustment to
this Agreement's reporting and accounting procedures shall be made; provided,
however, that no such change or adjustment shall alter the Term of this
Agreement or in any way reduce the distributions of Operating Profit or other
payments due hereunder.
"Five-Year Plan" shall mean the "FF&E Budget Approval for 1998-2002"
which is attached hereto as Exhibit "B-1".
"Fixed Asset Supplies" shall mean items included within "Property and
Equipment" under the Uniform System of Accounts including, but not limited to,
linen, china, glassware, tableware, uniforms, and similar items, whether used in
connection with public space or Guest Rooms.
"Food and Beverage Operation" means all of the following Hotel
services, whether performed inside or outside the Hotel: (1) all restaurant,
dining, bar and lounge food and beverage services; (2) all banquet, meeting,
convention, event, catering, and room services food and beverage services; and
(3) any other food, beverage or related services of the Hotel.
"Force Majeure" shall mean acts of God, acts of war, civil disturbance,
governmental action (including the revocation or refusal to grant licenses or
permits, where such revocation or refusal is not due to the fault of the party
whose performance is to be excused for reasons of Force Majeure), strikes,
lockouts, fire, unavoidable casualties or any other causes beyond the reasonable
control of either party (excluding, however, (i) lack of financing, or (ii)
general economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
Mortgagee, upon a default under the Mortgage held by such Mortgagee, which
results in a transfer of title to or possession of the Hotel. The term
"Foreclosure" shall include, without limitation, any one or more of the
following events, if they occur in connection with a default under a Mortgage:
(i) a transfer by judicial foreclosure; (ii) a transfer by deed in lieu of
foreclosure; (iii) the appointment by a court of a receiver to assume possession
of the Hotel; (iv) a transfer of either Owner or Wyndham or control of an Owner
or Wyndham, by exercise of a stock pledge or otherwise; (v) if title to the
Hotel is held by a tenant under a ground lease, an assignment of the tenant's
interest in such ground lease; or (vi) any similar judicial or non-judicial
exercise of the remedies held by the Mortgagee.
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"Franchise Agreement" shall have the meaning ascribed to it in the
Recitals.
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by Primary
Manager and reasonably satisfactory to Submanager (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Any dispute regarding the selection
of the Substitute Index or the adjustments to be made thereto shall be settled
by arbitration in accordance with Section 11.21. Except as otherwise expressly
stated herein, whenever a number or amount is required to be "adjusted by the
GDP Deflator", or similar terminology, such adjustment shall be equal to the
percentage increase or decrease in the GDP Deflator which is issued for the
month in which such adjustment is to be made (or, if the GDP Deflator for such
month is not yet publicly available, the GDP Deflator for the most recent month
for which the GDP Deflator is publicly available) as compared to the GDP
Deflator which was issued for the month in which the Effective Date occurred.
"Gross Food and Beverage Sales" shall mean all sales and receipts of
every kind and nature, including, among other items, credit charges, charge
backs and uncollectible amounts, from the Food and Beverage Operations, but
shall not be deemed to include any sales, hotel, entertainment tax or similar
taxes collected from patrons or guests. Gross Food and Beverage Sales shall be
accounted for on an accrual basis and in accordance with the Uniform System.
"Gross Revenues" shall mean all revenues and receipts of every kind
derived from operating the Hotel and all departments and parts thereof,
including, but not limited to: income (from both cash and credit transactions)
from rental of Guest Rooms, telephone charges, stores, offices, exhibit or sales
space of every kind; license, lease and concession fees and rentals (not
including gross receipts of licensees, lessees and concessionaires); income from
vending machines; income from parking; health club membership fees; food and
beverage sales; wholesale and retail sales of merchandise; service charges; and
proceeds, if any, from business interruption or other loss of income insurance;
provided, however, that Gross Revenues shall not include the following:
gratuities to employees of the Hotel; federal, state or municipal excise, sales
or use taxes or any other taxes collected directly from patrons or guests or
included as part of the sales price of any goods or services; proceeds from the
sale of FF&E; interest received or accrued with respect to the funds in the FF&E
Reserve or the other operating accounts of the Hotel; any refunds, rebates,
discounts and credits of a similar nature, given, paid or returned in the course
of obtaining Gross Revenues or components thereof; insurance proceeds (other
than proceeds from business interruption or other loss of income insurance;
condemnation proceeds (other than for a temporary taking); or any proceeds from
any Sale of the Hotel or from the refinancing of any debt encumbering the Hotel.
"Gross Room Sales" shall mean all sales and receipts of every kind and
nature which accrue from the rental of Guest Rooms including, among other items,
credit charges, charge backs and uncollectible amounts, but shall not be deemed
to include any sales tax, value added tax, or similar taxes collected from
patrons or guests. Gross Room Sales shall be accounted for on an accrual basis
and in accordance with the Uniform System.
"Guest Profile Data" shall mean personal guest profiles and information
regarding guest preferences.
"Guest Room" shall mean a separately-keyed lodging unit in the Hotel.
"Hazardous Materials" shall have the meaning ascribed to it in Section
11.08.B.
"Hotel" shall mean the Site together with the following: (i) the Hotel
Improvements and all other improvements constructed or to be constructed on the
Site pursuant to this Agreement; (ii) all FF&E, Fixed Asset Supplies and
Inventories installed or located on the Site or in the Hotel Improvements; and
(iii) all easements or other appurtenant rights thereto.
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"Hotel Executive Committee" shall mean the following individuals
employed by Submanager at the Hotel: general manager, resident manager,
controller, director of marketing, food and beverage director, the human
resources director, and the chief engineer, or similar titled positions.
"Hotel Improvements" shall have the meaning set forth in the Recitals.
"Impositions" shall have the meaning set forth in Section 7.01.
"Improvements" shall have the meaning set forth in the Recitals.
"Initial FF&E Reserve Balance" shall mean the dollar amount set forth
on Exhibit "A-1" attached hereto.
"Institutional Lender" shall mean a foreign or domestic commercial
bank, trust company, savings bank, savings and loan association, life insurance
company, real estate investment trust, pension trust, pension plan or pension
fund, a public or privately-held fund engaged in real estate and/or corporate
lending, or any other financial institution commonly known as an institutional
lender (or any Affiliate thereof) having a minimum paid up capital (or net
assets in the case of a pension fund) of One Hundred Million Dollars
($100,000,000).
"Insurance Retention" shall have the meaning ascribed to it in Section
6.01.F.
"Intellectual Property" shall mean: (i) all Software; (ii) all manuals,
brochures and directives issued by Submanager to its employees at the Hotel
regarding the procedures and techniques to be used in operating the Hotel; and
(iii) customer lists and Guest Profile Data.
"Inventories" shall mean "Inventories" as defined in the Uniform System
of Accounts, such as, but not limited to, provisions in storerooms,
refrigerators, pantries and kitchens; beverages in wine cellars and bars; other
merchandise intended for sale; fuel; mechanical supplies; stationery; and other
expensed supplies and similar items.
"Legal Requirement" shall mean any federal, state or local law, code,
rule, ordinance, regulation or order of any governmental authority or agency
having jurisdiction over the business or operation of the Hotel or the matters
which are the subject of this Agreement, including, without limitation, the
following: (i) any building, zoning or use laws, ordinances, regulations or
orders; and (ii) Environmental Laws.
"Litigation" shall mean: (i) any cause of action (including, without
limitation, bankruptcy or other debtor/creditor proceedings) commenced in a
federal, state or local court; or (ii) any claim brought before an
administrative agency or body (for example, without limitation, employment
discrimination claims).
"Marriott" shall mean Marriott International, Inc., a Delaware
corporation.
"Marriott Companies" shall mean Submanager, Marriott, and any Affiliate
of Submanager or Marriott.
"Marriott System" shall mean the chain of full-service hotels in the
United States which are operated by Submanager (or one of its Affiliates) under
the Trade Name of "Marriott".
"Marriott Trade Names" shall mean both the name "Marriott" (when used
alone or in connection with another word or words) and any other Trade Names
which contain the word "Marriott".
"Marriott Trademark" shall mean any Trademark which is used in the
operation of hotels in the Marriott System.
"Minor Casualty" shall mean any fire or other casualty which results in
damage to the Hotel and/or its contents, to the extent that the total cost (in
Submanager's reasonable judgment) of repairing and/or replacing of the
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damaged portion of the Hotel to the same condition as existed previously does
not exceed the dollar amount of Two Hundred Fifty Thousand Dollars ($250,000),
said dollar amount to be adjusted by the GDP Deflator.
"Mortgage" shall mean any mortgage, deed of trust, or security document
encumbering the Hotel and/or the Site or the interest of Owner or Wyndham
therein.
"Mortgagee" shall mean the holder of any Mortgage.
"Notice of Proposed Sale" shall have the meaning set forth in Section
10.02.B.
"Operating Accounts" shall have the meaning set forth in Section
4.03.A.
"Operating Loss" shall mean a negative Operating Profit.
"Operating Profit" shall mean, with respect to any given period of
time, the excess of Gross Revenues over Deductions (each calculated in
accordance with this Agreement and the Uniform System).
"Owner's Agreement" shall have the meaning ascribed to it in the
Recitals.
"Primary Management Agreement" shall have the meaning ascribed to it in
the Recitals."
"Primary Manager" shall have the meaning ascribed to it in the Preamble
or shall mean any successor or permitted assign, as applicable.
"Primary Manager Prospectus" shall have the meaning set forth in
Section 11.09.
"Performance Termination Period" shall mean the twelve (12) month
period consisting of the six (6) months immediately prior to and including the
month in which the Take-Over Date occurs, and the six (6) months immediately
thereafter.
"Performance Termination Threshold" shall mean the average Operating
Profit over the Performance Termination Period; provided, however, that for the
purpose of calculating the Performance Termination Threshold, the following
adjustments shall be made in calculating the average Operating Profit over the
Performance Termination Period: (i) so-called one-time charges in connection
with its take-over of the Hotel shall not be included as Deductions, and (ii)
costs that would have been incurred during the first six (6) months of the
Performance Termination Period had the Hotel been operating in accordance with
System Standards (i.e. costs of guest complementaries such as newspapers, front
desk staffing and other similar recurring operating costs to the extent not
incurred during such six first (6) month period) and management fees in a deemed
amount equal to the Base Management Fee (in lieu of any actual management fees)
shall be included in Deductions. Within sixty (60) days after the end of the
Performance Termination Period, Submanager shall deliver to Primary Manager a
statement of the Performance Termination Threshold, and therein shall describe
any adjustments made pursuant to subsections (i) and/or (ii) above. Any
adjustments made pursuant to subsection (ii) shall be made in good faith by
Submanager and shall reflect the costs reasonably incurred at similar hotels
managed by Submanager. Commencing as of first day of the fourth (4th) full
Fiscal Year during the Term, and for each Fiscal Year thereafter, the
Performance Termination Threshold (as originally calculated) applicable to such
year shall be adjusted by adding (or subtracting) thereto (or therefrom) an
amount equal to the product of (i) 75% of the percentage change in the GDP
Deflator from the Effective Date to the date of adjustment, times (ii) the
Performance Termination Threshold (as originally calculated).
"Person" means an individual (and the heirs, executors, administrators,
or other legal representatives of an individual), a partnership, a corporation,
limited liability company, a government or any department or agency thereof, a
trustee, a trust and any unincorporated organization.
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"Previously-Accrued Payables" shall mean all liabilities incurred with
respect to the operation of the Hotel prior to the Take-Over Date (or allocable
to the period prior to the Take-Over Date, under generally accepted accounting
principles). The term "Previously-Accrued Payables" shall include, without
limitation: (i) all accounts payable and accrued liabilities shown on the
Hotel's balance sheet (current copies of which, through the Take-Over Date,
shall be delivered to Submanager); and (ii) all accrued employee benefits.
"Previously-Accrued Receivables" shall mean all receivables accrued in
connection with the operation of the Hotel prior to the Take-Over Date,
including (i) those accounts receivable which are shown on Primary Manager's
balance sheet (current copies of which, through the Take-Over Date, shall be
delivered to Submanager); and (ii) all other receivables.
"Primary Manager" shall have the meaning set forth in the Recitals.
"Prime Rate" shall mean the "base rate" of interest announced from time
to time by Bankers Trust Company, New York, New York.
"Proposed Business Plan" shall have the meaning set forth in Section
4.05.
"Qualified Mortgage" shall have the meaning set forth in Section 8.02.
"Reasonable Amount of Working Capital" shall mean an amount equal to
$1,250 times the number of Guest Rooms in the Hotel, plus 1/26 of the annual
payroll costs of the Hotel., such amount to be subject to adjustment after the
first Fiscal Year of operation of the Hotel (either upward or downward) as the
parties may reasonably agree to account for individual characteristics of the
operations of the Hotel, such as seasonality of revenues and expenses. Following
the first Fiscal Year of operation of the Hotel, such amount shall be subject to
adjustment as part of the Proposed Business Plan approval process, provided that
Primary Manager shall not disapprove a Reasonable Amount of Working Capital that
is no more than the amount arrived at pursuant to the first sentence hereof, as
modified to adjust the amount of $1,250 in proportion to any percentage change
in the Revenue per Room for the Hotel for the previous Fiscal Year.
"Reinstated Franchise Agreement" shall have the meaning set forth in
Section 2.01.B.
"Restricted Area" shall mean the area described in Exhibit "A-1"
attached hereto.
"Restricted MHRS Hotel" shall mean any full-service hotel operating
(either managed or franchised) under the "Marriott" trade name. The term
"Restricted Hotel" shall not include any one or more of the following: (i) any
existing (as of the Effective Date) full-service hotel operating under the
"Marriott" trade name within the Restricted Area; (ii) any Ritz-Carlton hotel,
Courtyard by Marriott Hotel, Renaissance Hotel, Conference Center by Marriott,
Residence Inn by Marriott, Fairfield Inn, Fairfield Suites, TownePlace Suites or
any other lodging product which is not operated as a full-service hotel under
the "Marriott" trade name; or (iii) any future lodging product developed by
Manager or one of its Affiliates which is not operated under the "Marriott"
tradename.
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee,
or an alternative source, reasonably satisfactory to both parties, of data
regarding the Revenue Per Room of hotels in the general trade area of the Hotel.
If such Smith's STAR Report is discontinued in the future, or ceases (in the
reasonable opinion of either Primary Manager or Submanager) to be a satisfactory
source of data regarding the Revenue Per Room of various hotels in the general
trade area of the Hotel, Submanager shall select an alternative source, subject
to Primary Manager's approval (such approval not to be unreasonably withheld).
If the parties fail to agree on such alternative source within a reasonable
period of time, the matter shall be resolved by determination by arbitration
pursuant to Section 11.21.
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"Revenue Index" shall mean that fraction which is equal to (a) the
Revenue Per Room for the Hotel, divided by (b) the average Revenue Per Room for
the hotels in the Competitive Set, as set forth in the Revenue Data Publication.
Appropriate adjustments shall be made in the event of Force Majeure or a major
renovation of the Hotel.
"Revenue Index Threshold" shall mean ninety percent (90%) of the
Revenue Index as calculated over the Performance Termination Period.
"Revenue Per Room" shall mean (i) the term "revenue per room" as
defined by the Revenue Data Publication; or (ii) if the Revenue Data Publication
is no longer being used (as more particularly set forth in the definition of
"Revenue Data Publication"), the aggregate gross room revenues of the hotel in
question for a given period of time divided by the total room nights for such
period. If clause (ii) of the preceding sentence is being used, a "room" shall
be a hotel guestroom which is keyed as a single unit.
"Sale of the Hotel" shall mean any sale, assignment, transfer or other
disposition, for value or otherwise, voluntary or involuntary, of the fee simple
title to the Site and/or the Hotel [for Atlanta, leasehold interest]. For
purposes of this Agreement, a Sale of the Hotel shall also include a lease (or
sublease) of all or substantially all of the Hotel or Site and any sale,
assignment, transfer or other disposition, for value or otherwise, voluntary or
involuntary, in a single transaction or a series of transactions, of the
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" shall mean the right to exercise, directly or indirectly,
more than fifty percent (50%) of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of Owner.
"Settlement Agreement" shall have the meaning ascribed to it in the
Recitals.
"Site" shall have the meaning ascribed to it in Section A of the
Recitals.
"Soft Goods" shall mean all fabric, textile and flexible plastic
products (not including items which are classified as "Fixed Asset Supplies"
under the Uniform System of Accounts) which are used in furnishing the Hotel,
including, without limitation: carpeting, drapes, bedspreads, wall and floor
coverings, mats, shower curtains and similar items.
"Software" shall mean all computer software and accompanying
documentation (including all future upgrades, enhancements, additions,
substitutions and modifications thereof), other than computer software which is
commercially available, which are used by Submanager in connection with the
property management system, the reservation system and all future electronic
systems developed by Submanager for use in the Hotel.
"Special Capital Expenditures" shall mean certain routine, non-major
expenditures which are classified as "capital expenditures" under
generally-accepted accounting principles, but which will be funded from the FF&E
Reserve (pursuant to Section 5.02), rather than pursuant to the provisions of
Section 5.03. Special Capital Expenditures consist of the following types of
expenditures: exterior and interior repainting; resurfacing building walls and
floors; resurfacing parking areas; replacing folding walls; and miscellaneous
similar expenditures.
"Special Fee" shall have the meaning set forth for such term in the
Settlement Agreement.
"Submanager" shall have the meaning ascribed to it in the Preamble
hereto or shall mean any successor or permitted assign, as applicable.
"Submanager Prospectus" shall have the meaning set forth in Section
11.09.
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"Subordination Agreement" shall have the meaning ascribed to it in
Section 8.03.
"Subsequent Primary Managers" shall have the meaning ascribed to it in
Section 8.03.
"System Standards" shall mean either (or both, as the context requires)
of the following two (2) categories of standards: (i) the operational standards
(for example, services offered to guests, quality of food and beverages,
cleanliness, staffing and employee compensation and benefits, Chain Services,
the Marriott Rewards Program and other similar programs, etc.); and (ii) the
physical standards (for example, quality of the Improvements, FF&E, and Fixed
Asset Supplies, frequency of FF&E replacements, etc.); each of such standards
shall be the standard which is generally prevailing or in the process of being
implemented at other hotels in the Marriott System, including all services and
facilities in connection therewith that are customary and usual at comparable
hotels in the Marriott System.
"Take-Over Date" shall mean the date which is set forth on Exhibit
"A-1" hereto.
"Term" shall have the meaning ascribed to it in Section 2.01.
"Term Expiration Date" shall mean the date set forth on Exhibit "A-1"
attached hereto.
"Termination" shall mean the expiration or sooner cessation of this
Agreement.
"Termination Effective Date" shall have the meaning set forth in
Section 2.01.B.
"Total Casualty" shall mean any fire or other casualty which results in
damage to the Hotel and its contents to the extent that the total cost of
repairing and/or replacing the damaged portion of the Hotel to the same
condition as existed previously would be thirty percent (30%) or more of the
then total replacement cost of the Hotel.
"Trade Area Expiration Date" shall mean the date which is set forth in
Exhibit "A-1" attached hereto.
"Trade Names" shall mean any name, whether informal (such as a
fictitious name or d/b/a) or formal (such as the full legal name of a
corporation or partnership) which is used to identify an entity.
"Trademark" shall mean any word, name, device, symbol, logo, design,
brand, servicemark, other distinctive feature or any combination of the
foregoing which is used to identify or symbolize a party's goods and/or services
and to distinguish them from the goods and/or services of others.
"Uniform System of Accounts" shall mean the Uniform System of Accounts
for the Lodging Industry, Ninth Revised Edition, 1996, as published by the Hotel
Association of New York City, Inc.
"Working Capital" shall mean funds that are used in the day-to-day
operation of the business of the Hotel, including, without limitation, amounts
sufficient for the maintenance of change and petty cash funds, amounts
deposited in operating bank accounts, receivables, amounts deposited in payroll
accounts, prepaid expenses and funds required to maintain Inventories, less
accounts payable and accrued current liabilities.
"WARN Act" shall mean the "Worker Adjustment and Retraining
Notification Act, 29 U.S.C. 2101 et seq.
END OF ARTICLE XII
SIGNATURE PAGE FOLLOWS
47
<PAGE> 52
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed under seal as of the day and year first written above.
PRIMARY MANAGER:
IHC II, LLC
Attest:
By: By:
-------------------------- --------------------------
Title: Title:
SUBMANAGER:
Attest: MARRIOTT INTERNATIONAL, INC./MARRIOTT
HOTEL SERVICES, INC.
a Delaware corporation
By: By:
-------------------------- --------------------------
Title: Title:
48
<PAGE> 53
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Albany Marriott
189 Wolf Road
Albany, New York 12205
Submanager: Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: February 22, 2009
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $754,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: February 22, 2009
Chain Exception: Yes
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 54
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Atlanta Marriott North Central
2000 Century Boulevard, N.E.
Atlanta, Georgia 30345
Submanager: Marriott Hotel Services, Inc
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: September 1, 2005
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $327,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: September 1, 2005
Chain Exception: Yes
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 55
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Pittsburgh Airport Marriott
100 Aten Road
Pittsburgh, PA 15108
Submanager: Marriott Hotel Services, Inc
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: September 2, 2011
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $18,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: September 2, 2011
Chain Exception: No
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 56
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Harrisburg Marriott
4650 Lindle Road
Harrisburg, Pennsylvania 17111
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: March 30, 2004
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $144,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: March 30, 2004
Chain Exception: No
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 57
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Houston Marriott North at Greenspoint
255 No. Sam Houston Parkway, East
Houston, Texas 77060
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: One year after Divestiture Date
Term Expiration Date: January 31, 2011
Base Management Fee: Zero (i.e. no Base Management Fee)
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $660,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area" See Exhibit "A-2"
Trade Area Expiration Date: January 31, 2011
Chain Exception: No
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 58
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Indian River Plantation Marriott Resort
555 N.E. Ocean Boulevard
Stuart, Florida 34996
Submanager: Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: December 31, 2017
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $1,075,000*
FF&E Reserve Contribution: Through December, 1999: Four percent of Gross Revenues
2000 and thereafter: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: December 31, 2017
Chain Exception: No
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 59
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Philadelphia Marriott West
Matson Ford at Front Street
111 Crawford Avenue
West Conshohocken, Pennsylvania 19428
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: August 28, 2014
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $26,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area": See Exhibit "A-2"
Trade Area Expiration Date: August 28, 2014
Chain Exception: Yes
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 60
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: San Diego Marriott Mission Valley
8757 Rio San Diego Drive
San Diego, California 92108
Submanager Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: June 1, 2012
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $451,000
FF&E Reserve Contribution: Through May, 1999: Four percent of Gross Revenues
June 1999 and thereafter: Five percent of Gross Revenues
Description of "Restricted Area" See Exhibit "A-2"
Trade Area Expiration Date: June 1, 2012
Chain Exception: No
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 61
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Minneapolis Marriott Southwest
5801 Opus Parkway
Minnetonka, Minnesota 55343
Submanager: Marriott Hotel Services, Inc.
Take-Over Date: One Year after Divestiture Date
Term Expiration Date: April 22, 2013
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $148,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area" See Exhibit "A-2"
Trade Area Expiration Date: April 22, 2013
Chain Exception: No
</TABLE>
*Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 62
EXHIBIT A-1
<TABLE>
<CAPTION>
<S> <C>
Name and Location of Hotel: Warner Center Marriott Woodland Hills
21850 Oxnard Street
Woodland Hills, California 91367
Submanager: Marriott International, Inc.
Take-Over Date: Divestiture Date
Term Expiration Date: December 15, 2005
Base Management Fee: Two and 85/100 percent (2.85%) of Gross Revenues.
[subject to adjustment per the Settlement Agreement]
Initial FF&E Reserve Balance: $1,336,000*
FF&E Reserve Contribution: Five percent of Gross Revenues
Description of "Restricted Area" See Exhibit "A-2"
Trade Area Expiration Date: December 15, 2005
Chain Exception: Yes
</TABLE>
* Figure determined as of January 1, 1998. To be adjusted, as of the Take-Over
Date, based on expenditures and accruals with respect to FF&E Reserve in the
period from January 1, 1998 to the Take-Over Date, as reflected in the Five Year
Plan.
<PAGE> 63
EXHIBIT "A-2"
Atlanta Marriott North Central
Two (2) mile radius from the Hotel, as shown on the attached map.
<PAGE> 64
EXHIBIT "A-2"
Harrisburg Marriott
Dauphin County plus triangle of area bounded by the Pennsylvania Turnpike on the
south to a point west of Harrisburg where it connects with I-81 then northwest
on I-81 to the Susquehanna River south to the Pennsylvania Turnpike plus one (1)
mile outside the triangle at each interstate intersection. All as more
specifically indicated on the attached map.
For purposes of delineating the boundary of the area described above, such
boundary shall be the center line of the specified road or highway. If there
exists a conflict between the map and the narrative description set forth above,
the narrative shall control.
<PAGE> 65
EXHIBIT "A-2"
Houston Marriott North at Greenspoint
The area outlined on the attached map.
<PAGE> 66
EXHIBIT "A-2"
Indian River Plantation Marriott Resort
Ten (10) mile radius from the Hotel.
<PAGE> 67
EXHIBIT "A-2"
Philadelphia Marriott West (Conshohoken)
Three (3) mile radius from the Hotel, as shown on the attached map.
<PAGE> 68
EXHIBIT "A-2"
San Diego Marriott Mission Valley
That area outlined on the attached map which is described as follows:
At the intersection of Interstate 5 and 274, continue due east crossing
Genesee Avenue, 163, and Interstate 805 until Mission Gorge Road. Continue south
on Mission Gorge Road to Fairmont Avenue. Follow Fairmont Avenue south to
University. Head west on University until intersecting Park Boulevard. Continue
south on Park Boulevard turning south on Upas Street. Proceed on Upas Street to
Richmond. Continue south on Richmond until 163. Head south on 163 to El Prado.
Follow El Prado to Interstate 5. At the intersection of El Prado and Interstate
5 continue north on Interstate 5 until reaching 274.
For purposes of delineating the boundary of the area described above, such
boundary shall be the center line of the specified road or highway. If there
exists a conflict between the map and the narrative description set forth above,
the narrative shall control.
<PAGE> 69
EXHIBIT "A-2"
Warner Center Marriott Woodland Hills
That area outlined on the attached map which is described as follows:
Five (5) mile radius from the Hotel as extended to an area bounded by Victory
Boulevard, Interstate 405, Mulholland Drive, Triunfo Canyon Road, Kanan Road and
the Ventura County Line.
For purposes of delineating the boundary of the area described above, such
boundary shall be the center line of the specified road or highway. If there
exists a conflict between the map and the narrative description set forth above,
the narrative shall control.
<PAGE> 70
EXHIBIT "A-2"
Minneapolis, Minnesota
Three (3) mile radius from the Hotel, as shown on the attached map.
<PAGE> 71
EXHIBIT "A-2"
Pittsburgh Airport
In Pittsburgh, Pennsylvania, that certain area bounded on the south by the
Allegheny/Washington county line, on the west by the Beaver/Allegheny county
line, on the north by the Ohio River, and on the east by Interstate 79, as shown
on the attached map.
For purposes of delineating the boundary of the area described above, such
boundary shall be the center line of the specified road or highway. If there
exists a conflict between the map and the narrative description set forth above,
the narrative shall control.
<PAGE> 72
EXHIBIT B-1
Five-Year Plan
<PAGE> 73
EXHIBIT B-2
Additional Capital Expenditures
<PAGE> 74
EXHIBIT C
Memorandum of Management Agreement
WHEN RECORDED MAIL TO:
MARRIOTT INTERNATIONAL, INC.
[Attorney] - Dept. 52/923
Marriott Drive
Washington, DC 20058
MEMORANDUM OF MANAGEMENT AGREEMENT
THIS MEMORANDUM OF MANAGEMENT AGREEMENT (the "Memorandum") is
made and entered into as of this ______ day of _____, 19__ by and between
_______________, a _________________ ("Owner"), with a mailing address of
_________________ and ___________________, a ___________________ ("Manager"),
with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817.
WITNESSETH:
Owner acknowledges that Manager has entered into that certain
Submanagement Agreement dated ______________ (herein the "Management Agreement")
with respect to operation of a hotel on the premises located in ______________
County, _______________, as more particularly described on Exhibit A attached
hereto (the "Premises").
The Management Agreement is in effect. The term of the
Management Agreement expires on _____________________________, subject to early
termination as set forth therein.
Article 8 of the Management Agreement contains certain terms
and restrictions relating to financing of the Premises. Article 10 of the
Management Agreement also contains terms and conditions relating to Owner's
ability to sell or transfer interests in itself or the Premises.
This Memorandum is not intended to alter or modify in any way
the terms and conditions of the Management Agreement.
IN WITNESS WHEREOF, Owner and Manager have caused this Memorandum to be
executed under seal by their duly authorized representatives as of the day,
month and year first above written, for the purpose of providing an instrument
for recording and giving notice of the Management Agreement and certain of the
terms and conditions therein.
OWNER:
Witnesses: ---------------------------
By:
- ------------------------------- ------------------------
Printed: Name:
----------------------- ----------------------
Title:
---------------------
<PAGE> 75
MANAGER:
Witnesses: ---------------------------
By:
- ------------------------------- ------------------------
Printed: Name:
----------------------- ----------------------
Title:
---------------------
STATE OF ___________________
COUNTY OF _________________
On this the _____ day of ______________, 19__, before me, the
undersigned officer, personally appeared _____________________________ who
acknowledged himself to be the _________________ of __________________, a
_____________________ and that he as such officer being authorized so to do,
executed the foregoing instrument for the purposes therein contained, by signing
the name of the ___________________ by himself as _____________________.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
-------------------------------------
Notary Public
My Commission Expires:_______________
STATE OF ___________________
COUNTY OF _________________
On this the _____ day of ______________, 19__, before me, the
undersigned officer, personally appeared _____________________________ who
acknowledged himself to be the _________________ of __________________, a
_____________________ and that he as such officer being authorized so to do,
executed the foregoing instrument for the purposes therein contained, by signing
the name of the ___________________ by himself as _____________________.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
-------------------------------------
Notary Public
My Commission Expires:_______________
<PAGE> 76
EXHIBIT A TO MEMORANDUM OF MANAGEMENT AGREEMENT
LEGAL DESCRIPTION
[To Be Added]
<PAGE> 1
Exhibit 10.9
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (this "Agreement") is executed this
27th day of May, 1998 by and among MARRIOTT INTERNATIONAL, INC., a Delaware
corporation, INTERSTATE HOTELS CORPORATION, a Pennsylvania corporation,
INTERSTATE HOTELS COMPANY, a Pennsylvania corporation, PATRIOT AMERICAN
HOSPITALITY, INC., a Delaware corporation, and WYNDHAM INTERNATIONAL, INC., a
Delaware corporation.
PRELIMINARY STATEMENT
A. Pursuant to certain franchise agreements or license
agreements, Interstate Hotels Corporation (together with
Interstate Hotels Company and its other Affiliates,
collectively, "Interstate") is the franchisee, licensee or
operator with respect to the 62 full service hotels and
limited service hotels listed on Exhibits A, B, C and D
attached to this Agreement, except for the Troy, Michigan
Marriott hotel, for which an entity with which Patriot intends
to merge serves as the franchisee of such hotel. Marriott is
the franchisor or licensor with respect to each of such 62
hotels.
B. Patriot and Interstate have entered into an Agreement
and Plan of Merger dated as of December 2, 1997 pursuant to
which Interstate agreed to merge with and into Patriot (the
"Merger") effective upon satisfaction of certain closing
conditions.
C. Marriott filed suit in the United States District Court
for the District of Maryland (the "Maryland Court") (Marriott
International, Inc. v. Interstate Hotels Company, et al. CA
#MJG-98-925) (the "Maryland Case") seeking to enjoin
Interstate from transferring control, directly or indirectly,
of the franchisee under certain of the franchise and license
agreements noted above without Marriott's consent and to
obtain certain other relief, alleging that the proposed Merger
would violate the terms of such franchise agreements and
license agreements and would cause irreparable harm to
Marriott. Patriot filed suit in Dallas County, Texas state
court (the "Texas Court") (Patriot American Hospitality, Inc.
et al. v. Marriott International, Inc., Cause #98-02551-H)
(the "Texas Case") alleging that Marriott tortiously
interfered with the Merger.
1
<PAGE> 2
D. The parties hereto desire to enter into this Agreement
(i) to settle and resolve the disputes among themselves that
resulted in the filing of the Maryland Case and the Texas
Case, and (ii) to consummate the transactions contemplated
hereby.
NOW, THEREFORE, in consideration of the mutual premises,
obligations, covenants and agreements contained herein and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
1. RECITALS. The foregoing recitals and statements are made a
part of this Agreement.
2. DEFINITIONS. Unless otherwise provided, capitalized terms
used herein shall have the definitions specified below:
"Affiliate" means any Person that is directly or
indirectly (through one or more intermediaries) Controlled by, under common
Control with, or Controlling another Person; provided, however, that the term
Affiliate shall not include any individual.
"Agreement" means this Settlement Agreement.
"Amendment to Tyson's Corner Management Agreement" shall
have the meaning given such term in Section 3.3.1.
"Approved Operator" means, with respect to a particular
point in time, a Person in good standing as an operator of Marriott-brand
hotels, then approved to enter into franchise or license agreements with
Marriott, as determined in accordance with Marriott's then existing standards.
Unless otherwise expressly stated by Marriott, a Person shall be an Approved
Operator only with respect to the specific Marriott brand for which that Person
is approved.
"Approved Owner" means an owner who is neither (i) engaged
in the business of operating, franchising or managing (as distinguished from
merely owning or financing) its own brand or the functional equivalent of its
own brand in competition with Marriott, nor (ii) known in the community as being
of bad moral character, or has been convicted of a felony in any state or
federal court, or is in Control of, or Controlled by Persons who have been
convicted of felonies in any state or federal court.
"Certain Newco Shareholders" means, collectively, Messrs.
Carreker, D. Fine, M. Fine and Nussbaum; provided, however, that each such
individual shall be included in such term for only so long as the Voting
Agreement continues in effect with respect to such individual.
"Control" means (and any form thereof, such as
"Controlled" or "Controlling" means) the possession by one Person, directly or
indirectly (through one or more intermediaries) of the power (i) to direct or
cause the direction of the management or policies of another Person,
2
<PAGE> 3
whether through the ownership of voting stock, by contract or otherwise; or (ii)
to vote more than fifty percent (50%) of the voting stock of such Person in the
case of a privately owned company, or to vote more than twenty percent (20%) of
the voting stock of such Person in the case of a company whose stock is publicly
traded.
"Covered Liability" shall have the meaning given such term
in Section 8.1.
"Divestiture" means the transactions required by the terms
of this Agreement involving Newco and its subsidiaries, IHC II, LLC and
Interstate Hotels, LLC, pursuant to which Newco is recapitalized through a
"spin-off" of all of Newco's common stock, other than the common stock owned by
Patriot or Marriott, on a pro-rata basis to existing holders of outstanding
paired shares of common stock of Patriot.
"Dollars" or "$" means United States Dollars.
"Effective Date of the Merger" shall have the meaning
given such term in Section 3.2.4.1.
"Exhibit A Hotels" means the Marriott-brand hotels listed
on Exhibit A, with respect to which the existing franchise agreements or license
agreements with Interstate (collectively, the "Exhibit A Hotel Franchise
Agreements"), together with any existing owner's agreements, will be terminated
in accordance with the terms of this Agreement.
"Exhibit B Hotels" means the Marriott-brand hotels listed
on Exhibit B, with respect to which (i) new submanagement agreements will be
executed by the Submanager and IHC II, LLC as more particularly described in
Section 3.2.1 hereof (collectively, the "Submanagement Agreements"), and (ii)
the obligations of the parties under all existing franchise agreements or
license agreements with Interstate (collectively, the "Exhibit B Hotel Franchise
Agreements"), except for the obligations of the franchisees thereunder to
continue to make "franchise fee" payments, will be suspended, as more
particularly set forth in Section 3.2.2.
"Exhibit B Liquidated Damages" means, with respect to any
Exhibit B Hotel Franchise Agreement, liquidated damages equal to the sum of the
projected franchise fees that would have been payable under such Franchise
Agreement during its remaining term (as if such Franchise Agreement had not been
terminated) as set forth on Schedule 12.4-B, discounted to present value using a
7.3% per annum discount rate. For any partial year, that year's franchise fees
shall be determined by dividing the projected franchise fees set forth on
Schedule 12.4-B for such year by 365 and then multiplying the product by the
remaining days in such year.
3
<PAGE> 4
"Exhibit C Hotels" means the Marriott-brand hotels listed
on Exhibit C, with respect to which the existing management agreements,
franchise agreements or license agreements with Interstate (or, in the case of
the Troy, Michigan Marriott hotel, with an Affiliate of Patriot) (collectively,
the "Exhibit C Hotel Franchise Agreements") will be modified, as more
particularly set forth in Section 3.3.2 and as otherwise set forth in Section
3.3.3.
"Exhibit C Liquidated Damages" means, with respect to any
Exhibit C Hotel Franchise Agreement, liquidated damages equal to the sum of the
projected franchise fees that would have been payable under such Franchise
Agreement during its remaining term (as if such Franchise Agreement had not been
terminated) as set forth on Schedule 12.4-C, discounted to present value using a
7.3% per annum discount rate. For any partial year, that year's franchise fees
shall be determined by dividing the projected franchise fees set forth on
Schedule 12.4-C for such year by 365 and then multiplying the product by the
remaining days in such year.
"Exhibit D Hotels" means the Marriott-brand hotels owned
by the third parties listed on Exhibit D, with respect to which the existing
franchise agreements or license agreements with Interstate or the Third-Party
Owner (collectively, the "Exhibit D Hotel Franchise Agreements") will remain in
place, as more particularly set forth in Section 4.1.
"Exhibit D Liquidated Damages" means, with respect to any
Exhibit D Hotel Franchise Agreement, liquidated damages equal to the sum of the
projected franchise fees that would have been payable under such Franchise
Agreement during its remaining term (as if such Franchise Agreement had not been
terminated) as set forth on Schedule 12.4-D, discounted to present value using a
7.3% per annum discount rate. For any partial year, that year's franchise fees
shall be determined by dividing the projected franchise fees set forth on
Schedule 12.4-D for such year by 365 and then multiplying the product by the
remaining days in such year.
"Existing Franchise Agreement Liquidated Damages" means,
following consummation of the Divestiture, the liquidated damages or termination
fees set forth in a Franchise Agreement and payable in connection with the
termination of a Franchise Agreement but shall not include (i) any fees or
changes due at the time of termination under or in connection with the Franchise
Agreement other than as a result of such termination and (ii) and claims related
to the failure to de-identify the hotel.
"Filing Date" means the earlier to occur of (i) ninety
(90) days following the Effective Date of the Merger, or (ii) one hundred twenty
(120) days following the date of this Agreement.
"Forbearance Termination Event" means that Patriot shall
not have caused (i) all filings to be made pursuant to Section 5.11 by the
Filing Date or (ii) the Divestiture to occur prior to the Final Divestiture
Date.
"Final Divestiture Date" means January 29, 1999.
4
<PAGE> 5
"Franchise Agreements" mean, collectively, the Exhibit A
Hotel Franchise Agreements, the Exhibit B Hotel Franchise Agreements, the
Exhibit C Hotel Franchise Agreements and the Exhibit D Hotel Franchise
Agreements and, individually, any of such Franchise Agreements.
"Indemnified Party" shall have the meaning given such term
in Section 8.1.
"IHC II, LLC" means IHC II, LLC, a Delaware limited
liability company to be owned 99.99% by Newco and 0.01% by Marriott.
"Interstate" has the meaning given in Preliminary
Statement (A).
"Interstate Hotels, LLC" means Interstate Hotels, LLC, a
Delaware limited liability company and successor-by-merger to Interstate Hotels
Corporation, the ownership of which, subject to consummation of the Divestiture,
is currently contemplated to be approximately 65% by Patriot and 35% by Newco.
"Interstate Releasors" shall have the meaning given such
term in Section 10.4.
"Marks" shall have the meaning given such term in Section
12.1.
"Marriott" means and includes Marriott International, Inc.
and its Affiliates.
"Marriott Released Parties" shall have the meaning given
such term in Section 10.3.
"Marriott Releasors" shall have the meaning given such
term in Section 10.2.
"Merger" means the merger of Interstate with and into
Patriot pursuant to the terms and conditions of the Agreement and Plan of Merger
dated as of December 2, 1997, as amended.
"Newco" means a Maryland corporation to be formed in
accordance with Section 5.1 hereof.
"Patriot" means and includes Patriot American Hospitality,
Inc., Patriot Partnership, Wyndham International, Inc. and their Affiliates and,
upon the Merger, shall include Interstate.
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"Patriot and Interstate Released Parties" shall have the
meaning given such term in Section 10.2.
"Patriot Interest" means, effective upon consummation of
the Merger (except for the Troy, Michigan Marriott hotel, which is currently
owned by Patriot) with respect to Patriot's ownership of an Exhibit B Hotel or
an Exhibit C Hotel (as the case may be): (i) the hotel, or the Person owning the
hotel, in all cases where Patriot, directly or indirectly, owns 100% of the
hotel; and (ii) in all cases where Patriot (directly or indirectly) owns less
than 100% of the hotel, Patriot's actual ownership interest in the hotel or the
Person that owns the hotel.
"Patriot Partnership" means Patriot American Hospitality
Partnership, L.P., a Virginia limited partnership.
"Patriot Releasors" shall have the meaning given such term
in Section 10.3.
"Person" means an individual, a partnership, a
corporation, a limited liability company, a government agency or department, a
trust, or any unincorporated organization.
"Primary Manager" means IHC II, LLC.
"Primary Management Agreement" means the management
agreement between IHC II, LLC and Wyndham as described in Section 5.15.
"REIT" shall have the meaning given such term in Section
3.2.4.5.
"Restricted Purchasers" means Patriot, any Affiliate of
Patriot, directors who are then employed by Patriot or were so employed within
one (1) year prior to the proposed sale or transfer to such Person, senior
executive officers, or principal shareholders of Patriot or its Affiliates who
are then employed by Patriot or were so employed within one (1) year prior to
such sale or transfer, the Certain Newco Shareholders and any joint venture or
partnership in which any of the foregoing have a Controlling interest.
"Right of First Refusal" shall have the meaning given such
term in Section 3.2.4.3.
"Securities Filings" shall have the meaning given such
term in Section 12.1.
"Sensitive Information" shall have the meaning given such
term in Section 12.2.
"Special Fee" means the fee, payable to the Submanager in
connection with the termination of a Submanagement Agreement as provided herein,
equal to 2.35%, which already reflects a reduction for a 0.5% cost factor and
which is subject to adjustment pursuant to Section 5.11, multiplied by the
projected gross revenues that would have been generated by the hotel under such
terminated Submanagement Agreement during its remaining term as set forth on
Schedule 2
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(had such Submanagement Agreement not been terminated) (the "Remaining Projected
Fees"). Schedule 2 reflects whole calendar years, and any partial year shall be
determined by dividing the relevant year's projected revenue in Schedule 2 by
365 and then multiplying the product by the remaining days in such partial year.
Marriott has the option to receive the Remaining Projected Fees as either (i) a
lump sum determined by discounting the Remaining Projected Fees to present value
using a 7.3% per annum discount rate, or (ii) increased "Base Management Fees"
under the not terminated Submanagement Agreements equal to 2.35% (subject to
Section 5.11) of the Remaining Projected Fees of the terminated Submanagement
Agreement spread pro rata among the hotels in which Patriot holds 100% of the
ownership interests. Marriott shall elect option (i) or (ii) within sixty (60)
days after such fee becomes payable pursuant to the terms of this Agreement.
"Submanagement Agreement" shall have the meaning given
such term in Section 3.2.1.
"Submanager" means Marriott International, Inc. or a
wholly-owned subsidiary (direct or indirect) of Marriott International, Inc., as
the case may be, as the submanager under the various Submanagement Agreements.
"Territory" means an Exhibit B Territory as defined in
Section 3.2.2.2 or an Exhibit C Territory as defined in Section 3.3.2.
"Third-Party Owner" means with respect to any hotel listed
on Exhibit D, any person who owns such hotel.
"Wyndham" means, collectively, Wyndham International,
Inc., a Delaware corporation, and Patriot American Hospitality Operating
Partnership, L.P., a Delaware limited partnership.
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3. INTERSTATE-OWNED HOTELS.
3.1 Exhibit A Hotels.
3.1.1 Termination of Franchise Agreements.
Patriot shall use its reasonable best efforts to obtain all necessary consents
and approvals required in order to permit the termination of the Exhibit A Hotel
Franchise Agreements (and the existing related owner's agreements). All such
Exhibit A Hotel Franchise Agreements (and the existing related owner's
agreements) with respect to which the necessary consents and approvals have been
obtained by Patriot shall be terminated on the dates set forth on Exhibit A;
provided, however, that prior to such termination such Franchise Agreements
shall be held by Patriot as franchisee thereunder, and the corresponding hotel
shall be managed by an Affiliate of Patriot. In connection with any such
termination, Patriot and its Affiliates shall fully and timely "de-identify"
each of the relevant Exhibit A Hotels as Marriott hotels, and all amounts
payable by Interstate, Patriot, Wyndham or any Affiliate thereof under any
existing Exhibit A Hotel Franchise Agreement (subject to Section 3.1.3) shall be
paid to Marriott on or prior to the termination date of the relevant Exhibit A
Hotel Franchise Agreement or within fifteen (15) days after the date of any
subsequent invoice. Until such termination, each such Exhibit A Hotel Franchise
Agreement (and the existing related owner's agreement) shall continue in full
force and effect, and the franchisee thereunder shall be obligated to continue
to make all payments to Marriott or its Affiliates and otherwise to continue to
perform all of its obligations under such Franchise Agreement, and the
franchisor thereunder shall continue to perform all of its obligations under
such Franchise Agreement. Until any such Exhibit A Hotel Franchise Agreement is
terminated or expires, such agreement shall be subject to Section 12 hereof. The
parties agree that effective upon the Merger, each Exhibit A Hotel Franchise
Agreement for which the relevant consents referred to on Schedule 6.2.6 have
been obtained is hereby amended so that there are no restrictions on Patriot or
the Primary Manager from developing, owning, franchising or operating other
hotels within a designated area around the relevant Exhibit A Hotel.
3.1.2 Failure to Terminate. If, despite
Patriot's reasonable best efforts, any such Exhibit A Hotel Franchise Agreement
is not terminated on the date set forth on Exhibit A solely because the relevant
consents and approvals listed on Schedule 6.2.6 have not been obtained, the
management fees payable to Marriott pursuant to the Submanagement Agreements
shall be adjusted downward (pro-rata, with respect to all Submanagement
Agreements) to reflect the continuation of such Exhibit A Hotel Franchise
Agreements beyond such agreed upon termination date. If Patriot ultimately
obtains such missing consent within one (1) year after the scheduled termination
of the relevant Exhibit A Hotel Franchise Agreement, then such Franchise
Agreement (and the related owner's agreement) shall be terminated as of the date
of such consent and the management fees under the related Submanagement
Agreements shall be re-adjusted upward (pro-rata, with respect to all
Submanagement Agreements) to reflect such termination as of such date.
Adjustments under this Section 3.1.2 shall be effected in a manner that is
designed to achieve fee neutrality on a net present value basis, assuming a 7.3%
per annum discount rate, between the termination fees otherwise payable in
connection with the termination of the Exhibit A Hotel Franchise Agreement and
the fees to be earned under the Submanagement Agreements relating to
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the Exhibit B Hotels in which Patriot holds a 100% ownership interest. If
Patriot does not obtain such consent within one (1) year after the scheduled
termination of the relevant Exhibit A Hotel Franchise Agreement, then the
initial adjustment to the management fees to reflect the continuation of such
Franchise Agreement shall become permanent, and the management of such hotel
shall then be transferred to the Primary Manager.
3.1.3 Waiver of Termination Fees. Effective
upon the respective termination date of each of the Exhibit A Hotel Franchise
Agreements terminated pursuant to Section 3.1.1 or 3.1.2 hereof, Marriott hereby
waives any right to receive any liquidated damages or termination fees payable
to it pursuant to the terms of such Exhibit A Hotel Franchise Agreements (or the
related owner's agreements) as a result of such termination. Additionally, the
parties agree as follows:
a. The following definitions will apply to this Section 3.1.3:
"Termination Fee Payment Agreement" shall mean that
certain agreement dated December 15, 1995, by and
between Interstone/CGL Partners L.P.
("Interstone/CGL") and Marriott Hotel Services, Inc.
("MHSI").
"Franchise Agreements" shall have the meaning given
in the fourth "Whereas" clause of the Termination Fee
Payment Agreement.
"Payment Event" shall have the meaning given in
Section 1(a) of the Termination Fee Payment
Agreement.
b. Marriott agrees that the termination of any of the
Franchise Agreements pursuant to the terms of this Agreement shall not
constitute a Payment Event under the Termination Fee Payment Agreement.
c. The parties acknowledge and agree that the remaining terms
of the Termination Fee Payment Agreement shall remain in effect.
3.1.4 Termination and Payments If No
Divestiture. If a Forbearance Termination Event occurs, in addition to its other
rights pursuant to this Section 3.1, Marriott shall have the right to terminate
all Exhibit A Franchise Agreements (and the related owner's agreement), and
Patriot agrees to pay Marriott the amounts described on Schedule 3.1.4 hereof
for each Exhibit A Hotel.
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3.2 Exhibit B Hotels.
3.2.1 Execution of Submanagement Agreements.
On or before the Divestiture, the Submanager and IHC II, LLC will execute
Submanagement Agreements for each of the Exhibit B Hotels in the form attached
as Exhibit B, which Submanagement Agreements shall become effective immediately
upon execution for a term commencing on the "Take-Over Dates" (as defined in the
Submanagement Agreements), and pursuant to which the Submanager shall submanage
(as more particularly set forth therein) the relevant Exhibit B Hotel (each a
"Submanagement Agreement" and collectively, the "Submanagement Agreements") as
of the "TakeOver Dates" (as defined in such Submanagement Agreements), which
dates correspond to the dates set forth on Exhibit B. For any hotel listed on
Schedule 6.2.6, the terms of this Section 3.2.1 shall not apply to such hotel
until the consent set forth in Schedule 6.2.6 for such hotel is obtained. The
management fees of 2.85% payable to the Submanager for its submanagement
services under the Submanagement Agreements (on a collective basis), subject to
adjustment under Sections 3.1.2 and 5.11, reflect the value of Marriott
management (including costs), and the loss in economic value resulting from the
termination of the Exhibit A Hotel Franchise Agreements.
If, despite Patriot's reasonable best efforts and Marriott's
efforts to obtain the relevant consents referred to on Schedule 6.2.6, the
execution and effectiveness of any of the Submanagement Agreements must be
delayed beyond such Take-Over Dates because the relevant consents and approvals
listed on Schedule 6.2.6 have not been obtained (the "Delayed Submanagement
Agreements"), the management fees payable to Marriott pursuant to those
Submanagement Agreements which do become effective as of such Take-Over Dates
and with respect to which Patriot owns 100% of the related Exhibit B Hotel (the
"Timely Submanagement Agreements") shall be adjusted upward (pro-rata, with
respect to all such Timely Submanagement Agreements) to reflect the delayed
effectiveness of the Delayed Submanagement Agreements beyond their Take-Over
Dates. If Patriot ultimately obtains such missing consent within one (1) year
after such Take-Over Date, then such Delayed Submanagement Agreement shall be
executed and become effective within sixty (60) days after the date of such
consent and the management fees under the Timely Submanagement Agreements shall
be re-adjusted downward (pro-rata, with respect to all such Timely Submanagement
Agreements) to reflect such execution and effectiveness as of such date. If
Patriot does not obtain such consent within one (1) year after the scheduled
Take-Over Date of a particular Delayed Submanagement Agreement, then the initial
adjustment to the Timely Submanagement Agreements to reflect such failure to
obtain a required consent shall become permanent.
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3.2.2 Suspension of Obligations,
Modification of Franchise Agreements.
3.2.2.1 Suspension. Beginning on
the "Take-Over Date" (as defined therein) of each Submanagement Agreement and
continuing during the period when the Submanager has possession of the relevant
Exhibit B Hotel under the relevant Submanagement Agreement, the rights and
obligations of the franchisee and franchisor under the related Exhibit B
Franchise Agreement shall be suspended for all purposes, except as modified by
this Agreement and except for the obligation of the franchisee thereunder to
make "franchise fee" payments (i.e., payments to Marriott of a percentage of
gross room sales and, in certain agreements, gross food and beverage sales,
which are not designated for marketing, purchasing or other ancillary services),
which obligation shall continue in full force and effect. In connection with any
such suspension, all amounts not then in dispute that are then currently past
due under the relevant Exhibit B Hotel Franchise Agreements shall be paid to
Marriott on or prior to the date of suspension or within fifteen (15) days after
the date of any subsequent invoice.
3.2.2.2 Modifications. Each of
the Exhibit B Hotel Franchise Agreements is amended, effective upon the
consummation of the Merger, to provide that upon the termination (but not the
expiration) of any such Franchise Agreement by the franchisee or, upon the
default by such franchisee, by Marriott, Marriott shall have the right to
acquire from Patriot or its Affiliate the Patriot Interest in the relevant
Exhibit B Hotel at a price determined pursuant to Section 3.2.2.3, less the
amount of the Special Fee otherwise payable as a result of the termination of
the underlying Submanagement Agreement (to the extent not paid); provided,
however, that Marriott shall have no such right to acquire such Patriot Interest
in the event of the termination of a Submanagement Agreement (and related
Franchise Agreement) pursuant to Section 11.22 of such Submanagement Agreement.
For any hotel listed on Schedule 6.2.6, the terms of this Section 3.2.2.2 shall
not apply to such hotel until the consent set forth in Schedule 6.2.6 for such
hotel is obtained. Marriott shall elect to exercise such right to purchase (if
at all) within thirty (30) days after the termination of such Franchise
Agreement, and the parties shall use their reasonable best efforts to close the
related purchase transaction within ninety (90) days after the determination,
pursuant to Section 3.2.2.3, of the purchase price for such Patriot Interest. In
addition, each Exhibit B Hotel Franchise Agreement is hereby amended, effective
upon consummation of the Merger, (i) to delete any provision that limits,
restricts or in any way modifies Marriott's ability to develop, operate, manage
or franchise any hotel (including any provisions requiring Marriott to provide
franchisee with notice and/or an opportunity to develop other hotels) within a
restricted geographic area or territory as set forth in such agreement (an
"Exhibit B Territory"), and (ii) to amend each such Franchise Agreement to
incorporate by reference Sections 11.13 and 11.22 of the Submanagement Agreement
for the relevant Exhibit B Hotel regardless of whether the relevant
Submanagement Agreement has been executed or terminated, and to interpret the
defined terms of Sections 11.13 and 11.22 of the Submanagement Agreement to give
effect to and make binding on themselves the
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provisions of Sections 11.13 and 11.22 solely for the purpose of defining
Marriott's rights to operate or manage (or franchise another party to operate or
manage) any hotel in/or around a "Restricted Area" as defined in a Submanagement
Agreement. Upon any termination of any such Submanagement Agreement pursuant to
Section 11.22 thereof (and the termination of the corresponding Franchise
Agreement), neither the Special Fee nor the liquidated damages set forth on
Schedule 3.2.7 shall be payable. The parties agree that effective upon the
Merger, each Exhibit B Hotel Franchise Agreement is hereby amended so that there
are no restrictions on Patriot or the Primary Manager from developing, owning,
franchising or operating other hotels within a designated area around the
relevant Exhibit B Hotel.
3.2.2.3 Determination of Purchase
Price. The parties shall attempt by good faith negotiation to arrive at a fair
market value purchase price for Patriot Interest to be acquired by Marriott
pursuant to Section 3.2.2.2. In the event that pursuant to such negotiations,
Marriott and Patriot do not agree upon a price for such Patriot Interest,
Marriott and Patriot each shall, at its own expense and within thirty (30) days
thereafter, obtain an appraisal of the fair market value of such Patriot
Interest from a nationally recognized appraiser of hotel properties comparable
to such hotel. In determining the fair market value of such hotel, the
appraisers shall be instructed to assume that the hotel is not subject to a
management agreement but is subject to the existing Franchise Agreement. If such
appraisals differ, then the determination of the purchase price for such Patriot
Interest shall be submitted to arbitration in Washington, D.C. in accordance
with the arbitration rules of the American Arbitration Association then in
effect. The parties shall jointly select a single arbitrator. If the parties are
unable to agree upon an arbitrator within ten (10) days following the 30-day
period during which the appraisals were obtained, the arbitrator shall be
selected by the respective appraisers selected by each party within ten (10)
days of such initial 10-day period. Such arbitrator whether selected by the
parties or by their appraisers, shall be knowledgeable with respect to the
appraisal of hotel properties and shall be instructed and obligated to decide,
within thirty (30) days after such submission, whether the appraisal submitted
by Marriott or the appraisal submitted by Patriot most accurately reflects the
fair market value of such Patriot Interest, and the written decision of the
arbitrator shall be conclusive and binding on the parties and enforceable by a
court of competent jurisdiction. The expenses of the arbitration shall be borne
equally by the parties to the arbitration.
3.2.3 INTENTIONALLY OMITTED
3.2.4 Limitations on Sale of Exhibit B
Hotels. Sales or other transfers by Patriot of a Patriot Interest in an Exhibit
B Hotel may be made to Restricted Purchasers only with Marriott's prior written
consent (which consent shall not be unreasonably withheld or delayed) and only
upon the Restricted Purchaser providing a replacement guaranty, owner agreement,
and corporate structure, all of which give Marriott protections and rights that
Marriott reasonably believes are substantially identical to or better than
Marriott had prior to such transfer. Any transfers of all Patriot Interests in
connection with any merger, sale by Patriot of all or substantially all of its
assets, or other similar business combination of Patriot, Wyndham and their
respective Affiliates, shall not constitute a "sale" or "transfer" of a Patriot
Interest for purposes of this Section 3.2.4. Any
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sale or other transfer of a Patriot Interest in an Exhibit B Hotel to any Person
who is not a Restricted Purchaser may only be made as follows:
3.2.4.1 Prior to the fifth
anniversary of the date on which the effective time of the Merger
occurs (the "Effective Date of the Merger"), no sale or other transfer
of any Patriot Interest shall be permitted without Marriott's prior
written consent, which consent may be withheld by Marriott in its sole
and absolute discretion, and such consent, if granted, will be granted
only if (i) Marriott has received written notice of such transaction at
least thirty (30) days prior thereto and such notice gives Marriott
reasonably sufficient detail about the proposed transaction to
understand how the transaction will affect the Marriott hotel, and (ii)
the transferee assumes the Submanagement Agreement and the suspended
Exhibit B Hotel Franchise Agreement pursuant to documentation
reasonably acceptable in form and substance to Marriott relating to
such hotel. For any hotel listed on Schedule 6.2.6, the terms of this
Section 3.2.4.1 shall not apply to such hotel until the consent set
forth in Schedule 6.2.6 for such hotel is obtained.
3.2.4.2 Beginning with the fifth
anniversary of the Effective Date of the Merger and ending with the
seventh anniversary thereof, any Patriot Interest may be sold or
otherwise transferred to an Approved Owner without the prior written
consent of Marriott, if immediately prior to such transfer, Patriot
cures all outstanding breaches (if any) by IHC II, LLC under the
Submanagement Agreement and if the transferee assumes the Submanagement
Agreement and the suspended Exhibit B Hotel Franchise Agreement
pursuant to documentation reasonably acceptable in form and substance
to Marriott relating to such hotel and provided that Marriott has
received written notice of such transaction at least thirty (30) days
prior thereto and that Marriott has not stated within such 30-day
period that such transferee is not an Approved Owner. For any hotel
listed on Schedule 6.2.6, the terms of this Section 3.2.4.2 shall not
apply to such hotel until the consent set forth in Schedule 6.2.6 for
such hotel is obtained.
3.2.4.3 The provisions of this
Section 3.2.4.3 and Sections 3.2.4.1 and 3.2.4.2 shall not prohibit or
limit a sale by Patriot to its joint venture partner pursuant to the
exercise by such partner of a buy-sell or similar right currently held
by such partner with respect to Patriot's Interest in Warner Center.
Following the seventh anniversary of the Effective Date of the Merger,
any Patriot Interest may be sold or otherwise transferred to an
Approved Owner without the prior written consent of Marriott, provided
that Marriott shall have a right of first refusal, pursuant to Section
3.2.4.3.1 (the "Right of First Refusal"), with respect to such sale
(for as long as the Exhibit B Hotel Franchise Agreement remains in
place) and provided further, that Marriott has received written notice
of such transaction at least thirty (30) days prior thereto and that
Marriott has not stated within such 30-day period that such transferee
is not an Approved Owner. For any hotel listed on Schedule 6.2.6, the
terms of this Section 3.2.4.3 shall not apply to such hotel until
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the consent set forth in Schedule 6.2.6 for such hotel is obtained. If
Marriott elects not to exercise such Right of First Refusal, IHC II,
LLC (at the direction of Wyndham) may terminate the Submanagement
Agreement relating to such hotel in connection with the sale or
transfer if an Approved Operator replaces Marriott as the operator of
such hotel, provided that (i) Patriot shall pay to Marriott in
connection with any such sale, the Special Fee and (ii) such new owner
assumes, pursuant to documentation reasonably acceptable in form and
substance to Marriott, the relevant Exhibit B Hotel Franchise
Agreement, with the suspended obligations of the franchisee thereunder
being reinstated at such time with the same terms and provisions,
except as amended by this Agreement, as existed immediately prior to
such suspension, provided however, that if such owner is not an
Approved Operator, such new owner shall enter into a management
contract with an Approved Operator to operate the hotel.
3.2.4.3.1 Following the
seventh anniversary of the Effective Date of the Merger, prior to
accepting an offer to buy a Patriot Interest, Patriot shall send
Marriott two copies of a contract for the sale of the Patriot Interest
embodying the terms of an offer which Patriot has received from a third
party regarding Patriot's sale of such Patriot Interest, both copies of
which have been duly executed by Patriot, together with a written
notification from Patriot of its intention to sell the Patriot Interest
to such third party. Marriott shall have the right, within thirty (30)
days after its receipt of the contract and the written notice, to elect
to purchase the Patriot Interest on the terms and conditions set forth
in the contract. In the event Marriott elects to accept the offer
embodied in the contract, Marriott must do so by executing one copy of
the contract and returning it to Patriot within such thirty (30) day
period, and in such case, the closing of such purchase transaction
shall occur within ninety (90) days after such election by Marriott,
subject to the terms of such contract. If Marriott defaults under its
obligations under such contract to purchase such Patriot Interest,
Marriott shall no longer have a Right of First Refusal with respect to
such Patriot Interest. If Marriott elects not to exercise its Right of
First Refusal within such thirty (30) day period, then the offer
embodied in the contract shall be deemed withdrawn and Patriot may
accept the offer which it received from such third party and close as
set forth in its contract. If for any reason such purchase does not
close as set forth in the contract, then any subsequent offer must
first be submitted to Marriott in accordance with the provisions of
this Section 3.2.4.3.1. If Marriott purchases under this Section
3.2.4.3.1, the price will be reduced by the amount of the Special Fee,
and if it does not, and if the respective Submanagement Agreement
terminates, Marriott will be paid such amount by Patriot pursuant to
Section 3.2.6. If an Exhibit B Hotel (or Tyson's Corner) is sold and
the Submanagement Agreement is not terminated, then Patriot shall cause
the purchaser to assume the rights and obligations of the "Primary
Manager" thereunder, unless a different structure is agreed to by
Marriott.
3.2.4.4 Notwithstanding the
provisions of Sections 3.2.4.1 and 3.2.4.2, Patriot shall have the right to sell
or transfer a Patriot Interest relating to the Exhibit B Hotels located in
Houston, Harrisburg or Atlanta, provided that any such sale or transfer shall be
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governed by the procedures set forth in Section 3.2.4.3 (including without
limitation Section 3.2.4.3.1), regardless of when such Patriot Interest is sold
or transferred. Wyndham shall have the right to terminate the Primary Management
Agreement and to cause IHC II, LLC to terminate the relevant Exhibit B Hotel
Franchise Agreement, and the relevant Submanagement Agreement, upon any sale of
the Patriot Interest in the Exhibit B Hotel located in Houston and in connection
with such termination, and Patriot shall pay to Marriott the Exhibit B
Liquidated Damages for such hotel.
3.2.4.5 Any other provision of this
Section 3.2.4 notwithstanding, Patriot shall be permitted to sell or transfer a
Patriot Interest in an Exhibit B Hotel if, in the opinion of counsel for
Patriot, such sale or transfer is reasonably necessary in order to satisfy the
Real Estate Investment Trust ("REIT") qualification provisions of Internal
Revenue Code Section Section 856 and 857 relating to Patriot's income tests and
quarterly asset tests (including under proposed legislation not currently
enacted), provided that the transferee is acceptable to Marriott in the exercise
of its reasonable discretion (considering the effect on Patriot of not
transferring such Interest) and further provided that (A) if all of the Patriot
Interest is transferred, (i) the transferee shall execute a replacement
guarantee, owner agreement and corporate structure, all of which give Marriott
protection and rights that Marriott reasonably believes are substantially
identical to or better than Marriott had prior to such transfer, and (ii) the
transferee shall execute a written agreement, in form and substance reasonably
acceptable by Marriott, to be bound by the restrictions on transfer set forth in
this Section 3.2.4, and (B) if less than all of the Patriot Interest is
transferred, Marriott shall be reasonably satisfied that its rights and remedies
immediately following the transfer are substantially identical to or better than
such rights and remedies immediately prior to such transfer.
3.2.4.6 The provisions of this
Section 3.2.4 (including Sections 3.2.4.1 through 3.2.4.5) shall be effective
only upon consummation of the Divestiture and shall expire with respect to each
Exhibit B Hotel upon the termination or expiration of the respective Exhibit B
Hotel Franchise Agreement; provided, however, that prior to such time and before
the earlier of the consummation of the Divestiture or a Forbearance Termination
Event, Patriot shall take no action with respect to the sale or transfer of any
Patriot Interest in an Exhibit B Hotel that would in any way deprive or
prejudice Marriott's rights to purchase any such Patriot Interest under Sections
3.2.2.2., 3.2.4.3, and 3.2.7.
3.2.5 Substitution.
3.2.5.1 Failure to Obtain Warner
Center Consents. Patriot shall use its reasonable best efforts to obtain all
necessary consents and approvals required in order to permit the extension
through December 31, 2015 of the Franchise Agreement on Warner Center, the Right
of First Refusal of Marriott pursuant to Section 3.2.4.3, and to the other
arrangements set forth in this Agreement relating to Warner Center. If Patriot
fails to obtain such consents within one year after the consummation of the
Divestiture, Marriott and Patriot agree that IHC II, LLC shall
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instead (i) enter into an extension through December 31, 2015 with Marriott of
the Franchise Agreement on Casa Marina and (ii) enter into a Submanagement
Agreement with the Submanager providing for the submanagement of Casa Marina
through December 31, 2015. In connection with any such extension of the
Franchise Agreement on Casa Marina and the entering into of a Submanagement
Agreement regarding Casa Marina, Exhibits A, B and C hereto shall be deemed to
be amended so that Casa Marina shall be included on Exhibit B and Warner Center
shall be included on Exhibit C. If Patriot fails to obtain any necessary consent
to the submanagement of Warner Center by the Submanager, then Marriott shall
have the option, subject to Marriott's obtaining any necessary consents of Host
Marriott, of entering into a Submanagement Agreement relating to any one of the
following Marriott hotels, subject to Section 3.2.5.3: San Francisco --
Fisherman's Wharf, Charlotte Executive Park, Manhattan Beach, Pittsburgh City
Center, Ontario Airport, or Waterford Oklahoma City.
3.2.5.2 [INTENTIONALLY OMITTED].
3.2.5.3 Fee Neutrality. The terms of
any Submanagement Agreement entered into pursuant to this Section 3.2.5 shall be
designed to achieve fee neutrality on a net present value basis, assuming a 7.3%
per annum discount rate, with respect to the Submanagement Agreement it is
designed to replace.
3.2.6 Marriott Rights Upon Termination of the
Submanagement Agreements. If a Submanagement Agreement is terminated (but not
upon expiration or termination pursuant to Section 11.22 of the Submanagement
Agreement ("Restricted Area Right of Termination")) by IHC II, LLC or, upon a
default by IHC II, LLC thereunder, by the Submanager, and either Newco or one of
its Affiliates is then an Approved Operator under Marriott's continuing system
standards after the Divestiture, then such Approved Operator shall assume,
pursuant to documentation reasonably acceptable in form and substance to
Marriott, the relevant Exhibit B Hotel Franchise Agreement, with the suspended
obligations of such Approved Operator as the new franchisee thereunder being
reinstated at such time with the same terms and provisions, except as amended by
this Agreement, as existed immediately prior to such suspension. If upon such
termination, neither Newco nor any of its Affiliates is then an Approved
Operator under Marriott's continuing system standards, then Patriot shall secure
such an Approved Operator, and such Approved Operator shall assume the relevant
Exhibit B Hotel Franchise Agreement as set forth immediately above.
If a Submanagement Agreement is terminated (but not upon
expiration or termination pursuant to Section 11.22 of the Submanagement
Agreement ("Restricted Area Right of Termination")) by IHC II, LLC or, upon a
default by IHC II, LLC thereunder, by the Submanager, Patriot shall be obligated
to pay the Special Fee to Marriott.
3.2.7 Further Rights to Acquire Exhibit B
Hotels and Termination Rights. If a Forbearance Termination Event occurs, in
addition to its other rights pursuant to this Section 3.2, Marriott also shall
have the right with respect to each Exhibit B Hotel, (i) to acquire the
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Patriot Interest in such Exhibit B Hotel at a purchase price arrived at pursuant
to a process consistent with that provided in Section 3.2.2.3 hereof, and paid
in accordance with the provisions of Section 3.2.2.2 (in which case, the amounts
set forth on Schedule 3.2.7 shall not be payable for such hotel), or (ii) to
terminate the respective Exhibit B Hotel Franchise Agreement and in connection
therewith Patriot agrees to pay to Marriott the amounts set forth on Schedule
3.2.7 hereof for such hotel. For any hotel listed on Schedule 6.2.6, the terms
of this Section 3.2.7 shall not apply to such hotel until the consent set forth
in Schedule 6.2.6 for such hotel is obtained. Marriott shall elect to exercise
such right to purchase (if at all) within thirty (30) days after the Final
Divestiture Date, and the parties shall use their reasonable best efforts to
close each such related purchase transaction within 120 days after the
respective determination, pursuant to Section 3.2.2.3, of the purchase price(s)
for such Patriot Interest(s). With respect to each Patriot Interest that
Marriott elects not to purchase under this Section 3.2.7 (or otherwise breaches
any contract entered into with Patriot pursuant to an affirmative election to
purchase), Marriott's right to purchase such Patriot Interest shall then be
terminated.
3.2.8 Funding of Capital Plan Shortfalls.
Contemporaneously with the Merger, Patriot shall cause the escrow funds set
forth in Exhibit B-2 to the Submanagement Agreements (including, to the extent
not previously funded, all loans/advances referenced in the last parenthetical
thereof) for Exhibit B Hotels to be funded into a separate account.
Upon execution of Submanagement Agreements, Patriot shall cause
such accounts to be transferred to Wyndham pursuant to its lease agreement with
IHC II, LLC and from Wyndham to IHC II, LLC pursuant to the Primary Management
Agreement.
3.2.9 Obligation to Obtain Consents. Except
with respect to any consent or approval required from Host Marriott relating to
an Exhibit B Hotel, where Patriot shall not be obligated to use reasonable best
efforts to obtain such consent, Patriot shall be obligated to use its reasonable
best efforts to obtain all consents and approvals referred to on Schedule 6.2.6.
Patriot agrees that with respect to Marriott's efforts to obtain Host Marriott's
consent relating to Exhibit B Hotels partially owned by Host Marriott, Patriot
shall provide adequate assurances to Host Marriott that it shall not be
economically disadvantaged as a result of the fee differentials (including chain
services differentials) between the Submanagement Agreement and the existing
Franchise Agreement and the existing management agreement.
3.2.10 Current Defaults. Marriott hereby
acknowledges that, to its knowledge, no current or past defaults by the
franchisees exist under the Exhibit B Hotel Franchise Agreements (excluding life
safety and ADA issues), nor has Marriott issued any formal "red zone"
notifications with respect to the Exhibit B Hotels. The parties agree that any
default thereunder declared or occurring subsequent to the date hereof shall be
addressed pursuant to the terms of such Franchise Agreements.
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3.3 Exhibit C Hotels.
3.3.1 Modification of Tyson's Corner
Management Agreement. The provisions of this Section 3.3.1 shall not prohibit or
limit a sale by Patriot to its joint venture partner pursuant to the exercise by
such partner of a buy-sell or similar right currently held by such partner with
respect to Patriot's Interest in Tyson's Corner. On or before the Divestiture,
Patriot shall use its reasonable best efforts to cause Interstone/CGL Partners,
L.P. to enter into the First Amendment to Hotel Management Agreement -- Tyson's
Corner Marriott Hotel with Marriott in the form attached hereto as Exhibit C-1
(the "Amendment to Tyson's Corner Management Agreement"), pursuant to which, as
more particularly set forth therein, the Submanager shall continue to manage the
Tyson's Corner Marriott. Patriot acknowledges that Cigna must consent to the
execution of such Amendment to Tyson's Corner Management Agreement and commits
to use its reasonable best efforts to obtain such consent. If Patriot fails to
secure such consent, then during the term of such underlying Tyson's Corner
Hotel Management Agreement, Patriot shall be prohibited from selling or
otherwise transferring its ownership interest in the Tyson's Corner Marriott
without the prior written consent of Marriott, unless and until it obtains the
consent of Cigna.
3.3.2 Modification of Exhibit C Hotel
Franchise Agreements. Each of the Exhibit C Hotel Franchise Agreements (except
for Troy and Tyson's Corner, as to which the provisions of this Section 3.3.2
shall not apply) is amended, effective as of the date hereof to provide that
upon the termination of such Franchise Agreement by either party thereto (but
not the expiration), Marriott shall have the right to acquire from Patriot or
its Affiliate the Patriot Interest in the relevant Exhibit C Hotel at a price
determined pursuant to Section 3.2.2.3, and paid in accordance with the
provisions of Section 3.2.2.2. Marriott shall elect to exercise such right to
purchase (if at all) within thirty (30) days after the termination of such
Franchise Agreement, and the parties shall use their reasonable best efforts to
close the related purchase transaction within ninety (90) days after such
determination, pursuant to Section 3.2.2.3, of the purchase price for such
Patriot Interest. In addition, each Exhibit C Hotel Franchise Agreement is
hereby amended effective upon consummation of the Merger, (i) to delete any
provision that limits, restricts or in any way modifies Marriott's ability to
develop, operate, manage or franchise any hotel (including any provisions
requiring Marriott to provide franchisee with notice and/or an opportunity to
develop other hotels) within a restricted geographic area or territory as set
forth in such Franchise Agreement (an "Exhibit C Territory") (regardless of
whether the applicable provision has or shall lapse or terminate pursuant to its
terms) and (ii) to amend such Franchise Agreement as provided in Section 3.3.3.
For any hotel listed on Schedule 6.2.6, the terms of this Section 3.3.2 shall
not apply to such hotel until the consent set forth in Schedule 6.2.6 for such
hotel is obtained.
Patriot has agreed that it will amend the Troy Marriott Franchise Agreement
to reduce the Territory as set forth on Exhibit P, but has represented that it
cannot at this time execute such Amendment because Patriot's acquisition of the
Troy Marriott by merger has not been completed. Concurrent with the merger of
Patriot and an affiliate of CHC Lease Partners, Patriot shall cause
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CHC Lease Partners to execute and deliver to Marriott that certain Amendment to
Marriott Inn Franchise Agreement attached hereto as Exhibit P.
3.3.3 Modification of Territory Rights;
Termination Rights if New Marriott Competitor. Each of the Exhibit B Franchise
Agreement is hereby amended to provide that Marriott shall be entitled to engage
in any or all of the following activities, which are acknowledged to be
reasonable, within any geographic area described in an Exhibit C Territory
(notwithstanding the deletion of a territorial provision pursuant to Section
3.3.2): (i) to develop, own, operate, manage, license, franchise, and solicit
others to operate or develop hotels under any Marriott-owned or controlled trade
name; service marks, trademarks, or system; (ii) to publicize and promote such
hotels prior to opening and solicit and accept reservations for such hotels. The
parties agree that such Territory provision is hereby amended, subject to
obtaining the relevant consents referred to on Schedule 6.2.6, to permit
Marriott to engage in the activities described above in this Section 3.3.3 and
if such hotel is of the same Marriott brand (e.g., "Marriott Hotel" or
"Courtyard by Marriott") as the relevant Exhibit C Hotel, then either Marriott
or Interstate Hotels LLC shall have the right to terminate, or cause to be
terminated, the relevant Exhibit C Hotel Franchise Agreement (and the related
owner's agreement) as set forth below, and Wyndham shall have the right to
terminate the relevant management agreement between it and Interstate Hotels LLC
(in which case the related Franchise Agreement shall be terminated); provided,
however, that there is no such right to terminate if the hotel of the same
Marriott brand is acquired in connection with a chain acquisition that is
allowed by the "Territory" provision in the pre-Merger Franchise Agreement for
the New Haven Orange Courtyard, St. Louis Courtyard, Westborough Courtyard,
Tyson's Corner Marriott, and the Pittsburgh Airport Residence Inn. Such
termination right shall be the sole remedy (with respect to such activity) of
both Patriot or Marriott in such event, and Patriot and Marriott agree not to
institute suit against the other with respect to a violation of any implied
covenant of good faith or fair dealing or any other statutory or common law
theory claiming harm for such actions. Marriott shall notify Patriot upon the
earlier to occur of (x) thirty (30) days following execution of a purchase
agreement, management agreement, or license agreement or franchise agreement, as
the case may be, or (y) the opening of such hotel (including any so-called "soft
opening" of the hotel). Upon receipt by Patriot from Marriott of this written
notice, Patriot and Marriott shall each have the right to notify the other of
the termination of the relevant Franchise Agreement within sixty (60) days,
which termination shall not be effective until the opening date of such hotel.
Subject to Section 12.2, Patriot agrees to pay all amounts due to Marriott with
respect to the operation of the hotel under the Exhibit C Hotel Franchise
Agreement up to and including the termination date (excluding the fees set forth
on Schedule 3.3.5, which shall not be payable in such instance), and to fully
complete all aspects of the termination other than the payment of any damages in
accordance with the terms of the Exhibit C Hotel Franchise Agreement within
thirty (30) days of the effective date of termination or within fifteen (15)
days after the date of any subsequent invoice. Any termination by Patriot or
Marriott pursuant to this Section 3.3.3 shall not give Marriott the right to
acquire the Patriot Interest in such
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Exhibit C Hotel pursuant to Section 3.3.2. The parties agree that effective upon
the Merger, each Exhibit C Hotel Franchise Agreement for which the relevant
consents referred to on Schedule 6.2.6 have been obtained is hereby amended so
that there are no restrictions on Patriot or the Primary Manager from
developing, owning, franchising or operating other hotels within a designated
area around the relevant Exhibit C Hotel.
3.3.4 Limitations on Sale of Exhibit C
Hotels. Sales or other transfers by Patriot of a Patriot Interest in an Exhibit
C Hotel (except for Tyson's Corner and Troy) may be made to Restricted
Purchasers only with Marriott's prior written consent (which consent shall not
be unreasonably withheld or delayed) and only upon (i) the assumption by the
transferee of the Franchise Agreement (if Patriot is the franchisee immediately
prior to such transfer), such assumption to be in writing and in form and
substance reasonably acceptable to Marriott and (ii) a replacement guaranty,
owner agreement, and corporate structure, both of which give Marriott
protections and rights that Marriott reasonably believes are substantially
identical to or better than those that Marriott had prior to such transfer. Any
transfers of all Patriot Interests in connection with any merger, sale by
Patriot of all or substantially all of its assets, or other similar business
combination of Patriot, Wyndham and their respective Affiliates, shall not
constitute a "sale" or "transfer" of a Patriot Interest for purposes of this
Section 3.2.4. Any sale or other transfer of a Patriot Interest in an Exhibit C
Hotel (except for Tyson's Corner and Troy) to any Person who is not a Restricted
Purchaser may only be made as follows:
3.3.4.1 Following consummation of the
Divestiture, prior to accepting an offer to buy a Patriot Interest, Patriot
shall send Marriott two copies of a contract for the sale of the Patriot
Interest embodying the terms of an offer which Patriot has received from a third
party regarding Patriot's sale of such Patriot Interest, both copies of which
have been duly executed by Patriot, together with a written notification from
Patriot of its intention to sell the Patriot Interest to such third party.
Marriott shall have the right, within thirty (30) days after its receipt of the
contract and the written notice, to elect to purchase the Patriot Interest on
the terms and conditions set forth in the contract. In the event Marriott elects
to accept the offer embodied in the contract, Marriott must do so by executing
one copy of the contract and returning it to Patriot within such thirty (30) day
period, and in such case, the closing of such purchase transaction shall occur
within ninety (90) days after such election by Marriott, subject to the terms of
such contract. If Marriott defaults under its obligation under such contract to
purchase such Patriot Interest, Marriott shall no longer have a Right of First
Refusal with respect to such Patriot Interest. If Marriott elects not to
exercise its Right of First Refusal within such thirty (30) day period, then the
offer embodied in the contract shall be deemed withdrawn and Patriot may accept
the offer which it received from such third party and close as set forth in its
contract. If for any reason such purchase does not close as set forth in the
contract, then any subsequent offer must first be submitted to Marriott in
accordance with the provisions of this Section 3.3.4.1. If Marriott does not
purchase under this Section 3.3.4.1, and the Franchise Agreement terminates,
Marriott will be paid the Exhibit C Liquidated Damages. For any hotel listed on
Schedule 6.2.6, the terms of this Section 3.3.4.1 shall not apply to such hotel
until the consent set forth in Schedule 6.2.6 for such hotel is obtained.
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3.3.4.2 Any other provision of
this Section 3.3.4 notwithstanding, Patriot shall be permitted to sell or
transfer a Patriot Interest in an Exhibit C Hotel if, in the opinion of counsel
for Patriot, such sale or transfer is reasonably necessary in order to satisfy
the REIT qualification provisions of Internal Revenue Code Section Section 856
and 857 relating to Patriot's income tests and quarterly asset tests (including
under proposed legislation not currently enacted), provided that the transferee
is acceptable to Marriott in the exercise of its reasonable discretion
(considering the effect on Patriot of not transferring such Interest) and
further provided that (A) if all of the Patriot Interest is transferred, (i) the
transferee shall execute a replacement guarantee, owner agreement and corporate
structure, all of which give Marriott protection and rights that Marriott
reasonably believes are substantially identical to or better than Marriott had
prior to such transfer; (ii) the transferee shall execute a written agreement,
in form and substance reasonably acceptable by Marriott, to be bound by the
restrictions on transfer set forth in this Section 3.3.4, and (B) if less than
all of the Patriot Interest is transferred, Marriott shall be reasonably
satisfied that its rights and remedies immediately following the transfer are
substantially identical to or better than such rights and remedies immediately
prior to such transfer.
3.3.4.3. The provisions of
this Section 3.3.4 (including Sections 3.3.4.1 and 3.3.4.2) shall be effective
only upon consummation of the Divestiture and shall expire with respect to each
Exhibit C Hotel upon the termination or expiration of the respective Exhibit C
Hotel Franchise Agreement; provided, however, that prior to such time and before
the earlier of the consummation of the Divestiture or a Forbearance Termination
Event, Patriot shall take no action with respect to the sale or transfer of any
Patriot Interest in an Exhibit C Hotel that would in any way deprive or
prejudice Marriott's rights to purchase any such Patriot Interest under Sections
3.3.2, 3.3.4.1, and 3.3.5.
3.3.5 Further Right to Acquire Exhibit C
Hotels and Termination Rights. If a Forbearance Termination Event occurs, in
addition to its other rights pursuant to this Section 3.3, Marriott shall also
have the right, (i) to acquire any or all Patriot Interests in the Exhibit C
Hotels, except for Tyson's Corner or Troy, at a purchase price arrived at
pursuant to a process consistent with that provided in Section 3.2.2.3 hereof,
and paid in accordance with the provisions of Section 3.2.2.2, and (ii) to
terminate all Exhibit C Hotel Franchise Agreements (and related owner's
agreements) and Patriot agrees to pay Marriott the amounts set forth on Schedule
3.3.5 hereof. Marriott shall elect to exercise such right to purchase (if at
all) within thirty (30) days after the Final Divestiture Date, and the parties
shall use their reasonable best efforts to close each such related purchase
transaction within 120 days after their respective determination, pursuant to
Sections 3.3.2 and 3.2.2.3 of the purchase price(s) for such Patriot
Interest(s). With respect to each Patriot Interest that Marriott elects not to
purchase under this Section 3.3.5 (or otherwise breaches any contract entered
into with Patriot pursuant to an affirmative election to purchase), Marriott's
right to purchase such Patriot Interest shall then be terminated. For any hotel
listed on Schedule 6.2.6,
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the terms of this Section 3.3.5 shall not apply to such hotel until the consent
set forth in Schedule 6.2.6 for such hotel is obtained.
3.3.6 Current Defaults. Marriott hereby
acknowledges that, to its knowledge, no current or past defaults by the
franchisees exist under the Exhibit C Hotel Franchise Agreements (excluding life
safety and ADA issues), nor has Marriott issued any formal "red zone"
notifications with respect to the Exhibit C Hotels. The parties agree that any
default thereunder declared or occurring subsequent to the date hereof shall be
addressed pursuant to the terms of such Franchise Agreements.
3.3.7 [INTENTIONALLY OMITTED]
4. THIRD PARTY-OWNED HOTELS.
4.1 Continuation of Exhibit D Hotel Franchise
Agreements. Each Exhibit D Hotel Franchise Agreement shall continue in full
force and effect pursuant to the provisions thereof. In addition, each such
Franchise Agreement where Patriot or Interstate is the franchisee shall be
amended by this Agreement, as provided in Section 12 hereof.
4.2 Communication with Third-Party Owners. The
parties hereby agree that simultaneously with the execution of this Agreement, a
letter in the form attached as Exhibit D-1, shall be sent to the Third-Party
Owners (and/or any party Controlling or managing such Third-Party Owner).
4.3 Marriott Forbearance. Marriott and Patriot shall
each retain their respective rights against the other upon a Forbearance
Termination Event. However, subject to Sections 3.1.4, 3.2.7 and 3.3.5, until
consummation of the Divestiture, Marriott hereby agrees to forbear from
exercising any of its rights or remedies, if any, that arise from or with
respect to the Merger under any of the Franchise Agreements. This Agreement
shall constitute a "settlement of this action" permitting Interstate and Patriot
to transfer control in the twenty-nine (29) Marriott- franchised hotels covered
by the Order dated April 8, 1998, of the United States Court of Appeals for the
Fourth Circuit in the Maryland Case. Although Marriott is not consenting to the
Merger and asserts that its consent to the Merger is otherwise required,
Marriott agrees that (a) upon execution of this Agreement, it will seek a stay
of the Maryland Case as set forth in Section 9.1 hereof and (b) subsequent to
seeking the stay, it will not seek the enjoin the Merger until a Forbearance
Termination Event. Patriot does not agree that Marriott's consent is necessary
to consummate the Merger. If the Divestiture occurs on or prior to the Final
Divestiture Date, Marriott shall be deemed to have consented to the Divestiture
and the Merger, and shall be deemed to have waived any right to claim that the
Divestiture or Merger constitutes a breach, default, wrongful, unlawful or
improper act of any kind, including without limitation any default under the
terms of the Franchise Agreements, including without limitation, the trademark
license granted therein. Marriott may cease its forbearance if a Forbearance
Termination
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Event occurs, and upon any such occurrence, Marriott shall have its rights under
Sections 3.1.4, 3.2.7, and 3.3.5. In addition, if a Forbearance Termination
Event occurs, Marriott shall have all rights, if any, that it presently has to
issue a notice of default under each of the Franchise Agreements (without this
statement constituting an acknowledgment or admission by Patriot, Wyndham or
Interstate that such rights exist). Subject to Sections 9.1, 9.2 and 10.4, if
the Merger is not consummated, nothing in this Agreement or otherwise shall
modify any now existing rights, claims or agreements among Marriott, Patriot,
Wyndham or Interstate. Immediately following the execution hereof, Marriott will
send to the Third-Party Owners (and/or any Person Controlling or managing such
Third-Party Owner) the letter attached as Exhibit D-1, which describes the
Forbearance.
4.3.1 Third Party Owner Forbearance Damages.
Upon the occurrence of a Forbearance Termination Event, if a Third-Party Owner
elects to terminate its management agreement with Interstate but executes a
franchise or license agreement with Marriott containing substantially similar
terms and conditions, or agrees to continue to have the hotel operated pursuant
to the terms of the existing Exhibit D Hotel Franchise Agreement, with a new
Approved Operator, Patriot shall have no obligation to pay any damages,
termination fees or other amounts to Marriott with respect to its alleged
default under the Exhibit D Hotel Franchise Agreement if Patriot has paid to
Marriott any other amounts owed under the relevant Franchise Agreement.
If (i) Marriott and a Third-Party Owner, with respect to which
Patriot or Interstate is the franchisee, are unable to agree upon a new
operator, or (ii) a Third-Party Owner, with respect to which Patriot or
Interstate is the franchisee, elects not to continue to operate its hotel as a
Marriott- brand hotel as a result of the alleged default by Patriot under the
Exhibit D Hotel Franchise Agreement, then in either such case, Patriot shall pay
to Marriott the amounts for the applicable hotel set forth on Schedule 4.3.1.
The alleged default giving rise to such liquidated damage amount shall be
subject to Patriot's right to claim that Marriott or the Third-Party Owner is
not entitled to terminate the subject Exhibit D Hotel Franchise Agreement.
4.4 Third-Party Owner Communications. Marriott
shall be entitled to provide Third-Party Owners (and/or any Person Controlling
or managing such Third-Party Owner) with copies of any of the reports or hotel
performance information regarding the relevant hotel. Marriott also shall be
permitted to discuss such information and/or issues concerning such hotel's
continued participation in the Marriott system with Third-Party Owners at any
time. Marriott shall provide a copy of any information provided to Third-Party
Owners (and/or any Person Controlling or managing such Third-Party Owners) to
Patriot, prior to the Divestiture, and to Newco thereafter, concurrently with
its provision to Third-Party Owners (and/or any Person Controlling or managing
such Third-Party Owners). Similarly, Patriot agrees to provide a copy of any
information provided to Third-Party Owners (and/or any Person Controlling or
managing such Third-Party Owners) to Marriott concurrently with its provision to
Third-Party Owners. Each of the parties agrees not to interfere, either directly
or indirectly, with any other party's contractual relationships with Third-
Party Owners, it being acknowledged and agreed that the mere provision of such
information as set
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forth above (but not necessarily the content of such information), as well as
the act of discussing such information (but not necessarily the content of such
discussions), shall not in and of itself constitute such prohibited
interference.
4.5. Current Defaults. Marriott hereby acknowledges
that, to its knowledge, except for the Exhibit D Hotels in Cincinnati, Ohio and
Orlando I Drive, Florida, and the Omaha and Princeton Residence Inns, no current
or past defaults by the franchisees exist under the Exhibit D Hotel Franchise
Agreements (excluding life safety or ADA issues), nor has Marriott issued any
formal "red zone" notifications with respect to the Exhibit D Hotels. The
parties agree that any default thereunder declared or occurring subsequent to
the date hereof shall be addressed pursuant to the terms of such Franchise
Agreements; provided, however, that notwithstanding anything in this Agreement
or the relevant Exhibit D Hotel Franchise Agreement to the contrary, Patriot
shall not be obligated to Marriott for liquidated damages relating to any
current or past defaults by the franchisee on the Exhibit D Hotels in
Cincinnati, Ohio or Orlando I Drive, Florida.
5. NEWCO STRUCTURE AND INTERIM OPERATIONS.
5.1 Formation of Newco. All Exhibit B Hotels
submanaged by Marriott shall be subject to the structure described on Exhibit I.
Patriot shall form Newco, and shall merge into Interstate Hotels, LLC all of the
third party management business currently operated by Interstate and its
Affiliates which it conducts with Marriott and substantially all of Interstate's
non-Marriott third party-owned hotel management business which does not require
consent for its transfer to Interstate Hotels, LLC. Patriot estimates that
consent for transfer to Interstate Hotels, LLC is only required with respect to
the non-Marriott third party hotel management business representing 25% or less
of the revenues and profits of such non-Marriott third party hotel management
business.
The restated articles of incorporation and bylaws of Newco at the
time of the Divestiture shall in all material respects be in the forms attached
hereto as Exhibits E-1 and E-2, respectively. In addition, prior to consummation
of the Divestiture, the articles of incorporation of Newco shall be amended upon
the mutual agreement of Patriot and Marriott, to provide that either Patriot or
Marriott may forfeit its seat on the Board of Directors of Newco, if certain
agreed upon performance criteria related to Newco's subsidiaries are not
satisfied.
The restated articles of incorporation of Newco will also provide
for a class of preferred stock to be issuable to holders of Newco common stock
pursuant to a Rights Plan upon the occurrence of certain events to be agreed
upon between Patriot and Marriott and containing, among other things, a ten
percent (10%) trigger.
Patriot and Marriott shall have no obligation to offer to Newco
the opportunity to manage hotels or any other business opportunity, other than
as expressly provided in this Agreement; provided, however, that Patriot and
Marriott shall have the right to enter into management agreements with Newco for
the management by Newco of hotels other than as expressly provided
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herein, pursuant to terms and conditions mutually agreed to by Patriot or
Marriott, as the case may be, and Newco.
5.2 Formation of IHC II, LLC. Newco shall form IHC
II, LLC as a bankruptcy remote special purpose entity, which entity shall enter
into the Primary Management Agreements in the form attached hereto as Exhibit K
and the Submanagement Agreements. Patriot, Patriot Partnership and Wyndham are
not parties to and will not have recourse against Marriott (or any of its
Affiliates) with respect to breaches of the Submanagement Agreements or
Franchise Agreements (other than with respect to breaches of Section 11.22 of
the Submanagement Agreement); only IHC II, LLC will have recourse against
Marriott with respect to breaches of such Agreements. Effective upon the
consummation of Divestiture, IHC II, LLC shall assume each Exhibit B Hotel
Franchise Agreement and Interstate Hotels, LLC shall, as successor by merger to
Interstate Hotels Corporation, continue to be obligated under each Exhibit C
Hotel Franchise Agreement and Exhibit D Hotel Franchise Agreement, to the extent
in each case that Interstate is currently the franchisee thereunder.
The operating agreement of IHC II, LLC shall in all material
respects be in the form attached hereto as Exhibit F-1 upon consummation of the
Divestiture.
5.3 Formation of Interstate Hotels, LLC. Patriot,
prior to consummation of the Merger, will form Interstate Hotels, LLC.
The operating agreement of Interstate Hotels, LLC shall in
all material respects be in the form attached hereto as Exhibit F-2 upon
consummation of the Divestiture.
5.4 Newco Requirements. The parties desire for Newco
to be a strong, viable independent entity, and in order to accomplish such goal,
Patriot covenants and agrees that upon consummation of the Divestiture Newco
shall have a minimum initial capitalization of at least $50,000,000, and
"current assets" in an amount at least equal to "current liabilities" at the
time of the Divestiture, and total indebtedness which does not generate annual
debt service in excess of one-third EBITDA (i.e., earnings before interest,
taxes, depreciation and amortization) on a pro-forma basis.
5.5 Voting Agreement. Simultaneously with the
Divestiture, the Certain Newco Shareholders shall enter into the Voting
Agreement in the form attached as Exhibit G, which Voting Agreement shall become
effective immediately upon consummation of the Divestiture.
5.6 Owners Agreement. Simultaneously with the
Divestiture, the respective owners of the Exhibit B Hotels, Wyndham, IHC II, LLC
and Marriott shall enter into Owner Agreements in the form attached as Exhibit H
hereto, and shall use reasonable best efforts to provide
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written consents from all entities (other than Patriot) which own or have any
mortgage interest in the Exhibit B Hotels to provide non-disturbance assurances
as set forth in the Submanagement Agreement with respect to such hotels.
5.7 Compliance with Real Estate Investment Trust
("REIT") Requirements. In order to satisfy the REIT qualification provisions of
Internal Revenue Code Sections 856 and 857 relating to Patriot's income tests
and quarterly asset tests (including under proposed legislation not currently
enacted), at any time prior to the Final Divestiture Date, either Patriot or its
operating partnership may transfer all or any portion of its respective
ownership interest in Newco to an Affiliate of Patriot or Wyndham, including
individual members of Patriot's or Wyndham's senior management team or Persons
Controlled by one or more of such individuals. Any such transfer shall be
subject to any restrictions set forth in the charter and bylaws of Newco as of
the time of the Divestiture, as well as the terms and conditions of the Voting
Agreement, and the transferee being subject to all of the obligations of the
transferor hereunder. After consummation of the Divestiture, there shall be no
restrictions on Patriot's or Marriott's rights to transfer their interests in
Newco, IHC II, LLC or Interstate Hotels, LLC other than as set forth in the
organizational documents for such entities as they exist upon such consummation.
5.8 [INTENTIONALLY OMITTED].
5.9 Cost of Formation. All costs related to filing
fees, legal, accounting and other fees of advisors and consultants (such as
Newco's accountants, attorneys and financial advisors, if any), and financial
printing fees incurred in connection with the formation and implementation of
the Newco structure shall be borne solely by Patriot or its Affiliate.
5.10 Investment in Newco. Immediately prior to the
consummation of the Divestiture, Marriott shall acquire for cash four percent
(4%) of the Newco common stock at the economic equivalent value which Patriot
acquired its voting common stock in Newco (on a per share basis) and Patriot
shall retain, as of the consummation of the Divestiture, four percent (4%) of
such Newco common stock; provided however, that the maximum amount of Marriott's
capital contribution to acquire from Newco for cash such four percent (4%)
ownership interest shall be $3,000,000.
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5.11 Divestiture of Newco. The parties acknowledge
and agree that a fundamental condition of the execution of this Agreement by
Marriott is the agreement by Patriot to cause the Divestiture within the time
periods set forth below. Patriot shall cause all necessary filings (excluding
amendments or supplements to such filings) to be made by Patriot or its
Affiliates with federal and state governmental authorities and agencies to occur
on or prior to the Filing Date, other than routine filings not customarily made
prior to consummation of a "spin-off," such as, by way of example only, the
filing of amendments to charter documents.
If the Divestiture is consummated after November
30, 1998, but on or prior to the Final Divestiture Date, Patriot shall pay to
Marriott fees which are ten (10) basis points greater than the fees otherwise
due under the Submanagement Agreements (as modified hereby) for the entire term
of each such Submanagement Agreement and upon their termination the 2.35%
referenced in the definition of Special Fee shall be increased by ten (10) basis
points. In no event shall the Divestiture be consummated after the Final
Divestiture Date. Failure to consummate the Divestiture on or prior to the Final
Divestiture Date shall constitute a Forbearance Termination Event hereunder.
On or prior to the consummation of the Divestiture, the Board of Directors
of Newco shall be elected in accordance with the terms of the Charter and Bylaws
of Newco, and the Voting Agreement.
5.12 Marriott Approval Rights. All material aspects
of the formation of Newco (and subsidiary entities) as they exist at the time of
the Divestiture, and the Divestiture, shall be subject to Marriott's prior
approval, which approval shall not be unreasonably withheld or delayed.
5.13 Interim Operations. Prior to the Final
Divestiture Date, each of Newco and Patriot shall, subject to compliance with
this Agreement, and subject to ongoing compliance with Marriott's continuing
system standards, be an Approved Operator with respect to all Marriott- brand
hotels. In the event that the Divestiture is not consummated on or prior to
Final Divestiture Date, the status of Newco and Patriot as Approved Operators
shall be at Marriott's sole discretion. Any agreement entered into prior to the
Final Divestiture Date will clearly reflect the temporary status of Patriot and
Newco as Approved Operators.
5.14 Lease(s) between Patriot and Wyndham. Subject to
the consents set forth on Schedule 6.2.6, Patriot (or in the case of hotels
owned by joint ventures with third parties, the joint venture) and Wyndham
shall, upon the consummation of the Merger, execute one or more lease agreements
covering the Exhibit A Hotels, the Exhibit B Hotels, and the Exhibit C Hotels;
the leases for the Exhibit B Hotels and shall, upon the consummation of
Divestiture, be in the form attached as Exhibit J. The Tyson's Corner Marriott,
subject to obtaining the relevant consents listed on
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Schedule 6.2.6, shall be leased to Wyndham, managed by IHC II, LLC, and
submanaged by the Submanager pursuant to documentation similar to the
corresponding Exhibit B Hotel documentation, with appropriate changes to
correspond to the terms and conditions of the existing Tyson's Corner management
agreement.
5.15 Management Agreements between Wyndham and IHC
II, LLC. Simultaneously with the consummation of the Divestiture, in connection
with the Exhibit B Hotels, Wyndham and IHC II, LLC shall enter into the Primary
Management Agreements attached as Exhibit K, pursuant to which the Primary
Manager shall manage the Exhibit B Hotels as of the respective "Take-Over Dates"
specified therein.
5.16 Divestiture Payments. At the Divestiture,
Patriot will pay or cause to be paid all amounts not in dispute that are then
currently past due to Marriott or any other franchisor under any franchise or
license agreement for all Patriot-owned hotels to be operated by Newco.
5.17 Guarantees; Funding Obligations.
5.17.1 Guarantees. All of the obligations
of IHC II, LLC, and Interstate Hotels, LLC to Marriott hereunder or under any of
the Franchise Agreements, are, jointly and severally, irrevocably and
unconditionally guaranteed by Newco, pursuant to a separate Guaranty in the form
attached hereto as Exhibit L.
5.17.2 Funding Obligations. The following
obligations apply to all hotels submanaged by Marriott as listed on Exhibit B
from and after the respective "Take-Over Dates" (as defined in the relevant
Submangement Agreement (other than with respect to preliminary installation of
equipment pursuant to Section 1.02.B)). Patriot and Wyndham hereby acknowledge,
unless otherwise noted below, that each of the funding obligations (the
"Owner/Lessee Funding Obligations") listed below are required to be funded by
the owner of each of the properties ("Owner") to Wyndham under the leases for
the properties and, in turn, Wyndham is obligated to fund such obligation to the
Primary Manager under the terms of the Primary Management Agreement. Patriot
agrees that, to the extent of its interest in the properties (as shown on
Exhibit M), each of Primary Manager and Marriott are third party beneficiaries
of Owner's obligation to fund the Owner/Lessee Funding Obligations under the
leases. Wyndham hereby acknowledges that Marriott is a third party beneficiary
of its obligation to fund any Owner/Lessee Funding Obligation under the Primary
Management Agreements. Patriot agrees that Primary Manager and Marriott can
initiate legal proceedings directly against Patriot if any Owner fails to fund
the Owner/Lessee Funding Obligations, and Wyndham agrees that Marriott can
initiate legal proceedings directly against Wyndham if Wyndham fails to fund any
Owner/Lessee Funding Obligation under the Primary Management Agreement. Patriot
and Wyndham agree to satisfy any such claim without regard to any claims,
defenses or right of set-off or similar rights (except payment) that may be
available to the Owner or Wyndham in connection with the enforcement of the
corresponding obligations of the Owner or Wyndham under the lease or the Primary
Management Agreement and Marriott shall not be required to exhaust any of its
remedies against the Primary Manager. The
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Owner/Lessee Funding Obligations are the following (section references and
defined terms are to sections and defined terms in the Submanagement Agreement,
although the lease agreements between Patriot and Wyndham for the applicable
hotels and the Primary Management Agreement shall contain corresponding
provisions):
1. Preliminary installation of equipment (Section
1.02.B) and funding of Initial FF&E Reserve and
FF&E funding shortfalls described in 5-year
capital plans set forth in Exhibit B-1 to the
Submanagement Agreement (Section 5.02)
2. Restoration obligation in the event of casualty
(Section 6.03)
3. Funding of Capital Expenditures, including the
Capital Expenditures described in Exhibit B-2 to
the Submanagement Agreement (Section 5.03)
4. Funding of program for ADA and life-safety
compliance (Section 5.03.C and Section 5.03.E)
5. Assessments under CC&R's (Section 8.04) (all
non-capital costs to be funded solely by Wyndham)
6. Additional insurance premiums required to be paid
out of funds other than Gross Revenues (Section
6.02.D)
7. Funding necessary to maintain a reasonable amount
of Working Capital (Section 4.06) (funded solely
by Wyndham after initial working capital)
8. Payment of Impositions to the extent provided in
Sections 7.01.A and 7.01.B of the Submanagement
Agreement
9. Costs required to be funded by Primary Manager
pursuant to Section 11.12 of the Submanagement
Agreement
10. Obligations upon termination under Section 11.11
of the Submanagement Agreement (funded solely by
Wyndham)
11. Environmental removal and remediation costs
(Section 11.08)
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12. Costs incurred due to default by Primary Manager
(Section 9.03) (as a result of the failure of
Patriot or Wyndham to perform their respective
obligations, as applicable, under the lease
agreement and Primary Management Agreement)
13. Reimbursement for reasonable operating costs
(Section 4.01.C and Section 4.03.C) (funded
solely by Wyndham)
5.18 Troy Management. The parties acknowledge and
agree that Marriott intends to assume the management of the Marriott Hotel
located in Troy, Michigan, subject to and in accordance with the terms of the
Franchise Agreement and existing management agreement for such hotel. If
Marriott does not assume management of such hotel, then the Franchise Agreement
and management agreement shall be assumed by Newco.
5.19 Debt Repayment. On or prior to the Divestiture,
Patriot shall cause Newco, IHC II, LLC or Interstate Hotels LLC, as the case may
be, to pay off in full, refinance or purchase all presently existing third party
indebtedness due and owing with respect to any Exhibit A, B or C Hotel, except
for indebtedness in favor of the lenders Lincoln National relating to St. Louis
Marriott, Credit Lyonnais relating to Casa Marina and Harrisburg and
Massachusetts Mutual Life Insurance Company relating to the Reach, Syracuse and
Pittsburgh Airport Marriott, Harrisburg and Casa Marina.
6. REPRESENTATIONS AND WARRANTIES.
6.1 Representations and Warranties of Marriott.
Marriott International, Inc. hereby makes the following representations and
warranties to Patriot and Interstate as of the date hereof:
6.1.1 Organization and Authority; Good
Standing. Marriott International, Inc. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and is
duly licensed or qualified to do business in all jurisdictions where in the
nature of its business or the character of its properties requires such
licensing or qualification, except where the failure to be so qualified could
not reasonably be expected to have a material adverse effect on its business,
operations or financial condition. Marriott has full and adequate corporate
power to own its property and to carry on its business as now conducted.
6.1.2 Due Authorization. All necessary
corporate action has been taken to authorize the execution and delivery of this
Agreement by Marriott International Inc., and the performance of this Agreement
by Marriott, and this Agreement has been duly executed and delivered by Marriott
International, Inc.
6.1.3 Non-Contravention. Neither the
execution and the delivery of this Agreement by Marriott International, Inc.,
nor the consummation by Marriott of the transactions
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contemplated hereby, will (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which Marriott is subject,
(ii) violate any provision of its charter or bylaws, or (iii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
any material agreement, contract, lease, license, instrument, or other
arrangement to which Marriott is a party, by which it is bound or to which any
of its assets is subject.
6.1.4 Enforceability. This Agreement is the
legal, valid and binding obligation of Marriott, enforceable against Marriott in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws of general
application relating to or affecting the enforcement of creditor's rights and by
general principles of equity.
6.1.5 Litigation. Other than the Maryland
Case and the Texas Case, there is no litigation, investigation, suit, action or
other proceeding by or against Marriott, pending or, to the knowledge of
Marriott, threatened, before any court of competent jurisdiction or governmental
agency that seeks the restraint, prohibition, damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby, or which otherwise challenges or would affect the validity
or enforceability of this Agreement or such transactions.
6.2 Representations and Warranties of Patriot.
Patriot American Hospitality, Inc. hereby makes the following representations
and warranties to Marriott and Interstate as of the date hereof:
6.2.1 Organization and Authority; Good
Standing. Patriot American Hospitality, Inc. is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly licensed or qualified to do business in all jurisdictions where in
the nature of its business or the character of its properties requires such
licensing or qualification, except where the failure to be so qualified could
not reasonably be expected to have a material adverse effect on its business,
operations or financial condition. Patriot has full and adequate corporate power
to own its property and to carry on its business as now conducted.
6.2.2 Due Authorization. All necessary
corporate action has been taken to authorize the execution and delivery of this
Agreement by Patriot American Hospitality, Inc., and the performance of this
Agreement by Patriot, and this Agreement has been duly executed and delivered by
Patriot American Hospitality, Inc.
6.2.3 Non-Contravention. Neither the
execution and the delivery of this Agreement by Patriot American Hospitality,
Inc., nor the consummation by Patriot of the transactions contemplated hereby,
will (i) violate any constitution, statute, regulation, rule,
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injunction, judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which Patriot is subject, (ii)
violate any provision of its charter or bylaws, or (iii) except for its
agreements with Equity Inns, conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, any material agreement, contract,
lease, license, instrument, or other arrangement to which Patriot is a party, by
which it is bound or to which any of its assets is subject.
6.2.4 Enforceability. This Agreement is the
legal, valid and binding obligation of Patriot, enforceable against Patriot in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws of general
application relating to or affecting the enforcement of creditor's rights and by
general principles of equity.
6.2.5 Litigation. Other than the Maryland
Case and the Texas Case, there is no litigation, investigation, suit, action or
other proceeding by or against Patriot, pending or, to the knowledge of Patriot,
threatened, before any court of competent jurisdiction or governmental agency
that seeks the restraint, prohibition, damages or other relief in connection
with this Agreement or the consummation of the transactions contemplated hereby,
or which otherwise challenges or would affect the validity or enforceability of
this Agreement or such transactions.
6.2.6 Consents. Except as set forth on
Schedule 6.2.6 and except for (x) the consent of Massachusetts Mutual Life
Insurance Company (secured lender) as to Pittsburgh Airport, (y) the consent of
Credit Lyonnais (secured lender) as to Harrisburg, and (z) the consent of Credit
Lyonnais (secured lender) as to Casa Marina, all necessary consents and
approvals required (i) in order for the Submanager to acquire the rights to
submanage the Exhibit B Hotels pursuant to the Submanagement Agreements, (ii) to
extend the Franchise Agreement relating to Warner Center and to accomplish the
other arrangements contemplated herein relating to Warner Center, (iii) to
terminate the Exhibit A Hotel Franchise Agreements pursuant to Section 3.1.1,
(iv) in order for Marriott to acquire the rights to continue to manage the
Tyson's Corner Marriott pursuant to the Amendment to Tyson's Corner Management
Agreement, and (v) to continue the effectiveness of the Franchise Agreements (as
modified pursuant to the express provisions of this Agreement) until otherwise
terminated by their terms or pursuant hereto, have in all cases been obtained
prior to the date hereof.
6.2.7 Voting Agreement. Exhibit C to the
Voting Agreement accurately includes all directors, officers (as defined in Rule
16a-1(f) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) and holders of greater than 10% of the outstanding capital stock (other
than holders who are eligible to file Information Statements on Schedule 13G
(rather than Schedule 13D) pursuant to Rule 13d-1 under the Exchange Act) of
Patriot American Hospitality, Inc. and Wyndham International, Inc. For purposes
of stating and calculating the share ownership to be reflected on Exhibit C to
the Voting Agreement, each such director and executive officer shall be deemed
to own all shares beneficially owned by the members of such individual's
immediate family (including spouses), the spouses of the immediate family
members of such
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individual, trust, partnerships, corporations or similar entities controlled by
such individual, and any other Affiliates of such individual.
6.3 Representations and Warranties of Interstate.
Interstate Hotels Company and Interstate Hotels Corporation hereby make the
following representations and warranties to Marriott and Patriot as of the date
hereof:
6.3.1 Organization and Authority; Good
Standing. Each of Interstate Hotels Company and Interstate Hotels Corporation is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Pennsylvania and is duly licensed or qualified to do
business in all jurisdictions where in the nature of its business or the
character of its properties requires such licensing or qualification, except
where the failure to be so qualified could not reasonably be expected to have a
material adverse effect on its business, operations or financial condition.
Interstate has full and adequate corporate power to own its property and to
carry on its business as now conducted.
6.3.2 Due Authorization. All necessary
corporate action has been taken to authorize the execution and delivery of this
Agreement by each of Interstate Hotels Company and Interstate Hotels
Corporation, and the performance of this Agreement by Interstate, and this
Agreement has been duly executed and delivered by each of Interstate Hotels
Company and Interstate Hotels Corporation.
6.3.3 Non-Contravention. Neither the
execution and the delivery of this Agreement by either Interstate Hotels Company
or Interstate Hotels Corporation, nor the consummation by Interstate of the
transactions contemplated hereby, will (i) except with respect to the Maryland
case, violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Interstate is subject, (ii) violate any
provision of its charter or bylaws or (iii) except for its agreements with
Promus, Patriot, Marriott and Equity Inns, conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, any material agreement,
contract, lease, license, instrument, or other arrangement to which Interstate
is a party, by which it is bound or to which any of its assets is subject.
6.3.4 Enforceability. This Agreement is the
legal, valid and binding obligation of Interstate, enforceable against
Interstate in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application relating to or affecting the enforcement of creditor's
rights and by general principles of equity.
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6.3.5 Litigation. Other than the Maryland
Case and the Texas Case, there is no litigation, investigation, suit, action or
other proceeding by or against Interstate, pending or, to the knowledge of
Interstate, threatened, before any court of competent jurisdiction or
governmental agency that seeks the restraint, prohibition, damages or other
relief in connection with this Agreement or the consummation of the transactions
contemplated hereby, or which otherwise challenges or would affect the validity
or enforceability of this Agreement or such transactions.
6.4 Survival. The representations and warranties of
the parties set forth in this Section 6 and elsewhere in this Agreement shall
survive the execution of this Agreement.
7. CONDITIONS AND DELIVERIES.
7.1 Deliveries in Connection with the Execution of
this Agreement. Simultaneously with the execution and delivery of this
Agreement, the following agreements, documents, instruments, obligations,
payments and other items shall have been executed, delivered, made and/or
performed as provided below:
7.1.1 [INTENTIONALLY OMITTED].
7.1.2 [INTENTIONALLY OMITTED].
7.1.3 Payments to Marriott under Existing
Management Agreements and Franchise Agreements. All amounts not in dispute that
are currently past due and payable by Interstate or any Affiliate thereof under
the existing Franchise Agreements, and under the existing management agreement
governing the management of the Tyson's Corner Marriott, substantially all of
which amounts are set forth on Schedule 7.1.3 hereof, shall be paid by
Interstate to Marriott as follows: (1) a check for the Fort Lauderdale
receivable in the amount of $415,035.05 shall be sent to Marriott by overnight
courier on May 27, 1998 for delivery on May 28, 1998 and (2) all remaining
amounts set forth on Schedule 7.1.3 shall be paid in full by Interstate on or
before May 29, 1998.
7.1.4 Opinion Letters. Marriott shall have
received opinions of Goodwin, Procter & Hoar LLP, counsel to Patriot, and Jones,
Day, Reavis & Pogue, counsel to Interstate, in the forms attached as Exhibits
N-1 and N-2, respectively.
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8. INDEMNIFICATION.
8.1 Indemnification by Patriot. Subject in all
respects to Section 8.2, Patriot hereby agrees to indemnify and hold harmless
Marriott and its Affiliates, and each of their respective directors, officers,
employees, successors and assigns (individually an "Indemnified Party" and
collectively, the "Indemnified Parties") from and against, any and all losses,
liabilities, claims, damages (including consequential, punitive or treble
damages), obligations, liens, assessments, judgments, awards, fines, costs or
expenses (including reasonable attorney's fees) (individually a "Covered
Liability" and collectively, the "Covered Liabilities") which any of the
Indemnified Parties may sustain by reason of:
(a) the execution and delivery of this Agreement (or any
agreements contemplated herein) by Marriott, the performance by Marriott of its
obligations under this Agreement (provided such obligations are performed in
accordance with the terms of this Agreement), or the consummation of any of the
transactions contemplated herein;
(b) any and all actions of any of the Indemnified Parties
taken in furtherance of this Agreement;
(c) the Merger;
(d) the Divestiture;
(e) any alleged negligent, grossly negligent, reckless or
intentionally tortious or other misconduct (including, but not limited to,
intentional interference with contract or intentional interference with economic
relations) of any of the Indemnified Parties arising out of or related to (a)
through (d) above.
(f) any and all Covered Liabilities resulting from the
termination of the Franchise Agreements on the Exhibit A Hotels.
The remedies provided in this Section 8.1 will not be exclusive of or limit
any other remedies that may be available to Marriott or the other Indemnified
Parties. Notwithstanding anything to the contrary in clauses (a) through (f)
above, if a court of competent jurisdiction determines that an Indemnified Party
in (a) through (f) above was grossly negligent or acted fraudulently, then this
Section 8 shall not apply.
8.2 Limitation on Indemnification. The obligations of
Patriot under this Section 8 shall apply only to claims made or actions brought
by or on behalf of (i) both the stockholders of Patriot or Interstate, as well
as third-party owners of hotels on Exhibit D only, with
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respect to Sections 8.1(a) - 8.1(e), and (ii) the third-party owners of Exhibit
A Hotels with respect to Section 8.2(f).
8.3 Procedure.
(a) Except as provided in subparagraph (b) below, if any Covered
Liability for which Patriot will be liable pursuant to this Section 8 is
asserted against or sought to be collected from any of the Indemnified Parties,
Marriott shall promptly notify Patriot in writing. No delay on the part of
Marriott (or any of the Indemnified Parties) in notifying Patriot shall relieve
Patriot or its Affiliates from any obligation hereunder unless (and then solely
to the extent) Patriot is prejudiced. Patriot shall, at its sole cost and
expense, defend against such claim or demand. Marriott may elect, at its sole
cost and expense, to retain its own counsel and participate in any such defense,
but the control of such defense and its settlement and resolution shall rest
with Patriot. Patriot shall keep Marriott fully informed of the status of the
defense of any such claims.
(b) If any Covered Liability for which Patriot is liable pursuant
to this Section 8 is asserted against or sought to be collected from any of the
Indemnified Parties and such claim arises out of or in connection with an
agreement between Marriott and a third party, Marriott shall have the right, but
not the duty, to defend against any claim or demand at its sole cost and
expense, provided, however, that Marriott's right to defend against any such
claim shall be conditioned upon Marriott's notification to Patriot as set forth
in the immediately succeeding sentence within twenty (20) business days of the
date on which such claim is first asserted against Marriott. In the event that
Marriott elects to exercise its right under this Section 8.3(b) to defend
against such claim or demand, Marriott shall promptly notify Patriot of its
election to defend against such claim or demand. Marriott shall have the right
to control and defend against such claim or demand by appropriate proceedings,
but Marriott will be responsible for its expenses and the cost of any judgment
against any Indemnified Party or any settlement of a demand or claim against any
Indemnified Party.
(c) Notwithstanding any other statement herein to the contrary,
neither Patriot nor any of its Affiliates shall, without the written consent of
Marriott, settle or compromise or consent to the entry of any judgment with
respect to any action or third party claim if the effect thereof is to admit
any criminal liability by Marriott, or to permit any injunctive relief or
other order providing non-monetary relief to be entered against Marriott.
8.4 Duty of Mitigation. Notwithstanding any language
to the contrary contained herein, in the case of any claims or demands made by
Third-Party Owners of Marriott brand hotels, Marriott shall attempt to mitigate
such claim or demand by offering to, and negotiating in good faith with, any
such claimant that has a management or franchise agreement with Interstate, a
Marriott management or franchise agreement containing terms and conditions
comparable to the terms of Marriott's standard franchise or management
agreement.
8.5 Payment of Indemnity. If Patriot and its
Affiliates elect not to defend against such claim or demand for which they do
not dispute indemnity is due, the amount of such
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claim or demand, or if the same be defended by Patriot or its Affiliates, that
portion thereof as to which such defense is unsuccessful, or any amount agreed
to be paid in settlement of such claim, shall be payable by wire transfer of
immediately available funds by Patriot (jointly and severally, in the event
Patriot's Affiliates are also indemnifying parties) to the party making demand
for payment immediately upon receipt of a final judgment, order or settlement.
9. LITIGATION.
9.1 State of the Maryland Case; Retention of Federal
Jurisdiction. Simultaneously with the execution of this Agreement, the parties
shall jointly request that the Maryland Case be stayed, pending consummation of
the transactions contemplated by this Agreement. Upon Divestiture, the parties
will file a joint request for an Order of Dismissal pursuant to Fed. R. Civ.
Pro. 41(a)(2), in the form attached as Exhibit O-1, attaching this Agreement as
part of the Order of Dismissal, conditioning dismissal on compliance with the
terms of this Agreement and providing that the Maryland Court retains
jurisdiction to enforce the terms of this Agreement and resolve any disputes
relating to this Agreement with the express purpose that the Maryland Court
retain ancillary jurisdiction over matters relating to this Agreement pursuant
to the Supreme Court's decision in Kokkomen v. Guardian Life Insurance Company
of America, 511 U.S. 375 (1994).
9.2 Status of Texas Case. Immediately following the
approval of this Agreement by the Maryland Court, Patriot shall move to have its
claims in the Texas Case, which claims are based on the fact that Marriott
sought to enjoin the Merger, dismissed with prejudice, pursuant to an Order of
Dismissal in the form attached as Exhibit O-2, provided, however, that the
parties agree and will so stipulate that said dismissal will not have any claim
preclusion or res judicata effect with respect to any other, unasserted claims,
not based on the fact that Marriott sought to enjoin the Merger.
9.3 Further Assurances. The parties agree in good
faith to take any and all such further action, and to execute and deliver such
other notices, documents, instruments, certificates, or agreements as may be
necessary to implement the purposes of the foregoing provisions of this Section
9.
10. FACTUAL ACKNOWLEDGMENTS; RELEASES. The following
releases, and factual acknowledgments concerning the operation of the Marriott
system, shall be conditioned upon and subject to the satisfaction by each of the
parties of its material obligations hereunder and the consummation of the
transactions set forth in this Agreement.
10.1 Factual Acknowledgments. Marriott and Patriot
acknowledge that the charges and monetary allocations of costs as set forth in
the Submanagement Agreements, the
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Amendment to Tyson's Corner Management Agreement and Franchise Agreements are
legally enforceable, appropriate, fair and equitable. In addition, without
limiting the foregoing, Patriot further acknowledges that it is aware of
Marriott's chain services, reservations system, and marketing programs, charges,
allocations and protocols. Upon the occurrence of a Forbearance Termination
Event, the factual acknowledgments in this Section 10.1 shall be null and void
in all respects.
10.2 Marriott Release. Effective only upon
consummation of the Divestiture, Marriott, for itself and its directors,
officers, employees, stockholders, agents, successors, assigns, attorneys and
trustees (collectively, the "Marriott Releasors"), does hereby irrevocably and
unconditionally remise, release, acquit, exonerate and forever discharge Patriot
and Interstate and their respective directors, officers, employees,
stockholders, agents, successors, assigns, attorneys, financial advisors,
investment bankers, lenders and trustees (collectively, the "Patriot and
Interstate Released Parties"), of and from any or all actions, causes of action,
suits, debts, dues, sums of money, accounts, claims, demands, covenants,
contracts, controversies, promises, agreements, damages, attorney's fees, costs
and expenses of suit, obligations, liabilities and judgments, of whatever kind
or nature, known or unknown, now existing or which may develop in the future, in
law or in equity, which Marriott ever had against the Patriot and Interstate
Released Parties, now has or which any of the Marriott Releasors hereafter can,
shall or may have, upon or by reason of any act, omission, matter, cause or
thing whatsoever, from the beginning of time through the date of this Agreement,
arising out of, related to, or in connection with the Merger, including without
limitation, claims arising under any statute or law of the United States and any
franchise law of any state (excepting only such state statutory claims as may
not be released, regardless of the agreement of the parties, as a matter of
law). This release of all claims shall survive the assignment or termination of
any of the Franchise Agreements entered into by and between Marriott and
Interstate or Patriot. This release shall not apply to (a) any accrued fees,
costs, or charges, whether billed or unbilled, that Interstate would be
obligated to pay under or in connection with the Franchise Agreements or
management contracts with respect to the period occurring after the Divestiture
Date, except for amounts due pursuant to Section 7.1.3; (b) any claim for
indemnification of Marriott and others under the Franchise Agreements or
management contracts; and (c) the $2,426,000 fee payable pursuant to the Tyson's
Corner Management Agreement (subject to (i) the acknowledgment by Marriott
herein that neither the consummation of the Merger, nor the consummation of the
Divestiture, causes such fee to be due or payable, and (ii) the agreement by
Marriott hereby that if Patriot successfully obtains an Amendment to Tyson's
Corner Management Agreement which deletes the "termination on sale" provision,
this fee shall no longer be payable, and (iii) the termination of the
Submanagement Agreement.
10.3 Patriot and Wyndham Release. Effective only upon
consummation of the Divestiture, each of Patriot and Wyndham, for itself and its
respective directors, officers, employees, stockholders, agents, successors,
assigns, attorneys and trustees (collectively, the "Patriot Releasors"), does
hereby irrevocably and unconditionally remise, release, acquit, exonerate and
forever discharge Marriott and its respective directors, officers, employees,
stockholders, agents, successors, assigns, attorneys, financial advisors,
investment bankers, lenders and trustees
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<PAGE> 39
(collectively, the "Marriott Released Parties"), of and from any or all actions,
causes of action, suits, debts, dues, sums of money, accounts, claims, demands,
covenants, contracts, controversies, promises, agreements, damages, attorney's
fees, costs and expenses of suit, obligations, liabilities and judgments, of
whatever kind or nature, known or unknown, now existing or which may develop in
the future, in law or in equity, which Patriot or Wyndham ever had against the
Marriott Released Parties, now has or which any of the Patriot Releasors
hereafter can, shall or may have, upon or by reason of any act, omission,
matter, cause or thing whatsoever, from the beginning of time through the date
of this Agreement, arising out of, relating to, or in connection with (i) the
factual acknowledgments contained in Section 10.1, (ii) the Franchise Agreements
or any agreements related thereto, other than amounts thereunder that are being
disputed in good faith, or (iii) the Merger, including specifically claims
arising under any statute or law of the United States and any franchise law of
any state (excepting only such state statutory claims as may not be released,
regardless of the agreement of the parties, as a matter of law). This release of
all claims shall survive the assignment or termination of any of the Franchise
Agreements entered into by and between Marriott and Interstate or Patriot.
10.4 Interstate Release. Effective only upon
consummation of the Divestiture, Interstate, for itself and its directors,
officers, employees, stockholders, agents, successors, assigns, attorneys and
trustees (collectively, the "Interstate Releasors"), does hereby irrevocably and
unconditionally remise, release, acquit, exonerate and forever discharge the
Marriott Released Parties of and from any or all actions, causes of action,
suits, debts, dues, sums of money, accounts, claims, demands, covenants,
contracts, controversies, promises, agreements, damages, attorney's fees, costs
and expenses of suit, obligations, liabilities and judgments, of whatever kind
or nature, known or unknown, now existing or which may develop in the future, in
law or in equity, which Interstate ever had against the Marriott Released
Parties, now has or which any of the Interstate Releasors hereafter can, shall
or may have, upon or by reason of any act, omission, matter, cause or thing
whatsoever, from the beginning of time through the date of this Agreement,
arising out of, related to, or in connection with (i) the factual
acknowledgments contained in Section 10.1, (ii) the Franchise Agreements or any
agreements related thereto, or (iii) the Merger.
Additionally, upon the execution hereof, Interstate, for itself and the
Interstate Releasors, does hereby irrevocably and unconditionally remise,
release, acquit, exonerate and forever discharge the Marriott Released Parties
of and from any or all actions, causes of action, suits, debts, dues, sums of
money, amounts, claims, demands, damages, attorney's fees, costs and expenses of
suit, obligations, liabilities and judgments, of whatever kind or nature, known
or unknown, now existing or which may develop in the future, in law or in
equity, which Interstate ever had against the Marriott Released Parties, now has
or which any of the Interstate Releasers hereafter can, shall or may have, upon
or by reason of any act, omission, matter, cause or thing whatsoever, from the
beginning of time through the date of this Agreement, arising out of, related
to, or in connection with, Marriott's actions in attempting to enjoin the Merger
or which otherwise form the basis of the Texas Case.
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<PAGE> 40
10.5 California. Insofar as the releases given in
this Section 10 apply to any hotel, conduct or cause of action in the State of
California (or any jurisdiction in which principles comparable to California
Civil Code Section 1542, quoted below, apply by reason of statute or precedent),
the following is included in such release:
INTERSTATE, PATRIOT AND MARRIOTT HAVE EACH BEEN INFORMED OF AND ARE
AWARE OF THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH
READS AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
INTERSTATE, PATRIOT AND MARRIOTT EACH UNDERSTAND THAT SECTION 1542
GIVES THEM THE RIGHT NOT TO RELEASE EXISTING CLAIMS OF WHICH THEY ARE
NOT AWARE, UNLESS THEY VOLUNTARILY CHOOSE TO WAIVE THIS RIGHT. HAVING
BEEN SO APPRISED, THEY NEVERTHELESS HEREBY VOLUNTARILY ELECT TO, AND
DO, WAIVE THE RIGHTS DESCRIBED IN SECTION 1542 AND AGREE THAT THE
RELEASE STATED IN THIS SECTION 10 APPLIES TO ANY AND ALL LIABILITIES,
CLAIMS, DAMAGES, DEMANDS, COSTS, INDEBTEDNESS, EXPENSES, INDEMNITIES,
COMPENSATION, ACTIONS AND CAUSES OF ACTION OF ANY KIND WHATSOEVER,
WHETHER DEVELOPED OR UNDEVELOPED, KNOWN OR UNKNOWN, SUSPECTED OR
UNSUSPECTED.
11. [INTENTIONALLY OMITTED].
12. PATRIOT AND NEWCO FRANCHISE AGREEMENT COMMITMENTS AND
GENERAL MODIFICATIONS OF FRANCHISE AGREEMENTS. Patriot and Marriott each agrees
that it shall perform under the Franchise Agreements in accordance with the
terms of each and in accordance with the further provisions of this Agreement,
including without limitation, this Section 12. Patriot shall cause these same
obligations to be binding upon Newco, Interstate Hotels, LLC and IHC II, LLC
(prior to the Divestiture) and upon Patriot's Affiliates (prior to and following
the Divestiture). Finally, Patriot shall take all actions necessary in order to
cause such Affiliates to be bound by all of the terms and provisions of this
Agreement, and, to the extent an Affiliate is a party thereto, the Franchise
Agreements, Submanagement Agreements, and the Amendment to Tyson's Corner
Management Agreement (as such Agreements are modified hereby), as though such
Affiliates were parties hereto. For any Franchise Agreement to which Interstate
is a party, this Agreement shall be deemed an amendment to each such Franchise
Agreement. Notwithstanding anything to the contrary, no Franchise Agreement
shall be amended, and no owner of a hotel whose joint venture partner or lender
has the right to consent to any amendment of a Franchise Agreement, as indicated
on Schedule 6.2.6, shall be bound by the terms hereof.
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<PAGE> 41
12.1 Use of Marks. Patriot shall use Marriott's
trade names, service marks, trademarks, and other proprietary rights (the
"Marks") only as allowed and required by the applicable Franchise Agreements
relating to such Marks and Marriott's standards and policies. Patriot will not
market or advertise the Marks or Marriott hotels with any trademarks, tradename
or service mark not approved by Marriott. Patriot will further agree not to use
Marriott hotel customers or customer information generated by the Marriott
system to sell or market other business activities in which Patriot is engaged
and which compete with Marriott (except that Patriot may use such customer
information if legally obtained from a third party). Patriot will cause its
employees not to use the Marks, or any other proprietary information concerning
Marriott, the Marks or the Marriott system, in any way, directly or indirectly,
other than for the purpose of managing and operating Marriott hotels. In
connection with Patriot's operation of its Marriott hotels, Patriot will not
direct customers or business that originates at a Marriott hotel or in or
through the Marriott system to any other lodging system or chain or to any hotel
not in the Marriott system. Marriott shall be entitled to injunctive relief to
enforce its rights under this section in addition to any other remedies at law
it may have. Marriott shall additionally have the right to recover an additional
amount equal to 300% of the liquidated damages for the hotel in question (as set
forth on Schedules 3.1.4, 3.2.7, 3.3.5, and 4.3.1); provided, however, that
these damage provisions shall not apply to any documents filed pursuant to the
Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as
amended (collectively, "Securities Filings"). Patriot shall have no obligation
to obtain Marriott's prior approval of the use of Marriott's Marks, which use
shall be pursuant to the Marriott standards, in any table or chart describing
Marriott hotels used in a Securities Filing, and Marriott shall not unreasonably
withhold or delay its consent to any other use of its Marks (in a non-derogatory
manner) in such a Securities Filing.
12.2 Treatment of Sensitive Information. Patriot
acknowledges that Marriott may provide its franchisees with certain sensitive
and confidential hotel operating and trademark information, including
information concerning pricing, market strategy, hotel rate structures, Marriott
customers and customer accounts (the "Sensitive Information"). Patriot agrees
that if Marriott provides Sensitive Information to the management team of a
Marriott hotel in which Patriot has an interest, or to a regional manager of
such Marriott hotel, Patriot shall treat such Sensitive Information as
confidential and shall not disclose any such Sensitive Information to any person
involved in the operation of any competing hotels that are not Marriott hotels
(or use such Sensitive Information for the benefit of same), and shall not
disclose such Sensitive Information to any person directly involved in the
operation of Wyndham Hotels. Sensitive information shall not include any
information that: (i) was publicly known or generally known within the trade at
the time of the disclosure; (ii) is obtained from a third party who is under no
obligation of confidentiality with respect to such information, or (iii) is
required to be disclosed by applicable law. Patriot agrees that Marriott may, in
its sole discretion, decide either to provide Sensitive Information directly to
Patriot or provide similar or replacement information or services in a way that
has the effect of giving the
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<PAGE> 42
Sensitive Information to the management teams of hotels but does not give
Patriot access to the Sensitive Information.
12.3 Operation. Prior to the Merger, Interstate
shall (i) be responsible for causing all Marriott franchised hotels to be
managed in a good faith manner as a full participant in the Marriott system,
consistent with Marriott's standards, policies and capital and expenditure
requirements, including participation in all mandatory national, regional and
area-wide marketing or promotional programs being implemented for hotels in the
Marriott system, all in accordance with the applicable Franchise Agreements, and
(ii) fund any and all capital expenditures required to maintain each such hotel
to Marriott standards in accordance with the applicable Franchise Agreements.
Following the Merger and prior to (x) the consummation of the Divestiture or (y)
the Final Divestiture Date, whichever comes first, the obligations imposed on
Interstate by this Section 12.3 shall instead be those of Patriot or its
Affiliates, and following the Divestiture, such obligations shall instead be
those of Newco and its Affiliates (including without limitation IHC II, LLC and
Interstate Hotels, LLC).
12.4 Liquidated Damages.
12.4.1 Effective on the Divestiture Date and
subject to Sections 3.2.2.2 and 3.3.3 and the consents set forth on Schedule
6.2.6, the Exhibit B Hotel Franchise Agreements are hereby amended to delete the
Existing Franchise Agreement Liquidated Damages payable under the Exhibit B
Hotel Franchise Agreements and the Exhibit B Liquidated Damages are hereby
substituted in lieu thereof. Except for the substitution of Exhibit B Liquidated
Damages for Existing Franchise Agreement Liquidated Damages, the provisions
relating to the payment of liquidated damages under the Exhibit B Hotel
Franchise Agreements shall remain in full force and effect, subject to the other
sections of this Agreement.
12.4.2 Effective on the Divestiture Date and
subject to Sections 3.2.2.2 and 3.3.3 and the consents set forth on Schedule
6.2.6, the Exhibit C Hotel Franchise Agreements are hereby amended to delete the
Existing Franchise Agreement Liquidated Damages payable under the Exhibit C
Hotel Franchise Agreements and the Exhibit C Liquidated Damages are hereby
substituted in lieu thereof. Except for the substitution of Exhibit C Liquidated
Damages for Existing Franchise Agreement Liquidated Damages, the provisions
relating to the payment of liquidated damages under the Exhibit C Hotel
Franchise Agreements shall remain in full force and effect, subject to the other
sections of this Agreement.
12.4.3 Effective on the Divestiture Date and
subject to the consents of the respective Third-Party Owners, the Exhibit D
Hotel Franchise Agreements as to which Patriot or Interstate is the franchisee
are hereby amended to delete the Existing Franchise Agreement Liquidated Damages
payable under the Exhibit D Hotel Franchise Agreements and the Exhibit D
Liquidated Damages are hereby substituted in lieu thereof. Except for the
substitution of Exhibit D Liquidated Damages for Existing Franchise Agreement
Liquidated Damages, the provisions relating to the payment of liquidated damages
under the Exhibit D Hotel Franchise Agreements
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<PAGE> 43
shall remain in full force and effect, subject to the other sections of this
Agreement.
13. PRESS RELEASES. Unless otherwise required by law, no party
will issue any press release relating to this Agreement, or the Divestiture,
without each of the other party's reasonable consent to such release. The
parties designate the following individuals for purpose of reviewing such press
releases: Marriott -- Steve Joyce; Patriot -- Bill Evans; and prior to the
Merger, Interstate -- Bill Richardson.
14. COOPERATION. The parties mutually agree to cooperate in
good faith and to deal fairly with one another to accomplish the terms of this
Agreement, including the Divestiture and the parties agree to take all actions
reasonably necessary to implement the Divestiture. No party hereto shall object
to, directly or indirectly, interfere with, or delay, the consummation of the
Divestiture, provided that the Divestiture is effected in accordance with the
provisions of this Agreement.
15. [INTENTIONALLY OMITTED].
16. [INTENTIONALLY OMITTED].
17. MISCELLANEOUS.
17.1 Applicable Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Maryland, without
regard to principles of conflict of laws.
17.2 Notices. All notices, requests, demands,
statements and other communications required or permitted to be given under the
terms of this Agreement shall be in writing and delivered by hand against
receipt, sent by certified mail (postage prepaid and return receipt requested),
or carried by reputable overnight/ international courier service, to the
respective party at the following addresses:
If to Marriott:
Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
Bryson L. Cook, Esq.
Venable, Baetjer and Howard, LLP
Two Hopkins Plaza, Suite 1800
Baltimore, Maryland 21201
43
<PAGE> 44
If to Interstate:
Milton Fine
Interstate Hotels Corporation
680 Anderson Drive
Foster Plaza Ten
Pittsburgh, PA 15220
with a copy to:
Marvin I. Droz
Senior Vice President and General Counsel
Interstate Hotels Corporation
680 Anderson Drive
Foster Plaza Ten
Pittsburgh, PA 15220
If to Patriot:
Paul A. Nussbaum
Patriot American Hospitality, Inc.
1950 Stemmons Freeway
Suite 6001
Dallas, TX 75207
with a copy to:
Gilbert G. Menna, P.C. and
Kathryn I. Murtagh, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
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<PAGE> 45
If to Wyndham:
James D. Carreker
1950 Stemmons Freeway
Suite 6001
Dallas, TX 75207
with a copy to:
Gilbert G. Menna, P.C. and
Kathryn I. Murtagh, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
or to such other address as a party provides to the other parties from time to
time. Any such notice or communication shall be deemed to have been given at the
date and time of: (A) receipt of or first refusal of delivery, if sent via
certified mail or delivered by hand; or (B) one day after the posting thereof,
if sent via reputable overnight/international courier service.
17.3 Entire Agreement; Amendment. All Exhibits,
Schedules and other documents attached hereto or delivered in connection
herewith are deemed to be an integral part of the parties agreement with respect
to the subject matter hereof, and are incorporated herein by reference. This
Agreement, such Exhibits and Schedules, and all documents delivered in
connection herewith shall constitute the entire Agreement between the parties
pertaining to the subject matter hereof, and shall supersede any and all prior
and contemporaneous agreements, understandings, negotiations, and discussions of
the parties, whether oral or written. No amendment, modification, waiver or
termination of this Agreement shall be binding unless executed in writing by all
of the parties hereto, or in the case of a waiver, by the party for whom such
benefit was intended.
17.4 Waiver. The failure of any party to enforce at
any time the provisions of this Agreement shall in no way be construed to be a
waiver of any such provision nor in any way to affect the validity of this
Agreement nor any part hereof, or the rights of any party to enforce thereafter
each and every such provision. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision of
this Agreement, whether or not similar, nor shall such waiver constitute a
continuing waiver unless otherwise expressly so provided in writing.
17.5 Expenses. Except as expressly stated otherwise
herein, each party shall pay the fees of its legal counsel, accountants,
advisors and any other expenses incurred by it in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated by this Agreement.
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<PAGE> 46
17.6 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. No party shall assign any of its rights or
obligations hereunder without the prior written consent of each of the other
parties.
17.7 Severability. If any provision or clause of this
Agreement is determined by a court of competent jurisdiction to be invalid or
unenforceable, the validity of the rest of the Agreement shall not be affected
and the rights and obligations of the parties shall be construed and enforced as
if this Agreement did not contain the particular part held to be invalid or
unenforceable.
17.8 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same Agreement.
17.9 No Third Party Beneficiaries. Nothing contained
in this Agreement shall be deemed to confer any rights or benefits upon any
third parties.
17.10 Captions. Caption and section headings are used
herein for convenience of reference only. They are not part of this Agreement
and shall not be used in construing it.
17.11 Personal Jurisdiction. Each party hereby
expressly and irrevocably submits itself to the exclusive jurisdiction of the
Maryland Court in any suit, action, or proceeding arising, directly or
indirectly, out of or relating to this Agreement, and to the maximum extent
permitted under applicable law, this consent to personal jurisdiction shall be
self-operative; provided that nothing in this Section 17.11 shall preclude
Patriot from maintaining the Texas Case referred to in Section 9.2 to the extent
such case is not ultimately dismissed in accordance with Section 9.2.
17.12 Interpretation. The parties each acknowledge that
they and their respective legal counsel have actively participated in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement.
17.13 Specific Performance. Each party agrees that a
breach of any of the terms, conditions, representations or warranties, or other
obligations under this Agreement, may result in irreparable harm to the
non-breaching party, and shall give rise to a right in the non-breaching party
to seek enforcement of this Agreement in a court of equity by a decree of
specific performance. This remedy is intended to be cumulative and in addition
to any other remedy a party may have.
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<PAGE> 47
17.14 Confidentiality. Except as required by law or
judicial or administrative proceedings, including proceedings between the
parties with respect to the transactions contemplated hereby, and then only to
the extent specifically required in any such proceedings, each of the parties
agrees (i) to take any and all action reasonably necessary to preserve the
confidentiality of the terms of this Agreement, and all settlement discussions
and negotiations held prior to the execution of this Agreement, including any
and all oral and written communications exchanged by the parties hereto (or
their legal counsel) as part of such discussions and negotiations, (ii) not to
disclose any confidential or proprietary information ("Confidential
Information") obtained from any other party in connection with the transactions
contemplated hereby, to any individual or entity (other than its directors,
officers, employees, agents and representatives with a need to know such
Confidential Information in order to consummate the transactions contemplated
hereby), and (iii) not to use any Confidential Information for any purpose. If
the parties fail to close the transactions contemplated hereby, each party
agrees to return to the other party or to destroy all Confidential Information
obtained from the other party in its possession upon the written request of the
other party. Notwithstanding anything in this Section 17.14 to the contrary, the
parties acknowledge and agree that (x) Patriot may file a copy of this Agreement
or any part hereof (including the Exhibits and Schedules hereto) with the
Securities and Exchange Commission as a part of any Form 8-K filing of Patriot;
provided, however, that Patriot shall avoid including the Exhibits and Schedules
attached hereto as a part of any such Form 8-K filing if it determines in good
faith that such Exhibits and Schedules are not necessary or appropriate in
connection with such filing and (y) each of Marriott and Patriot may provide a
copy of this Agreement to any party from whom it is obligated to seek to obtain
a consent or approval in connection herewith.
17.15 Dispute Resolution. The parties intend and desire
for the United States District Court for the District of Maryland to have sole
and exclusive jurisdiction to resolve any and all disputes that may arise under
or in connection with this Agreement and the transactions contemplated herein;
provided that nothing in this Section 17.11 shall preclude Patriot from
maintaining the Texas Case referred to in Section 9.2 to the extent such case is
not ultimately dismissed in accordance with Section 9.2.
17.16 Operation of this Agreement. Interstate has
entered into this Agreement solely to facilitate the consummation of the Merger
in accordance with the terms of the Agreement and Plan of Merger dated December
2, 1997. Accordingly, Sections 3 and 4 (except for Section 4.3) of this
Agreement will not impose any obligations or otherwise be binding on Interstate,
Patriot, or Marriott unless and until the Merger is completed in accordance with
the terms of such Agreement and Plan of Merger. In the event that the Merger
does not occur on or prior to the date and time specified in the Agreement and
Plan of Merger, then, as between Interstate and each of the other parties
hereto, Interstate will be restored to the position it had prior to the
execution of this Agreement. Each of Marriott, Patriot and Wyndham acknowledges
and agrees that neither the
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<PAGE> 48
existence of this Agreement, the discussions giving rise thereto nor any event
referred to herein or contemplated hereby will limit or otherwise affect
Interstate's rights under or in respect of the Agreement and Plan of Merger or
otherwise or Marriott's rights with respect to the Franchise Agreements.
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<PAGE> 49
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representatives to execute this Agreement as of the day and year
first written above.
ATTEST: MARRIOTT INTERNATIONAL, INC.
________________________________ By:__________________________(SEAL)
John L. Williams,
Senior Vice President
INTERSTATE HOTELS CORPORATION
________________________________ By:__________________________(SEAL)
J. William Richardson,
Executive Vice President
INTERSTATE HOTELS COMPANY
________________________________ By:__________________________(SEAL)
J. William Richardson,
Executive Vice President
PATRIOT AMERICAN HOSPITALITY, INC.
________________________________ By:__________________________(SEAL)
William W. Evans III
President and Chief Operating
Officer
S-1
<PAGE> 50
WYNDHAM INTERNATIONAL, INC.
________________________________ By:__________________________(SEAL)
William W. Evans III
Executive Vice President
S-2
<PAGE> 51
List Of Exhibits
----------------
<TABLE>
<S> <C>
Exhibit A Exhibit A Hotels
B Exhibit B Hotels
B-1 Form Submanagement Agreement
C Exhibit C Hotels
C-1 Form Amendment to Tyson's Corner Management Agreement
D Exhibit D Hotels
D-1 Form Letter to Third-Party Owners
E-1 Form Newco Charter
E-2 Form Newco Bylaws
F-1 Form IHC II, LLC Operating Agreement
F-2 Form Interstate Hotels, LLC Operating Agreement
G Form Voting Agreement
H Form Owners Agreement
I Hotel Management Structure
J Form Lease between Patriot and Wyndham
K Form Primary Management Agreement between Wyndham and IHC II, LLC
L Form Guarantee
M Patriot Interests in Exhibit B Hotels
N-1 Form Opinion of Goodwin, Procter & Hoar LLP
N-2 Form Opinion of Jones, Day, Reavis & Pogue
O-1 Form Order of Dismissal of Maryland Case
O-2 Form Order of Dismissal of Texas Case
P Form Amendment to Marriott Inn Franchise Agreement
</TABLE>
S-3
<PAGE> 52
List Of Schedules
-----------------
Schedule 2 Special Fee
3.1.4 Liquidated Damages (Exhibit A Hotels)
3.2.7 Forbearance Termination Event Liquidated Damages
(Exhibit B Hotels)
3.3.5 Forbearance Termination Event Liquidated Damages
(Exhibit C Hotels)
4.3.1 Forbearance Termination Event Liquidated Damages
(Exhibit D Hotels)
6.2.6 Required Consents
7.1.3 Settlement Agreement Payments
12.4-B Exhibit B Liquidated Damages
12.4-C Exhibit C Liquidated Damages
12.4-D Exhibit D Liquidated Damages
S-4
<PAGE> 53
EXHIBIT A
Hotels Terminated by Patriot
<TABLE>
<CAPTION>
Hotel Termination Date Brand
----- ---------------- -----
<S> <C> <C>
1. Andover, MA One Year After MHRS
Date of Divestiture
2. Arlington, TX Date of Divestiture MHRS
3. Casa Marina, FL One Year After MHRS
Date of Divestiture
4. Colorado Springs, CO One Year After MHRS
Date of Divestiture
5. Valley Forge, PA One Year After MHRS
Date of Divestiture
6. Reach, FL Date of Divestiture MHRS
7. Roanoke, VA Date of Divestiture MHRS
8. St. Louis, MO One Year After MHRS
Date of Divestiture
9. Syracuse, NY Date of Divestiture MHRS
10. Westborough, MA Date of Divestiture MHRS
</TABLE>
S-5
<PAGE> 54
EXHIBIT B
Hotels Managed by Marriott
<TABLE>
<CAPTION>
Hotel Effective Date Brand
----- -------------- -----
<S> <C> <C>
1. Albany, NY Date of Divestiture MHRS
2. Atlanta North, GA 1 Year after Date of MHRS
Divestiture
3. Conshohocken, PA 1 Year after Date of MHRS
Divestiture
4. Harrisburg, PA 1 Year after Date of MHRS
Divestiture
5. Houston, TX 1 Year after Date of MHRS
Divestiture
6. Indian River Plantation, FL Date of Divestiture MHRS
7. San Diego Mission Valley, CA Date of Divestiture MHRS
8. Minneapolis, MN 1 Year after Date of MHRS
Divestiture
9. Warner Center, CA Date of Divestiture MHRS
10. Pittsburgh Airport, PA Date of Divestiture MHRS
</TABLE>
S-6
<PAGE> 55
EXHIBIT C
Hotels with Contracts Assumed
Hotel Brand
--------------------- -----
1. New Haven Orange, CT CY
2. Tyson's Corner, VA MHRS
3. Troy, MI MHRS
4. Westborough, MA CY
5. St. Louis, MO CY
6. Pittsburgh Airport, PA RI
S-7
<PAGE> 56
EXHIBIT D
Hotels Owned by 3rd Parties
<TABLE>
<CAPTION>
Hotel Brand
----------------------- --------------
<S> <C>
1. Boca Raton, FL MHRS
2. Charlotte Executive Park, NC MHRS
3. Cincinnati, OH* MHRS
4. Ft. Lauderdale North, FL MHRS
5. Laguna Cliffs Dana Point, CA MHRS
6. Manhattan Beach, CA MHRS
7. Memphis, TN MHRS
8. Ontario Airport, CA MHRS
9. Orlando Airport, FL MHRS
10. Pittsburgh City Center, PA MHRS
11. Pittsburgh Green Tree, PA MHRS
12. Providence, RI MHRS
13. San Francisco, CA MHRS
14. Sawgrass, FL MHRS
15. Trumbull, CT MHRS
16. Waterford Oklahoma City, OK MHRS
17. Orlando I Drive, FL* MHRS
18. Moscow, Russia MHRS
19. Albany, NY (CY) CY
20. Burlington, VT (RI) RI
21. Chambersberg, PA (FFI) FFI
22. Colorado Springs, CO (RI) RI
23. Eagan Minneapolis, MN (RI) RI
24. Jackson, MS (FFI) FFI
25. Madison, WI (RI) RI
26. Manhattan, NY (CY) CY
27. Memphis, MS (FFI) FFI
28. Mobile Gulf, AL (CY) CY
29. Oklahoma City, OK (RI) RI
30. Omaha Central NE (RI) RI
31. Princeton, NJ (RI) RI
32. Tinton Falls, NJ (RI) RI
33. Tucson, AZ (RI) RI
34. Vicksburg, MS (FFI) FFI
35. Boise, Idaho RI
36. Portland, Oregon RI
* The parties acknowledge that these hotels will exit the system
without any payments to either party.
</TABLE>
S-8
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 3 to this registration
statement on Form S-1 (Registration Statement No. 333-67065) of our report dated
March 5, 1999, except for the last two paragraphs of Note 8, as to which the
date is March 31, 1999, and Note 18, as to which the date is April 23, 1999, on
our audits of the combined financial statements as of December 31, 1998 and 1997
and for the period from January 1, 1998 to June 1, 1998 and for the period from
June 2, 1998 to December 31, 1998 and for each of the two years in the period
ended December 31, 1997 of Interstate Hotels Management, Inc.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
April 28, 1999
