<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -------- EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File No. 1-12962
GRAND CASINOS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1689535
- ---------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(612) 449-9092
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of August 3, 1998, there were 42,293,145 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 32
<PAGE> 2
GRAND CASINOS, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
PART I. FINANCIAL INFORMATION
----------------------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of 3
June 28, 1998 and December 28, 1997
Consolidated Statements of Earnings 4
for the three months ended June 28, 1998
and June 29, 1997
Consolidated Statements of Earnings 5
for the six months ended June 28, 1998
and June 29, 1997
Consolidated Statements of Cash Flows 6
for the six months ended June 28, 1998
and June 29, 1997
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 14
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
------------------
ITEM 1. Legal Proceedings 22
ITEM 4. Submission of Matters to
a Vote of Security Holders 31
ITEM 5. Other Information 32
ITEM 6. Exhibits and Reports On Form 8-K 33
-2-
<PAGE> 3
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) *
JUNE 28, 1998 DECEMBER 28, 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $92,847 $238,635
Current installments of notes receivable 7,367 6,856
Accounts receivable 21,239 15,644
Deferred income taxes 12,602 13,399
Other current assets 15,751 15,087
- ----------------------------------------------------------------------------------------------------------------
Total Current Assets 149,806 289,621
- ----------------------------------------------------------------------------------------------------------------
Property and Equipment-Net 1,034,020 941,022
- ----------------------------------------------------------------------------------------------------------------
Other Assets:
Cash and cash equivalents-restricted 8,120 4,967
Securities available for sale 15,372 13,110
Notes receivable-less current installments 25,955 26,979
Investments in and notes from unconsolidated affiliates 8,142 8,180
Debt issuance and deferred licensing costs-net 21,625 26,000
Other long-term assets 29,615 23,858
- ----------------------------------------------------------------------------------------------------------------
Total Other Assets 108,829 103,094
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,292,655 $1,333,737
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $9,745 $12,947
Current installments of long-term debt 60 3,509
Current installments of capital lease obligations - 97,376
Accrued interest 5,291 5,817
Accrued payroll and related expenses 25,551 25,555
Income taxes payable 10,180 -
Other accrued expenses 36,582 22,398
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 87,409 167,602
- ----------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt-less current installments 566,481 566,434
Deferred income taxes 97,192 97,085
- ----------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 663,673 663,519
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 751,082 831,121
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
common stock issued and outstanding 42,291 and 41,966
at June 28, 1998 and December 28, 1997, respectively 423 420
Additional paid-in-capital 416,566 413,631
Net unrealized losses on securities available for sale (1,548) (2,947)
Retained earnings 126,132 91,512
- ----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 541,573 502,616
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,292,655 $1,333,737
================================================================================================================
</TABLE>
* FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS
- 3 -
<PAGE> 4
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------
JUNE 28, 1998 JUNE 29, 1997
------------- -------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Casino $121,090 $113,628
Hotel 12,602 9,514
Food and beverage 18,072 16,347
Management fee income 19,717 19,814
Retail and other income 3,606 3,488
- ----------------------------------------------------------------------------------------------------------
Gross Revenues 175,087 162,791
Less: Promotional allowances (12,801) (11,954)
- ----------------------------------------------------------------------------------------------------------
NET REVENUES 162,286 150,837
- ----------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 40,609 39,587
Hotel 4,096 2,291
Food and beverage 9,647 8,534
Other operating expenses 3,258 3,390
Depreciation and amortization 13,948 12,410
Lease expense 5,356 4,676
Selling, general and administrative 48,149 40,993
- ----------------------------------------------------------------------------------------------------------
Total Costs and Expenses 125,063 111,881
- ----------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 37,223 38,956
- ----------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 2,785 2,981
Interest expense (10,118) (11,971)
Other (583) (125)
- ----------------------------------------------------------------------------------------------------------
Total other expense, net (7,916) (9,115)
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes 29,307 29,841
Provision for income taxes 10,567 11,525
- ----------------------------------------------------------------------------------------------------------
Earnings before Extraordinary Charge 18,740 18,316
Extraordinary Charge-Net of Taxes (1,560) -
- ----------------------------------------------------------------------------------------------------------
NET EARNINGS $17,180 $18,316
==========================================================================================================
Basic Earnings per Share before Extraordinary Charge $0.44 $0.44
Basic Loss per Share - Extraordinary Charge ($0.04) $0.00
- ----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.40 $0.44
==========================================================================================================
Diluted Earnings per Share before Extraordinary Charge $0.43 $0.43
Diluted Loss per Share - Extraordinary Charge ($0.04) $0.00
- ----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.39 $0.43
==========================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,136 41,890
==========================================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 43,378 42,782
==========================================================================================================
</TABLE>
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<PAGE> 5
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------------
JUNE 28, 1998 JUNE 29, 1997
------------- -------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Casino $247,272 $222,308
Hotel 22,472 16,576
Food and beverage 35,943 30,952
Management fee income 42,748 38,868
Retail and other income 6,572 6,425
- --------------------------------------------------------------------------------------------------------------
Gross Revenues 355,007 315,129
Less: Promotional allowances (26,256) (22,122)
- --------------------------------------------------------------------------------------------------------------
NET REVENUES 328,751 293,007
- --------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 81,932 78,067
Hotel 7,192 4,110
Food and beverage 18,517 16,519
Other operating expenses 6,159 6,451
Depreciation and amortization 28,011 23,961
Lease expense 10,750 9,181
Selling, general and administrative 102,846 84,899
- --------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 255,407 223,188
- --------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 73,344 69,819
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 6,852 6,694
Interest expense (21,815) (22,617)
Other (888) (313)
- --------------------------------------------------------------------------------------------------------------
Total expense, net (15,851) (16,236)
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 57,493 53,583
Provision for income taxes 21,313 20,686
- --------------------------------------------------------------------------------------------------------------
Earnings before extraordinary charge 36,180 32,897
Extraordinary charge-net of taxes (1,560) -
- --------------------------------------------------------------------------------------------------------------
Net Earnings $34,620 $32,897
==============================================================================================================
Basic Earnings per Share before Extraordinary Charge $0.86 $0.79
Basic Loss per Share - Extraordinary Charge ($0.04) -
- --------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.82 $0.79
==============================================================================================================
Diluted Earnings per Share before Extraordinary Charge $0.84 $0.77
Diluted Loss per Share - Extraordinary Charge ($0.04) -
- --------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.80 $0.77
==============================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,101 41,859
==============================================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 43,229 42,609
==============================================================================================================
</TABLE>
- 5 -
<PAGE> 6
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 28, 1998 JUNE 29, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $34,620 $32,897
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 28,011 23,961
Equity in loss of unconsolidated affiliates 225 200
Deferred income taxes - 1,250
Changes in operating assets and liabilities:
Current assets (6,828) (3,927)
Accounts payable (3,202) (5,641)
Accrued expenses 23,887 (1,106)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 76,713 47,634
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (117,837) (101,590)
Increase in notes receivable (2,728) -
Proceeds from repayment of notes receivable 3,241 3,905
Decrease (increase) in cash and cash equivalents-restricted and other (3,153) 3,626
Increase in other long-term assets (6,510) (3,878)
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (126,987) (97,937)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 2,938 641
Debt issuance costs and deferred financing costs 2,379 (79)
Proceeds from issuance of long-term debt - 45,088
Payments on long-term debt and capital lease obligations (100,831) (10,000)
- -------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (95,514) 35,650
- -------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (145,788) (14,653)
Cash and cash equivalents - beginning of year 238,635 147,254
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $92,847 $132,601
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $30,519 $27,325
Income taxes - 17,301
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
<PAGE> 7
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1998
(UNAUDITED)
NOTE 1 UNAUDITED FINANCIAL STATEMENTS
Grand Casinos, Inc. and its subsidiaries (collectively "the Company")
develops, constructs, and manages land-based and dockside casinos and
related hotel and entertainment facilities. The Company owns and
operates two dockside casinos on the Mississippi Gulf Coast and one
dockside casino in Tunica County, Mississippi, and manages two
Indian-owned casinos in Minnesota (the management contract with Grand
Casino Mille Lacs in Onamia, Minnesota, expired on April 2, 1998) and
two Indian-owned casinos in Louisiana. Related hotel, health spa/salon,
and convention center facilities at Company-owned Grand Casino Gulfport,
located in Gulfport, Mississippi, and hotel and health spa/salon
facilities at Grand Casino Tunica, located in Tunica County,
Mississippi, are currently under construction. In addition, a casino
expansion and a new hotel at Indian-owned Grand Casino Coushatta,
located in Kinder, Louisiana, are currently under construction.
The accompanying unaudited consolidated financial statements include the
accounts of Grand Casinos, Inc. and its wholly-owned and majority-owned
subsidiaries. Investments in unconsolidated affiliates representing
between 20% and 50% of voting stock are accounted for on the equity
method. All material intercompany balances and transactions have been
eliminated in the consolidation.
The consolidated financial statements have been prepared by the Company
in accordance with generally accepted accounting principles for interim
financial information, in accordance with the rules and regulations of
the Securities and Exchange Commission. Pursuant to such rules and
regulations, certain financial information and footnote disclosures
normally included in the consolidated financial statements have been
condensed or omitted. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for
fair presentation have been included.
Operating results for the six months ended June 28, 1998, are not
necessarily indicative of the results that may be expected for the
fiscal year ending January 3, 1999. Operating results for such six
months include management fees from the Company's management of Grand
Casino Mille Lacs. The contract pursuant to which the Company managed
Grand Casinos Mille Lacs expired on April 2, 1998.
The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 28,
1997.
- 7 -
<PAGE> 8
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 ACCOUNTING PRONOUNCEMENTS
The Company adopted FASB Statement No. 130, "Reporting Comprehensive
Income", effective December 29, 1997. Statement No. 130 establishes
standards for reporting and display of comprehensive earnings and its
components in financial statements; however, the adoption of this
Statement had no impact on the Company's net earnings or shareholders'
equity. Statement No. 130 requires minimum pension liability
adjustments, unrealized gains or losses on the company's
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive earnings.
Total comprehensive earnings (loss) for the six months ended June 28,
1998 and June 29, 1997 were $1.4 million and ($1.9) million,
respectively. Differences between comprehensive earnings (loss) for
these periods were due to unrealized holding gains and losses on
securities available for sale.
During April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires companies to expense as
incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. The
Company expects to adopt the Statement effective January 3, 1999. The
effect of the adoption is not expected to be significant. Start-up and
preopening amounts capitalized as of June 28, 1998 totaled $1.2 million.
The Company expects that all such costs will be fully amortized prior to
the end of 1998.
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
statement is effective for fiscal years beginning after December 15,
1998. The statement defines which costs of computer software developed
or obtained for internal use are capital and which costs are expenses.
The effect of adoption is not expected to materially effect the
Company's financial position or results of operation.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. Statement 133 is effective for fiscal years
beginning after June 15, 1999. The Company has not yet quantified the
impacts of adopting Statement 133 on its financial statements and has
not determined the timing of adoption of Statement 133. However, the
statement could increase volatility in earnings and other comprehensive
income.
- 8 -
<PAGE> 9
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 INTEREST COSTS
The Company's policy is to capitalize interest incurred on debt during
the course of qualifying construction projects at Company-owned
facilities. Such interest costs are amortized over the related assets'
estimated useful lives. For the six months ended June 28, 1998 and June
29, 1997, approximately $8.2 million and $3.7 million, respectively, of
interest cost was capitalized.
NOTE 4 NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
June 28, 1998 Dec. 28, 1997
------------- -------------
<S> <C> <C>
Notes from the Coushatta Tribe with
interest at a defined reference rate plus
1% (not to exceed 16%), receivable in
monthly installments through
January 2002 22,235 22,722
Notes from the Tunica-Biloxi Tribe with
interest at a defined reference rate plus
1% (not to exceed 16%), receivable in
monthly installments through June
2001 10,497 10,409
Other, less allowance for doubtful accounts
of $3,050 and $3,050, respectively 590 704
------------- -------------
$33,322 $33,835
Less current installments of notes receivable (7,367) (6,856)
------------- -------------
Notes receivable-less current installments $25,955 $26,979
============= =============
</TABLE>
NOTE 5 LONG-TERM DEBT
On November 30, 1995, the Company completed its public offering of
$450.0 million of eight year 10.125% first mortgage notes due December
1, 2003. The first mortgage notes are secured by substantially all the
assets of Grand Casino Biloxi and Grand Casino Gulfport as of November
30, 1995, Grand Casino Tunica assets included in Phase 1 development as
described in the indenture pursuant to which the first mortgage notes
were issued, capital stock of Stratosphere Corporation owned by the
Company, and certain notes receivable due the Company from Tribes.
- 9 -
<PAGE> 10
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LONG-TERM DEBT (CONTINUED)
The first mortgage notes require semi-annual payments of interest only
on June 1 and December 1 of each year commencing June 1, 1996, and
continuing until December 1, 2003, at which time the entire principal
plus accrued interest is due and payable. The first mortgage notes may
be redeemed at the Company's option, in whole or in part, anytime after
December 1, 1999, at a premium, declining ratably thereafter to par
value on December 1, 2002.
On May 10, 1996, the Company completed a $120 million capital lease
facility through BA Leasing & Capital Corporation. The five-year
capital lease facility, with varying interest rates ranging from 1.75%
to 2.50% over the LIBO Rate, was used to fund the continued development
of the Company's Grand Casino Tunica project, located in northern
Mississippi, just outside of Memphis, Tennessee. Approximately $90
million of the loan was used for furniture, fixtures and equipment for
the 340,000 square foot casino complex. The balance of approximately $30
million was used to construct a 600-room hotel at Grand Casino Tunica.
On March 31, 1998, the Company used cash proceeds received from the
$115.0 million, senior unsecured note offering which closed on October
14, 1997, (described below) to pay off the $94.6 million balance of
principal and interest, remaining under the $120.0 million capital
lease facility. Unamortized debt issuance costs of $1.6 million, net of
tax, were classified as extraordinary charge relating to early
extinguishment of debt.
On September 30, 1997, the Company completed a $100.0 million revolving
loan facility through BA Leasing & Capital Corporation. The five-year
revolving capital lease facility, with interest rates ranging from 1.75%
to 2.50% over the LIBO Rate, will be used for the continued development
of Grand Casino Tunica and Grand Casino Gulfport, as well as other
general corporate purposes. As of June 28, 1998, no advances relating
to this financing had been made.
On October 14, 1997, the Company completed a $115.0 million, 9.0%,
seven-year, senior unsecured note offering due 2004. The majority of the
proceeds from the offering were used to refinance the $120.0 million
capital lease facility (described above) on March 31, 1998. The notes
require semi-annual payments of interest only on April 15 and October 15
of each year commencing April 15, 1998 and continuing until October 15,
2004, at which time the entire principal plus accrued interest is due
and payable.
- 10 -
<PAGE> 11
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LONG-TERM DEBT (CONTINUED)
The notes may be redeemed in whole or in part, anytime after October 15,
2001, at a premium, declining ratably thereafter to par value on October
15, 2003.
NOTE 6 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
As of July 31, 1998, the Company owns approximately 37% of the common
stock issued by Stratosphere Corporation ("Stratosphere"). Stratosphere
and its wholly-owned operating subsidiary developed and operate the
Stratosphere Tower, Hotel and Casino in Las Vegas, Nevada. In January
1997, Stratosphere and its wholly-owned operating subsidiary filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In October 1997, the Company announced that it had not been able to
reach an agreement with holders of a significant portion of
Stratosphere's first mortgage notes for a consensual reorganization of
Stratosphere that would involve the Company's participation. The
Company also announced that it had no intention of participating in any
plan of reorganization for Stratosphere.
A reorganization plan for Stratosphere has been confirmed by the
Bankruptcy Court, but as of June 30, 1998 is not yet effective. The
confirmed reorganization plan provides for cancellation of the
Stratosphere common stock owned by the Company when the reorganization
plan becomes effective.
In March 1995, in connection with Stratosphere's issuance of its first
mortgage notes, the Company entered into a Standby Equity Commitment
Agreement (the "Standby Equity Commitment") between Stratosphere and the
Company.
The Company agreed in the Standby Equity Commitment, subject to the
terms and conditions stated in the Standby Equity Commitment, to
purchase up to $20.0 million of additional equity in Stratosphere during
each of the first three years Stratosphere is operating (as defined in
the Standby Equity Commitment) to the extent Stratosphere's consolidated
cash flow (as defined in the Standby Equity Commitment) during each of
such years does not exceed $50.0 million.
- 11 -
<PAGE> 12
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATOSPHERE CORPORATION (CONTINUED)
Based on provisions of the U.S. Bankruptcy Code that the Company
contends apply to the Standby Equity Commitment, the Company has
asserted that the enforceability of the Standby Equity Commitment is in
question. Both the Official Committee of Noteholders in the
Stratosphere Bankruptcy case (the "Official Committee") and the current
trustee under the indenture pursuant to which Stratosphere issued its
first mortgage notes (the "Trustee") have asserted that the Standby
Equity Commitment is enforceable.
The enforceability of the Standby Equity Commitment is the subject of
litigation to which the Company is a party in (i) the Stratosphere
bankruptcy case (as a result of a motion brought by the Official
Committee), and (ii) the U.S. District Court for the district of Nevada
(as a result of an action brought by the Trustee). In February 1998,
the Bankruptcy Court ruled that the Standby Equity Commitment is not
enforceable in the Stratosphere bankruptcy proceeding as a matter of
law.
The Stratosphere reorganization plan contemplates formation of a new
limited liability company that will own certain alleged claims that
Stratosphere and other parties may have against various other parties,
including the Company and/or officers and/or directors of the Company.
As of July 31, 1998, the Company has not been served with any documents
evidencing the commencement of any legal action based on such claims.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed two loan and security agreements entered into
by the Tunica-Biloxi Tribe of Louisiana for $14.1 million for the
purpose of financing casino equipment, and for $16.5 million for the
purpose of purchasing a hotel and additional casino equipment. The
agreements extend through 1998 and 2000, respectively, and as of June
28, 1998, the amounts outstanding were $1.0 million and $10.1 million,
respectively.
The Company has also guaranteed loan and security agreements entered
into by the Coushatta Tribe of Louisiana for $22.3 million for the
purpose of financing casino equipment. The agreements are for three
years and have various maturity dates through 1998, and as of June 28,
1998, the amounts outstanding were $0.5 million.
- 12 -
<PAGE> 13
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
LOAN GUARANTY AGREEMENTS (CONTINUED)
In addition, on May 1, 1997, the Company guaranteed a loan agreement
entered into by the Coushatta Tribe in the amount of $25.0 million, for
the purpose of constructing a hotel and acquiring additional casino
equipment. The guaranty will remain in effect until the loan is paid.
The loan term is approximately five years. As of June 28, 1998, $11.3
million has been advanced, and is outstanding.
The Company has entered into a master hotel development agreement with
Casino Resource Corporation for the Grand Casino Hinckley Inn adjacent
to Grand Casino Hinckley. The Company has guaranteed the mortgage for
the hotel which had an unpaid principal balance of $2.3 million as of
June 28, 1998. On June 29, 1998, the mortgage was paid in full and the
Company was released from its guaranty.
OTHER
The Company is a defendant in various pending litigation. In
management's opinion, the ultimate outcome of such litigation will not
have a material adverse effect on the results of operations or the
financial position of the Company. See Part II - Item 1. Legal
Proceedings of this Form 10-Q.
NOTE 7 SUBSEQUENT EVENTS
On June 30, 1998, the Company announced that it will separate its
non-Mississippi business (principally its Indian casino management
business) from its Mississippi gaming operations in a tax-free
distribution to shareholders, and simultaneously merge its Mississippi
gaming operations with the gaming operations of Hilton Hotels
Corporation (NYSE:HLT). The transactions are subject to shareholder
and regulatory approvals and are expected to be completed by
year-end 1998.
- 13 -
<PAGE> 14
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
OVERVIEW
The Company develops, constructs and manages land-based and dockside
casinos and related hotel and entertainment facilities in emerging and
established gaming jurisdictions. The Company's revenues are derived
from the Company-owned casinos of Grand Casino Biloxi, Grand Casino
Gulfport, and Grand Casino Tunica, and from management fee income from
Grand Casino Hinckley, Grand Casino Avoyelles, and Grand Casino
Coushatta and, prior to April 2, 1998, Grand Casino Mille Lacs.
Pursuant to the Mille Lacs, Hinckley, Avoyelles, and Coushatta
management contracts, the Company receives a fee based on the net
distributable profits (as defined in the contracts) generated by Grand
Casino Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and
Grand Casino Coushatta. The management agreement for Grand Casino Mille
Lacs expired on April 2, 1998. The Company believes that the management
agreement for Grand Casino Hinckley, which expires in May 1999, will
not be renewed.
The Company commenced operations in August 1990, and opened its
Company-owned casinos, Grand Casino Gulfport, Grand Casino Biloxi and
Grand Casino Tunica in May 1993, January 1994 and June 1996,
respectively.
The Company's limited operating history may not be indicative of the
Company's future performance. In addition, a comparison of results from
year to year may not be meaningful due to the opening of new facilities
during each year.
The Company's growth strategy contemplates expanding existing operations
and establishing additional gaming operations. The successful
implementation of this growth strategy is contingent upon the
satisfaction of various conditions and the occurrence of certain events,
including obtaining governmental approvals and increased competition,
many of which are beyond the control of the Company. The Company expects
that Grand Casino Biloxi and Grand Casino Gulfport may be affected by
the addition of new competition on the Mississippi Gulf Coast.
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<PAGE> 15
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
OVERVIEW (CONTINUED)
On June 30, 1998, the Company announced that it will separate its Indian
casino management business from its Mississippi gaming operations in a
tax-free distribution to shareholders, and simultaneously merge its
Mississippi gaming operations with the gaming operations of Hilton
Hotels Corporation (NYSE:HLT). The transactions are subject to
shareholder and regulatory approvals and are expected to be completed by
year-end 1998.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 28,
1997.
Revenues from owned casinos are calculated in accordance with generally
accepted accounting principles and are presented in a manner consistent
with industry practice. Net distributable profits from Grand Casino
Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and Grand
Casino Coushatta are computed using a modified cash basis of accounting
in accordance with the management contracts. The effect of the use of
the modified cash basis of accounting is to accelerate the write-off of
capital equipment and leased assets, which thereby impacts the timing of
net distributable profits.
Earlier this year, the Louisiana legislature considered various
proposals for state constitutional amendments and/or legislation that
would impose certain taxes, including excise taxes, on certain
activities conducted on Indian reservations. Certain of the proposals
were to become effective after the expiration dates of the existing
compacts between the State of Louisiana and the Indian tribes that own
and operate casinos in the State of Louisiana. None of the proposals
was adopted.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 29
1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $.86 and $.84,
respectively, for the six months ended June 28, 1998 before a $.04
extraordinary charge per share related to early extinguishment of debt.
This compares to basic and diluted earnings of $.79 and $.77 per common
share for the prior year's comparable period.
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<PAGE> 16
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Earnings Per Common Share and Net Earnings (Continued)
Earnings increased $1.7 million to $34.6 million for the six months
ended June 28, 1998 compared to the same period in the prior year. Net
earnings for the six months ended June 28, 1998 includes a $1.6 million,
net of tax, extraordinary charge relating to early extinguishment of
debt.
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $ 247.3 million in gross casino revenue and $65.0 million in
gross hotel, food, beverage, retail and entertainment revenue during the
six months ended June 28, 1998 as compared to $222.3 million in gross
casino revenue and $54.0 million in gross food, beverage, and retail
revenue for the prior year's comparable period. At Grand Casino Tunica,
gross revenues increased $19.1 million for the six months ended June 28,
1998 compared to the same period in the prior year. The increase is
attributable to increased hotel occupancy and average daily rate along
with increased guest counts from a full six months use of the Convention
Center, which opened in July of 1997. Combined gross revenues for Grand
Casino Biloxi and Grand Casino Gulfport increased $16.9 million for the
six months ended June 28, 1998 compared to the same period in the prior
year. The increase in gross revenues is primarily related to the
500-room Biloxi Bayview Hotel, which opened during the first quarter of
1998. Management fees increased $3.8 million to $42.7 million for the
six months ended June 28, 1998 compared to the same period in the prior
year, despite the fact that the Mille Lacs contract expired April 2,
1998.
Costs and Expenses
Total costs and expenses increased $32.2 million from $223.2 million for
the six months ended June 29 1997 to $255.4 million for the six-month
period ended June 28, 1998. Casino expenses were $81.9 million for the
six-month period ended June 28, 1998 compared to $78.1 million for the
comparable period last year. The increase of $3.9 million relates
primarily to additional casino expenses for Grand Casino Tunica, which
had a $13.7 million increase in casino revenues for the six month period
ended June 28, 1998. Food and beverage expenses increased $2.0 million
to $18.5 million for the six-month period ended June 28, 1998.
Selling, general, and administrative expenses increased in the amount of
$17.9 million from $84.9 million for the six months ended June 29, 1997
to $102.8 million for the six months ended June 28, 1998.
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<PAGE> 17
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
Contributing to this increase were increased selling, general, and
administrative expenses at Grand Casino Tunica of $6.0 million from the
six months ended June 29, 1997 to the six months ended June 28, 1998,
relating to the opening of the 600-room hotel and the convention center,
and an increase in employee benefit costs. In addition, corporate
expense increased $10.4 million from the six months ended June 29, 1997
to the six months ended June 28, 1998. This increase is primarily
attributable to reserves relating to the corporate office relocation and
litigation reserves.
Other
Interest income increased slightly from $6.7 million to $6.9 million for
the six months ended June 28, 1998 over the comparable period last year.
In addition, interest expense decreased by $.8 million to $21.8 million
for the six months ended June 28, 1998. The decrease is the result of
additional interest expense relating to the $115.0 million senior
unsecured notes and the capital lease facility which were outstanding
during the first quarter of 1998, offset by an increase in capitalized
interest for the six month period ended June 28, 1998. Capitalized
interest was $8.2 million and $3.7 million for the six months ended June
28, 1998 and June 29 1997, respectively.
THREE MONTHS ENDED JUNE 28, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE
29, 1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $.44 and $.43,
respectively, for the three months ended June 28, 1998 and June 29,
1997. Net earnings decreased $1.1 million from the three months ended
June 29, 1997 to $17.2 million for the three months ended June 28, 1998.
Net earnings for the three months ended June 28, 1998 includes an
extraordinary charge of $1.6 million, net of tax, related to early
extinguishment of debt.
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $121.1 million in gross casino revenue and $34.3 million in
gross hotel, food, beverage, retail, and entertainment revenue during
the three months ended June 28, 1998.
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<PAGE> 18
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Revenues (Continued)
During the same period in the prior year, Grand Casino Biloxi, Grand
Casino Gulfport and Grand Casino Tunica generated $113.6 million in
gross casino revenue and $29.3 million in gross hotel, food, beverage
and retail revenue.
The increase in gross revenues is attributable to increased revenue at
all properties. Grand Casino Tunica's gross revenues increased $4.6
million to $52.0 million, an increase of 9.6%, for the three months
ended June 28, 1998. Contributing to this increase at Grand Casino
Tunica was the Convention Center, which was not open during the second
quarter of 1997, but was open the entire second quarter of 1998. In
addition, other new amenities added in the Tunica market appear to have
increased the overall Tunica market capacity.
Combined gross revenues for Grand Casino Biloxi and Grand Casino
Gulfport increased $7.8 million for the three months ended June 28,
1998, compared to the same period in the prior year. Contributing to
this increase was the opening of a 500-room hotel at Grand Casino Biloxi
in mid-February 1998. Finally, the Company's management fees from
Indian-owned casinos were flat at $19.7 million for the three months
ended June 28, 1998, compared to the same period in the prior year,
despite the expiration of the Grand Casino Mille Lacs contract on April
2, 1998.
Costs and Expenses
Total costs and expenses increased $13.2 million, from $111.9 million
for the three months ended June 29, 1997, to $125.1 million for the
three months ended June 28, 1998. Casino expenses were $40.6 million
for the three-month period ended June 28, 1998, compared to $39.6
million for the comparable period in 1997. This increase of $1.0
million relates to additional operating expenses to produce a $7.5
million increase in casino revenue for such three-month period, compared
to the same period in the prior year. Food and beverage expenses
increased $1.1 million to $9.6 million for the three-month period ended
June 28, 1998.
Selling, general, and administrative expenses increased $7.1 million
from $41.0 million for the three months ended June 29, 1997, to $48.1
million for the three months ended June 28, 1998. Grand Casino Tunica's
selling, general, and administrative expenses increased $3.0 million, as
a result of the opening of the 600-room hotel and the convention center,
and an increase in employee benefit costs.
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<PAGE> 19
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
In addition, combined selling, general, and administrative expenses for
Grand Casino Biloxi and Grand Casino Gulfport were constant as compared
to the prior year. Corporate expenses for the three months ended June
28, 1998 increased $4.1 million from the same period in 1997. The
increase in corporate expenses is primarily related to the relocation of
the corporate headquarters and litigation reserves.
Other
Interest income of $2.8 million for the three months ended June 28, 1998
was flat when compared to the same period for the prior year. Interest
expense decreased by $1.9 million to $10.1 million for the three months
ended June 28, 1998. The decrease is the result of the $115.0 million
senior unsecured notes being outstanding during the three month period
ended June 28, 1998, offset by an increase in capitalized interest for
the same period. Capitalized interest was $4.2 million and $1.3 million
for the three months ended June 28, 1998 and June 29, 1997,
respectively.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At June 28, 1998, the Company had $92.8 million in cash and cash
equivalents. On March 31, 1998, $94.6 million was used to pay off an
existing capital lease facility and related interest resulting in an
extraordinary charge of $.04 per share.
Net cash provided by operating activities totaled $76.7 million for the
three month period ended June 28, 1998, compared with $47.6 million for
the three-month period ended June 29, 1997. During the six-month
periods ended June 28, 1998 and June 29, 1997, the Company's capital
expenditures totaled $117.8 and $101.6 million, respectively. Capital
expenditures related primarily to constructing new 600-room hotels at
Grand Casino Tunica and Grand Casino Gulfport and completion of a new
500-room hotel at Grand Casino Biloxi.
At June 28, 1998, the Company's long-term debt included 10.125% first
mortgage notes due 2003 in the amount of $450.0 million and 9% senior
unsecured notes in the amount of $115.0 million due 2004 (which the
Company incurred in connection with the refinancing of an existing
capital lease facility). The first mortgage notes are redeemable on
December 1, 1999, or thereafter based on a stated premium that
declines ratably to par value.
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<PAGE> 20
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY (CONTINUED)
The senior unsecured notes are redeemable on October 15, 2001, or
thereafter based on a stated premium that declines ratably to par value.
At March 29, 1998, $93.9 million remained outstanding on the capital
lease facility and was classified as a current liability on the March
29, 1998 balance sheet. The balance was paid in full on March 31, 1998
using proceeds from the $115.0 million senior unsecured notes. The
Company also has available a $100.0 million revolving capital lease
facility for continued development of Grand Casino Gulfport and Grand
Casino Tunica. As of June 28, 1998, no advances relating to this
financing had been made.
Pursuant to the Company's covenants related to the 10.125% first
mortgage notes and the 9% senior unsecured notes and to provide funds
for the growth of the Company, no cash dividends are expected to be paid
on common shares in the foreseeable future.
FORWARD-LOOKING STATEMENTS
Certain information included in this Form 10-Q and other materials filed
or to be filed by the Company with the Securities and Exchange
Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contains
statements that are "forward-looking" as defined under the Federal
Private Securities Litigation Reform Act of 1995.
Forward-looking statements are those which include statements regarding
projections, plans and objectives, and future economic performance,
together with statements regarding any assumptions pertaining to such
projections, plans and objectives, and future economic performance.
While these forward-looking statements reflect the best judgment of the
Company, based on information available on the date when such statements
are made, such statements are all subject to risks and uncertainties
that could cause actual results to vary from the forward-looking
statements made. Those variances could be significant.
Such forward-looking statements involve risks and uncertainties that
could significantly affect future results, and accordingly, such results
may differ from those expressed in any forward-looking statements made
by or on behalf of the Company.
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<PAGE> 21
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
FORWARD-LOOKING STATEMENTS (CONTINUED)
These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on
existing management, leverage and debt service (including sensitivity to
fluctuations in interest rates), changes in competitive conditions,
domestic or global economic conditions, changes in federal or state tax
laws or the administration of such laws and changes in gaming laws or
regulations (including the legalization of gaming in certain
jurisdictions). In addition to any specific risks and uncertainties
mentioned or discussed in this Form 10-Q, the risks and uncertainties
discussed in detail in the Company's 1997 Form 10-K provide information
which should be considered in evaluating any of the Company's
forward-looking statements. In addition, you should be aware that the
facts and circumstances which exist when any forward-looking statements
are made and on which those forward-looking statements are based may
significantly change in the future, thereby rendering obsolete the
forward-looking statements on which such facts and circumstances were
based.
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<PAGE> 22
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following descriptions are summaries of the status of each of the
following legal proceedings as of July 31, 1998. More complete and/or
updated information may be obtained by reviewing the court files
pertaining to such proceedings.
COHEN - STATE ACTION
In August 1995, Harvey Cohen brought a legal action in the District
Court for Clark County, Nevada -- Harvey J. Cohen, et al. v.
Stratosphere Corporation, et al. - Case No. A349985 -- against various
defendants, including Grand Casinos Resorts, Inc., a wholly owned
subsidiary of the Company. Cohen alleges securities law violations and
various state law claims in connection with the initial public offering
(the "IPO") for Stratosphere Corporation ("Stratosphere"). Cohen
brought the action as a class action, and alleges that the defendants
deprived the plaintiffs of the opportunity to purchase Stratosphere
common stock in the IPO.
The action was, by agreement of the parties, stayed pending a decision
in a similar action brought by Cohen in 1994 in U.S. District Court for
the District of Nevada. Cohen alleged securities law violations and
various state law claims in the federal action. The federal action was
dismissed by the U.S. District Court, and that dismissal was affirmed by
the U.S. Court of Appeals.
The Clark County action was dismissed in June 1998.
SLOT MACHINE LITIGATION - NEVADA
In April 1994, William H. Poulos brought a legal action in the U.S.
District Court for the Middle District of Florida, Orlando Division --
William H. Poulos, et al. vs. Caesars World, Inc. et al. - Case No.
39-478-CIV-ORL-22 -- in which various parties (including the Company)
alleged to operate casinos or be slot machine manufacturers were named
as defendants. The plaintiff sought to have the action certified as a
class action.
A subsequently filed action -- William Ahearn, et al. vs. Caesars World,
Inc., et al. - Case No. 94-532-CIV-ORL-22 -- made similar allegations
and was consolidated with the Poulos action.
Both actions included claims under the federal Racketeering-Influenced
and Corrupt Organizations Act and under state law, and sought
compensatory and punitive damages.
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<PAGE> 23
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
SLOT MACHINE LITIGATION - NEVADA (CONTINUED)
The plaintiffs claimed that the defendants are involved in a scheme to
induce people to play electronic video poker and slot machines based on
false beliefs regarding how such machines operate and the extent to
which a player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al. vs. Caesars
World, Inc., et al. - Case No. CV-S-95-00923-DWH (RJJ). The plaintiffs'
allegations in the Schreier action were similar to those made by the
plaintiffs in the Poulos and Ahearn actions, except that Schreier
claimed to represent a more precisely defined class of plaintiffs than
Poulos or Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier
actions consolidated under the title William H. Poulos, et al. vs.
Caesars World, Inc., et al. - Case No. CV-S-94-1126 - DAE (RJJ) - (Base
File), and required the plaintiffs to file a consolidated and amended
complaint. In February 1997, the plaintiffs filed a consolidated and
amended complaint.
In March 1997, various defendants (including the Company) filed motions
to dismiss or stay the consolidated action until the plaintiffs
submitted their claims to gaming authorities and those authorities
considered the claims submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and
amended complaint. That complaint has been filed. The Company has filed
its answer to the new complaint.
STRATOSPHERE SECURITIES LITIGATION - FEDERAL
In August 1996, a complaint was filed in the U.S. District Court for the
District of Nevada -- Michael Caesar, et al. v. Stratosphere
Corporation, et al. -- against Stratosphere Corporation and others,
including the Company. The complaint was filed as a class action, and
sought relief on behalf of Stratosphere shareholders who purchased their
stock between December 19, 1995 and July 22, 1996. The complaint
included allegations of misrepresentations, federal securities law
violations and various state law claims.
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<PAGE> 24
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
In August through October 1996, several other nearly identical
complaints were filed by various plaintiffs in the U.S. District Court
for the District of Nevada. The defendants in the actions submitted
motions requesting that all of the actions be consolidated. Those
motions were granted in January 1997, and the consolidated action is
entitled In Re: Stratosphere Corporation Securities Litigation - Master
File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended
complaint naming various defendants, including the Company and certain
current and former officers and directors of the Company. The amended
complaint included claims under federal securities laws and Nevada laws
based on acts alleged to have occurred between December 19, 1995 and
July 26, 1996.
In February 1997, various defendants, including the Company and the
Company's officers and directors named as defendants, submitted motions
to dismiss the amended complaint. Those motions were made on various
grounds, including the Company's claim that the amended complaint failed
to state a valid cause of action against the Company and the Company's
officers and directors.
In May 1997, the court dismissed the amended complaint. The dismissal
order did not allow the plaintiffs to further amend their complaint in
an attempt to state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its dismissal
order, and to allow the plaintiffs to submit a second amended complaint
in an attempt to state a valid cause of action. In July 1997, the court
allowed the plaintiffs to submit a second amended complaint.
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including the Company and the
Company's officers and directors named as defendants, submitted a motion
to dismiss the second amended complaint. The motion was based on
various grounds, including the Company's claim that the second amended
complaint failed to state a valid cause of action against the Company
and those officers and directors.
In April 1998, the court granted the Company's motion to dismiss in
part, and denied the motion in part. Thus, the plaintiffs are pursuing
the claims in the second amended complaint that survived the Company's
motion to dismiss.
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<PAGE> 25
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
In June 1998, the Company submitted a motion for summary judgment
seeking an order that the Company and the Company's officers and
directors are entitled to judgment as a matter of law.
STRATOSPHERE SECURITIES LITIGATION - STATE
In August 1996, a complaint was filed in the District Court for Clark
County, Nevada -- Victor M. Opitz, et al. v. Robert E. Stupak, et al. -
Case No. A363019 -- against various defendants, including the Company.
The complaint seeks relief on behalf of Stratosphere Corporation
shareholders who purchased stock between December 19, 1995 and July 22,
1996. The complaint alleges misrepresentations, state securities law
violations and other state claims.
The Company and certain defendants submitted motions to dismiss or stay
the state court action pending resolution of the federal court action
described above. The court has stayed further proceedings pending the
resolution of In Re: Stratosphere Securities Litigation.
GRAND SECURITIES LITIGATION - FEDERAL
In September and October 1996, two actions were filed by Company
shareholders in the U.S. District Court for the District of Minnesota
against the Company and certain of the Company's current and former
directors and officers.
The complaints allege misrepresentations, federal securities law
violations and other claims in connection with the Stratosphere project.
The actions have been consolidated as In Re: Grand Casinos, Inc.
Securities Litigation - Master File No. 4-96-890 -- and the plaintiffs
filed a consolidated complaint. The defendants submitted a motion to
dismiss the consolidated complaint, based in part on the Company's claim
that the consolidated complaint failed to properly state a cause of
action.
In December 1997, the court granted the Company's motion to dismiss in
part, and denied the motion in part. Thus, the plaintiffs are pursuing
the claims in the consolidated complaint that survived the Company's
motion to dismiss. Discovery has commenced.
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<PAGE> 26
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
DERIVATIVE ACTION
In February 1997, certain shareholders of the Company brought an action
in the Hennepin County, Minnesota District Court -- Lloyd Drilling, et
al. v. Lyle Berman, et al. - Court File No. MC97-002807 -- against
certain current and former officers and directors of the Company. The
plaintiffs alleged that those officers and directors breached certain
fiduciary duties to the shareholders of the Company as a result of
certain transactions involving the Stratosphere project.
Pursuant to Minnesota law, the Company's Board of Directors appointed an
independent special litigation committee to evaluate whether the Company
should pursue the claims made in the action against the officers and
directors. The special litigation committee completed its evaluation in
December 1997, and filed a report with the court recommending that such
claims not be pursued.
The Company provided the defense for the Company's current and former
officers and directors who were defendants in the action pursuant to the
Company's indemnification obligations to such defendants.
In January 1998, the Company submitted a motion for summary judgment
based on the special litigation committee's report. In May 1998, the
court granted that motion, thereby dismissing the plaintiffs' claims.
STRATOSPHERE VACATION CLUB LITIGATION
In late April 1997, the Company and Grand Casinos Resorts, Inc.
("Resorts"), a wholly-owned subsidiary of the Company, were made
defendants in an action in District Court in Clark County, Nevada --
Richard Duncan, et al. vs. Bob and Jane Doe Stupak, et al. - Case No.
A370127. The plaintiffs alleged that the defendants, including the
Company and Resorts, engaged in acts that constitute "consumer fraud"
under Nevada law in connection with vacation packages which the
defendants claim to have purchased from Bob Stupak. The plaintiffs also
alleged "unjust enrichment", breach of contract and other claims under
Nevada law. The plaintiffs sought to pursue their claims as a class
action, and asked for various remedies including compensatory damages
and punitive damages.
In April 1998, the court preliminarily approved a proposed settlement of
the action. The terms and conditions of the settlement are described in
a settlement agreement filed with the court. In June 1998, the court
dismissed the action pursuant to the settlement.
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<PAGE> 27
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the "Committee") in
the Chapter 11 bankruptcy proceeding for Stratosphere Corporation
("Stratosphere") pending in the U.S. Bankruptcy Court for the District
of Nevada (the "Bankruptcy Court") filed a motion by which the Committee
sought Bankruptcy Court approval for assumption (on behalf of
Stratosphere's bankruptcy estate) of the March 1995 Standby Equity
Commitment (the "Standby Equity Commitment") between Stratosphere and
the Company.
In the motion, the Committee sought Bankruptcy Court authorization to
compel the Company to fund up to $60 million in "capital contributions"
to Stratosphere over three years, based on the Committee's claim that
such "contributions" are required by the Standby Equity Commitment.
The Company opposed the Committee's motion. The Company asserted, in
its opposition to the Committee's motion, that the Standby Equity
Commitment is not enforceable in the Stratosphere bankruptcy proceeding
as a matter of law.
The Bankruptcy Court held a preliminary hearing on the Committee's
motion in June 1997, and an evidentiary hearing in February 1998 on the
issues raised by the Committee's motion and the Company's opposition to
that motion.
In February 1998, the Bankruptcy Court denied the Committee's motion,
and determined that the Standby Equity Commitment cannot be assumed (or
enforced) by Stratosphere under applicable bankruptcy law.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the successor trustee (the "Stratosphere Trustee")
under the indenture pursuant to which Stratosphere Corporation issued
Stratosphere Corporation's first mortgage notes filed a complaint in the
U.S. District Court for the District of Nevada - - IBJ Schroeder Bank &
Trust Company, Inc. vs. Grand Casinos, Inc. - File No. CV-S-
97-01252-DWH (RJJ) - - naming the Company as defendant.
The complaint alleges that the Company failed to perform under the
Standby Equity Commitment entered into between Stratosphere Corporation
and the Company in connection with Stratosphere Corporation's issuance
of such first mortgage notes in March 1995.
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<PAGE> 28
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STANDBY EQUITY COMMITMENT LITIGATION (CONTINUED)
The complaint seeks an order compelling specific performance of what the
Committee claims are the Company's obligations under the Standby Equity
Commitment. The Stratosphere Trustee filed the complaint in its alleged
capacity as a third party beneficiary under the Standby Equity
Commitment.
In November 1997, the Company submitted a motion requesting, among other
things, that the court dismiss the complaint. As of June 30, 1998, that
motion is pending.
STRATOSPHERE PREFERENCE CLAIM
In April 1998, Stratosphere served on the Company and Grand Media &
Electronics Distributing, Inc., a wholly-owned subsidiary of the Company
("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking
recovery of certain amounts paid by Stratosphere to (i) the Company as
management fees and for costs and expenses under a management agreement
between Stratosphere and the Company, and (ii) Grand Media for
electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable
by Stratosphere as preferential payments under bankruptcy law.
In May 1998, the Company responded to Stratosphere's complaint. That
response denies that Stratosphere is entitled to recover the amounts
described in the complaint. Discovery has begun.
STRATOSPHERE REORGANIZATION PLAN
The Stratosphere reorganization plan contemplates formation of a new
limited liability company that will own certain alleged claims that
Stratosphere and other parties may have against various other parties,
including the Company and/or officers and/or directors of the Company.
As of June 30, 1998, the Company has not been served with any documents
evidencing the commencement of any legal action based on such claims.
- 28 -
<PAGE> 29
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
TULALIP TRIBES LITIGATION
In 1995, the Company entered into discussions with Seven Arrows, L.L.C.
("Seven Arrows"), a Delaware limited liability company, regarding
possible participation by the Company in a proposed casino resort
development on land in the State of Washington held in trust by the
United States for the Tulalip Tribes. The Company and Seven Arrows
entered into a letter of intent providing for the negotiation of a
revision to the Seven Arrows limited liability company agreement by
which the Company (or a subsidiary of the Company) would become a member
of Seven Arrows. Those negotiations were not completed, and such a
revision to the limited liability agreement was not signed.
During the negotiations, the Company entered into an agreement (the
"Advance Agreement") with Seven Arrows and the Tulalip Tribes. The
Advance Agreement provided for the loan by the Company and Seven Arrows
of certain amounts to the Tulalip Tribes upon the satisfaction of
certain conditions. The Company contends that those conditions were
never satisfied. Neither the Company nor Seven Arrows advanced any
amount under the Advance Agreement.
In April 1996, the Tulalip Tribes brought a legal action in Tulalip
Tribal Court - - Tulalip Tribes of Washington v. Seven Arrows, et al -
Case No. TUL-Ci-4/96-499 - - against Seven Arrows and the Company. The
action seeks various remedies, including (i) a declaration that a lease
and a sublease between the Tulalip Tribes and Seven Arrows for the land
on which the casino resort was proposed has been terminated, (ii)
damages for breach of the lease, the sublease and the Advance Agreement,
and (iii) a declaration that the lease, sublease and Advance Agreement
are void.
Because the Company is not a party to the lease or the sublease, the
Company contends that the only claim against the Company in the tribal
court action is for a breach of the Advance Agreement, that the Company
did not breach the Advance Agreement, and that any damages sustained by
the Tulalip Tribes as a result of any such breach are not material to
the Company.
In May 1996, Seven Arrows and the Company brought a legal action in the
U.S. District Court in the Western District of Washington - - Seven
Arrows, L.L.C., et al v. Tulalip Tribes of Washington - File No.
C96-0709Z - - against the Tulalip Tribes. Seven Arrows seeks in that
action certain remedies against the Tulalip Tribes, including damages,
and the Company seeks an order rescinding the Advance Agreement.
- 29 -
<PAGE> 30
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
TULALIP TRIBES LITIGATION (CONTINUED)
Seven Arrows, the Company and the Tulalip Tribes have, since June 1996,
been engaged in disputes in both the tribal court and the federal court
regarding which court has jurisdiction over the various claims made in
the two legal actions.
As of July 31, 1998, Seven Arrows, the Company and the Tulalip Tribes
are discussing a partial settlement that, if implemented, will resolve
the jurisdiction disputes. During the discussions regarding that
partial settlement, both Seven Arrows and the Tulalip Tribes have stated
that they may pursue claims against the Company that have not yet been
pleaded in either the tribal court action or the federal court action.
The Company does not know the nature or the extent of any such
additional claims and, as of July 31, 1998, has not received any amended
pleading in either action stating any such additional claims. Such
claims, if made, could be in amounts material to the Company.
- 30 -
<PAGE> 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 15, 1998.
(b) Matters voted upon:
(1) Directors elected at meeting:
Affirmative Negative
Votes Votes Abstentions
----- ----- -----------
Lyle Berman 35,867,228 271,154 5,896,119
Thomas J. Brosig 35,868,884 269,498 5,896,119
Morris Goldfarb 35,860,686 277,696 5,896,119
Ronald Kramer 35,870,495 267,885 5,896,119
David L. Rogers 35,872,400 265,982 5,896,119
Neil I. Sell 35,872,803 265,579 5,896,119
Timothy J. Cope 35,875,860 262,522 5,896,119
Joel N. Waller 35,862,696 275,686 5,896,119
- 31 -
<PAGE> 32
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority/Shareholder Proposals
On May 21, 1998 the Securities and Exchange Commission adopted
an amendment to Rule 14a-4, as promulgated under the Securities and
Exchange Act of 1934. The amendment to Rule 14a-4(c)(1) governs
the Company's use of its discretionary proxy voting authority with
respect to a shareholder proposal which the shareholder has not sought
to include in the Company's proxy statement. The new amendment provides
that if a proponent of a proposal fails to notify the company at least
45 days prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of
Shareholders, if the Company is not provided notice of a shareholder
proposal, which the shareholder has not previously sought to
include in the Company's proxy statement, by February 10, 1999, the
management proxies will be allowed to use their discretionary authority
as outlined above.
- 32 -
<PAGE> 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger by and among Hilton Hotels
Corporation, Gaming Co., Inc., Gaming Acquisition Corporation,
GCI Lakes, Inc. and Grand Casinos, Inc. Dated as of June 30,
1998.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.1 Form of Distribution Agreement by and between Grand Casinos,
Inc. and GCI Lakes, Inc.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.2 Form of Employee Benefits and Other Employment Matters
Allocation Agreement By and Between Grand Casinos, Inc.
and GCI Lakes, Inc.
10.3 Form of Intellectual Property License Agreement.
10.4 Form of Tax Allocation and Indemnity Agreement.
10.5 Form of Trust Agreement.
10.6 Form of Pledge and Security Agreement.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarterly period ended
June 28, 1998.
- 33 -
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 5, 1998 GRAND CASINOS, INC.
----------------------------
Registrant
By/ S /THOMAS J. BROSIG
----------------------------
Thomas J. Brosig
President and
Chief Executive Officer
/ S / TIMOTHY J. COPE
----------------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
- 34 -
<PAGE> 35
Exhibit Index
Exhibit No. Document
2.1 Agreement and Plan of Merger by and among Hilton Hotels
Corporation, Gaming Co., Inc., Gaming Acquisition Corporation,
GCI Lakes, Inc. and Grand Casinos, Inc. Dated as of June 30,
1998.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.1 Form of Distribution Agreement by and between Grand Casinos,
Inc. and GCI Lakes, Inc.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.2 Form of Employee Benefits and Other Employment Matters
Allocation Agreement By and Between Grand Casinos, Inc.
and GCI Lakes, Inc.
10.3 Form of Intellectual Property License Agreement.
10.4 Form of Tax Allocation and Indemnity Agreement.
10.5 Form of Trust Agreement.
10.6 Form of Pledge and Security Agreement.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HILTON HOTELS CORPORATION,
GAMING CO., INC.,
GAMING ACQUISITION CORPORATION,
GCI LAKES, INC.
AND
GRAND CASINOS, INC.
-----------------------------------
DATED AS OF JUNE 30, 1998
------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. DEFINITIONS...........................................................................................2
ARTICLE II. THE MERGER..........................................................................................15
Section 2.1. The Merger.................................................................................15
Section 2.2. Effective Time of the Merger...............................................................15
Section 2.3. Closing....................................................................................15
Section 2.4. Effects of the Merger......................................................................15
Section 2.5. Articles of Incorporation and Bylaws of the Surviving Corporation..........................15
Section 2.6. Directors and Officers of the Surviving Corporation........................................16
Section 2.7. Directors of Gaming Co.....................................................................16
ARTICLE III. CONVERSION OF SECURITIES...........................................................................16
Section 3.1. Conversion of Capital Stock................................................................20
Section 3.2. Exchange of Certificates...................................................................23
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF COMPANY...........................................................24
Section 4.1. Organization, Standing and Corporate Power.................................................24
Section 4.2. Subsidiaries...............................................................................24
Section 4.3. Capitalization.............................................................................24
Section 4.4. Authority; Enforceability; No Conflict; Consents...........................................25
Section 4.5. Vote Required; Ownership of Hilton Capital Stock; State Takeover Statutes..................27
Section 4.6. Compliance with Applicable Laws............................................................27
Section 4.7. Company SEC Documents; Undisclosed Liabilities.............................................28
Section 4.8. Absence of Changes or Events...............................................................29
Section 4.9. Litigation.................................................................................29
Section 4.10. Taxes.....................................................................................31
Section 4.11. Employee Benefits.........................................................................31
Section 4.12. Brokers and Intermediaries................................................................33
Section 4.13. Opinion of Financial Advisor..............................................................33
Section 4.14. Title to Properties.......................................................................33
Section 4.15. Indian Gaming and Debt Agreements and Lakes Agreements....................................34
Section 4.16. Insurance.................................................................................34
Section 4.17. Transactions with Company Affiliates......................................................34
Section 4.18. Certain Matters Relating to Stratosphere and the Lakes Group..............................35
Section 4.19. Pro Forma Financial Information of Company Retained Business..............................36
Section 4.20. Capital Expenditure Plan..................................................................36
Section 4.21. Prohibited Payments.......................................................................36
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF HILTON.............................................................36
Section 5.1. Organization, Standing and Corporate Power.................................................36
Section 5.2. Ownership of Gaming Co.....................................................................36
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 5.3. Capitalization.............................................................................37
Section 5.4. Authority; Enforceability; No Conflict; Consents..........................................39
Section 5.5. Ownership of Company Capital Stock.........................................................40
Section 5.6. Compliance with Applicable Laws............................................................40
Section 5.7. Hilton SEC Documents; Undisclosed Liabilities..............................................41
Section 5.8. Absence of Changes or Events...............................................................42
Section 5.9. Litigation.................................................................................42
Section 5.10. Taxes.....................................................................................42
Section 5.11. Employee Benefits.........................................................................43
Section 5.12. Brokers and Intermediaries................................................................43
Section 5.13. Opinion of Financial Advisor..............................................................43
Section 5.14. Pro Forma Financial Information of Gaming Co. Business....................................43
Section 5.15. Transactions with Hilton Affiliates.......................................................44
Section 5.16. Ownership of Merger Sub: No Prior Activities; Assets of Merger Sub........................44
Section 5.17. Prohibited Payments.......................................................................44
ARTICLE VI. COVENANTS RELATING TO CONDUCT OF BUSINESS...........................................................44
Section 6.1. Conduct of Company.........................................................................44
Section 6.2. Conduct of Hilton with Respect to the Gaming Co. Business..................................47
Section 6.3. Access to Information......................................................................49
Section 6.4. Indian Gaming and Other Guarantees Release.................................................49
Section 6.5. Dissenters' Rights.........................................................................49
ARTICLE VII. ADDITIONAL AGREEMENTS..............................................................................50
Section 7.1. Preparation of Form S-4, Forms 10 and the Joint Proxy Statement/Prospectus;
Shareholders Meeting..............................................................50
Section 7.2. Letter of Company's Accountants............................................................51
Section 7.3. Letter of Hilton's Accountants.............................................................52
Section 7.4. Reasonable Best Efforts; Notification......................................................52
Section 7.5. Approval of Gaming Commissions; Regulatory Matters.........................................52
Section 7.6. Supplemental Disclosure....................................................................53
Section 7.7. Announcements..............................................................................53
Section 7.8. No Solicitation............................................................................53
Section 7.9. Indemnification............................................................................54
Section 7.10. Distributions.............................................................................56
Section 7.11. Private Letter Ruling and Tax Opinions....................................................57
Section 7.12. NYSE Listing..............................................................................57
Section 7.13. Affiliate Agreements......................................................................57
Section 7.14. Stock Plans...............................................................................58
Section 7.15. Indian Gaming and Debt Agreements and Lakes Agreements....................................59
Section 7.16. Conveyance Taxes..........................................................................59
Section 7.17. Stockholder or Shareholder Litigation.....................................................59
Section 7.18. Employee Benefits.........................................................................59
Section 7.19. Indentures and Company Notes..............................................................60
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
Section 7.20. Post-Closing Marketing Activities.........................................................60
Section 7.21. Shark Club Ground Lease...................................................................60
ARTICLE VIII. CONDITIONS TO MERGER..............................................................................61
Section 8.1. Conditions to Each Party's Obligation to Effect the Merger.................................61
Section 8.2. Additional Conditions to Obligations of Gaming Co..........................................62
Section 8.3. Additional Conditions to Obligations of Company............................................64
ARTICLE IX. TERMINATION AND AMENDMENT...........................................................................65
Section 9.1. Termination................................................................................65
Section 9.2. Effect of Termination......................................................................66
Section 9.3. Fees and Expenses..........................................................................67
Section 9.4. Amendment..................................................................................67
Section 9.5. Extension; Waiver..........................................................................67
ARTICLE X. MISCELLANEOUS........................................................................................68
Section 10.1. Nonsurvival of Representations, Warranties and Agreements.................................68
Section 10.2. Notices 70
Section 10.3. Interpretation............................................................................68
Section 10.4. Counterparts..............................................................................69
Section 10.5. Entire Agreement; No Third Party Beneficiaries............................................69
Section 10.6. Governing Law.............................................................................69
Section 10.7. Assignment................................................................................70
Section 10.8. Headings; References......................................................................70
Section 10.9. Severability; Enforcement.................................................................70
Section 10.10. Specific Performance.....................................................................70
Section 10.11. Effect of Hilton Distribution............................................................70
Section 10.12. Approvals, Consent and Waivers...........................................................71
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
Exhibit A Form of Hilton Distribution Agreement
Exhibit B Form of Company Distribution Agreement
Exhibit C Form of Affiliate Agreement
Exhibit D Company Retained Business Financial Statements
Exhibit E Lakes Balance Sheet
Exhibit F Company's Capital Expenditure Plans 1998 - 1999
Exhibit G Gaming Co. Business Financial Statements
Exhibit H Form of Opinion of Latham & Watkins
Exhibit I Form of Certificate of Company
Exhibit J Form of Certificate of Gaming Co.
Exhibit K Form of Opinion of Maslon, Edelman, Borman & Brand, LLP
Exhibit L Form of Non-Competition Agreement
Exhibit M Trust Agreement
Exhibit N Pledge and Security Agreement
</TABLE>
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<PAGE> 6
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 30,
1998, is by and among HILTON HOTELS CORPORATION, a Delaware corporation
("Hilton"), GAMING CO., INC., a Delaware corporation and wholly-owned subsidiary
of Hilton ("Gaming Co."), Gaming Acquisition Corporation, a Minnesota
corporation and wholly-owned subsidiary of Gaming Co. ("Merger Sub"), GRAND
CASINOS, INC., a Minnesota corporation ("Company"), and GCI LAKES, INC., a
Minnesota corporation and wholly-owned subsidiary of Company ("Lakes").
WHEREAS, subject to shareholder ratification and certain other conditions
set forth herein, the Board of Directors of Hilton has approved the transactions
described in the Hilton Distribution Agreement attached hereto as Exhibit A (the
"Hilton Distribution Agreement"), pursuant to which (a) all of the operations,
assets and liabilities of Hilton and its Subsidiaries comprising the Gaming
Business (as defined in the Hilton Distribution Agreement) will be contributed
to Gaming Co. and (b) all of the shares of Gaming Co. will be distributed on a
pro rata basis to Hilton's stockholders (the "Hilton Distribution");
WHEREAS, following the Hilton Distribution, Hilton will retain the Hilton
Retained Business, consisting principally of Hilton's existing lodging
operations;
WHEREAS, subject to shareholder ratification and certain other conditions
set forth herein, the Board of Directors of Company has approved certain
transactions, described in the Company Distribution Agreement attached hereto as
Exhibit B (the "Company Distribution Agreement") pursuant to which (a) all of
the operations, assets and liabilities of Company and its Subsidiaries
comprising the Non-Mississippi Business (as defined in the Company Distribution
Agreement) will be contributed to Lakes and (b) all of the shares of Lakes will
be distributed on a pro rata basis to Company's shareholders (the "Company
Distribution," and together with the Hilton Distribution, the "Distributions");
WHEREAS, following the Company Distribution, Company will retain the Company
Retained Business, consisting principally of Company's existing Mississippi
gaming operations;
WHEREAS, the respective Boards of Directors of Hilton and Company have
determined that, following the Distributions, the merger of Merger Sub with and
into Company (the "Merger") with Company as the surviving corporation (the
"Surviving Corporation") would be advantageous and beneficial to their
respective corporations and stockholders, and that the consummation of the
Merger would not be approved unless both Distributions occur prior to the
Merger;
WHEREAS, the consummation of the Distributions is a condition to each of
Hilton's and Company's respective obligations to effect the Merger;
WHEREAS, for federal income tax purposes, it is intended that (a) (i) the
Hilton Distribution shall qualify as a tax-free distribution within the meaning
of Section 355 of the
<PAGE> 7
Internal Revenue Code of 1986, as amended (the "Code") to Hilton and its
stockholders and (ii) the Company Distribution shall qualify as a tax-free
distribution within the meaning of Section 355 of the Code solely with respect
to Company's shareholders and (b) the Merger shall qualify as a reorganization
under Section 368(a) of the Code, and this Agreement is intended to be and is
adopted as a plan of reorganization; and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Hilton's willingness to enter into this
Agreement, certain shareholders of Company have entered into the Shareholder
Support Agreement, pursuant to which such shareholders have agreed, among other
things, to vote all voting securities of Company beneficially owned by them in
favor of approval and adoption of the Agreement and the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
For purposes of this Agreement, the following terms shall have the meanings
set forth or as referenced below:
"Acquisition Proposal" shall have the meaning set forth in Section 7.8(a).
"Affiliate" shall have the meaning set forth in Section 7.13.
"Affiliate Agreement" shall have the meaning set forth in Section 7.13.
"Agreement" shall mean this Agreement and Plan of Merger dated June 30,
1998, including all Exhibits and Schedules hereto.
"Ancillary Agreements" shall have the meaning set forth in Section 7.10(b).
"Applicable Laws" shall mean, with respect to a Person, any and all
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Authority applicable to such Person and such Person's business, properties and
assets.
"Articles of Incorporation" shall mean the Second Amended and Restated
Articles of Incorporation, as amended, of Company.
"Articles of Merger" shall have the meaning set forth in Section 2.2.
- 2 -
<PAGE> 8
"Bankruptcy and Equity Exception" shall mean the effect of any bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and of general
equity principles.
"Certificate of Incorporation" shall mean the Restated Certificate of
Incorporation, as amended, of Hilton.
"Certificates" shall have the meaning set forth in Section 3.2(b).
"Closing" shall have the meaning set forth in Section 2.3.
"Closing Date" shall have the meaning set forth in Section 2.3.
"Code" shall have the meaning set forth in the Recitals.
"Company" shall have the meaning set forth in the Preamble.
"Company Ancillary Agreements" shall have the meaning set forth in Section
7.10(b).
"Company Bylaws" shall mean the Amended and Restated Bylaws of Company.
"Company Capital Plan" shall have the meaning set forth in Section 4.20.
"Company Common Stock" shall have the meaning set forth in Section 3.1.
"Company Closing Schedule" shall have the meaning set forth in Section
3.1(c)(i)(A)(1).
"Company Disclosure Schedule" shall mean the disclosure schedule delivered
by Company to Hilton on or before the date of this Agreement.
"Company Distribution" shall have the meaning set forth in the Recitals.
"Company Distribution Agreement" shall have the meaning set forth in the
Recitals.
"Company Net Equity Value" shall have the meaning set forth in Section
3.1(c)(i)(A).
"Company Notes" shall mean, collectively, the First Mortgage Notes and the
Senior Notes.
"Company Retained Business" means the operations, assets and liabilities to
be retained by Company and its Subsidiaries following the Company Distribution,
as set forth in the Company Distribution Agreement.
"Company Retained Business Balance Sheet" shall have the meaning set forth
in Section 4.19(a).
"Company Retained Business Financial Statements" shall have the meaning set
forth in Section 4.19(a).
- 3 -
<PAGE> 9
"Company Retained Business Income Statement" shall have the meaning set
forth in Section 4.19(a).
"Company SEC Documents" shall have the meaning set forth in Section 4.7(a).
"Company Shareholder Approval" shall have the meaning set forth in Section
4.4(a).
"Company Shareholders Meeting" shall have the meaning set forth in Section
7.1(d).
"Company Stock Options" shall have the meaning set forth in Section 4.3.
"Company Stock Plans" shall have the meaning set forth in Section 4.3.
"Company Valuation Factor" shall have the meaning set forth in Section
3.1(c)(i)(A).
"Company's 1997 10-K" shall mean Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1997.
"Company's 1998 Proxy" shall mean Company's Proxy Statement dated March 27,
1998.
"Confidentiality Agreement" shall have the meaning set forth in Section 6.3.
"Contamination" shall mean the introduction into the environment (including
the land, surface water and ground water underlying or in proximity to any Real
Property and the ambient air above or in the proximity of any Real Property) of
any contaminant, pollutant or other toxic or hazardous substance or waste as
those terms are defined in applicable Environmental Laws (whether or not upon
the Real Property or other property used by Company or any of its Subsidiaries
and whether or not such pollution, when it occurred, violated any Environmental
Law) as a result of any actual or threatened spill, discharge, leak, emission,
escape, injection, dumping or release of any kind of any substance, in violation
of any Environmental Law, or as a result of which Company or any of its
Subsidiaries has or is reasonably likely to become liable to any Person or
entity or by reason of which the Real Property or any other assets of Company or
any of its Subsidiaries is reasonably likely to suffer or be subjected to any
Encumbrance or claim.
"Determination Date" shall have the meaning set forth in Section
3.1(c)(i)(A)(1)(ii).
"Dissenting Shares" shall have the meaning set forth in Section 3.2(k).
"Distribution Agreements" shall mean collectively, the Hilton Distribution
Agreement and the Company Distribution Agreement.
"Distributions" shall have the meaning set forth in the Recitals.
"Effective Time" shall have the meaning set forth in Section 2.2.
"Employee Benefit Plans" shall have the meaning set forth in Section
4.11(a).
- 4 -
<PAGE> 10
"Employee Stock Purchase Plan" shall have the meaning set forth in Section
5.3(a).
"Encumbrances" shall have the meaning set forth in Section 4.2.
"Environmental Laws" shall mean any and all applicable federal, state, local
or foreign statutes, ordinances, rules, regulations, Permits, judgments, orders,
decrees, injunctions or other legally binding authorizations, relating to: (a)
Releases (as defined in 42 U.S.C. Section 9601(22)) or threatened Releases of
Hazardous Material into the environment; or (b) the generation, treatment,
storage, disposal, use, handling, manufacturing, transportation or shipment of,
or exposure to, a Hazardous Material.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall mean, with respect to a Person, any other Person
that, together with such Person, as of the relevant measuring date under ERISA,
is or was required to be treated as a single employer under Section 414 of the
Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning set forth in Section 3.2(a).
"Exchange Fund" shall have the meaning set forth in Section 3.2(a).
"Exchange Ratio" shall have the meaning set forth in Section 3.1(c).
"Extraordinary Acquisition" shall have the meaning set forth in Section 6.2.
"Fairness Opinion" shall have the meaning set forth in Section 4.13.
"First Mortgage Notes" shall mean Company's outstanding $450 million 10.125%
First Mortgage Notes, due December 1, 2003 issued pursuant to the First Mortgage
Notes Indenture.
"First Mortgage Notes Indenture" shall mean that certain Indenture, dated as
of November 30, 1995, as amended from time to time, by and among Company, the
Guarantors (as defined in the First Mortgage Notes Indenture) and Firstar Bank
of Minnesota, N.A., as trustee.
"Foreign Gaming Laws" shall mean the laws, rules and regulations promulgated
by the applicable Governmental Authorities of Australia or Uruguay or any
political subdivisions thereof relating to casino gaming.
"Form 10s" shall mean collectively, the Gaming Co. Form 10 and the Lakes
Form 10.
"Form S-4" shall mean the Registration Statement on Form S-4 to be prepared
and filed in connection with the issuance of Gaming Co. Common Stock in the
Merger.
"GAAP" shall have the meaning set forth in Section 4.7(a).
- 5 -
<PAGE> 11
"Gaming Co." shall have the meaning set forth in the Preamble.
"Gaming Co. Business" means the operations, assets and liabilities of Gaming
Co. as of the time of the Hilton Distribution, as set forth in the Hilton
Distribution Agreement.
"Gaming Co. Business Balance Sheet" shall have the meaning set forth in
Section 5.14.
"Gaming Co. Business Financial Statements" shall have the meaning set forth
in Section 5.14.
"Gaming Co. Business Income Statement" shall have the meaning set forth in
Section 5.14.
"Gaming Co. Closing Schedule" shall have the meaning set forth in Section
3.1(c)(i)(B)(1).
"Gaming Co. Common Stock" shall mean the shares of common stock, par value
$.01 per share, of Gaming Co.
"Gaming Co. Form 10" shall have the meaning set forth in Section 5.4(c).
"Gaming Co. Preferred Stock" shall have the meaning set forth in Section
5.3(b).
"Gaming Co. Rights" shall mean the rights issued under the Gaming Co. Rights
Agreement to purchase shares of Gaming Co. Common Stock.
"Gaming Co. Rights Agreement" shall mean the shareholder rights plan to be
entered into by Gaming Co. prior to the Hilton Distribution, the terms of which
shall be substantially similar to the Hilton shareholder rights plan in effect
at the Effective Time.
"Gaming Co. Valuation Factor" shall have the meaning set forth in Section
3.1(c)(i)(B).
"Gaming Commissions" shall mean, with respect to Company or Hilton, as
applicable, the Louisiana Gaming Control Board, the Minnesota Gambling Control
Board, the Mississippi Gaming Commission, Missouri Gaming Commission, the
National Indian Gaming Commission and any similar commission that regulates or
enforces the Indian Gaming Laws, the Nevada Gaming Commission, the Nevada State
Gaming Control Board, the New Jersey Casino Control Commission, and the Ontario
Gaming Commission, and any similar commission that regulates or enforces the
Foreign Gaming Laws.
"Gaming Laws" shall mean, with respect to Company or Hilton, as applicable,
Foreign Gaming Laws, Indian Gaming Laws, Louisiana Gaming Laws, Minnesota Gaming
Laws, Mississippi Gaming Laws, Missouri Gaming Laws, Nevada Gaming Laws, the New
Jersey Gaming Laws, and Ontario Gaming Laws.
"Governmental Authority" shall mean any court, administrative agency or
commission, Gaming Commission or other governmental authority or
instrumentality.
- 6 -
<PAGE> 12
"Hazardous Material" shall mean (i) hazardous substances (as defined in 42
U.S.C. Section 9601(14)), (ii) petroleum, including crude oil and any fractions
thereof, (iii) natural gas, synthetic gas and any mixtures thereof, (iv)
asbestos and/or asbestos-containing material, (v) PCBs, or materials containing
PCBs in excess of 50 ppm and (vi) any material regulated as a medical waste or
infectious waste.
"Hilton" shall have the meaning set forth in the Preamble.
"Hilton Ancillary Agreements" shall have the meaning set forth in Section
7.10(a).
"Hilton Bylaws" shall mean the Bylaws, as amended, of Hilton.
"Hilton Common Stock" shall mean the shares of common stock, par value $2.50
per share, of Hilton.
"Hilton Convertible Notes" shall have the meaning set forth in Section
5.3(a).
"Hilton Disclosure Schedule" shall mean the disclosure schedule delivered by
Hilton to Company on or before the date of this Agreement.
"Hilton Distribution" shall have the meaning set forth in the Recitals.
"Hilton Distribution Agreement" shall have the meaning set forth in the
Recitals.
"Hilton Preferred Stock" shall have the meaning set forth in Section 5.3(a).
"Hilton Retained Business" means the operations, assets and liabilities to
be retained by Hilton and its subsidiaries following the Hilton Distribution, as
set forth in the Hilton Distribution Agreement.
"Hilton Rights Agreement" shall mean the Rights Agreement, dated as of July
14, 1988 between Hilton and the First National Bank of Chicago, as rights agent,
as amended from time to time.
"Hilton SEC Documents" shall have the meaning set forth in Section 5.7(a).
"Hilton Stock Options" shall have the meaning set forth in Section 5.3(a).
"Hilton's 1997 10-K" shall mean Hilton's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Improvements" shall mean, with respect to any Real Property, all buildings,
fixtures, improvements and facilities located on or attached to such Real
Property or owned or leased by Company or any of its Subsidiaries and used in or
at such Real Property, together with any and
- 7 -
<PAGE> 13
all loading docks, parking lots, garages and other facilities serving any such
buildings and any landscaping and site improvements.
"Incentive Pool Agreement" shall mean that certain Management and Consultant
Incentive Compensation Pool Agreement, dated as of July 31, 1991, by and among
Company, Lyle Berman, S.M. Taube & Co., Inc. and David Anderson, as amended.
"Indemnified Parties" shall have the meaning set forth in Section 7.9(b).
"Indemnified Persons" shall have the meaning set forth in Section 7.9(a).
"Indentures" shall mean, collectively, the First Mortgage Notes Indenture
and the Senior Notes Indenture.
"Indian Gaming Laws" shall mean (a) the Indian Gaming Regulatory Act of 1988
and the rules and regulations promulgated thereunder, (b) any state laws and
regulations governing gaming operations and facilities on Indian land and (c)
any tribal ordinances and regulations governing gaming on land within such
tribe's jurisdiction.
"Indian Gaming and Debt Agreements" shall mean the management agreements,
loan agreements, leases, guaranty agreements, promissory notes and related
collateral and other agreements of the Indian tribes, or of Company or any of
its Subsidiaries, each as amended to date, relating to (a) Grand Casino
Avoyelles, (b) Grand Casino Coushatta, (c) Grand Casino Hinckley and (d) any
other Indian gaming operations, including, without limitation, (i) the
guarantees of Company and Grand Casinos of Louisiana, Inc. - Tunica-Biloxi
pursuant to that certain Guaranty Agreement, dated as of August 7, 1994 in favor
of Pitney Bowes Credit Corporation guaranteeing the debt obligations of the
Tunica-Biloxi Tribe of Louisiana, (ii) the guarantees of Company and Grand
Casinos of Louisiana, Inc. - Coushatta pursuant to that certain Guaranty
Agreement, dated as of January 31, 1995 in favor of PB Funding Corporation,
guaranteeing the lease obligations of the Coushatta Tribe of Louisiana, (iii) to
the extent such guarantees are in effect, the guarantees of Company and Grand
Casinos of Louisiana, Inc. - Coushatta pursuant to that certain Guaranty
Agreement, dated as of January 31, 1995 in favor of Sentry Corporation,
guaranteeing the lease obligations of the Coushatta Tribe of Louisiana, (iv) the
guarantees of Company and Grand Casinos of Louisiana, Inc. - Tunica-Biloxi
pursuant to that certain Commercial Guaranty Agreement, dated as of April 7,
1997 in favor of Cottonport Bank, guaranteeing the loan obligations of the
Tunica-Biloxi Tribe of Louisiana and (v) the guarantees of Company and Grand
Casinos of Louisiana, Inc. - Coushatta pursuant to that certain Commercial
Guaranty Agreement, dated as of May 1, 1997 in favor of Hibernia National Bank,
guaranteeing the loan obligations of the Coushatta Tribe of Louisiana.
"Joint Proxy Statement/Prospectus" shall mean the joint proxy
statement/prospectus to be mailed to shareholders of Company in connection with
the Company Shareholder Approval.
"Lakes" shall have the meaning set forth in the Preamble.
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<PAGE> 14
"Lakes Agreements" shall mean the contracts, loan agreements, leases,
guaranty agreements and related collateral and other agreements relating to the
Lakes Business, under which Company and/or its Subsidiaries has guaranteed
payments or has obligated itself in any way, including, without limitation, (a)
the Shark Club Ground Lease and the assignment of lease and guaranty relating
thereto, (b) the Lease, dated as of June 17, 1996, by and among Grand Casinos
Nevada I, Inc., Cloobeck Enterprises, Brooks Family Trust and Nevada Brooks Cook
and the assignment of lease and guaranty relating thereto, (c) the
Indemnification Agreement, dated as of December 31, 1997, by and between Company
and Lyle Berman relating to New Horizon's Kid Quest, Inc. and Innovative Gaming
Corporation of America, (d) the Office Lease, dated as of February 1, 1996, by
and between Company and Carlson Real Estate Company, (e) the Lease Agreement,
dated as of September 29, 1993, by and between Company and the Estate of James
Cambell, (f) the Lease Agreement, dated as of October 29, 1993, by and between
Company and the Estate of James Campbell and (g) the Joint Contribution
Agreement, dated as of March 16, 1998, by and among Company, Digital Biometrics,
Inc. and Trak 21 Development, L.L.C., and the Membership Control Agreement of
Trak 21 Development, L.L.C. relating thereto, but excluding the Indian Gaming
and Debt Agreements.
"Lakes Balance Sheet" shall have the meaning set forth in Section 4.19(b).
"Lakes Business" means the operations, assets and liabilities of the Lakes
Group as of the time of the Company Distribution, as set forth in the Company
Distribution Agreement.
"Lakes Form 10" shall have the meaning set forth in Section 4.4(c).
"Lakes Group" means Lakes and any Person in which Lakes will own, directly
or indirectly, any interest as of the Company Distribution.
"Louisiana Gaming Laws" shall mean the Louisiana Riverboat Economic
Development and Gaming Control Act and the rules and regulations promulgated
thereunder.
"Louisiana Indian Management Contracts" shall mean the Amended and Restated
Management & Construction Agreement by and between the Coushatta Tribe of
Louisiana and Grand Casinos of Louisiana, Inc. - Coushatta, dated February 25,
1992 and the Amended and Restated Management & Construction Agreement by and
between the Tunica-Biloxi Tribe of Louisiana and Grand Casino of Louisiana, Inc.
- - Tunica-Biloxi, dated November 1, 1992.
"Material Adverse Effect" shall mean, with respect to a Person, any change,
occurrence or effect that is or is reasonably likely to be materially adverse to
the assets, business, results of operations or condition (financial or
otherwise) of such Person and its Subsidiaries, taken as a whole; provided,
however, that with respect to (a) the Gaming Co. Business, a "Material Adverse
Effect" shall mean a Material Adverse Effect with respect to Gaming Co. and its
Subsidiaries, after giving effect to the Hilton Distribution and the other
transactions contemplated by the Hilton Distribution Agreement and (b) with
respect to the Company Retained Business, a "Material Adverse Effect" shall mean
a Material Adverse Effect with respect to Company and its Subsidiaries, after
giving effect to the Company Distribution and the other transactions
- 9 -
<PAGE> 15
contemplated by the Company Distribution Agreement, but taking into account any
contingent liabilities of Company with respect to liabilities assumed by the
Lakes Group.
"MBCA" shall mean the Minnesota Business Corporation Act, as amended from
time to time.
"Merger" shall have the meaning set forth in the Recitals.
"Merger Sub" shall have the meaning set forth in the Preamble.
"Minnesota Gaming Laws" shall mean the Minnesota Lawful Gambling and
Gambling Devices Act and the rules and regulations promulgated thereunder.
"Mississippi Casinos" shall mean Company's existing casino properties
located in Tunica, Mississippi, Gulfport, Mississippi, and Biloxi, Mississippi.
"Mississippi Gaming Laws" shall mean the Mississippi Gaming Control Act and
the rules and regulations promulgated thereunder.
"Missouri Gaming Laws" shall mean the Missouri Gaming Law and the rules and
regulations promulgated thereunder.
"Multiemployer Plans" shall mean employee benefit plans within the meaning
of Section 3(37) of ERISA or Section 4001(a)(3) of ERISA.
"Nevada Gaming Laws" shall mean the Nevada Gaming Control Act and the rules
and regulations promulgated thereunder, the Clark County, Nevada Code and the
rules and regulations promulgated thereunder, the City of Reno, Nevada Code and
other applicable local regulations.
"New Jersey Gaming Laws" shall mean the New Jersey Casino Control Act and
the rules and regulations promulgated thereunder.
"Non-Competition Agreement" shall mean the Non-Competition Agreement to be
entered into by each of Lyle Berman, Thomas J. Brosig and Stanley M. Taube,
substantially in the form attached hereto as Exhibit L.
"Non-Plan Director Option Agreements" shall mean (a) the Option Agreement,
dated as of April 12, 1994, by and between Company and Morris Goldfarb, (b) the
Option Agreement, dated as of July 9, 1992, by and between Company and David L.
Rogers, (c) the Option Agreement, dated as of July 9, 1992, by and between
Company and Joel N. Waller and (d) the Option Agreement, dated as of July 9,
1992, by and between Company and Neil I. Sell, each as amended as of June 15,
1998.
"Ontario Gaming Laws" shall mean the Ontario Gaming Control Act, 1992 and
the rules and regulations promulgated thereunder.
- 10 -
<PAGE> 16
"Other Transactions" shall have the meaning set forth in Section 7.11.
"Outside Date" shall have the meaning set forth in Section 9.1(b).
"Pension Plans" shall mean employee pension benefit plans within the meaning
of Section 3(2) of ERISA.
"Permits" shall mean any and all federal, state, local and foreign
governmental approvals, authorizations, certificates, filings, franchises,
licenses, notices, permits and rights, including all authorizations under
Environmental Laws and Gaming Laws.
"Permitted Encumbrances" shall mean the following title exceptions: (a)
liens with respect to Taxes either not delinquent or being diligently contested
in appropriate proceedings; (b) mechanics', materialmen's or similar statutory
liens for amounts not yet due or being diligently contested in appropriate
proceedings; (c) other exceptions with respect to title to Real Property
(including easements of public record) that do not and would not materially
interfere with the current and intended use of such Real Property; and (d)
Encumbrances related to indebtedness which Encumbrances are disclosed in the
Company SEC Documents filed and publicly available prior to the date of this
Agreement.
"Person" shall mean any individual, corporation, limited liability entity,
partnership, firm, joint venture, association, joint-stock company, trust,
estate, unincorporated organization, governmental or regulatory body or other
entity.
"Pledge and Security Agreement" shall have the meaning set forth in Section
7.9.
"Private Letter Ruling" shall have the meaning set forth in Section
8.1(d)(i).
"Real Property" shall have the meaning set forth in Section 4.14(a).
"Required Credit Support" shall have the meaning set forth in Section 7.9.
"Restricted Activities" shall mean any of the following with respect to the
Mississippi Casinos: (a) billboard advertising; (b) newspaper or other print
media advertising; (c) television or radio advertising; or (d) other similar
indirect marketing activities.
"Restricted Payment" shall mean: (i) the declaration or payment of any
dividend or any distribution on account of Lake's or any of its Subsidiaries'
equity interests; or (ii) the purchase, redemption, defeasance or other
acquisition or retirement for value of any equity interests of Lakes, without
the written consent of Gaming Co. which consent can be given or withheld in
Gaming Co.'s sole and absolute discretion.
"Revolving Credit Facility" shall mean that certain $100 million Capital
Lease Facility, dated as of September 29, 1997, entered into by Company, BA
Leasing & Capital Corporation and the other parties listed therein.
"Rule 145" shall have the meaning set forth in Section 7.13.
- 11 -
<PAGE> 17
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Security Agreements" shall have the meaning set forth in Section 7.9.
"Senior Notes" shall mean Company's outstanding $115 million Series B Senior
Notes due 2004, issued pursuant to the Senior Notes Indenture.
"Senior Notes Indenture" shall mean that certain Series A and Series B 9%
Senior Notes due 2004 Indenture, dated as of October 16, 1997, by and among
Company, the Guarantors (as defined in the Senior Notes Indenture) and Firstar
Bank of Minnesota N.A., as trustee.
"Service" shall mean the United States Internal Revenue Service.
"Settlement Agreement" shall have the meaning set forth in Section 4.10(h).
"Shareholder Support Agreement" shall mean the Shareholder Support
Agreement, dated as of the date hereof, by and among Stanley M. Taube, S.M.
Taube & Co., Inc., a Nevada corporation, Lyle Berman and Neil I. Sell, as
trustee of the Amy Berman Irrevocable Trust dated August 9, 1989, Bradley Berman
Irrevocable Trust dated August 9, 1989, Jessie Lynn Berman Irrevocable Trust
dated August 9, 1989 and Julie Berman Irrevocable Trust dated August 9, 1989.
"Shark Club Ground Lease" shall mean that certain Ground Lease, dated as of
July 1997, by and between Cloobeck Enterprises and MacGregor Income Properties
West I, Inc.
"Stratosphere" shall mean Stratosphere Corporation and any of its
Subsidiaries or Affiliates, including Stratosphere Gaming Corp., and any
business or operations conducted by or related to such entities, including the
Stratosphere Tower, Casino & Hotel and adjoining retail-entertainment center.
"Stratosphere Contracts" shall mean any and all contracts, loan agreements,
leases, guaranty agreements, notes, mortgages, indentures, obligations and other
agreements relating to Stratosphere, including, without limitation, (a) the
Standby Equity Commitment, dated as of March 9, 1995, by and between Company and
Stratosphere, (b) the Limited Guaranty, dated as of March 28, 1997, by Company
for the benefit of each of the beneficiaries listed therein, (c) the
Indemnification Agreement, dated as of May 1, 1997, by and between Company and
Thomas G. Bell, (d) the Indemnification Agreement, dated as of May 1, 1997, by
and between Company and Andrew S. Blumen, (e) the Indemnification Agreement,
dated as of May 1, 1997, by and between Company and Robert A. Maheu, (f) the
Indemnification Agreement, dated as of May 1, 1997, by and between Company and
David R. Wirshing and (g) the indemnification arrangement described in the
Minutes of Company's Board of Directors, dated May 3, 1995, relating to the
indemnification of Lyle Berman, Neil I. Seil and Stanley M. Taube in connection
with their service on the Stratosphere Board of Directors.
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<PAGE> 18
"Stratosphere Litigation" shall mean any and all actions, suits,
proceedings, claims, arbitrations or investigations relating to Stratosphere,
including the Stratosphere shareholders litigation in the U.S. District Court
for the District of Nevada (In re Stratosphere Corporation Securities Litigation
- -- Master File No. CV-5-96-00708PMP), Grand Casinos, Inc. shareholders
litigation in the U.S. District Court for the District of Minnesota (In Re:
Grand Casinos, Inc. Securities Litigation -- Master Filed No. 4-96-890), the
Stratosphere shareholders litigation in the Nevada State Court (Victor M. Opitz,
et. al. v. Robert E. Stupak, et. al. -- Case No. A363019), the Cohen litigation
in the U.S. District Court for the District of Nevada (Henry Cohen, et al. v.
Stratosphere Corporation, et. al.-- Case No. A349985), the Stratosphere vacation
club litigation in the District Court in Clark County, Nevada (Richard Duncan,
et al. v. Bob and Jane Doe Stupak, et al. -- Case No. A370127), the Standby
Equity Commitment litigation in the U.S. District Court for the District of
Nevada (IBJ Schroeder Bank & Trust Company, Inc. v. Grand Casinos, Inc. -- File
No. CV-S-97-01252-DWH), the Stratosphere Noteholder Committee bankruptcy court
action in the U.S. Bankruptcy Court for the District of Nevada, Stratosphere
Plan of Reorganization in the U.S. Bankruptcy Court for the District of Nevada,
the Las Vegas Downtown Redevelopment Agency litigations in the Nevada Supreme
Court (City of Las Vegas Downtown Redevelopment Agency v. Crockett, et al. and
City of Las Vegas Downtown Redevelopment Agency v. Mouldo, et. al.), a
derivative litigation in Hennepin County, Minnesota District Court (Lloyd
Drilling, et al. v. Lyle Berman, et al.--Court File No. MC97-002807), and a
Stratosphere action for Recovery of Preferential Transfers Pursuant to Sections
547 and 550 of the Bankruptcy Court filed with the Bankruptcy Court against
Company, and including any actions, suits, proceedings, claims, arbitrations or
investigations relating to the Litigation LLC described in Stratosphere
Corporation's Restated Second Amended Plan of Reorganization dated February 26,
1998.
"Subsidiary" shall mean, with respect to any Person, (a) each corporation,
partnership, joint venture, limited liability company or other legal entity of
which such Person owns, either directly or indirectly, 50% or more of the stock
or other equity interests the holders of which are generally entitled to vote
for the election of the board of directors or similar governing body of such
corporation, partnership, joint venture or other legal entity and (b) each
partnership or limited liability company in which such Person or another
Subsidiary of such Person is the general partner, managing partner or other
otherwise controls; provided that with respect to Hilton, "Subsidiary" shall
mean only those Subsidiaries that, in addition to satisfying clauses (a) and (b)
above, comprise part of the Gaming Co. Business.
"Subsidiaries Note Pledge" shall mean the pledge of the outstanding capital
stock of certain Subsidiaries of Company which will become part of the Lakes
Group as a result the Company Distribution, pursuant to that certain Company
Security and Pledge Agreement, dated as of November 30, 1995, relating to the
First Mortgage Notes.
"Surviving Corporation" shall have the meaning set forth in the Recitals.
"Tax" or "Taxes" shall mean any federal, state, local or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security,
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<PAGE> 19
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty or addition
thereto, whether disputed or not, and shall include any transferee liability in
respect of Taxes and any liability in respect of Taxes imposed by contract, tax
sharing agreement, tax indemnity agreement or any similar agreement.
"Tax Return" shall mean any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Total Debt of Company" shall have the meaning set forth in Section
3.1(c)(i)(A)(1).
"Total Debt of Gaming Co." shall have the meaning set forth in Section
3.1(c)(i)(B)(1).
"Total Number of Company Shares Outstanding" shall have the meaning set
forth in Section 3.1(c)(i)(A)(4).
"Total Number of Gaming Co. Shares Outstanding" shall have the meaning set
forth in Section 3.1(c)(i)(B)(4).
"Transaction Costs" shall mean any and all costs and expenses which are
incurred (or which are reasonably expected to be incurred) by the parties hereto
in connection with the consummation of the transactions contemplated by this
Agreement and the Distribution Agreements.
"Transaction Documents" means, collectively, this Agreement, the
Distribution Agreements, the Ancillary Agreements, the Shareholder Support
Agreement, the Trust Agreement and the Pledge and Security Agreement.
"Transferred Assets" shall have the meaning set forth in Section 7.9(d).
"Trust Agreement" shall have the meaning set forth in Section 7.9.
"Unrestricted Cash" shall mean, with respect to any Person, as of any date
of determination, the total amount of cash and cash equivalents of such Person
as of such date of determination, less the Working Capital Cash of such Person
as of such date of determination.
"Working Capital Cash" shall mean, as of any date of determination, with
respect to Company and its Subsidiaries, $15 million and, with respect to Gaming
Co. and its Subsidiaries, the total amount of Gaming Field Cash (as defined in
the Hilton Distribution Agreement) as of such date of determination.
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<PAGE> 20
ARTICLE II.
THE MERGER
Section 2.1. The Merger. Upon the terms and subject to the provisions
of this Agreement, and in accordance with the MBCA, Merger Sub will merge with
and into Company at the Effective Time. Following the Merger, the separate
corporate existence of Merger Sub shall cease and Company shall continue as the
Surviving Corporation and shall succeed to and assume all the rights and
obligations of Merger Sub in accordance with the MBCA.
Section 2.2. Effective Time of the Merger. Subject to the provisions
of this Agreement, articles of merger in such form as is required by the
relevant provisions of the MBCA (the "Articles of Merger") shall be duly
prepared, executed and acknowledged and thereafter delivered to the Secretary of
State of the State of Minnesota for filing, as provided in the MBCA, as early as
practicable on the Closing Date. The Merger shall become effective immediately
after the Distributions and upon the filing of the Articles of Merger with the
Secretary of State of the State of Minnesota or at such time thereafter as
provided in the Articles of Merger (the "Effective Time").
Section 2.3. Closing. The closing of the Merger (the "Closing") will
take place at 10:00 a.m., California time, on a date to be specified by the
parties, which shall be no later than the second business day after satisfaction
or, if permissible, waiver of the conditions set forth in Section 8.1 (the
"Closing Date"), at the offices of Latham & Watkins, 633 West Fifth Street,
Suite 4000, Los Angeles, California 90071, unless another date, place or time is
agreed to in writing by the parties hereto.
Section 2.4. Effects of the Merger. The Merger shall have the effects
set forth in the MBCA. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all properties, rights, privileges,
powers and franchises of Merger Sub and Company shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Merger Sub and Company
shall become the debts, liabilities and duties of the Surviving Corporation.
Section 2.5. Articles of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time, the Articles of Incorporation and Company
Bylaws, as in effect immediately prior to the Effective Time, shall be the
articles of incorporation and bylaws, respectively, of the Surviving
Corporation, in each case until duly amended in accordance with Applicable Law.
Section 2.6. Directors and Officers of the Surviving Corporation. The
directors of Merger Sub immediately prior to the Effective Time shall be the
initial directors of the Surviving Corporation, each to hold office in
accordance with the articles of incorporation and bylaws of the Surviving
Corporation and until his or her successor is duly elected and qualified. The
officers of Merger Sub immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, each to hold office in accordance
with the articles of incorporation and bylaws of the Surviving Corporation and
until his or her successor is duly appointed and qualified.
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<PAGE> 21
Section 2.7. Directors of Gaming Co. At the Effective Time, Gaming Co.
shall take all action necessary to increase the size of its Board of Directors
by one member and to elect Lyle Berman as a director of Gaming Co. and in the
event of his incapacity to so serve, another person selected by the Board of
Directors of Company (as constituted prior to the Effective Time); provided that
such other Person is not an employee of the Surviving Corporation and is
reasonably acceptable to Gaming Co.
ARTICLE III.
CONVERSION OF SECURITIES
Section 3.1. Conversion of Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of any of the parties
hereto or the holders of any shares of Common Stock, par value $.01 per share,
of Company (the "Company Common Stock"):
(a) Capital Stock of Merger Sub. Each share of the capital stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
remain an issued and outstanding share of the same class of capital stock of the
Surviving Corporation.
(b) Cancellation of Treasury Stock and Gaming Co. Owned Stock. All
shares of Company Common Stock that are owned by Company or any wholly-owned
Subsidiary of Company (but not any Employee Benefit Plans of Company or any of
its Subsidiaries) and any shares of Company Common Stock owned by Gaming Co. or
any wholly-owned Subsidiary of Gaming Co. shall be canceled and retired and
shall cease to exist and no stock of Company or any other consideration shall be
delivered in exchange therefor.
(c) Conversion of Company Stock.
(i) Subject to Section 3.2(e), each issued and outstanding share of
Company Common Stock (other than shares to be canceled in accordance with
Section 3.1(b) and Dissenting Shares (as defined in Section 3.2(k)) shall be
converted into the right to receive the number of shares of Gaming Co. Common
Stock equal to the Company Valuation Factor divided by the Gaming Co. Valuation
Factor, rounded to the fourth decimal (the "Exchange Ratio").
(A) For purposes of the foregoing, the "Company Valuation
Factor" shall be equal to (1) $1,200,000,000 minus the dollar amount of the
Total Debt of Company (the resulting difference being referred to as the
"Company Net Equity Value"), divided by (2) the Total Number of Company Shares
Outstanding; provided, however, that if the Company Net Equity Value is less
than $617,600,000 but more than $585,100,000, then it shall be deemed to be
equal to $617,600,000; and provided, further, however, that if the Company Net
Equity Value is less than $585,100,000, then Hilton shall be entitled to
terminate this Agreement pursuant to Section 9.1(i).
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<PAGE> 22
(1) For purposes of the foregoing, the "Total Debt of
Company" shall be (x) determined as of the earlier of (i) the Closing Date and
(ii) December 31, 1998 (the earlier of such dates, the "Determination Date") and
(y) equal to the total indebtedness for borrowed money (both long-term and
current maturities) of Company and its Subsidiaries as of the Determination
Date, plus the increase (if any) between (A) total current liabilities
(excluding (i) maturities of long-term indebtedness, (ii) payables relating to
unfunded expenditures under the Company Capital Plan, (iii) amounts accrued for
performance bonuses (but including amounts accrued for retention and relocation
bonuses) and (iv) liabilities that constitute Transaction Costs) of Company and
its Subsidiaries as of the Determination Date and (B) the total current
liabilities (excluding (i) maturities of long-term indebtedness, (ii) payables
relating to unfunded expenditures under the Company Capital Plan, (iii) amounts
accrued for performance bonuses (but including amounts accrued for retention and
relocation bonuses) and (iv) liabilities that constitute Transaction Costs) of
Company and its Subsidiaries on a pro forma basis at December 28, 1997, plus the
total amount of 1998 capital expenditures under the Company Capital Plan that
remain unfunded as of the Determination Date (excluding up to $25 million in
Lady Luck-Biloxi acquisition and improvement costs and any additional capital
expenditures approved in writing by Hilton pursuant to Section 6.1), plus that
percentage of the total Transaction Costs that is equal to Company's
shareholders' pro forma ownership of Gaming Co. determined pursuant to the
foregoing formula as of the Determination Date but without giving effect to the
aggregate Transaction Costs, less (i) the total amount of Unrestricted Cash of
Company and its Subsidiaries as of the Determination Date, (ii) $8 million and
(iii) so long as Company has not consummated any sale, transfer or other
disposition involving its Gulfport headquarters prior to the Determination Date,
an amount equal to the sum of (X) the 1998 increase in book value of Company's
Gulfport headquarters plus (Y) the dollar value of any depreciation expense
accrued by Company in connection therewith from and after December 27, 1997 and
through the Determination Date. The elements of the Total Debt of Company and
its Subsidiaries shall be as set on a "Company Closing Schedule" to be prepared
and finally determined as set forth in clause (2) below.
(2) No later than the 10th business day before the day that
Company and Hilton reasonably estimate to be the Closing Date, Company shall
deliver the Company Closing Schedule to Hilton, together with all supporting
documentation reasonably necessary to Hilton's review and verification of the
Company Closing Schedule. The Company Closing Schedule shall set forth all of
the elements of the Total Debt of Company, as set forth in clause (1) above. In
the event the Determination Date is prior to December 31, 1998, the elements of
the Total Debt of Company set forth on the Company Closing Schedule shall
reflect Company's best estimates of the applicable amounts as of the Closing
Date, based on actual amounts as of the most recent month-end for which a
Company balance sheet is available (but in no event shall such balance sheet be
as of a date more than 60 days prior to the Closing Date), rolled forward to the
Closing Date based on reasonable assumptions and methodologies; and the details
of such assumptions and roll-forward methodologies shall be clearly stated in
the supporting materials delivered to Hilton. In the event that the
Determination Date is December 31, 1998, then the Company Closing Schedule shall
to the greatest extent possible reflect the actual amounts as of such date and
shall utilize estimates only to the extent necessary under the circumstances. In
each case, the elements of the Total Debt of Company shall be (i) set
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forth in accordance with generally accepted accounting principles, applied on a
basis consistent with that used by Company in preparing the Company Retained
Business Balance Sheet and (ii) pro forma for the Company Distribution (i.e.,
shall reflect the elements of the Total Debt of Company as if the Company
Distribution had already occurred). The Company Closing Schedule shall be
accompanied by a certification of Company's chief financial officer that the
Company Closing Schedule has been prepared in accordance with the requirements
of this Section 3.1(c)(i)(A)(2). Unless Hilton, within five business days after
receipt of such schedule, notifies Company that it objects to any elements of
the Company Closing Schedule, specifying the basis for any such objection, the
amounts set forth on such schedule shall be binding upon the parties hereto for
purposes of calculating the Exchange Ratio. If Hilton does make an objection in
the manner specified above, then Company and Hilton shall use all reasonable
efforts to resolve such objection as promptly as possible. If Company and Hilton
are unable to resolve such objections within two business days after such
notification has been given by Hilton, the controversy shall be referred to the
Manhattan, New York office of Arthur Andersen LLP (or another nationally
recognized accounting firm reasonably acceptable to the parties hereto) for a
final determination thereof, which determination shall be made as promptly as
practicable. Such determination shall be binding upon the parties hereto for
purposes of calculating the Exchange Ratio, absent manifest error.
(3) Upon delivery of the Company Closing Schedule, Company
shall provide to Hilton and its representatives such access to records,
workpapers and other documents, and to the personnel involved in preparation of
the Company Closing Schedule, as Hilton shall reasonably request for purposes of
reviewing and verifying the Company Closing Schedule.
(4) For purposes of the foregoing, the "Total Number of
Company Shares Outstanding" is equal to 42,293,145, plus any additional shares
of Company Common Stock issued in accordance with the terms of Section 6.1 after
the date hereof and prior to the Effective Time (excluding any such issuances
relating to exercises or conversions of Company Stock Options (as defined in
Section 4.3)).
(B) Subject to the last paragraph of Section 6.2, for purposes
of the foregoing, the "Gaming Co. Valuation Factor" shall be equal to (1)
$6,024,600,000 minus the dollar amount of the Total Debt of Gaming Co., divided
by (2) the Total Number of Gaming Co. Shares Outstanding.
(1) For purposes of the foregoing, the "Total Debt of
Gaming Co." shall be (x) determined as of the Determination Date and (y) equal
to the total indebtedness for borrowed money (both long-term and current
maturities) of Gaming Co. and its Subsidiaries as of the Determination Date,
plus the increase (if any) between (A) total current liabilities (excluding (i)
maturities of long-term indebtedness, (ii) payables relating to unfunded
expenditures relating to Gaming Co.'s Paris Casino-Resort, (iii) amounts accrued
for performance bonuses (but including amounts accrued for retention and
relocation bonuses) and (iv) liabilities that constitute Transaction Costs) of
Gaming Co. and its Subsidiaries as of the Determination Date and (B) the total
current liabilities (excluding (i) maturities of long-term
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<PAGE> 24
indebtedness, (ii) payables relating to unfunded expenditures relating to Gaming
Co.'s Paris Casino-Resort, (iii) amounts accrued for performance bonuses (but
including amounts accrued for retention and relocation bonuses) and (iv)
liabilities that constitute Transaction Costs) of Gaming Co. and its
Subsidiaries on a pro forma basis at December 31, 1997, plus the total amount of
capital expenditures that remain unfunded with respect to Gaming Co.'s Paris
Casino-Resort as of the Determination Date (excluding any additional capital
expenditures approved in writing by Company), plus that percentage of the total
Transaction Costs that is equal to 100% minus that percentage that is equal to
Company's shareholders' pro forma ownership of Gaming Co. determined pursuant to
the foregoing formula as of the Determination Date but without giving effect to
the aggregate Transaction Costs, less the total amount of Unrestricted Cash of
Gaming Co. and its Subsidiaries as of the Determination Date. The elements of
the Total Debt of Gaming Co. and its Subsidiaries shall be as set on a "Gaming
Co. Closing Schedule" to be prepared and finally determined as set forth in
clause (2) below.
(2) No later than the 10th business day before the day that
Company and Hilton reasonably estimate to be the Closing Date, Hilton shall
deliver the Gaming Co. Closing Schedule to Company, together with all supporting
documentation reasonably necessary to Company's review and verification of the
Gaming Co. Closing Schedule. The Gaming Co. Closing Schedule shall set forth all
of the elements of the Total Debt of Gaming Co., as set forth in clause (1)
above. In the event the Determination Date is prior to December 31, 1998, the
elements of the Total Debt of Gaming Co. set forth on the Gaming Co. Closing
Schedule shall reflect Gaming Co.'s best estimates of the applicable amounts as
of the Closing Date, based on actual amounts as of the most recent month-end for
which a Gaming Co. balance sheet is available (but in no event shall such
balance sheet be as of a date more than 60 days prior to the Closing Date),
rolled forward to the Closing Date based on reasonable assumptions and
methodologies; and the details of such assumptions and roll-forward
methodologies shall be clearly stated in the supporting materials delivered to
Company. In the event that the Determination Date is December 31, 1998, then the
Gaming Co. Closing Schedule shall to the greatest extent possible reflect the
actual amounts as of such date and shall utilize estimates only to the extent
necessary under the circumstances. In each case, the elements of the Total Debt
of Gaming Co. shall be (i) set forth in accordance with generally accepted
accounting principles, applied on a basis consistent with those used by Hilton
in preparing the Gaming Co. Business Balance Sheet and (ii) pro forma for the
Hilton Distribution (i.e., shall reflect the elements of the Total Debt of
Gaming Co. as if the Hilton Distribution had already occurred). The Gaming Co.
Closing Schedule shall be accompanied by a certification of Gaming Co.'s chief
financial officer that the Gaming Co. Closing Schedule has been prepared in
accordance with the requirements of this Section 3.1(c)(i)(B)(2). Unless
Company, within five business days after receipt of such schedule, notifies
Hilton that it objects to any elements of the Gaming Co. Closing Schedule,
specifying the basis for any such objection, the amounts set forth on such
schedule shall be binding upon the parties hereto for purposes of calculating
the Exchange Ratio. If Company does make an objection in the manner specified
above, then Hilton and Company shall use all reasonable efforts to resolve such
objection as promptly as possible. If Hilton and Company are unable to resolve
such objections within two business days after such notification has been given
by Company, the controversy shall be referred to the Manhattan, New York office
of Arthur Andersen LLP (or another nationally recognized accounting firm
reasonably acceptable to the
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<PAGE> 25
parties hereto) for a final determination thereof, which determination shall be
made as promptly as practicable. Such determination shall be binding upon the
parties hereto for purposes of calculating the Exchange Ratio, absent manifest
error.
(3) Upon delivery of the Gaming Co. Closing Schedule,
Hilton shall provide to Company and its representatives such access to records,
workpapers and other documents, and to the personnel involved in preparation of
the Gaming Co. Closing Schedule, as Company shall reasonably request for
purposes of reviewing and verifying the Gaming Co. Closing Schedule.
(4) For purposes of the foregoing, the "Total Number of
Gaming Co. Shares Outstanding" is equal to 260,450,202, plus any additional
shares of Gaming Co. Common Stock issued in accordance with the terms of Section
6.2 after the date hereof and prior to the Effective Time (excluding any such
issuances relating to exercises or conversions of Hilton Preferred Stock or
Hilton Stock Options (as defined in Section 5.3) or Gaming Co. options in
substitution thereof, and excluding any such issuances pursuant to the Employee
Stock Purchase Plan.
(ii) If, between the date of this Agreement and the Effective
Time, the outstanding shares of Company Common Stock or Gaming Co. Common Stock
shall have been changed into a different number of shares or a different
class, by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, or in the event
that Gaming Co. shares are distributed to Hilton Stockholders in the Hilton
Distribution on less than a 1 for 1 basis (a "non-equal distribution"), the
Exchange Ratio correspondingly shall be appropriately adjusted to reflect such
stock dividend, subdivision, reclassification, recapitalization, split,
combination, exchange of shares or non-equal distribution.
(iii) All such shares of Company Common Stock, when so converted,
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right to
receive the shares of Gaming Co. Common Stock and any cash in lieu of fractional
shares of Gaming Co. Common Stock to be issued or paid in consideration therefor
upon the surrender of such certificate in accordance with Section 3.2, and any
dividends or other distributions to which such holder is entitled pursuant to
Section 3.2(c), in each case without interest.
(iv) Pursuant to the Gaming Co. Rights Agreement, one Gaming Co.
Right will be attached to each share of Gaming Co. Common Stock issued upon
conversion of Company Common Stock in accordance with this Section 3.1(c) and
all references in this Agreement to Gaming Co. Common Stock shall be deemed to
include the Gaming Co. Rights.
Section 3.2. Exchange of Certificates. The procedures for exchanging
shares of Company Common Stock for Gaming Co. Common Stock pursuant to
the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Gaming Co. shall
deposit with a bank or trust company designated by it and reasonably acceptable
to Company (the "Exchange
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<PAGE> 26
Agent"), for the benefit of the holders of shares of Company Common Stock
outstanding immediately prior to the Effective Time, for exchange in accordance
with this Section 3.2, through the Exchange Agent, certificates representing the
shares of Gaming Co. Common Stock issuable pursuant to Section 3.1 in exchange
for outstanding shares of Company Common Stock (such shares of Gaming Co. Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the "Certificates"),
which shares were converted pursuant to Section 3.1 into the right to receive
shares of Gaming Co. Common Stock, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Gaming Co. and
Company may reasonably specify) and (ii) instructions for effecting the
surrender of the Certificates in exchange for certificates representing shares
of Gaming Co. Common Stock (plus cash in lieu of fractional shares, if any, of
Gaming Co. Common Stock as provided below). Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Gaming Co. and reasonably acceptable to Company, together with such
letter of transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Gaming Co. Common Stock which such holder has the right to
receive pursuant to the provisions of this Article III, and the Certificate so
surrendered shall immediately be canceled. In the event of a transfer of
ownership of Company Common Stock prior to the Effective Time which is not
registered in the transfer records of Company, a certificate representing the
proper number of shares of Gaming Co. Common Stock may be issued to a transferee
if the Certificate representing such Company Common Stock is presented to the
Exchange Agent accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. After the Effective Time, each outstanding Certificate which theretofore
represented shares of Company Common Stock shall represent only the right to
receive shares of Gaming Co. Common Stock (and cash in lieu of fractional
shares, if any) pursuant to the terms hereof and shall not be deemed to evidence
ownership of the number of shares of Gaming Co. Common Stock into which such
shares of Company Common Stock were converted until the Certificate therefor
shall have been surrendered in accordance with this Section 3.2.
(c) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Gaming Co. Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the shares
of Gaming Co. Common Stock the holder thereof is entitled to receive in exchange
therefor and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to subsection (e) below until the holder of record of such
Certificate surrenders such Certificate. Subject to the effect of Applicable
Laws, following surrender of any such Certificate there shall be paid to the
record holder of the certificates representing whole shares of Gaming Co. Common
Stock issued in exchange therefor, without interest, (i) at the
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<PAGE> 27
time of such surrender, the amount of any cash payable in lieu of a fractional
share of Gaming Co. Common Stock to which such holder is entitled pursuant to
subsection (e) below and the amount of dividends or other distributions with a
record date after the Effective Time previously paid with respect to such whole
shares of Gaming Co. Common Stock and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Gaming Co. Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares
of Gaming Co. Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms hereof (and any cash paid pursuant to
subsection (c) or (e) of this Section 3.2) shall be deemed to have been issued
in full satisfaction of all rights pertaining to the shares of Company Common
Stock theretofore represented by such Certificates, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by Company on such shares of Company Common Stock in accordance
with the terms of this Agreement (to the extent permitted under Section 6.1) or
prior to the date hereof and which remain unpaid at the time of such surrender;
and from and after the Effective Time there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of Company Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation or Gaming Co. for any reason, such Certificates shall be
canceled and exchanged as provided in this Section 3.2.
(e) No Fractional Shares. No certificate or scrip representing
fractional shares of Gaming Co. Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any other rights of a stockholder of
Gaming Co. Notwithstanding any other provision of this Agreement, each holder of
shares of Company Common Stock outstanding immediately prior to the Effective
Time exchanged pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of Gaming Co. Common Stock (after taking into
account all Certificates held by such holder) shall receive, in lieu thereof,
cash (without interest) in an amount equal to such fractional part of a share of
Gaming Co. Common Stock multiplied by the per share closing sales price of
Gaming Co. Common Stock (as reported on the New York Stock Exchange Composite
Tape) on the first day of trading of Gaming Co. Common Stock on the NYSE after
the Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the shareholders of Company for 180 days after
the Effective Time shall be delivered to Gaming Co. upon demand, and any
shareholder of Company who has not previously complied with this Section 3.2
shall thereafter look only to Gaming Co. for payment of such shareholder's claim
for Gaming Co. Common Stock, any cash in lieu of fractional shares of Gaming Co.
Common Stock and any dividends or distributions with respect to Gaming Co.
Common Stock.
(g) No Liability. Neither Hilton, Gaming Co. nor Company shall be
liable to any holder of shares of Company Common Stock for any shares of Gaming
Co. Common Stock (or
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<PAGE> 28
dividends or distributions with respect thereto) or cash in lieu of fractional
shares delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(h) Withholding Rights. Gaming Co. and the Surviving Corporation
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock such amounts as it is required to deduct and withhold with respect to such
consideration under the Code or any provision of federal, state, local or
foreign tax law. To the extent that amounts are so withheld by Gaming Co. or the
Surviving Corporation, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of the shares of Company
Common Stock in respect of which such deduction and withholding was made.
(i) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Gaming Co. or the Surviving Corporation, the posting by such Person of a bond in
such reasonable amount as Gaming Co. or the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Gaming Co. Common Stock and any cash in lieu
of fractional shares and unpaid dividends and distributions on shares of Gaming
Co. Common Stock deliverable in respect thereof pursuant to this Agreement.
(j) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any Affiliate of Company shall not be
exchanged until Gaming Co. has received an Affiliate Agreement from such
Affiliate.
(k) Dissenting Shares. Any shares of Common Stock held by a holder
who dissents from the Merger and becomes entitled to obtain payment for the
value of such Common Stock pursuant to the applicable provisions of Minnesota
law shall be herein called "Dissenting Shares." Any Dissenting Shares shall not,
after the Effective Time, be entitled to vote for any purpose or receive any
dividends or other distributions and shall not be converted into Gaming Co.
Common Stock; provided, however, that the Common Stock held by a dissenting
shareholder who subsequently withdraws a demand for payment, fails to comply
fully with the requirements of Minnesota law, or otherwise fails to establish
the right of such shareholder to be paid the value of such shareholder's shares
under Minnesota law shall be deemed to be have been converted into Gaming Co.
Common Stock pursuant to the terms and conditions referred to above.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Hilton that the statements contained in
this Article IV are true and correct, except as set forth in the Company
Disclosure Schedule. The Company Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered
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<PAGE> 29
and lettered paragraphs contained in this Article IV, and the disclosure in any
paragraph shall not qualify other paragraphs in this Article IV unless such
disclosure is specifically referred to in such other paragraphs.
Section 4.1. Organization, Standing and Corporate Power. Each of
Company and its Subsidiaries is a corporation, limited liability entity or
partnership duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated or
organized and has the requisite corporate, limited liability company or
partnership power and authority to carry on its business as now being conducted.
Each of Company and its Subsidiaries is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualifications
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed would not, individually or in the aggregate, have a
Material Adverse Effect with respect to Company or the Company Retained
Business. Company has made available to Hilton complete and correct copies of
its Articles of Incorporation and Company Bylaws and the comparable charter or
organizational documents of its Subsidiaries, in each case, as amended to the
date of this Agreement.
Section 4.2. Subsidiaries. The Company Disclosure Schedule sets forth
all the Subsidiaries of Company and each other Person in which Company owns,
directly or indirectly, any interest. All the outstanding shares of capital
stock or other equity interests of each Subsidiary of Company are duly
authorized, validly issued, fully paid and non-assessable and are owned by
Company, by another wholly-owned Subsidiary of Company or by Company and another
wholly-owned Subsidiary of Company, free and clear of any and all mortgages,
security interests, liens, claims, pledges, restrictions, leases, title
exceptions, rights of others, charges or other encumbrances ("Encumbrances").
Subject to compliance with applicable Gaming Laws, the respective articles of
incorporation and bylaws or other organizational documents of Company's
Subsidiaries do not contain any provision limiting or otherwise restricting the
ability of Gaming Co., following the Effective Time, from controlling such
Subsidiaries on the same basis as Company.
Section 4.3. Capitalization. The authorized capital stock of Company
consists of 100,000,000 shares of Common Stock, $.01 par value per share. As of
June 17, 1998, (i) 42,293,145 shares of Company Common Stock were issued and
outstanding, all of which are validly issued, fully paid and nonassessable, (ii)
1,788 shares of Company Common Stock were owned by Company and held in street
name by Company, (iii) 100,000 shares of Company Common Stock were reserved for
issuance pursuant to that certain stock purchase warrant issued to the Corporate
Commission of the Mille Lacs Band of Ojibwe Indians, (iv) 4,224,108 shares of
Company Common Stock were reserved for issuance upon exercise of outstanding
options to purchase shares of Company Common Stock under Company's 1991 Stock
Option and Compensation Plan, (v) 150,000 shares of Company Common Stock were
reserved for issuance upon exercise of outstanding options to purchase shares of
Company Common Stock under Company's Director Option Plan and (vi) 151,500
shares of Company Common Stock were reserved for issuance upon exercise of
outstanding options to purchase Shares of Company Common Stock under Company's
Non-Plan Director Option Agreements (collectively, the plans
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<PAGE> 30
or agreements described in clauses (iv) and (vi), the "Company Stock Plans" and
the options issued thereunder are referred to as the "Company Stock Options").
Except as set forth above, as of June 17, 1998, no shares of capital stock or
other voting or equity securities of Company were issued, reserved for issuance
or outstanding. No change in such capitalization has occurred between June 17,
1998 and the date of this Agreement other than the issuance of Common Stock upon
the exercise of Company Stock Options. There are no other outstanding
contractual rights the value of which is derived from the financial performance
of Company or the value of shares of Company Common Stock. All outstanding
shares of capital stock of Company are, and all shares which may be issued as
contemplated by this Agreement will be, when issued, duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights. As of
the date of this Agreement, there are no bonds, debentures, notes or other
indebtedness of Company or any other Person having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters on which shareholders of Company may vote. Except as set forth
above, as of the date of this Agreement, there are no outstanding securities,
options, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which Company or any of its Subsidiaries is a party,
or by which any of them is bound, obligating Company or any of its Subsidiaries
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting or equity securities of Company or any
of its Subsidiaries or obligating Company or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. Other than redemptions,
purchases and other acquisitions required by applicable provisions under Gaming
Laws or similar provisions contained in the terms of the capital stock of
Company or any of its Subsidiaries, as of the date of this Agreement, there are
not any outstanding contractual obligations of Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Company or any of its Subsidiaries. As of the time of the Company
Distribution, (i) the issued and outstanding shares of common stock of Lakes
will be equal to the shares of Company Common Stock that are then issued and
outstanding, (ii) Lakes will have issued options as described in the Company
Distribution Agreement and (iii) all outstanding shares of capital stock of
Lakes will be duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights.
Section 4.4. Authority; Enforceability; No Conflict; Consents.
(a) Each of Company and Lakes has the requisite corporate power and
authority to enter into each of the Transaction Documents to which it is a party
and to consummate the transactions contemplated thereby, subject to, with
respect to the Merger, the approval of this Agreement and the Merger by the
affirmative vote of the holders of at least a majority of the voting power of
all shares of Company Common Stock entitled to vote (the "Company Shareholder
Approval") and, with respect to the Company Distribution, the declaration of the
Company Distribution by Company's Board of Directors and the ratification of the
Company Distribution by the affirmative vote of holders of at least a majority
of the outstanding shares of Company Common Stock. The execution and delivery by
each of Company and Lakes of each of the Transaction Documents to which it is a
party and the consummation by each of Company and Lakes of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
on the part of Company and Lakes, subject to, with respect to the Merger, the
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<PAGE> 31
Company Shareholder Approval and, with respect to the Company Distribution, the
declaration of the Company Distribution by Company's Board of Directors and the
ratification of the Company Distribution by the affirmative vote of holders of
at least a majority of the outstanding shares of Company Common Stock. Each of
the Transaction Documents to which it is a party (other than the Company
Distribution Agreement and the Company Ancillary Agreements) has been duly
executed and delivered by each of Company and Lakes and constitutes the valid
and binding obligation of Company and Lakes (as applicable), enforceable in
accordance with its terms, subject to the Bankruptcy and Equity Exception. Prior
to the Company Distribution, the Company Distribution Agreement and the Company
Ancillary Agreements will be duly executed and delivered by each of Company and
Lakes and upon such execution and delivery, will constitute the valid and
binding obligations of each of Company and Lakes, enforceable against each of
them in accordance with its terms, subject to the Bankruptcy and Equity
Exception.
(b) The execution and delivery by each of Company and Lakes of each of the
Transaction Documents to which it is a party does not, and the consummation of
the transactions contemplated thereby will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or cause loss of a material benefit under, or result in the
creation or maturation of any lien, liability or purchase right upon any of the
properties or assets of Company or any of its Subsidiaries under, (i) the
Articles of Incorporation or Company Bylaws or the comparable charter or
organizational documents of its Subsidiaries, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Company or any of its
Subsidiaries or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in Section 4.4(c), any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Company or any of its Subsidiaries or their respective properties or assets,
other than, in the case of clauses (ii) or (iii), any such conflicts,
violations, defaults, rights, liabilities or liens that would not, individually
or in the aggregate, (x) have a Material Adverse Effect with respect to Company
or the Company Retained Business, (y) impair, in any material respect, the
ability of Company or Lakes to perform its obligations under each of the
Transaction Documents to which it is a party or (z) prevent or significantly
delay the consummation of any of the transactions contemplated by the
Transaction Documents.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Authority is required by Company or
any of its Subsidiaries in connection with the execution and delivery of each of
the Transaction Documents to which Company is a party or the consummation of the
transactions contemplated thereby, except for (i) the filing of a pre-merger
notification and report form under the HSR Act, (ii) the filing with the SEC of
(x) the Joint Proxy Statement/Prospectus Prospectus and the Form S-4 and the
obtaining of any related orders as may be so required, (y) a registration
statement on Form 10 (the "Lakes Form 10") under the Exchange Act relating to
the equity securities of Lakes, and (z) such reports and filings under Section
13 and Section 16 of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated by this Agreement, (iii) the filing
of Articles of Merger with the Minnesota Secretary of State, (iv) the filing of
notices with and the approval by (A) the Mississippi Gaming Commission under the
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Mississippi Gaming Laws, (B) the Minnesota Gambling Control Board under the
Minnesota Gaming Laws, (C) the Louisiana Gaming Control Board under the
Louisiana Gaming Laws and (D) the National Indian Gaming Commission and any
other appropriate Governmental Authorities as may be required under the Indian
Gaming Laws, (v) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required by any applicable
state securities or "blue sky" laws and (vi) such other consents, approvals,
orders, authorizations, registrations, declarations and filings which, if not
obtained or made, would not, individually or in the aggregate: (1) have a
Material Adverse Effect with respect to Company or the Company Retained
Business; (2) impair, in any material respect, the ability of Company or Lakes
to perform its obligations under the Transaction Documents to which it is a
party; or (3) prevent or significantly delay the consummation of the
transactions contemplated by the Transaction Documents.
Section 4.5. Vote Required; Ownership of Hilton Capital Stock; State
Takeover Statutes.
(a) The Company Shareholder Approval is the only vote of the holders
of any class or series of Company's capital stock necessary to approve the
Transaction Documents to which Company is a party and the transactions
contemplated thereunder.
(b) Neither Company nor any of its Subsidiaries beneficially owns,
either directly or indirectly, any shares of Hilton capital stock.
(c) The Board of Directors of Company has taken all actions necessary
under the MBCA, including approving the transactions contemplated by the
Agreement and each of the Transaction Documents to which Company is a party, to
ensure that Section 302A.673 of the MBCA applicable to a "business combination"
does not, and will not, apply to the transactions contemplated hereunder and
thereunder. The restrictions contained in Section 302A.671 of the MBCA
applicable to "control share acquisitions" will not apply to the authorization,
execution, delivery and performance of this Agreement or each of the Transaction
Documents by Company to which it is a party or the consummation of the Merger by
Company. No other "fair price," "moratorium," or other similar anti-takeover
statute or regulation is applicable to Company or (by reason of Company's
participation therein) the Merger or the other transactions contemplated by this
Agreement or the other Transaction Documents to which it is a party.
Section 4.6. Compliance with Applicable Laws.
(a) Each of Company and its Subsidiaries has in effect all Permits
necessary for it to own, lease or operate its properties and assets and to carry
on its business as now conducted, other than such Permits the absence of which
would not, individually or in the aggregate, have a Material Adverse Effect with
respect to Company or the Company Retained Business, and there has occurred no
default under any such Permit other than such defaults which, individually or in
the aggregate, would not have a Material Adverse Effect with respect to Company
or the Company Retained Business. Company and its Subsidiaries are in compliance
with all Applicable Laws, except for such noncompliance which, individually or
in the aggregate, would not have Material Adverse Effect with respect to Company
or the Company Retained Business.
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(b) Each of Company and its Subsidiaries is, and has been, and each
entity formerly owned by Company or its Subsidiaries, while so owned, was in
compliance in all respects with all applicable Environmental Laws, except for
such noncompliance which, individually or in the aggregate, would not have
Material Adverse Effect with respect to Company or the Company Retained
Business.
(c) During the period of ownership or operation by Company and its
Subsidiaries of any of their owned or leased properties, there has been no
Release of Hazardous Material in, on, under or affecting such properties and
none of Company or its Subsidiaries has disposed of any Hazardous Material or
any other substance in a manner that has led to, or could reasonably be
anticipated to lead to, a Release except in each case for those which are not,
individually or in the aggregate, reasonably likely to have a Material Adverse
Effect with respect to Company or the Company Retained Business.
Section 4.7. Company SEC Documents; Undisclosed Liabilities.
(a) Each of Company and its Subsidiaries has filed all required
reports, registration statements, proxy statements, forms and other documents
with the SEC since January 1, 1995 (as such documents since the time of their
filing have been amended or supplemented, collectively, the "Company SEC
Documents"). As of their respective dates, (i) the Company SEC Documents
(including any financial statements filed as a part thereof or incorporated by
reference therein) complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as applicable, and the
rules and regulations of the SEC promulgated thereunder applicable to such
Company SEC Documents and (ii) none of the Company SEC Documents contained at
the time they were filed or declared effective any untrue statement of a
material fact or omitted at the time they were filed or declared effective to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which they were
made, not misleading. At their respective dates, the financial statements of
Company included in the Company SEC Documents complied as to form in all
material respects with the applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented (subject, in the case of unaudited
financial statements, to normal, year-end audit adjustments) the consolidated
financial position of Company and its consolidated Subsidiaries as of and at the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended.
(b) Except as disclosed in the Company SEC Documents filed and
publicly available prior to the date of this Agreement and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice since March 29, 1998, Company and its Subsidiaries
do not have any indebtedness, obligations or liabilities of any kind (whether
accrued, absolute, contingent or otherwise) (i) required by GAAP to be reflected
on a consolidated balance sheet of Company and its consolidated Subsidiaries or
in the notes, exhibits or schedules thereto or (ii) which reasonably could be
expected to have a Material Adverse Effect
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with respect to Company or the Company Retained Business. Except as set forth
under the "Legal Proceedings" section of Company's 1997 10-K, neither Company
nor any of its Subsidiaries have any indebtedness, obligation or liabilities of
any kind (whether accrued, absolute, contingent or otherwise) relating to
Stratosphere or Stratosphere's assets, liabilities, operations or businesses.
Except for liabilities and obligations incurred in the ordinary course of
business, consistent with past practices since March 29, 1998, neither Company
nor any of its Subsidiaries have any indebtedness, obligation or liabilities of
any kind (whether accrued, absolute, contingent or otherwise) relating to the
Lakes Group or its assets, liabilities, operations or businesses (i) required by
GAAP to be reflected on a consolidated balance sheet of Lakes and its
consolidated Subsidiaries or in the notes, exhibits or schedules thereto
(assuming the Company Distribution had been effected) or (ii) which reasonably
could be expected to have a Material Adverse Effect with respect to Lakes or the
Lakes Business.
Section 4.8. Absence of Changes or Events. Except as disclosed in the
Company SEC Documents filed and publicly available prior to the date hereof, and
except for the Company Distribution and the other transactions contemplated by
the Company Distribution Agreement, (a) since December 31, 1997, there has not
been any change or occurrence which resulted in or is reasonably likely to have
a Material Adverse Effect with respect to the Company Retained Business and (b)
from December 31, 1997 to the date of this Agreement, Company and its
Subsidiaries have conducted the Company Retained Business only in the ordinary
course and there has not been (i) any declaration, setting aside or payment of
any dividend or other distribution with respect to the capital stock of Company,
(ii) any issuance of any shares of Company Common Stock or other capital stock
of Company or any securities convertible into or exchangeable or exercisable for
capital stock of Company that is not reflected in Section 4.3, (iii) any split,
combination or reclassification of any of the capital stock of Company or any
issuance or the authorization of any issuance of any other securities in respect
of, in lieu of or in substitution for shares of capital stock of Company, (iv)
(x) any granting by Company or any of its Subsidiaries to any director or
officer of Company or any of its Subsidiaries of any increase in compensation,
(y) any granting by Company or any of its Subsidiaries to any such Person of any
increase in severance or termination pay, or (z) except for employment,
severance or termination arrangements in the ordinary course of business
consistent with past practice with employees other than any officer of Company
or any of its Subsidiaries, any entry by Company or any of its Subsidiaries into
any employment, severance or termination agreement with any such Person, (v) any
acquisition of or commitment to purchase or build any property or project
involving an expenditure in excess of $2 million in the aggregate, except to the
extent reflected in the Company's Capital Expenditure Plan attached hereto as
Exhibit F or as set forth on the Company Disclosure Schedule, (vi) any damage,
destruction or loss that has or reasonably could be expected to have a Material
Adverse Effect with respect to Company or the Company Retained Business or (vii)
any change in accounting methods, principles or practices by Company materially
affecting its assets, liabilities or business, except insofar as may have been
required by a change in GAAP.
Section 4.9. Litigation. Except as described in the Company SEC
Documents filed and publicly available prior to the date hereof, there is no
action, suit or proceeding, claim, arbitration or investigation pending or, to
the knowledge of Company, threatened against Company or any
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<PAGE> 35
of its Subsidiaries or any member of the Lakes Group that, individually or in
the aggregate, could reasonably be expected to (a) have a Material Adverse
Effect with respect to Company or the Company Retained Business or (b) prevent
or significantly delay the consummation of the transactions contemplated by the
Transaction Documents. Except as disclosed in the Company SEC Documents filed
and publicly available prior to the date hereof, there is no judgment, order,
injunction or decree of any Governmental Authority outstanding against Company
or any of its Subsidiaries or any member of the Lake Group that, individually or
in the aggregate, could reasonably be expected to have any effect referred to in
the foregoing clauses (a) and (b).
Section 4.10. Taxes.
(a) Company and each of its Subsidiaries, and each affiliated group
(within the meaning of Section 1504 of the Code) of which Company or any of its
Subsidiaries is or has ever been a member, has timely filed all federal income
Tax Returns and all other material Tax Returns required to be filed by them. All
such Tax Returns are complete and correct in all material respects. Company and
each of its Subsidiaries has paid (or Company has paid on its Subsidiaries'
behalf) all Taxes shown as due on such Tax Returns. The most recent consolidated
financial statements contained in Company SEC Documents reflect an adequate
reserve for all Taxes payable by Company and its Subsidiaries for all taxable
periods and portions thereof through the date of such financial statements.
(b) No material deficiencies for any Taxes have been proposed,
asserted or assessed against Company or any of its Subsidiaries that have not
been fully paid or adequately provided for in the appropriate financial
statements of Company and its Subsidiaries, no requests for waivers of the time
to assess any Taxes are pending, and none of Company or any of its Subsidiaries
has waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to a Tax assessment or deficiency. There is no
dispute or claim concerning any material Tax Liability of any of Company and its
Subsidiaries either (i) claimed or raised by any authority in writing or (ii) as
to which any of the officers or employees responsible for Tax matters of any of
Company and its Subsidiaries has knowledge based upon personal contact with any
agent of such authority. The statute of limitations for the federal income Tax
Returns of Company and each of its Subsidiaries consolidated in such Tax Returns
have expired for all years through July 31, 1992.
(c) No material liens for Taxes exist with respect to any assets or
properties of Company or any of its Subsidiaries, except for statutory liens for
Taxes not yet due.
(d) Except as contemplated by the Company Distribution Agreement,
none of Company or any of its Subsidiaries is a party to or is bound by any tax
sharing agreement, tax indemnity obligation or similar agreement, arrangement or
practice with respect to Taxes (including any advance pricing agreement, closing
agreement or other agreement relating to Taxes with any taxing authority).
(e) None of Company or any of its Subsidiaries has taken or agreed to
take any action that would prevent (i) the Merger from constituting a
reorganization qualifying under the provisions of Section 368(a)(1)(B) of the
Code or (ii) the Company Distribution from
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<PAGE> 36
constituting a tax-free transaction, solely with respect to Company's
shareholders, within the meaning of Section 355 of the Code.
(f) There is not any employment, severance or termination agreement
or other compensation arrangement or employee benefit plan (as defined in
Section 3(3) of ERISA) currently in effect which provides for the payment of any
amount (whether in cash or property or the vesting of property) as a result of
any of the transactions contemplated by the Transaction Documents to any
employee, officer or director of Company or any of its affiliates who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) that would be characterized as an "excess parachute
payment" (as such term is defined in Section 280G(b)(1) of the Code).
(g) Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes.
(h) There are no federal, state, local or foreign audits or other
administrative proceedings or court proceedings presently pending with regard to
any federal or state, local or foreign Taxes or Tax Returns of Company or its
Subsidiaries and neither Company nor any of its Subsidiaries has received a
written notice of any pending audit or proceeding. To the Company's knowledge,
Company has settled the audit of its federal Tax Return relating to the
depreciation of its dockside casinos. The terms of such settlement are set forth
on the Company Disclosure Schedule (the "Settlement Agreement").
(i) Neither Company nor any of its Subsidiaries has agreed to or is
required to make any adjustments under Section 481(a) of the Code.
(j) Neither Company nor any of its Subsidiaries has, with regard to
any assets or property held or acquired by any of them, filed a consent to the
application of Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by Company or any of its
Subsidiaries.
(k) No property owned by Company or any of its Subsidiaries: (i) is
property required to be treated as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986;
(ii) constitutes "tax exempt use property" within the meaning of Section
168(h)(1) of the Code; or (iii) is tax exempt bond financed property within the
meaning of Section 168(g) of the Code.
Section 4.11. Employee Benefits.
(a) The Company Disclosure Schedule lists all employee benefit plans
(as defined in Section 3(3) of ERISA) and all other employee benefit plans,
agreements, contracts or other benefit arrangements, including executive
compensation and directors' benefit plans, and payroll practices which Company,
any ERISA Affiliate of Company or any of its Subsidiaries maintains,
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contributes to or has any obligation to or liability for (collectively, the
"Employee Benefit Plans").
(b) With respect to each Employee Benefit Plan, Company has made
available to Hilton a true and correct copy of (i) the most recent annual report
(Form 5500) filed with the Service, (ii) such Employee Benefit Plan and all
amendments thereto, (iii) each trust agreement and group annuity contract, if
any, and all amendments thereto relating to such Employee Benefit Plan, (iv) the
most recent actuarial report or valuation relating to any such Employee Benefit
Plan subject to Title IV of ERISA, (v) the most recent determination letter with
respect to any such Employee Benefit Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code and (vi) the most recent
summary plan descriptions.
(c) As of the date hereof, (i) all material payments required to be
made by or under any Employee Benefit Plan, any related trusts, or any related
collective bargaining agreement have been made or are being processed in
accordance with normal operating procedures, and except as set forth in
Company's financial statements, all material amounts required to be reflected
thereon have been properly accrued to date as liabilities under or with respect
to each Employee Benefit Plan for the current year; (ii) Company and its
Subsidiaries have performed all material obligations required to be performed by
them under any Employee Benefit Plan; (iii) the Employee Benefit Plans have been
administered in material compliance with their terms and the requirements of
ERISA, the Code and other Applicable Laws; (iv) there are no material actions,
suits, arbitrations or claims (other than routine claims for benefits) pending
or, to Company's knowledge, threatened with respect to any Employee Benefit
Plan; (v) Company and its Subsidiaries have no liability as a result of any
"prohibited transaction" (as defined in Section 406 of ERISA and Section 4975 of
the Code) for any material excise tax or civil penalty and (vi) neither Company
nor any Subsidiary of Company has any liabilities or obligations with respect to
any Employee Benefit Plan, whether accrued, contingent or otherwise, except
liabilities or obligations (A) incurred in the ordinary course of business
consistent with past practice or (B) which are fully funded or reserved for on
the most recent financial statements of Company included in the Company SEC
Documents.
(d) None of the Employee Benefit Plans, other than Multiemployer
Plans, is subject to Title IV of ERISA.
(e) Company and its Subsidiaries have not, with respect to any
Multiemployer Plan, suffered or otherwise caused a "complete withdrawal" or
"partial withdrawal," as such terms are respectively defined in Sections 4023
and 4025 of ERISA, which has resulted in any material liability to Company or
any of its Subsidiaries which has not been fully satisfied or which is not set
forth in Company's financial statements filed with the Company SEC Documents.
(f) Each of the Pension Plans which is intended to be "qualified"
within the meaning of Section 401(a) of the Code has been determined by the
Service to be so "qualified" and Company knows of no fact which would adversely
affect the qualified status of any such Pension Plan.
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(g) Neither the execution and delivery of the Transaction Documents
to which Company is a party, nor the consummation of the transactions
contemplated thereby will: (i) result in any material payment becoming due, or
materially increase the amount of compensation due, to any current or former
employee of Company or any of its Subsidiaries; (ii) materially increase any
benefits otherwise payable under any Employee Benefit Plan; or (iii) result in
the acceleration of the time of payment or vesting of any such material
benefits.
(h) The Incentive Pool Agreement has been terminated and there are no
amounts due or payable thereunder.
Section 4.12. Brokers and Intermediaries. No broker, investment banker,
financial advisor or other Person, other than Ladenburg Thalmann & Co. Inc.
(whose fee arrangements have been disclosed to Hilton in writing and will not be
modified subsequent to the date of this Agreement), the fees and expenses of
which will be paid by Company, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Company.
Section 4.13. Opinion of Financial Advisor. Company has received the
opinion of Ladenburg Thalmann & Co. Inc. to the effect that, as of the date of
this Agreement, the consideration to be received by Company's shareholders in
the Merger and the Company Distribution, considered as a unitary transaction, is
in the aggregate fair to Company's shareholders from a financial point of view
(the "Fairness Opinion").
Section 4.14. Title to Properties.
(a) The Company Disclosure Schedule sets forth a complete list of all
material real property owned in fee by Company or any of its Subsidiaries and
sets forth all material real property leased by Company or any of its
Subsidiaries as lessee as of the date hereof (such owned and leased material
real property, including all Improvements thereon, referred to collectively as
the "Real Property"). The Real Property set forth on the Company Disclosure
Schedule comprises all of the material real property necessary and/or currently
used in the operations of the business of Company and its Subsidiaries. Company
and its Subsidiaries have good and valid title to, or (as to Real Property
designated as leased) a valid leasehold interest in, all of the Real Property.
The Real Property is free of Encumbrances, except for Permitted Encumbrances and
Encumbrances created under the First Mortgage Notes Indenture, and the
consummation of the transactions contemplated by the Transaction Documents will
not create any Encumbrance (other than Permitted Encumbrances) on any of the
Real Property. Each of Company and its Subsidiaries enjoys peaceful and
undisturbed possession under all leases of Real Property, except for such
breaches of the right to peaceful and undisturbed possession that do not
materially interfere with the ability of Company and its Subsidiaries to conduct
their business on such property.
(b) No toxic or hazardous wastes, substances or materials are stored
or otherwise held on the Real Property in violation of Environmental Laws, and
to the knowledge of
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Company, no Contamination exists at, on or under the Real Property at levels
that contravene those allowed by Environmental Laws.
Section 4.15. Indian Gaming and Debt Agreements and Lakes Agreements.
The execution and delivery by each of Company and Lakes of this Agreement and
each of the Transaction Documents to which it is a party does not, and the
consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default (with or without notice
of lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or cause loss of a material
benefit under, or result in the creation or maturation of any lien, liability or
purchase right upon any of the properties or assets of Company or any Subsidiary
under any of the Indian Gaming and Debt Agreements or the Lakes Agreements and
in each case, to which Company or any of its Affiliates or Subsidiaries is a
party or subject to, or to Company's knowledge, to which any other Person is a
party or subject to, or have or result in a Material Adverse Effect to Company
with respect to any of the Indian Gaming and Debt Agreements or Lakes Agreements
to which Company or any of its Affiliates or Subsidiaries is a party or subject
to, or to Company's knowledge, to which any other Person is a party or subject
to.
Section 4.16. Insurance. Company and its Subsidiaries have insurance
coverage with insurance companies or associations in such amounts, on such terms
and covering such risks, including fire and other risks insured against by
extended coverage, as is reasonably prudent, and each has public liability
insurance, insurance against claims for personal injury or death or property
damage occurring in connection with any of activities of Company or any of its
Subsidiaries or of any properties owned, occupied or controlled by Company or
any of its Subsidiaries, in such amount as is reasonably prudent.
Section 4.17. Transactions with Company Affiliates. Except as disclosed
in the "Certain Transactions" section of Company's 1998 Proxy, from January 1,
1995 through the date of this Agreement, there have been no transactions,
agreements, arrangements or understandings between Company or its Subsidiaries,
on the one hand, and Company's affiliates or other Persons, on the other hand,
that would be required to be disclosed under Item 404 of Regulation S-K under
the Securities Act.
Section 4.18. Certain Matters Relating to Stratosphere and the Lakes
Group.
(a) Neither Company nor any of its Subsidiaries has any obligation to
make contributions or advances to, or otherwise fund or guarantee indebtedness
or operations of, or undertake any liabilities pertaining to, Stratosphere.
(b) Company has settled the Stratosphere vacation club litigation in
the District Court in Clark County, Nevada (Richard Duncan, et al. v. Bob and
Jane Doe Stupak, et al. -- Case No. A370127) and the terms of such settlement
are set forth on the Company Disclosure Schedule.
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<PAGE> 40
(c) A description of the Stratosphere action for Recovery of
Preferential Transfers Pursuant to Sections 547 and 550 of the Bankruptcy Court
filed with the U.S. Bankruptcy Court for the District of Nevada against Company
is set forth on the Company Disclosure Schedule.
(d) Neither Company nor any of its Subsidiaries has any obligation to
provide indemnification to any of Company's current or former officers or
directors with respect to such officer's or director's employment or service
with any Person except for (i) Company or its Subsidiaries, (ii) Stratosphere
Corporation, (iii) New Horizons Kid Quest, Inc. and (iv) Innovative Gaming
Corporation of American (in the case of clauses (iii) and (iv), only pursuant to
the Indemnification Agreement, dated as of December 31, 1997, by and between
Company and Lyle Berman).
(e) The Company Disclosure Schedule lists all of the material
liabilities of Company and its Mississippi Subsidiaries (as defined in the
Company Distribution Agreement) that arise out of, or are specifically
associated with, either the Lakes Business or any member of the Lakes Group.
(f) The Company Disclosure Schedule lists and describes all of
Company's oral marketing agreements with any Indian tribe relating to any of the
Indian Gaming and Debt Agreements.
Section 4.19. Pro Forma Financial Information of Company Retained
Business.
(a) Attached hereto as Exhibit D is an unaudited pro forma
consolidated balance sheet of the Company Retained Business of Company and its
Subsidiaries at December 28, 1997 (including certain explanatory notes thereto,
the "Company Retained Business Balance Sheet") and an unaudited pro forma
consolidated statement of operations for the Company Retained Business of
Company and its Subsidiaries for the period ended December 28, 1997 (including
certain explanatory notes thereto, the "Company Retained Business Income
Statement" and together with the Company Retained Business Balance Sheet, the
"Company Retained Business Financial Statements"). The Company Retained Business
Financial Statements have been derived from Company's financial statements, and
prepared in accordance with the principles set forth in the notes thereto. The
Company Retained Business Financial Statements fairly present in all material
respects (on the basis indicated in the notes thereto) the consolidated
financial position of Company and its Subsidiaries at the date thereof, after
giving pro forma effect to the Company Distribution (assuming the Company
Distribution occurred on December 28, 1997), and the consolidated results of
their operations for the one-year period then ended, after giving pro forma
effect to the Company Distribution (assuming the Company Distribution occurred
on December 29, 1996) At the Effective Time, except as contemplated by this
Agreement or the Company Distribution Agreement, neither Lakes nor any of its
Subsidiaries will own or have rights to use any of the assets or properties,
whether tangible, intangible or mixed, which are necessary for the conduct of
the Company Retained Business as conducted on the date hereof or be a party to
any material agreement or arrangement with the Surviving Corporation or any of
its Subsidiaries, other than as described in the Transaction Documents.
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<PAGE> 41
(b) Attached hereto as Exhibit E is an unaudited pro forma
consolidated balance sheet of Lakes and its Subsidiaries at December 28, 1997
(including certain explanatory notes thereto, the "Lakes Balance Sheet"), after
giving pro forma effect to the Company Distribution (assuming the Company
Distribution occurred on December 28, 1997).
Section 4.20. Capital Expenditure Plan. Attached hereto as Exhibit F is a
true and correct copy of Company's Capital Expenditure Plan 1998 - 1999, dated
June 3, 1998 (such plan, as it is in existence on the date hereof, the "Company
Capital Plan").
Section 4.21. Prohibited Payments. Company has not entered into any
understanding, agreement or arrangement, written or oral, under or pursuant to
which bribes, kickbacks, illegal rebates, payoffs or other forms of illegal
payments have been or will be made, provided or suffered.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF HILTON
Hilton represents and warrants to Company that the statements contained
in this Article V are true and correct, except as set forth in the Hilton
Disclosure Schedule. The Hilton Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article V, and the disclosure in any paragraph shall not qualify other
paragraphs in this Article V unless such disclosure is specifically referred to
in such other paragraphs. As used in this Agreement, any reference to Hilton and
its Subsidiaries shall be a reference to Hilton and each of its Subsidiaries.
Section 5.1. Organization, Standing and Corporate Power. Each of Hilton
and its Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized and has the requisite corporate or partnership power and authority to
carry on its business as now being conducted. Each of Hilton and its
Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualifications or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed would not, individually or in the aggregate, have a Material Adverse
Effect with respect to the Gaming Co. Business. Hilton has made available to
Company complete and correct copies of its Certificate of Incorporation and
Hilton Bylaws and the comparable charter or organizational documents of its
Subsidiaries, in each case, as amended to the date of this Agreement.
Section 5.2. Ownership of Gaming Co.. As of the date hereof, all of the
outstanding shares of capital stock of Gaming Co. are owned by Hilton, free and
clear of any Encumbrances except for any Encumbrance that would not have a
Material Adverse Effect with respect to the Gaming Co. Business. Subject to
compliance with applicable Gaming Laws, the articles of incorporation and bylaws
of Gaming Co. do not contain any provision limiting or otherwise
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<PAGE> 42
restricting the ability of Gaming Co., following the Effective Time, from owning
the Surviving Corporation.
Section 5.3. Capitalization.
(a) The authorized capital stock of Hilton consists of
400,000,000 shares of Hilton Common Stock, par value $2.50 per share, and
24,832,700 shares of preferred stock, par value $1.00 per share (the "Hilton
Preferred Stock"). As of May 31, 1998, (i) 246,804,578 shares of Hilton Common
Stock and 14,832,200 shares of Hilton Preferred Stock, designated as "Preferred
Redeemable Increased Dividend Equity Securities(SM), 8% PRIDES(SM), Convertible
Preferred Stock," were issued and outstanding, (ii) 4,414,827 shares of Hilton
Common Stock, and no shares of Hilton Preferred Stock, were held in the treasury
of Hilton or by any Subsidiary of Hilton, (iii) 24,000 shares of Hilton Common
Stock were reserved for issuance upon the exercise of options issued under
Hilton's 1997 Independent Director Stock Option Plan, (iv) 7,100,417 shares of
Hilton Common Stock were reserved for issuance upon the exercise of outstanding
options issued under Hilton's 1996 Stock Incentive Plan, as amended, (v)
6,000,000 shares of Hilton Common Stock were reserved for issuance upon the
exercise of outstanding options issued under Hilton's 1996 Chief Executive Stock
Incentive Plan, (vi) 2,937,701 shares of Hilton Common Stock were reserved for
issuance upon the exercise of outstanding options issued under Hilton's 1990
Stock Option and Stock Appreciation Rights Plan, as amended, (vii) 397,200
shares of Hilton Common Stock were reserved for issuance upon the exercise of
outstanding options issued under Hilton's 1984 Stock Option and Stock
Appreciation Rights Plan, as amended (the options issued pursuant to the stock
option plans referred to in clauses (iii) through (vii) being collectively
referred to as the "Hilton Stock Options"), (viii) 1,707,956 shares of Hilton
Common Stock were reserved for issuance under the Hilton Employee Stock Purchase
Plan (the "Employee Stock Purchase Plan", (ix) 15,488,867 shares were reserved
for issuance upon conversion of Hilton's outstanding Convertible Subordinated
Notes due 2006, which were as of such date convertible into 15,488,867 shares of
Hilton Common Stock ("Hilton Convertible Notes"), and (x) 2,468,046 shares of
Hilton Preferred Stock, denominated as Series A Junior Participating Preferred
Stock, were reserved for issuance in connection with the Hilton Rights
Agreement. Except as set forth above, as of May 31, 1998, no shares of capital
stock or other voting securities of Hilton were issued, reserved for issuance or
outstanding. No change in such capitalization has occurred between May 31, 1998
and the date of this Agreement other than the issuance of Hilton Common Stock
upon the exercise of Hilton Stock Options or the conversion of Hilton
Convertible Notes or Hilton Preferred Stock. Except as set forth above, as of
the date of this Agreement, there are no other outstanding contractual rights
the value of which is derived from the financial performance of Hilton or the
value of shares of Hilton Common Stock. All outstanding shares of capital stock
of Hilton are when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. Except as set forth above,
as of the date of this agreement, there are no bonds, debentures, notes or other
indebtedness of Hilton or any of its Subsidiaries having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matters on which stockholders of Hilton may vote. Except as set forth above
and except for the transactions contemplated by the Hilton Distribution
Agreement, as of the date of this Agreement, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to
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which Hilton or any of its Subsidiaries is a party or by which any of them is
bound, obligating Hilton or any of its Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of Hilton or of any of its Subsidiaries or obligating
Hilton or any of its Subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking. Except as set forth above and other than redemptions, purchases and
other acquisitions required by applicable provisions under Gaming Laws or
similar provisions contained in the terms of the capital stock of Hilton or any
of its Subsidiaries, as of the date of this agreement, there are not any
outstanding contractual obligations of Hilton or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of Hilton or
any of its Subsidiaries.
(b) The authorized capital stock of Gaming Co. consists of 900
shares of Gaming Co. Common Stock, par value $.01 per share, and 100 shares of
preferred stock, par value $.01 per share (the "Gaming Co. Preferred Stock"). As
of June 10, 1998, 100 shares of Gaming Co. Common Stock and no shares of Gaming
Co. Preferred Stock were outstanding. Except as set forth above, as of June 10,
1998, no shares of capital stock or other voting securities of Gaming Co. were
issued, reserved for issuance or outstanding. No change in such capitalization
has occurred between June 10, 1998 and the date of this Agreement. Except as set
forth above, as of the date of this Agreement, there are no other outstanding
contractual rights the value of which is derived from the financial performance
of Gaming Co. or the value of shares of Gaming Co. Common Stock. All outstanding
shares of capital stock of Gaming Co. are, and all shares which may be issued as
contemplated by this Agreement and the Hilton Distribution Agreement will be,
when issued, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. As of the date of this Agreement, there are no
bonds, debentures, notes or other indebtedness of Gaming Co. or any of its
Subsidiaries having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders of
Gaming Co. may vote. Except for the transactions contemplated by the Hilton
Distribution Agreement, as of the date of this Agreement, there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which Gaming Co. or any
of its Subsidiaries is a party or by which any of them is bound, obligating
Gaming Co. or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other voting
securities of Gaming Co. or of any of its Subsidiaries or obligating Gaming Co.
or any of its Subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking. Other than redemptions, purchases and other acquisitions required
by applicable provisions under Gaming Laws or similar provisions contained in
the terms of the capital stock of Gaming Co. or any of its Subsidiaries, as of
the date of this Agreement, there are not any outstanding contractual
obligations of Gaming Co. or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of Gaming Co. or any of its
Subsidiaries. As of the time of the Hilton Distribution, (i) the issued and
outstanding shares of common stock of Gaming Co. will be equal to the shares of
Hilton Common Stock that are then issued and outstanding as of the record date
for the Hilton Distribution, (ii) Gaming Co. will have issued options as
described in the Hilton Distribution Agreement and (iii) all outstanding shares
of capital stock of Gaming Co. will be duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights.
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Section 5.4. Authority; Enforceability; No Conflict; Consents.
(a) Each of Hilton and Gaming Co. has the requisite corporate
power and authority to enter into each of the Transaction Documents to which it
is a party and to consummate the transactions contemplated thereby, subject to,
with respect to the Hilton Distribution, the declaration of the Hilton
Distribution by Hilton's Board of Directors and the ratification of the Hilton
Distribution by the affirmative vote of holders of at least a majority of the
outstanding shares of Hilton Common Stock and Hilton Preferred Stock, voting
together as a class, with the holders of the Hilton Preferred Stock entitled to
4/5 of a vote for each share held. The execution and delivery by each of Hilton
and Gaming Co. of each of the Transaction Documents to which it is a party and
the consummation by each of Hilton and Gaming Co. of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
on the part of Hilton and Gaming Co., subject to, with respect to the Hilton
Distribution, the declaration of the Hilton Distribution by Hilton's Board of
Directors and the ratification of the Hilton Distribution by the affirmative
vote of holders of at least a majority of the outstanding shares of Hilton
Common Stock and Hilton Preferred Stock, voting together as a class, with the
holders of the Hilton Preferred Stock entitled to 4/5 of a vote for each share
held. Each of the Transaction Documents to which it is a party (other than the
Hilton Distribution Agreement and the Hilton Ancillary Agreements) has been duly
executed and delivered by each of Hilton and Gaming Co. and constitutes the
valid and binding obligation of Hilton and Gaming Co. (as applicable),
enforceable in accordance with its terms, subject to the Bankruptcy and Equity
Exception. Prior to the Hilton Distribution, the Hilton Distribution Agreement
and the Hilton Ancillary Agreements will be duly executed and delivered by each
of Hilton and Gaming Co. and upon such execution and delivery, will constitute
the valid and binding obligations of each of Hilton and Gaming Co., enforceable
against each of them in accordance with its terms, subject to the Bankruptcy and
Equity Exception.
(b) The execution and delivery of each of the Transaction
Documents to which it is a party by each of Hilton and Gaming Co. does not, and
the consummation of the transactions contemplated thereby will not, conflict
with, or result in any violation of or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or cause loss of any material benefit under, or
result in the creation or maturation of any lien, liability or purchase right
upon any of the properties or assets of Hilton or any of its Subsidiaries under,
(i) the Certificate of Incorporation or Hilton Bylaws or the comparable charter
or organizational documents of Gaming Co. or any of its Subsidiaries, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
Hilton or Gaming Co. or any of its Subsidiaries or their respective properties
or assets or (iii) subject to the governmental filings and other matters
referred to in Section 5.4(c), any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Hilton or Gaming Co. or any of its
Subsidiaries or their respective properties or assets, other than, in the case
of clauses (ii) or (iii), any such conflicts, violations, defaults, rights,
liabilities or liens that would not, individually or in the aggregate, (x) have
a Material Adverse Effect with respect to the Gaming Co. Business, (y) impair,
in any material respect, the ability of Hilton or Gaming Co. (to the extent
applicable) to perform its obligations under each of the Transaction Documents
to which it is a party or (z)
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prevent or significantly delay the consummation of any of the transactions
contemplated by the Transaction Documents.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
by Hilton or Gaming Co. or any of its Subsidiaries in connection with the
execution and delivery of each of the Transaction Documents to which it is a
party or the consummation of the transactions contemplated thereby, except for
(i) the filing of a pre-merger notification and report form under the HSR Act,
(ii) the filing with the SEC of (x) the Joint Proxy Statement/Prospectus and the
Form S-4 and the obtaining of any related orders as may be so required, (y) a
registration statement on Form 10 (the "Gaming Co. Form 10") under the Exchange
Act relating to the equity securities of Gaming Co., and (z) such reports and
filings under Section 13 and Section 16 of the Exchange Act as may be required
in connection with this Agreement and the transactions contemplated by this
Agreement, (iii) the filing of the Articles of Merger with the Minnesota
Secretary of State, (iv) the filing of notices with and the approval by (A) the
New Jersey Casino Control Commission under the New Jersey Gaming Laws, (B) the
Nevada State Gaming Control Board, the Nevada Gaming Commission, the Clark
County Liquor and Gaming Licensing Board, and the City of Reno under the Nevada
Gaming Laws, (C) the Mississippi Gaming Commission under the Mississippi Gaming
Laws, (D) the Louisiana Gaming Control Board under the Louisiana Gaming Laws,
(E) the Ontario Gaming Control Commission under the Ontario Gaming Laws, (F) the
Missouri Gaming Commission under the Missouri Gaming Laws and (G) the
appropriate Governmental Authorities as may be required under the applicable
Gaming Laws of the countries of Australia and Uruguay, (v) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities or "blue sky" laws and (vi)
such other consents, approvals, orders, authorizations, registrations,
declarations and filings which, if not obtained or made, would not, individually
or in the aggregate, be reasonably likely to: (1) have a Material Adverse Effect
on the Gaming Co. Business; (2) impair, in any material respect, the ability of
Hilton or Gaming Co. to perform its obligations under each of the Transaction
Documents to which it is a party; or (3) prevent or significantly delay the
consummation of the transactions contemplated by the Transaction Documents.
(d) No approval or consent for the Merger by holders of
securities of Gaming Co. is required under the MBCA, Gaming Co.'s certificate of
incorporation or bylaws, its NYSE listing agreement or any other agreement to
which Gaming Co. is a party thereto.
Section 5.5. Ownership of Company Capital Stock. Neither Hilton nor any
of its Subsidiaries beneficially owns, either directly or indirectly, any shares
of Company capital stock.
Section 5.6. Compliance with Applicable Laws.
(a) Each of Hilton and its Subsidiaries has in effect all Permits
necessary for it to own, lease or operate its properties and assets and to carry
on its business as now conducted, other than such Permits the absence of which
would not, individually or in the aggregate, have a Material Adverse Effect with
respect to the Gaming Co. Business, and there has occurred no default under any
such Permit other than such defaults which, individually or in the aggregate,
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would not have a Material Adverse Effect with respect to the Gaming Co.
Business. Hilton and its Subsidiaries are in compliance with all Applicable
Laws, except for such noncompliance which, individually or in the aggregate,
would not have a Material Adverse Effect with respect to the Gaming Co.
Business.
(b) Except as set forth in Hilton's 1997 10-K, each of Hilton and
its Subsidiaries is, and has been, and each entity formerly owned by Hilton's
Subsidiaries, while so owned, was in compliance in all respects with all
applicable Environmental Laws, except for such noncompliance which, individually
or in the aggregate, would not have a Material Adverse Effect with respect to
the Gaming Co. Business.
(c) Except as set forth in Hilton's 1997 10-K, during the period
of ownership or operation by Hilton and its Subsidiaries of any of their owned
or leased properties, there has been no Release of Hazardous Material in, on,
under or affecting such properties and none of Hilton or its Subsidiaries has
disposed of any Hazardous Material or any other substance in a manner that has
led to, or could reasonably be anticipated to lead to, a Release except in each
case for those which are not, individually and in the aggregate, reasonably
likely to have a Material Adverse Effect with respect to the Gaming Co.
Business.
Section 5.7. Hilton SEC Documents; Undisclosed Liabilities.
(a) Each of Hilton and its Subsidiaries has filed all required
reports, registration statements, proxy statements, forms and other documents
with the SEC since January 1, 1995 (as such documents have since the time of
their filing been amended or supplemented, the "Hilton SEC Documents"). As of
their respective dates, (i) the Hilton SEC Documents (including any financial
statements filed as a part thereof or incorporated by reference therein)
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations of the SEC
promulgated thereunder applicable to such Hilton SEC Documents, and (ii) none of
Hilton SEC Documents contained at the time they were filed or declared effective
any untrue statement of a material fact or omitted at the time they were filed
or declared effective to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. At their respective dates, the
financial statements of Hilton included in Hilton SEC Documents complied as to
form in all material respects with the applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
presented (subject, in the case of unaudited statements, to normal year-end
audit adjustments) the consolidated financial position of Hilton and its
consolidated subsidiaries as of and at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended.
(b) Except as disclosed in the Hilton SEC Documents filed and
publicly available prior to the date of this Agreement and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice since March 31, 1998, Hilton and its
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<PAGE> 47
Subsidiaries do not have any indebtedness, obligations or liabilities of any
kind (whether accrued, absolute, contingent or otherwise) (i) required by GAAP
to be reflected on a consolidated balance sheet of Hilton and its consolidated
Subsidiaries or in the notes, exhibits or schedules thereto or (ii) which
reasonably could be expected to have a Material Adverse Effect with respect to
the Gaming Co. Business.
Section 5.8. Absence of Changes or Events. Except as disclosed in the
Hilton SEC Documents filed and publicly available prior to the date hereof and
as set forth in the Hilton Disclosure Schedule, and except for the Hilton
Distribution and the other transactions contemplated by the Hilton Distribution
Agreement, (a) since December 31, 1997, there has not been any change or
occurrence which resulted in or is reasonably likely to have a Material Adverse
Effect with respect to the Gaming Co. Business, and (b) from December 31, 1997
to the date of this Agreement, Hilton and its Subsidiaries have conducted the
Gaming Co. Business only in the ordinary course and there has not been (i) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the capital stock of Hilton, other than regular dividends on Hilton
Common Stock and Hilton Preferred Stock, (ii) any split, combination or
reclassification of any of the capital stock of Hilton or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock of Hilton, (iii) any damage,
destruction or loss that has or reasonably could be expected to have a Material
Adverse Effect with respect to the Gaming Co. Business or (iv) any change in
accounting methods, principles or practices by Hilton materially affecting its
assets, liabilities or business, except insofar as may have been required by a
change in GAAP.
Section 5.9. Litigation. Except as described in the Hilton SEC Documents
filed and publicly available prior to the date hereof, there is no action, suit
or proceeding, claim, arbitration or investigation pending or, to the knowledge
of Hilton, threatened against Hilton or any of its Subsidiaries that,
individually or in the aggregate, could reasonably be expected to (i) have a
Material Adverse Effect with respect to the Gaming Co. Business or (ii) prevent
or significantly delay the consummation of the transactions contemplated by the
Transaction Documents. Except as disclosed in the Hilton SEC Documents filed and
publicly available prior to the date hereof, there is no judgment, order,
injunction or decree of any Governmental Authority outstanding against Hilton or
any of its Subsidiaries that, individually or in the aggregate, could reasonably
be expected to have any effect referred to in the foregoing clauses (i) and
(ii).
Section 5.10. Taxes.
(a) Hilton and each of its Subsidiaries, and each affiliated
group (within the meaning of Section 1504 of the Code) of which Hilton or any of
its Subsidiaries is a member, has timely filed all federal income Tax Returns
and all other material Tax Returns required to be filed by it. All such Tax
Returns are complete and correct in all material respects. Hilton and each of
its Subsidiaries has paid (or Hilton has paid on its Subsidiaries' behalf) all
Taxes shown as due on such Tax Returns. The most recent consolidated financial
statements contained in the Hilton SEC Documents reflect an adequate reserve for
all Taxes payable by Hilton and its Subsidiaries for all taxable periods and
portions thereof through the date of such financial statements.
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(b) None of Hilton or any of its Subsidiaries has taken or agreed
to take any action that would prevent (i) the Merger from constituting a
reorganization qualifying under the provisions of Section 368(a)(1)(B) of the
Code or (ii) the Hilton Distribution from constituting a tax-free transaction to
Hilton and its stockholders within the meaning of Section 355 of the Code.
Section 5.11. Employee Benefits. Except as disclosed in the Hilton SEC
Documents filed and publicly available prior to the date hereof or as set forth
on the Hilton Disclosure Schedule or as would not have a Material Adverse Effect
with respect to Hilton, (i) all employee benefit plans or programs maintained
for the benefit of the current or former employees of Hilton or any Subsidiary
of Hilton in the Gaming Co. Business that are sponsored, maintained or
contributed to by Hilton or any Subsidiary of Hilton, or with respect to which
Hilton or any Subsidiary of Hilton has any liability, including any such plan
that is an "employee benefit plan" as defined in Section 3(3) of ERISA, are in
compliance in all material respects with all applicable requirements of law,
including ERISA and the Code, and (ii) neither Hilton nor any Subsidiary of
Hilton has any material liabilities or obligations with respect to any such
employee benefit plans or programs, whether accrued, contingent or otherwise,
except liabilities or obligations (x) incurred in the ordinary course of
business consistent with past practice or (y) which are fully funded or reserved
for on the most recent financial statements of Hilton included in the Hilton SEC
Documents.
Section 5.12. Brokers and Intermediaries. No broker, investment banker,
financial advisor or other Person, other than Donaldson, Lufkin & Jenrette
Securities Corporation, the fees and expenses of which will be paid by Hilton or
Gaming Co., is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Hilton or Gaming
Co.
Section 5.13. Opinion of Financial Advisor. The financial advisor of
Hilton, Donaldson, Lufkin & Jenrette Securities Corporation, has delivered to
Hilton an opinion dated June 29, 1998 to the effect that the Hilton Distribution
and the consideration to be paid by Gaming Co. pursuant to this Agreement, after
giving effect to the Company Distribution, taken as a whole, are fair to the
stockholders of Hilton from a financial point of view.
Section 5.14. Pro Forma Financial Information of Gaming Co. Business.
Attached hereto as Exhibit G is an unaudited pro forma consolidated balance
sheet of the Gaming Co. Business of Hilton and its Subsidiaries at December 31,
1997 (including certain explanatory notes thereto, the "Gaming Co. Business
Balance Sheet") and an unaudited pro forma consolidated statement of operations
for the Gaming Co. Business of Hilton and its Subsidiaries for the period ended
December 31, 1997 (including certain explanatory notes thereto, the "Gaming Co.
Business Income Statement" and together with the Gaming Co. Business Balance
Sheet, the "Gaming Co. Business Financial Statements"). The Gaming Co. Business
Financial Statements have been derived from Hilton's financial statements, and
prepared in accordance with the principles set forth in the notes thereto. The
Gaming Co. Business Financial Statements fairly present in all material respects
(on the basis indicated in the notes thereto) the consolidated
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financial position of the Gaming Co. Business of Hilton and its Subsidiaries at
the date thereof, after giving pro forma effect to the Hilton Distribution
(assuming the Hilton Distribution occurred on December 31, 1997), and the
consolidated results of their operations for the one-year period then ended,
after giving pro forma effect to the Hilton Distribution (assuming the Hilton
Distribution occurred on January 1, 1997). At the Effective Time, except as
contemplated by this Agreement or the Hilton Distribution Agreement, neither
Hilton nor any of its Subsidiaries will own or have rights to use any of the
assets or properties whether tangible, intangible or mixed, which are necessary
for the conduct of the Gaming Co. Business as conducted on the date hereof or be
a party to any material agreement or arrangement with the Surviving Corporation
or any of its Subsidiaries, other than as described in the Transaction
Documents.
Section 5.15. Transactions with Hilton Affiliates. Other than matters
included in the Hilton SEC Documents filed and publicly available prior to the
date of this Agreement, from January 1, 1995 through the date of this Agreement,
and only with respect to the Gaming Co. Business, there have been no
transactions, agreements, arrangements or understandings between Hilton or its
Subsidiaries, on the one hand, and Hilton's affiliates or other Persons, on the
other hand, that would be required to be disclosed under Item 404 of Regulation
S-K under the Securities Act.
Section 5.16. Ownership of Merger Sub: No Prior Activities; Assets of
Merger Sub. Merger Sub was formed by Gaming Co. solely for the purposes of
engaging in the transactions contemplated hereby. All of the capital stock of
Merger Sub is directly owned by Gaming Co. Except for this Agreement and the
Hilton Distribution Agreement, there are no outstanding or authorized options,
warrants, calls, rights, commitments or any other agreements to which Merger Sub
is a party, or by which it is bound, requiring it to issue, transfer, sell,
purchase, redeem or acquire any shares of capital stock or any securities or
rights convertible into, exchangeable for, or evidencing the right to subscribe
for or acquire, any shares of capital stock of Merger Sub. Except for
obligations or liabilities incurred in connection with its incorporation or
organization and except for the transactions contemplated by this Agreement and
the Hilton Distribution Agreement, Merger Sub has not incurred, directly or
indirectly through any Subsidiary or Affiliate, any obligations or liabilities,
and has not engaged in any business or activities or entered into any
arrangements with any Person.
Section 5.17. Prohibited Payments. Hilton has not entered into any
understanding, agreement or arrangement, written or oral, under or pursuant to
which bribes, kickbacks, illegal rebates, payoffs or other forms of illegal
payments have been or will be made, provided or suffered.
ARTICLE VI.
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 6.1. Conduct of Company. Except as otherwise provided by the terms
of this Agreement, and except for the Company Distribution and the other
transactions, actions or events provided for in the Company Distribution
Agreement, from and after the date hereof to
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the Effective Time, Company shall, and shall cause each of its Subsidiaries to,
carry on their respective businesses in the ordinary course and use their
reasonable efforts to (a) preserve intact their current business organizations,
(b) keep available the services of their current officers and key employees and
(c) preserve their relationship consistent with past practice with desirable
customers, suppliers and others having business dealings with them to the end
that their goodwill and ongoing businesses shall be unimpaired in all material
respects at the Effective Time it being understood however, that between the
date hereof and the Closing Date, (i) the employees of the Company Retained
Business may also be engaged in activities for Lakes and its Subsidiaries and
certain officers of Company may resign at the time of the Company Distribution
and may serve as officers of Lakes and (ii) the failure of any employee of
Company to remain an employee of Company shall not constitute a breach of this
covenant. Without limiting the generality of the foregoing, prior to the
Effective Time, except as otherwise provided by the terms of this Agreement, and
except for the Company Distribution and the other transactions, actions or
events otherwise provided for in the Company Distribution Agreement and except
as to those matters set forth in paragraph 6.1 of the Company Disclosure
Schedule (for which Hilton hereby consents), Company shall not and shall cause
its Subsidiaries not to, without the written consent of Hilton, which consent
may not be unreasonably withheld:
(a) (i) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect wholly-owned Subsidiary of
Company to Company, (ii) split, combine or reclassify any of its capital stock
or, except pursuant to the exercise of options, warrants, conversion rights,
exchange rights and other contractual rights existing on the date hereof, issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or other equity interest or
(iii) purchase, redeem or otherwise acquire or amend any shares of capital stock
or other equity interests of Company or any of its Subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares, interests or other securities (other than (x) redemptions, purchases or
other acquisitions required by applicable provisions under Gaming Laws or
pursuant to the terms of such capital stock or equity interest or other
contractual rights existing on the date hereof and (y) issuances or redemptions
of capital stock of wholly-owned Subsidiaries occurring between Company and any
of its wholly-owned Subsidiaries);
(b) issue, deliver, sell, pledge or otherwise encumber or amend
any shares of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, interests, voting securities or convertible securities, including
pursuant to the Company Stock Plans (other than the issuance of Company Common
Stock upon the exercise of Company Stock Options outstanding on the date of this
Agreement in accordance with their present terms and issuances described in
subclause (y) of paragraph (a) above);
(c) amend its Articles of Incorporation, Company Bylaws or other
comparable charter or organization documents;
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(d) acquire or agree to acquire (i) by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any Person or other business organization or division
thereof or (ii) any other material assets, except (x) mergers and consolidations
and other reasonable tax planning transactions between or among Company and one
or more wholly-owned Subsidiaries of Company (including liquidations of
Subsidiaries) that will not create adverse tax consequences to Company or its
Subsidiaries or (y) purchases of inventory, furnishings and equipment in the
ordinary course of business consistent with past practice;
(e) sell, lease, license, mortgage or otherwise encumber or
subject to any lien or otherwise dispose of any of its properties or assets,
except in the ordinary course of business consistent with past practice;
(f) (i) other than (x) ordinary course working capital borrowings
(including indebtedness incurred under the Revolving Credit Facility to fund
capital expenditures made pursuant to the Company Capital Plan) and (y) other
incurrences of indebtedness which, in the aggregate, do not exceed $2 million,
incur any indebtedness for borrowed money or guarantee any such indebtedness of
another Person, issue or sell any debt securities or warrants or other rights to
acquire any debt securities of Company or any of its Subsidiaries, guarantee any
debt securities of another Person, enter into any "keep well" or other agreement
to maintain any financial statement condition of another Person or enter into
any arrangement having the economic effect of any of the foregoing or (ii) make
any loans, advances or capital contributions to, or investments in, any other
Person other than (x) loans, advances or capital contributions to Company or any
direct or indirect wholly-owned Subsidiary of Company or (y) advances to
employees, suppliers or customers in the ordinary course of business consistent
with past practice;
(g) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction, (i)
in the ordinary course of business consistent with past practice, (ii) in
accordance with their terms of liabilities reflected or reserved against in the
most recent consolidated financial statements (or the notes thereto) of Company
included in the Company SEC Documents filed and publicly available prior to the
date of this Agreement or incurred in the ordinary course of business consistent
with past practice since the date of such financial statements or (iii)
involving an amount not to exceed $2 million in the aggregate;
(h) except as required to comply with Applicable Laws, (i) adopt,
enter into, terminate, amend or allow to be extended or renewed, any Employee
Benefit Plan for the benefit or welfare of any director, officer or current or
former employee, (ii) increase in any manner the compensation or fringe benefits
of, or pay any bonus to, any director, officer or employee (except for normal
increases or bonuses as contractually required pursuant to agreements disclosed
in Company SEC Documents filed and publicly available prior to the date of this
Agreement or in the ordinary course of business consistent with past practice to
employees other than directors and officers of Company or any of its
Subsidiaries and that, in the aggregate, do not result in a significant increase
in benefits or compensation expenses to employees of Company and its
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Subsidiaries relative to the level in effect prior to such action), (iii) pay
any benefit not provided for under any Employee Benefit Plan, (iv) except for
payments or awards in cash permitted by clause (ii), grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Employee Benefit Plan (including the grant of stock options, stock appreciation
rights, stock based or stock related awards, performance units or restricted
stock, or the removal of existing restrictions in any Employee Benefit Plans or
agreements or awards made thereunder) or (v) take any action to fund or in any
other way secure the payment of compensation or benefits under any Employee
Benefit Plan other than in the ordinary course of business consistent with past
practice;
(i) waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which Company or any of its
Subsidiaries is a party, or except in the ordinary course of business, modify,
amend or terminate any contract or agreement set forth in the Company SEC
Documents to which Company or any Subsidiary is a party or waive, release or
assign any material rights or claims;
(j) take or agree to take any action that would prevent (i) the
Merger from constituting a reorganization qualifying under the provisions of
Section 368(a)(1)(B) of the Code, (ii) the Hilton Distribution from qualifying
as a tax-free transaction to Hilton and its stockholders within the meaning of
Section 355 of the Code or (iii) the Company Distribution from qualifying as a
tax-free transaction, solely with respect to Company's shareholders, within the
meaning of Section 355 of the Code;
(k) conduct its business in a manner or take, or cause to be
taken, any other action that would or might reasonably be expected to prevent or
materially delay Company, Hilton, Gaming Co. or Lakes from consummating the
transactions contemplated by the Transaction Documents in accordance with their
respective terms (regardless of whether such action would otherwise be permitted
or not prohibited hereunder or thereunder), including any action which may
materially limit the ability of Company, Hilton, Gaming Co. or Lakes to
consummate the transactions contemplated thereby as a result of antitrust,
gaming or other regulatory concerns;
(l) adopt or enter into any arrangement, contract or agreement
that obligates, or otherwise creates a liability of, Company or any of its
Subsidiaries (except for the Non-Mississippi Subsidiaries (as defined in the
Company Distribution Agreement)) for more than 12 months; or
(m) authorize any of, or commit or agree to take any of, the
foregoing actions.
Section 6.2. Conduct of Hilton with Respect to the Gaming Co. Business.
Except as otherwise provided by the terms of this Agreement, and except for the
Hilton Distribution and the other transactions, actions or events provided for
in the Hilton Distribution Agreement, from and after the date hereof to the
Effective Time, Hilton shall, and shall cause each of its Subsidiaries to (a)
carry on the Gaming Co. Business in the ordinary course and use their reasonable
efforts to preserve intact the Gaming Co. Business, (b) keep available the
services of their key employees engaged in the Gaming Co. Business and (c)
preserve their relationships consistent with past practice with desirable
customers, suppliers and others having business
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dealings with respect to the Gaming Co. Business to the end that their goodwill
and the Gaming Co. Business shall be unimpaired in all material respects at the
Effective Time, it being understood, however, that (i) certain employees of the
Gaming Co. Business may also be engaged in activities for Hilton and its
Subsidiaries and certain officers of Gaming Co. may resign at the time of the
Hilton Distribution and may serve as officers of Hilton and (ii) the failure of
any employee in the Gaming Co. Business to remain an employee in the Gaming Co.
Business shall not constitute a breach of this covenant. Without limiting the
generality of the foregoing, prior to the Effective Time, except as otherwise
provided by the terms of this Agreement, and except for the Hilton Distribution
and the other transactions, actions or events provided for in the Hilton
Distribution Agreement, Hilton shall not and shall cause its Subsidiaries not
to, without the written consent of Company, which consent may not be
unreasonably withheld:
(a) (i) declare, set aside or pay any dividends on, or make any
other distributions in respect of Gaming Co. Common Stock, other than regular
quarterly dividends and the issuance of the Gaming Co. Rights with respect to
the Gaming Co. Common Stock or (ii) split, combine or reclassify any of the
capital stock of Gaming Co. or, except pursuant to the exercise of options,
warrants, convertible debt, conversion rights, exchange rights and other
contractual rights of Hilton or Gaming Co. existing on the date hereof, issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of the capital stock of Gaming Co. or other equity
interest of Gaming Co., except for any such issuance (or authorization for such
issuance) of Gaming Co. Common Stock that shall not exceed 20% of the number of
shares then outstanding after giving pro forma effect to such issuance;
(b) amend Gaming Co.'s certificate of incorporation or bylaws or
other comparable charter or organization documents in any manner adverse to the
holders of Gaming Co. Common Stock (other than the filing of a Certificate of
Designations for the issuance of any series of preferred stock of Gaming Co.);
(c) sell any substantial portion of the properties and assets
included in the Gaming Co. Business, except in the ordinary course consistent
with past practice, or merge, amalgamate or consolidate Gaming Co. with any
other entity except where Gaming Co. is the surviving corporation;
(d) take or agree to take any action that would prevent (i) the
Merger from constituting a reorganization qualifying under the provisions of
Section 368(a)(1)(B) of the Code, (ii) the Hilton Distribution from qualifying
as a tax-free transaction to Hilton and its stockholders within the meaning of
Section 355 of the Code or (iii) the Company Distribution from qualifying as a
tax-free transaction, solely with respect to Company's shareholders, within the
meaning of Section 355 of the Code;
(e) conduct the Gaming Co. Business in any manner or take, or
cause to be taken, any other action that would or might reasonably be expected
to prevent or materially delay Hilton, Company, Gaming Co. or Lakes from
consummating the transactions contemplated by the Transaction Documents in
accordance with their respective terms (regardless of whether such
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action would otherwise be permitted or not prohibited hereunder or thereunder),
including any action which may materially limit the ability of Hilton, Company,
Gaming Co. or Lakes to consummate the transactions contemplated thereby as a
result of antitrust, gaming or other regulatory concerns;
(f) authorize any of, or commit or agree to take any of, the
foregoing actions.
Nothing contained in this Section 6.2 (other than subsection (d)) shall
prohibit Hilton from acquiring or disposing of or agreeing to acquire or dispose
of, whether by merger or consolidation or by purchase of assets, any assets,
business or any Person or other business organization or division thereof which
do not and will not constitute part of the Gaming Co. Business.
Each of the parties hereto acknowledges and agrees, that in the event
Gaming Co. or any of its Subsidiaries, in compliance with the provisions of this
Section 6.2, acquires any Person, properties, assets or businesses prior to the
Effective Time, the Gaming Co. Valuation Factor shall be adjusted to reflect (i)
the increase in the gross value of Gaming Co. resulting from such acquisition
(i.e., adjust the $6,024,600,000 figure upwards by the amount of the total
consideration paid for the subject Person, properties, assets or businesses),
(ii) the change (if any) in the Total Debt of Gaming Co. as a result of such
acquisition and (iii) the change (if any) in the Total Number of Gaming Co.
shares outstanding as a result of such acquisitions.
Section 6.3. Access to Information. Each of Company and Hilton shall, and
shall cause each of its respective Subsidiaries to, afford to the other party
and to the officers, employees, accountants, counsel, financial advisors and
other representatives of such other party, reasonable access during normal
business hours during the period prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records and,
during such period, each of Company and Hilton shall, and shall cause each of
its respective Subsidiaries to, furnish promptly to the other party (a) a copy
of each report, schedule, registration statement and other document filed by it
during such period pursuant to the requirements of federal or state securities
laws and (b) all other information concerning its business, properties and
personnel as such other party may reasonably request. Except as required by
Applicable Laws, each of Company and Hilton will hold, and will cause its
respective officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to hold, any nonpublic information in
confidence to the extent required by, and in accordance with, the provisions of,
the letter dated June 1, 1998, between Company and Hilton (the "Confidentiality
Agreement").
Section 6.4. Indian Gaming and Other Guarantees Release. Company and each
member of the Lakes Group shall use their reasonable best efforts to have the
Surviving Corporation and its Subsidiaries be released from any and all
liabilities or obligations under or relating to the Indian Gaming and Debt
Agreements and Lakes Agreements.
Section 6.5. Dissenters' Rights. The Surviving Corporation shall be
responsible for any payments that are required to be made to its shareholders
pursuant to any applicable provisions of Minnesota law. Hilton shall be entitled
to jointly direct and control with Company
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any and all actions or proceedings relating to any of the foregoing claims for
payment to the extent such actions or proceedings are made or commence prior to
the Closing Date.
ARTICLE VII.
ADDITIONAL AGREEMENTS
Section 7.1. Preparation of Form S-4, Forms 10 and the Joint Proxy
Statement/Prospectus; Shareholders Meeting.
(a) As promptly as practicable following the date of this
Agreement, Hilton and Company shall prepare and file with the SEC the Joint
Proxy Statement/Prospectus, the Form S-4, in which the Joint Proxy
Statement/Prospectus shall be included, and the Forms 10. Each of Hilton and
Company shall use all reasonable efforts to have the Form S-4 declared effective
under the Securities Act and the Forms 10 declared effective under the Exchange
Act as promptly as practicable after such filing. Company shall use its
reasonable best efforts to cause the Joint Proxy Statement/Prospectus to be
mailed to its shareholders as promptly as practicable after the Form S-4 is
declared effective. Gaming Co. shall also take any action (other than qualifying
to do business in any jurisdiction in which it is not now so qualified or
consenting to service of process in any jurisdiction in any action other than
one arising out of the offering of Gaming Co. Common Stock in such jurisdiction)
required to be taken under any applicable state securities or "blue sky" laws in
connection with the issuance of Gaming Co. Common Stock in the Merger, and
Gaming Co. shall furnish all information concerning Gaming Co. as may be
reasonably requested in connection with any such action.
(b) Each of Company, Hilton, Gaming Co. and Lakes covenants that
none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 is
filed with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (ii) the Joint
Proxy Statement/Prospectus will, at the date it is first mailed to the
shareholders of Company, or at the time of the Company Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Joint Proxy Statement/Prospectus and the Form S-4 will comply as
to form in all material respects with the requirements of the Exchange Act and
the Securities Act, as applicable. Notwithstanding the foregoing, (i) no
representation or covenant is made by Company or Lakes with respect to
statements made or incorporated by reference based on information supplied in
writing by Hilton or Gaming Co. specifically for inclusion or incorporation by
reference in the Joint Proxy Statement/Prospectus and (ii) no representation or
covenant is made by Hilton or Gaming Co. with respect to statements made or
incorporated by reference based on information supplied in writing by Company or
Lakes for inclusion or incorporation by reference in the Joint Proxy
Statement/Prospectus. If at any time prior to the Effective Time there shall
occur (i) any event with respect to Company or any of its Subsidiaries, or with
respect to other information
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supplied by Company or Lakes for inclusion in the Joint Proxy
Statement/Prospectus or (ii) any event with respect to Hilton or Gaming Co., or
with respect to information supplied by Hilton or Gaming Co. for inclusion in
the Joint Proxy Statement/Prospectus, in either case, which event is required to
be described in an amendment of, or a supplement to the Joint Proxy
Statement/Prospectus or the Form S-4, such event shall be so described, and such
amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the shareholders of Company.
(c) Each of Company, Lakes, Hilton and Gaming Co. shall promptly
notify the other of the receipt of any comments from the SEC or its staff or any
other appropriate government official and of any requests by the SEC or its
staff or any other appropriate government official for amendments or supplements
to any of the filings with the SEC in connection with the Merger and other
transactions contemplated hereby or for additional information and shall supply
the other with copies of all correspondence between Company or any of its
representatives, or Hilton or any of its representatives, as the case may be, on
the one hand, and the SEC or its staff or any other appropriate government
official, on the other hand, with respect thereto. Company, Lakes, Hilton and
Gaming Co. shall use their respective reasonable efforts to respond to any
comments of the SEC with respect to the Form S-4 as promptly as practicable.
Company and Hilton shall cooperate with each other and provide to each other all
information necessary in order to prepare the Form S-4, the Joint Proxy
Statement/Prospectus and the Forms 10, and shall provide promptly to the other
party any information such party may obtain that could necessitate amending any
such document.
(d) Company shall take all action necessary in accordance with
Applicable Laws and its Articles of Incorporation and Company Bylaws to convene
and hold a meeting of its shareholders (the "Company Shareholders Meeting") as
promptly as practicable for the purpose of obtaining the Company Shareholder
Approval. Company shall, through its Board of Directors, recommend to its
shareholders the adoption of this Agreement and the transactions contemplated
hereby and shall use its reasonable best efforts to solicit from its
shareholders proxies in favor of adoption of this Agreement and the transactions
contemplated hereby and to take all other lawful action necessary to secure the
Company Shareholder Approval. Notwithstanding the foregoing, Company's
obligation to recommend the adoption of this Agreement and the transactions
contemplated hereby and to solicit proxies from its shareholders (but not its
obligations to convene and hold the Company Shareholders Meeting) shall be
subject to any action (including any withdrawal or change of its recommendation)
taken by, or upon authority of, the Board of Directors of Company which the
Board of Directors determines, based on the written advice of outside legal
counsel to Company, is required in the exercise of its fiduciary duties to
Company's shareholders under Applicable Laws.
(e) Company shall coordinate and cooperate with Hilton with
respect to the timing of the Company Shareholders Meeting.
Section 7.2. Letter of Company's Accountants. Company shall use all
reasonable efforts to cause to be delivered to Hilton and Company a letter of
Arthur Andersen LLP, Company's independent auditors, dated a date within two
business days before the date on which
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the Form S-4 shall become effective and addressed to Hilton, in form reasonably
satisfactory to Hilton and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4.
Section 7.3. Letter of Hilton's Accountants. Hilton shall use all
reasonable efforts to cause to be delivered to Company and Hilton a letter of
Arthur Andersen LLP, Hilton's independent auditors, dated a date within two
business days before the date on which the Form S-4 shall become effective and
addressed to Company, in form reasonably satisfactory to Company and customary
in scope and substance for letters delivered by independent public accountants
in connection with registration statements similar to the Form S-4.
Section 7.4. Reasonable Best Efforts; Notification. Upon the terms and
subject to the conditions set forth in this Agreement, each of the parties
hereto agrees to use all reasonable best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, and to assist and cooperate with
the other party in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement, including (i)
the obtaining of all necessary action or nonactions, waivers, consents and
approvals from Governmental Authorities and the making of all necessary
registrations and filings (including filings with Governmental Authorities, if
any) and the taking of all steps as may be reasonably necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Authority (including in respect of any Gaming Law), (ii) the
obtaining of all necessary consents, approvals or waivers from third parties,
(iii) the defending of any lawsuits or other legal proceedings, whether judicial
or administrative, challenging any of the Transaction Documents or the
consummation of any of the transactions contemplated thereby, including seeking
to have any stay or temporary restraining order entered by any court or other
Governmental Authority vacated or reversed and (iv) the execution and delivery
of any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, the Transaction
Documents.
Section 7.5. Approval of Gaming Commissions; Regulatory Matters. Hilton
and Company shall as promptly as practicable, but in no event later than 30 days
following the execution and delivery of this Agreement, file or submit those
filings and other submissions under applicable Gaming Laws in connection with
the Transaction Documents and the transactions contemplated thereby, and to
respond as promptly as practicable in order to obtain as soon as practicable
those approvals and consents required or necessary in connection with the
Transaction Documents or the transactions contemplated thereby. In addition,
each of Hilton and Company shall, and shall cause each of its Subsidiaries to
(and shall use its reasonable efforts to cause each of its affiliates other than
each of its Subsidiaries to), if it is necessary to obtain any regulatory
approval for the Merger or the Distributions, disassociate themselves from any
Person or Persons deemed, or reasonably likely to be deemed, unsuitable by any
Gaming Commission. Hilton and Company shall keep each other apprised of the
status of any communications with, and any inquiries or requests for additional
information from, the Gaming Commissions and shall comply promptly with any such
inquiry or request.
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Section 7.6. Supplemental Disclosure. Subject to compliance with
applicable Gaming Laws, Company shall confer on a regular and frequent basis
with Hilton, report on operational matters and promptly notify Hilton of, and
furnish Hilton with, any information it may reasonably request with respect to,
any event or condition or the existence of any fact that could reasonably be
expected to cause any of the conditions to Hilton's obligation to consummate the
Merger and the Hilton Distribution not to be completed, and Hilton shall
promptly notify Company of, and furnish Company any information it may
reasonably request with respect to, any event or condition or the existence of
any fact that could reasonably be expected to cause any of the conditions to
Company's obligation to consummate the Merger and the Company Distribution not
to be completed.
Section 7.7. Announcements. Prior to the Closing, none of the parties
hereto shall issue any press release or make any public announcement with
respect to this Agreement and the Merger without the prior consent of the other
(which consent shall not be unreasonably withheld), except as may be required by
Applicable Laws or applicable stock exchange regulations, in which event the
party required to make the release shall, if possible, allow the other party
reasonable time to comment on such release in advance of such issuance. The
parties hereto agree that the initial press release to be issued with respect to
the transactions contemplated hereby shall be in a form heretofore agreed to by
the parties hereto.
Section 7.8. No Solicitation.
(a) Company shall not, and shall not permit or cause any of its
Subsidiaries or any of the officers and directors of it or its Subsidiaries to,
and shall direct its and its Subsidiaries' employees, agents and representatives
(including any investment banker, attorney or accountant retained by it or any
of its Subsidiaries) not to, directly or indirectly, initiate, solicit, or
otherwise encourage any inquiries or the making of any proposal or offer with
respect to a merger, reorganization, share exchange, tender offer, consolidation
or similar transaction involving, or any purchase of, 15% or more of the assets
or any equity securities of Company or any of its Subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal").
Company shall not, and shall not permit or cause any of its Subsidiaries or any
of the officers and directors of it or its Subsidiaries to, and shall direct its
and its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to an Acquisition Proposal, whether made
before or after the date of this Agreement, or otherwise facilitate any effort
or attempt to make or implement or consummate an Acquisition Proposal; provided,
however, that nothing contained in this Agreement shall prevent Company or its
Board of Directors from (i) complying with Rule 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal or (ii) at any time after
180 days from the date hereof if the Merger shall not by such date have received
the Company Shareholder Approval: (x) providing information in response to a
request therefor by a Person who has made an unsolicited bona fide written
Acquisition Proposal if the Board of Directors receives from the Person so
requesting such information an executed confidentiality agreement on terms
substantially equivalent to those contained in the Confidentiality Agreement;
(y) engaging in any
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negotiations or discussions with any Person who has made an unsolicited bona
fide written Acquisition Proposal; or (z) recommending such an Acquisition
Proposal to the shareholders of Company, if, and only to the extent that, (i) in
each such case referred to in clause (x), (y) or (z) above, the Board of
Directors of Company determines in good faith after consultation with outside
legal counsel that such action is necessary in order for its directors to comply
with their respective fiduciary duties under applicable law and (ii) in each
case referred to in clause (y) or (z) above, the Board of Directors of Company
determines in good faith (after consultation with its financial advisor) that
such Acquisition Proposal, if accepted, is reasonably likely to be consummated,
taking into account all legal, financial and regulatory aspects of the proposal
and the Person making the proposal, and would, if consummated, result in a more
favorable transaction than the transaction contemplated by this Agreement,
taking into account the long-term prospects and interests of Company and its
shareholders. Company shall immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. Company agrees that it will
take the necessary steps to promptly inform the individuals or entities referred
to in the first sentence hereof of the obligations undertaken in this Section
7.8 and in the Confidentiality Agreement. Company also shall promptly request
each Person that has heretofore executed a confidentiality agreement in
connection with its consideration of an Acquisition Proposal to return all
confidential information heretofore furnished to such Person by or on behalf of
it or any of its Subsidiaries.
(b) Company shall notify Hilton immediately if any Acquisition
Proposal or inquiries regarding a potential Acquisition Proposal are received
by, any information with respect to an Acquisition Proposal or a potential
Acquisition Proposal is requested from, or any discussions or negotiations with
respect to an Acquisition Proposal or a potential Acquisition Proposal are
sought to be initiated or continued with, it or any of its representatives
indicating, in connection with such notice, the name of the Person involved and
the material terms and conditions of any such Acquisition Proposal, and
thereafter shall keep Hilton informed, on a current basis, on the status and
terms of any such inquiries or Acquisition Proposals and the status of any such
negotiations or discussions. Nothing in this Section 7.8(b), however, shall be
construed as authorizing Company, its Subsidiaries or their respective
employees, agents or representatives to engage in any activities prohibited by
Section 7.8(a) hereof.
Section 7.9. Indemnification.
(a) All indemnification obligations existing as of the date
hereof (including indemnification obligations relating to or arising out of the
transactions contemplated by this Agreement) relating to acts or omissions
occurring at or prior to the Effective Time in favor of the current or former
directors or officers of Company or any of its Subsidiaries (the "Indemnified
Persons") in the articles of incorporation or bylaws (or comparable
organizational documents) or indemnity contracts of Company or its Subsidiaries
(i) will be assumed by each of the Surviving Corporation and Lakes, each of whom
shall be jointly and severally liable for such indemnification, without further
action, as of the Effective Time and (ii) shall continue in full force and
effect in accordance with their respective terms for a period not less than six
years from the Effective Time. The parties hereto acknowledge and agree that
nothing in the preceding
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sentence modifies or in any way limits Company's ability or rights to seek
indemnification from Lakes pursuant to Section 7.9(b) with respect to any of the
foregoing obligations. If the Surviving Corporation is required to indemnify any
Indemnified Person for any act or omission relating to any of the
Non-Mississippi Group Liabilities (as defined in the Company Distribution
Agreement), including those relating to (A) Stratosphere, the Stratosphere
Litigation and/or the Stratosphere Contracts or (B) the Lakes Business,
including the Lakes Contracts and/or any member of the Lakes Group, then as a
condition to such indemnification, such Indemnified Person shall enter into a
subrogation agreement pursuant to which the Surviving Corporation shall be
subrogated to, and shall stand in the place of, such Indemnified Person as to
any events or circumstances in respect of which such Indemnified Person may have
any right or claim relating to such Non-Mississippi Group Liabilities against
any claimant or plaintiff asserting such liabilities against the Indemnified
Person, or against any other party (other than an Indemnified Person) that may
be liable.
(b) Lakes shall indemnify, defend and hold harmless the Surviving
Corporation and its Affiliates from and against any and all losses, liabilities,
damages and expenses (including the reasonable costs and expenses of
investigation and reasonable attorneys' fees and expenses in connection with any
or all such investigations or any and all Actions or threatened Actions)
incurred or suffered by the Surviving Corporation or any of its Affiliates
relating to the Non-Mississippi Group Liabilities, including those relating to
(A) the Stratosphere, the Stratosphere Litigation and/or the Stratosphere
Contracts and (B) the Lakes Business, including the Lakes Contracts and/or any
member of the Lakes Group.
(c) Prior to the Effective Time, Lakes and Company shall enter
into the Trust Agreement in the form of Exhibit M attached hereto (the "Trust
Agreement") and the Pledge and Security Agreement in the form of Exhibit N
attached hereto (the "Pledge and Security Agreement," and together with the
Trust Agreement, the "Security Agreements"), in each case, with such changes
thereto as the trustee thereunder may reasonably request, pursuant to which
Lakes shall deposit and make available the amounts set forth in such Security
Agreements for the time periods specified therein to secure and satisfy any and
all indemnification claims made or asserted against it pursuant to any of the
Transaction Documents.
(d) For so long as the Surviving Corporation is required to
provide indemnification to any of the Indemnified Persons, Lakes shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly, make any
Restricted Payment. If Lakes is unable, within 15 days of request, to pay in
full any claim made for indemnification by the Surviving Corporation or any of
its Affiliates pursuant to this Agreement or the Company Distribution Agreement,
then for so long as any such claim or any other claim for indemnification made
by the Surviving Corporation or any of its Affiliates remains unpaid, Lakes
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guaranty or otherwise become directly
or indirectly liable with respect to any indebtedness.
(e) For so long as the Surviving Corporation is required to
provide indemnification to any Indemnified Person, Gaming Co.'s ability to
transfer any material Mississippi Group Assets (as defined in the Company
Distribution Agreement) out of the Surviving Corporation
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shall be limited as follows. In connection with the transfer of any material
Mississippi Group Asset out of the Surviving Corporation, Gaming Co. shall
determine the net equity value of such asset at the time of such transfer (i.e.,
the fair market value of such asset less any indebtedness and known liabilities
relating thereto). So long as the net equity value of the asset being
transferred, together with the aggregate net equity values of all assets
previously transferred, is equal to or less than the total indebtedness of
Company as of the Determination Date under the Indentures and the Revolving
Credit Facility (collectively, the "Threshold Debt"), the subject asset can be
transferred without restriction. If, however, the net equity value of the asset
being transferred, together with the aggregate net equity values of all assets
previously transferred, is more than the Threshold Debt (such excess being
referred to as the "Required Credit Support"), then Gaming Co. shall either (i)
contribute to the Surviving Corporation assets with a net equity value at least
equal to the Required Credit Support or (ii) guaranty the indemnification
obligations to the Indemnified Persons in an amount at least equal to the
Required Credit Support. Once Gaming Co. is required to provide any Required
Credit Support, it shall only be entitled to transfer additional material
Mississippi Group Assets out of the Surviving Corporation if it concurrently
with such transfer either (x) contributes to the Surviving Corporation other
assets with a net equity value at least equal to the net equity value of the
assets to be transferred out of the Surviving Corporation or (ii) guarantees the
indemnification obligations of the Surviving Corporation to the Indemnified
Persons in an amount at least equal to the net equity value of the assets to be
transferred out of the Surviving Corporation.
(f) The provisions of this Section 7.9 are intended to be for the
benefit of, and shall be enforceable by, the Surviving Corporation and each
Indemnified Person (including such Person's heirs and representatives) and shall
be binding on all successors and assigns of the Surviving Corporation, Gaming
Co. and Lakes.
Section 7.10. Distributions.
(a) Prior to the Closing, Hilton will, and will cause each of its
Subsidiaries that is a party thereto, to enter into the Hilton Distribution
Agreement and such ancillary agreements (the "Hilton Ancillary Agreements") as
are reasonably required to effect the Hilton Distribution and to govern the
relationships between Hilton and Gaming Co. following the Hilton Distribution.
The Hilton Distribution Agreement and the Hilton Ancillary Agreements will
conform in all material respects to the terms of the subject forms attached
hereto as Exhibit A, with such changes thereto as Hilton and Gaming Co. deem
reasonably necessary and appropriate, provided that such changes are not
materially adverse to the interests of either Gaming Co., Company or Lakes.
Hilton shall use its reasonable best efforts to take all action necessary to
effect the Hilton Distribution prior to the Effective Time, pursuant to the
terms of the Hilton Distribution Agreement and the Hilton Ancillary Agreements.
Prior to the Effective Time and subject to the second preceding sentence, Hilton
will not agree to or permit any material modification of the terms of the Hilton
Distribution Agreement or the Hilton Ancillary Agreements that relate to the
Gaming Co. Business without the prior written consent of Company, which consent
will not be unreasonably withheld.
(b) Prior to the Closing, Company will, and will cause each of
its Subsidiaries that is a party thereto, to enter into the Company Distribution
Agreement and such ancillary agreements (the "Company Ancillary Agreements," and
together with the Hilton Ancillary Agreements, the
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"Ancillary Agreements") as are reasonably required to effect the Company
Distribution and to govern the relationships between Company and Lakes following
the Company Distribution. The Company Distribution Agreement and the Company
Ancillary Agreements will conform in all material respects to the terms of the
subject forms attached hereto as Exhibit B, with such changes thereto as Company
and Lakes deem reasonably necessary and appropriate, provided that such changes
are not materially adverse to the interests of either Company, Hilton or Gaming
Co. Company shall use its reasonable best efforts to take all action necessary
to effect the Company Distribution prior to the Effective Time, pursuant to the
terms of the Company Distribution Agreement and the Company Ancillary
Agreements. Prior to the Effective Time and subject to the second preceding
sentence, Company will not agree to or permit any material modification of the
terms of the Company Distribution Agreement or the Company Ancillary Agreements
without the prior written consent of Hilton, which consent will not be
unreasonably withheld.
Section 7.11. Private Letter Ruling and Tax Opinions. Each of
Hilton and Company shall use its reasonable best efforts and cooperate with the
other party and to obtain from the Service or tax counsel, as the case may be,
the Private Letter Rulings or tax opinions, as the case may be, contemplated by
Section 8.1(d) and 8.1(e) of this Agreement. Each party hereto shall also use
its reasonable best efforts to cause (a) the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(B) of the Code, (b)
the Hilton Distribution to qualify as a tax-free transaction to Hilton and its
stockholders within the meaning of Section 355 of the Code and (c) the Company
Distribution to qualify as a tax-free transaction, solely with respect to
Company's shareholders, within the meaning of Section 355 of the Code. Company
acknowledges, however, that (i) the Private Letter Ruling requested by Hilton
will also seek rulings with respect to the tax-free nature of certain other
transactions in which Hilton intends to engage after the Hilton Distribution
(the "Other Transactions") and (ii) Hilton will also be entitled to seek a
Private Letter Ruling that covers (and assumes the consummation of) such Other
Transactions in the Private Letter Ruling referred to above.
Section 7.12. NYSE Listing. Gaming Co. shall use its reasonable
efforts to cause the shares of Gaming Co. Common Stock to be issued in the
Merger to be approved for listing on the NYSE (or such other securities exchange
or market comprising the principal securities exchange on which the Gaming Co.
Common Stock is listed), subject to notice of official issuance, prior to the
Effective Time.
Section 7.13. Affiliate Agreements. Upon the execution of this
Agreement, Company will provide Hilton with a list of those Persons who are, in
Company's reasonable judgment, "affiliates" of Company within the meaning of
Rule 145 (each such Person who is an "affiliate" of Company within the meaning
of Rule 145 is referred to as an "Affiliate") promulgated under the Securities
Act ("Rule 145"). Company shall provide Hilton such information and documents as
Hilton shall reasonably request for purposes of reviewing such list and shall
notify Hilton in writing regarding any change in the identity of its Affiliates
prior to the Closing Date. Company shall each use all reasonable efforts to
deliver or cause to be delivered to Hilton by July 31, 1998 (and in any case
prior to the Effective Time) from each of its Affiliate, an executed Affiliate
Agreement, substantially in the form attached hereto as Exhibit C (an "Affiliate
Agreement").
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Gaming Co. may be entitled to place appropriate legends on the certificates
evidencing any Gaming Co. Common Stock to be received by such Affiliates of
Company pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for Gaming Co. Common Stock,
consistent with the terms of the Affiliate Agreements (provided that such
legends or stop transfer instructions shall be removed when such shares of
Gaming Co. Common Stock are generally transferable without any restrictions
imposed by Rule 145, upon the request of any shareholder that is not then an
Affiliate of Company).
Section 7.14. Stock Plans.
(a) At the Effective Time, each outstanding Company Stock Option
under the Company Stock Plans, whether vested or unvested, shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Stock Option the same number of shares of Gaming
Co. Common Stock as the holder of such Company Stock Option would have been
entitled to receive pursuant to the Merger had such holder exercised such option
in full immediately prior to the Effective Time (rounded to the nearest whole
number), at a price per share (rounded to the nearest whole cent) equal to (y)
the aggregate exercise price for the shares of Company Common Stock purchasable
pursuant to such Company Stock Option immediately prior to the Effective Time
divided by (z) the number of full shares of Gaming Co. Common Stock deemed
purchasable pursuant to such Company Stock Option in accordance with the
foregoing, it being acknowledged by Hilton that each such Company Stock Option
will, to the extent provided for in the applicable option or agreement, become
fully vested at the Effective Time as a result of the Merger.
(b) Promptly after the Effective Time, Gaming Co. shall deliver
to the participants in the Company Stock Plans appropriate notice setting forth
such participants' rights pursuant thereto and the grants pursuant to Company
Stock Plans shall continue in effect on the same terms and conditions (subject
to the adjustments required by this Section 7.14 after giving effect to the
Merger).
(c) Gaming Co. shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Gaming Co. Common Stock
for delivery under Company Stock Plans assumed in accordance with this Section
7.14. Promptly after the Effective Time, Gaming Co. shall file a registration
statement on Form S-8 (or any successor or other appropriate forms), or another
appropriate form with respect to the shares of Gaming Co. Common Stock subject
to such options and shall use its reasonable best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such options remain outstanding.
(d) The Board of Directors of Company shall, prior to or as of
the Effective Time, take all necessary actions, pursuant to and in accordance
with the terms of the Company Stock Plans and the instruments evidencing the
Company Stock Options, to provide for the conversion of the Company Stock
Options into options to acquire Gaming Co. Common Stock in accordance with this
Section 7.14; and Company represents and warrants that no consent of the holders
of the Company Stock Options is required in connection with such conversion.
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(e) The Board of Directors of Company shall, prior to or as of
the Effective Time, take appropriate action to approve the deemed cancellation
of the Company Stock Options for purposes of Section 16(b) of the Exchange Act.
The Board of Directors of Gaming Co. shall, prior to or as of the Effective
Time, take appropriate action to approve the deemed grant of options to purchase
Gaming Co. Common Stock under the Company Stock Options (as converted pursuant
to this Section 7.14) for purposes of Section 16(b) of the Exchange Act.
Section 7.15. Indian Gaming and Debt Agreements and Lakes
Agreements. Subject to Lake's obligations to indemnify the Surviving Corporation
with respect to such obligations pursuant to Section 7.9 hereof and Article V of
the Company Distribution Agreement, the Surviving Corporation shall comply with
all of Company's obligations under any Indian Gaming and Debt Agreements or
Lakes Agreements to which it is a party or subject to and for which it has not
been released.
Section 7.16. Conveyance Taxes. Hilton and Company shall cooperate
in the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees or any similar taxes which become payable
in connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time. Company shall
pay, without deduction or withholding from any amount payable to the holders of
Company Common Stock, any such taxes or fees imposed by any Governmental
Authority (and any penalties and interest with respect to such taxes and fees)
which become payable in connection with the transactions contemplated by this
Agreement on behalf of its shareholders.
Section 7.17. Stockholder or Shareholder Litigation. Each of Hilton
and Company shall give the other the reasonable opportunity to participate in
the defense of any stockholder or shareholder litigation against Hilton or
Company, as applicable, and its directors relating to the transactions
contemplated hereby.
Section 7.18. Employee Benefits.
(a) Gaming Co. shall or shall cause the Surviving Corporation to
maintain in effect employee benefit plans and arrangements which provide
benefits which have a value which is substantially comparable, in the aggregate,
to the benefits provided by the Employee Benefit Plans (not taking into account
the value of any benefits under any such plans which are equity based) for a
period of one year after the Effective Time.
(b) Gaming Co. shall or shall cause the Surviving Corporation to
honor all employment, severance and termination agreements (including change in
control provisions) of the employees of Company and its Subsidiaries in effect
on the date hereof; provided that (x) all such agreements are set forth or
summarized on the Company Disclosure Schedule, (y) such agreements will not be
amended, modified or extended after the date hereof without the written consent
of Hilton and (z) to the extent such agreement would unjustly or inequitably
enrich such employee, the foregoing commitment shall not apply to any Persons
who become employees of
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any member of the Lakes Group and shall instead become a commitment of Lakes who
shall honor any such agreement.
(c) For purposes of determining eligibility to participate and
vesting, including accrual or entitlement to benefits where length of service is
relevant under any employee benefit plan or arrangement of Gaming Co. or the
Surviving Corporation, employees of Company and its Subsidiaries as of the
Effective Time shall receive service credit for service with Company and any of
its Subsidiaries to the same extent such service was granted under the Employee
Benefit Plans.
Section 7.19. Indentures and Company Notes. Gaming Co. shall cause
the Surviving Corporation to comply with any "Change of Control Offer" (as
defined in the Indentures) that the Surviving Corporation is required to make
under any of the Indentures or the Company Notes. Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties hereto agrees to
use all reasonable best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other party in
doing, all things necessary, proper or advisable to satisfy the conditions set
forth in Section 8.1(j) below.
Section 7.20. Post-Closing Marketing Activities. Gaming Co. shall,
and shall cause the Surviving Corporation to, maintain and observe Company's
marketing agreements with each of the Coushatta Tribe of Louisiana and the
Tunica-Biloxi Tribe of Louisiana as follows:
For as long as the current Louisiana Indian Management Contracts (the
management contract relating to the Avoyelles casino expires June 2001 and the
management contract relating to the Coushatta casino expires January 2002) are
existing, neither Gaming Co. nor Surviving Corporation shall directly or
indirectly engage in Restricted Activities in the following markets: (i) greater
Houston, Texas; (ii) greater Alexandria, Louisiana; (iii) greater Baton Rouge,
Louisiana; or (iv) greater Lafayette, Louisiana; provided, however, that nothing
herein shall prevent the Surviving Corporation from directly mailing any
marketing material relating to the Mississippi Casinos in such markets to
individuals or entitles that are included in the Surviving Corporation's patron
database; and provided further, however, that nothing herein shall prevent
Gaming Co. from marketing or advertising its casinos (or employing its related
databases) other than Mississippi Casinos in such markets.
Section 7.21. Shark Club Ground Lease. Subject to the terms of the
Shark Club Ground Lease, Lakes shall, and shall cause its Subsidiaries to,
exercise the "call" option to purchase the leased premises (as described in the
Shark Club Ground Lease) prior to the commencement of the period during which
the landlord under the lease has the right to exercise a "put" option to sell
such leased premises to a Subsidiary of Lakes.
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ARTICLE VIII.
CONDITIONS TO MERGER
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction or waiver prior to the Effective
Time of the following conditions:
(a) Shareholder Approval. Company shall have obtained the Company
Shareholder Approval.
(b) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have expired or been earlier
terminated.
(c) Registration Statement. The Form S-4 shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceeding seeking a stop order.
(d) Private Letter Rulings. Unless otherwise agreed upon by
Hilton and Company as set forth in paragraph (e) below, (i) Hilton shall have
received from the Service a private letter ruling (the "Private Letter Ruling"),
reasonably satisfactory in form and substance to Hilton and Company,
substantially to the effect that, on the basis of the facts, representations,
and Applicable Law existing at the date of the issuance of such Private Letter
Ruling, including the intended consummation of the Other Transactions, the pro
rata distribution of the stock of Gaming Co. to the holders of Hilton Common
Stock in the Hilton Distribution will be non-taxable for federal income tax
purposes to both Hilton and its stockholders under Section 355 of the Code and
(ii) Company shall have received from the Service a Private Letter Ruling,
reasonably satisfactory in form and substance to Hilton and Company,
substantially to the effect that, on the basis of the facts, representations,
and Applicable Law existing at the date of the issuance of such Private Letter
Ruling, the pro rata distribution of the stock of Lakes to the holders of
Company Common Stock in the Company Distribution will be non-taxable for federal
income tax purposes to Company's shareholders under Section 355 of the Code.
(e) Tax Opinions in Lieu of Private Letter Ruling. In the event
that Hilton and Company agree to complete the transactions contemplated by this
Agreement without obtaining the Private Letter Rulings, (i) Hilton shall have
received an opinion of Latham & Watkins, counsel to Hilton, reasonably
satisfactory in form and substance to each of Hilton and Company, substantially
to the effect that, on the basis of the facts, representations, and Applicable
Law existing at the date of such opinion, including the intended consummation of
the Other Transactions, the pro rata distribution of the stock of Gaming Co. to
the holders of Hilton Common Stock in the Hilton Distribution will be, although
not free from doubt, non-taxable for federal income tax purposes to both Hilton
and its stockholders under Section 355 of the Code and (ii) Company shall have
received an opinion of Maslon, Edelman, Borman & Brand, LLP counsel to Company,
reasonably satisfactory in form and substance to each of Hilton and Company,
substantially to the effect that, on the basis of the facts, representations,
and Applicable Law existing at the date of such opinion, the pro rata
distribution of the stock of Lakes to the holders of Company Common Stock in the
Company Distribution will be, although
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not free from doubt, non-taxable for federal income tax purposes to Company's
shareholders under Section 355 of the Code.
(f) No Injunctions or Restraints. No Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any order, executive
order, stay, decree, judgment or injunction or statute, rule, regulation which
is in effect and which has the effect of making the Merger or the Distributions
illegal or otherwise prohibiting consummation of the Merger or the
Distributions.
(g) Consummation of the Distributions. Each of the Hilton
Distribution and the Company Distribution shall have become effective in
accordance with the terms of the applicable Distribution Agreement and the
applicable Ancillary Agreements.
(h) Tax Legislation. There shall be no proposed legislation
introduced in bill form and pending congressional action which, if passed, would
have the effect of amending the Code so as to alter in any materially adverse
respect any of the tax consequences prescribed by the Private Letter Ruling or
the tax opinions in lieu thereof.
(i) National Listing. The shares of Gaming Co. Common Stock to be
issued in the Merger and upon exercise or conversion of the Company Stock
Options shall have been approved for listing on a national securities exchange,
subject to official notice of issuance.
(j) Indentures. Each member of the Lakes Group shall have been
released from all obligations relating to (x) the Company Notes, including the
release of the capital stock of each member of the Lakes Group from the
obligations and Encumbrances under the Subsidiaries Notes Pledge and (y) the
Revolving Credit Facility.
(k) Closing Date. The Closing of the Merger shall not take place
before December 1, 1998.
Section 8.2. Additional Conditions to Obligations of Gaming Co.
The obligation of Gaming Co. to effect the Merger is subject to the satisfaction
of each of the following conditions prior to the Effective Time, any of which
may be waived in writing exclusively by Gaming Co.:
(a) Representations and Warranties. The representations and
warranties of Company set forth in this Agreement that are qualified as to
materiality shall be true and correct in all respects, and the representations
and warranties of Company set forth in this Agreement that are not so qualified
shall be true and correct in all material respects, in each case, as of the date
of this Agreement and (except to the extent such representations and warranties
speak as of an earlier date, in which case they shall be true and correct as of
such date) as of the Closing Date as though made on and as of the Closing Date,
except for changes contemplated or permitted by this Agreement; and Gaming Co.
shall have received a certificate signed on behalf of Company by the chief
executive officer and the chief financial officer of Company to such effect.
(b) Performance of Obligations of Company and Lakes. Company and
Lakes shall have performed in all material respects all obligations required to
be performed by them under
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this Agreement at or prior to the Closing Date, and Gaming Co. shall have
received a certificate signed on behalf of Company by the chief executive
officer and the chief financial officer of Company to such effect.
(c) Tax Opinion. Gaming Co. shall have received an opinion of
Latham & Watkins, substantially in the form of Exhibit H, dated the Closing Date
and to the effect that: (i) the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a)(1) of the
Code; (ii) each of Gaming Co. and Company will be a party to the reorganization
within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will
be recognized by Company, Hilton, or Gaming Co. as a result of the Merger,
except for any gain which may be recognized by Company from the Company
Distribution as a result of the Merger. In rendering such opinion, Latham &
Watkins shall receive and may rely upon representations contained in
certificates of Company and Gaming Co. substantially in the forms of Exhibits I
and J attached hereto.
(d) Consents. All necessary approvals or authorizations of any
Governmental Authority required or necessary under applicable Gaming Laws in
connection with the Merger and the Distributions shall have been obtained.
(e) Letters from Affiliates. Gaming Co. shall have received from
each Person referred to in Section 7.13 an executed Affiliate Agreement.
(f) Security Agreements. Lakes shall have executed each of the
Security Agreements, each of which shall be in full force and effect and legally
binding against Lakes and no material breach by Lakes shall have occurred
thereunder as of the Closing Date.
(g) Non-Competition Agreements. Each of Lyle Berman, Thomas J.
Brosig and Stanley M. Taube shall have executed a Non-Competition Agreement,
each of which shall be in full force and effect and legally binding against each
of Lyle Berman, Thomas J. Brosig and Stanley M. Taube and no material breach by
either Lyle Berman, Thomas J. Brosig or Stanley M. Taube shall have occurred
thereunder as of the Closing Date.
(h) Settlement Agreement. The Settlement Agreement shall be in
full force and effect and be legally binding on the parties thereto, and no
material breach by any of the parties thereto shall have occurred as of the
Closing Date.
(i) Accountant's Letter and Tax Opinion. Company and Gaming Co.
shall have received from Company's representative Arthur Andersen LLP a letter
dated the date of the Closing Date addressed to Company and Gaming Co. at a
level of detail reasonably satisfactory to Company and Gaming Co., setting out,
based on a reasonable estimate, the computation of the basis in the stock of
Lakes immediately before the Company Distribution, together with the amount of
the Stratosphere Loss (as defined in the Tax Allocation and Indemnity Agreement
attached to the Company Distribution Agreement). Company and Gaming Co. also
shall have received as of the same date an opinion of Arthur Andersen LLP at a
level of detail reasonably satisfactory to Company and Gaming Co., indicating
that there is at least a "reasonable basis" (as defined in Code section 6662)
for filing the Tax Returns reporting the Base Stratosphere Loss (as
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defined in the Tax Allocation and Indemnity Agreement attached to the Company
Distribution Agreement) in the manner recommended by Lakes and its
representatives.
(j) Net Equity Value. The Company Net Equity Value shall be equal
to or greater than $585,100,000.
Section 8.3. Additional Conditions to Obligations of Company. The
obligations of Company to effect the Merger are subject to the satisfaction of
each of the following conditions prior to the Effective Time, any of which may
be waived in writing exclusively by Company:
(a) Representations and Warranties. The representations and
warranties of Hilton set forth in this Agreement that are qualified as to
materiality shall be true and correct in all respects, and the representations
and warranties of Hilton set forth in this Agreement that are not so qualified
shall be true and correct in all material respects, in each case, as of the date
of this Agreement and (except to the extent such representations and warranties
speak as of an earlier date, in which case they shall be true and correct as of
such date) as of the Closing Date as though made on and as of the Closing Date,
except for changes contemplated or permitted by this Agreement; and Company
shall have received a certificate signed on behalf of Gaming Co. by the chief
executive officer and the chief financial officer of Gaming Co. to such effect.
(b) Performance of Obligations of Hilton and Gaming Co. Hilton
and Gaming Co. shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the Closing
Date; and Company shall have received a certificate signed on behalf of Gaming
Co. by the chief executive officer and the chief financial officer of Gaming Co.
to such effect.
(c) Tax Opinion. Company shall have received an opinion of
Maslon, Edelman, Borman & Brand, LLP, substantially in the form of Exhibit K,
dated the Closing Date and to the effect that: (i) the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a)(1) of the Code; (ii) each of Gaming Co. and Company will be a
party to the reorganization within the meaning of Section 368(b) of the Code;
and (iii) no gain or loss will be recognized by Company as a result of the
Merger, except for any gain which may be recognized by Company from the Company
Distribution as a result of the Merger. In rendering such opinion, Maslon,
Edelman, Borman & Brand, LLP shall receive and may rely upon representations
contained in certificates of Company and Gaming Co. substantially in the forms
of Exhibits I and J attached hereto.
(d) Receipt of an Updated Fairness Opinion. In the event: (a) (i)
Hilton consummates the Hilton Distribution after the Company Shareholder
Approval has been obtained; (ii) the Closing Date shall not have occurred within
20 business days of the date that the Hilton Distribution is consummated; and
(iii) an Acquisition Proposal involving Company shall not have been received by
or made known to Company, then Ladenburg Thalmann & Co. Inc. shall have reissued
to Company the Fairness Opinion as of a date at least 21 or more business days
after the date that the Hilton Distribution is consummated, after having been
requested by Company to reissue such opinion following the consummation of the
Henry Distribution; or (b) Gaming Co. acquires after the date hereof, either
individually or in the
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aggregate, any Person, properties, assets or businesses with a net equity value
in excess of $300 million, then Ladenburg Thalmann & Co. Inc. shall have
reissued to Company the Fairness Opinion dated as of a date after the date any
such acquisition is consummated, after having been requested by Company to
reissue such opinion following the Consummation of any such acquisition.
ARTICLE IX.
TERMINATION AND AMENDMENT
Section 9.1. Termination. This Agreement may be terminated at any
time prior to the Effective Time (with respect to Sections 9.1(b) through
9.1(l), by written notice by the terminating party to the other party), whether
before or after approval of the matters presented in connection with the Merger
by the shareholders of Company:
(a) by mutual written consent of Hilton and Company; or
(b) by either Hilton or Company, if the Merger shall not have
been consummated by December 31, 1998 (provided that (i) either Hilton or
Company may extend such date to March 1, 1999 by providing written notice
thereof to the other party on or prior to December 31, 1998, such date, as it
may be so extended, shall be referred to herein as the "Outside Date") and (ii)
the right to terminate this Agreement under this Section 9.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); or
(c) by either Hilton or Company, if a court of competent
jurisdiction or other Governmental Authority shall have issued a nonappealable
final order, decree or ruling or taken any other nonappealable final action, in
each case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger or the Distributions; or
(d) by either Hilton or Company, if prior to the Effective Time,
the Code is amended so as to alter in any materially adverse respect any of the
tax consequences provided by the Private Letter Rulings described in Section
8.1(d) or the opinions of counsel described in Section 8.1(e); or
(e) by Hilton, if, at the Company Shareholders Meeting (including
any adjournment or postponement), the Company Shareholder Approval shall not
have been obtained; or
(f) by Company, if the Hilton stockholders do not ratify the
Hilton Distribution; or
(g) by Hilton, if (i) the Board of Directors of Company shall
have withdrawn or modified its recommendation of this Agreement or the Merger;
(ii) after the receipt by Company of an Acquisition Proposal, Hilton requests in
writing that the Board of Directors of Company reconfirm its recommendation of
this Agreement and the Merger to the shareholders of Company and the Board of
Directors of Company fails to do so within 20 business days after its receipt of
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Hilton's request; (iii) the Board of Directors of Company shall have recommended
to the shareholders of Company an Acquisition Proposal; (iv) a tender offer or
exchange offer for 15% or more of the outstanding shares of Company Common Stock
is commenced (other than by Hilton or an Affiliate of Hilton) and the Board of
Directors of Company recommends that the shareholders of Company tender their
shares in such tender or exchange offer; or (v) for any reason Company fails to
call and hold the Company Shareholders Meeting by the Outside Date (provided
that Hilton's right to terminate this Agreement under such clause (v) shall not
be available if (1) at such time Company would be entitled to terminate this
Agreement under Section 9.1(h) or (2) Company failed to call and hold such
meeting because the Form S-4 shall not have become effective under the
Securities Act, provided that Company shall have complied with all of its
obligations under this Agreement); or
(h) by Hilton or Company, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in this Agreement, which breach (i) will cause the conditions set
forth in Section 8.2(a) or (b) (in the case of termination by Hilton) or 8.3(a)
or (b) (in the case of termination by Company) not to be satisfied, and (ii)
shall not have been cured within 20 business days following receipt by the
breaching party of written notice of such breach from the other party; or
(i) by Hilton, if the Company Net Equity Value is less than
$585,100,000; or
(j) by Company, if (i) Hilton consummates the Hilton Distribution
before the Company Shareholders Meeting, (ii) an Acquisition Proposal involving
Company shall not have been received by or made known to Company prior to the
Company Shareholders Meeting, and (iii) the Company Shareholder Approval is not
obtained; or
(k) by Company, if (i) Hilton consummates the Hilton Distribution
after the Company Shareholder Approval has been obtained, (ii) the Closing Date
shall not have occurred within 20 business days of the date that the Hilton
Distribution is consummated, (iii) an Acquisition Proposal involving Company
shall not have been received or made known to Company and (iv) Ladenburg
Thalmann & Co. Inc. shall not have reissued to Company the Fairness Opinion as
of a date at least 21 or more business days after the date that the Hilton
Distribution is consummated after having been requested by Company to reissue
such opinion following the consummation of the Hilton Distribution; or
(l) by Company, if Gaming Co. acquires after the date hereof,
either individually or in the aggregate, any Person, properties, assets or
businesses with a net equity value in excess of $300 million and Ladenburg
Thalmann & Co. Inc. shall not have reissued to Company the Fairness Opinion as
of a date after any such acquisition is consummated, after having been requested
by Company to reissue such opinion following the consummation of any such
acquisition.
Section 9.2 Effect of Termination. In the event of termination of
this Agreement as provided in Section 9.1, this Agreement shall immediately
become void and there shall be no liability or obligation on the part of Hilton
or Company or any of their respective officers, directors, stockholders or
Affiliates, except as set forth in Section 9.3 and except that such
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<PAGE> 72
termination shall not limit liability for a willful breach of this Agreement;
provided, that the provisions of Section 9.3 of this Agreement and the
Confidentiality Agreement shall remain in full force and effect and survive any
termination of this Agreement.
Section 9.3. Fees and Expenses.
(a) Except as set forth in Section 7.16 or in this Section 9.3,
all Transaction Costs shall be paid by the party incurring such expenses,
whether or not the Merger is consummated; provided, however, that if the Merger
is consummated, all Transaction Costs of Company shall be paid by the Surviving
Corporation.
(b) Company shall pay Hilton a termination fee of $30 million
upon the earliest to occur of the following events:
(i) the termination of this Agreement by Hilton pursuant
to Section 9.1(e), if any Acquisition Proposal involving Company shall have been
received or made known to Company prior to the Company Shareholders Meeting and
either a binding agreement with respect to any such Acquisition Proposal is
entered into, or the transactions constituting any such Acquisition Proposal are
consummated, within 18 months of such termination; provided, however, that no
termination fee shall be payable in such an event if Company would be entitled
to terminate this Agreement pursuant to either Section 9.1(j) or 9.1(k); or
(ii) the termination of this Agreement by Hilton pursuant
to Section 9.1(g), whether or not Company is entitled to terminate this
Agreement pursuant to Section 9.1(j) or 9.1(k).
Company's payment of a termination fee pursuant to this subsection shall be the
sole and exclusive remedy of Hilton against Company and any of its Subsidiaries
and their respective directors, officers, employees, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment;
provided that, this limitation shall not apply in the event of a willful breach
of this Agreement by Company.
(c) The expenses and fees, if applicable, payable pursuant to
Section 9.3(b) shall be paid concurrently with the first to occur of the events
described in Section 9.3(b)(i) or (ii).
Section 9.4. Amendment. This Agreement may be amended by Hilton and
Company, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the shareholders of Company, but, after any such approval, no
amendment shall be made which by law requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 9.5. Extension; Waiver. At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their respective
Boards of Directors, may, to the extent legally allowed, (i) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
- 67 -
<PAGE> 73
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained here. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such party.
ARTICLE X.
MISCELLANEOUS
Section 10.1. Nonsurvival of Representations, Warranties and
Agreements. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Sections 2.4,
2.5, 2.6, 3.1, 3.2, 6.5, 7.4(iii) and (iv), 7.9, 7.14, 7.15, 7.16, 7.18, 7.20
and 7.21 hereof, this Article X and the Security Agreements delivered pursuant
to Section 7.9(c) and the agreements of the Affiliates delivered pursuant to
Section 7.13. The Confidentiality Agreement shall survive the execution and
delivery of this Agreement.
Section 10.2. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Hilton, to
Hilton Hotels Corporation
9336 Civic Center Drive
Beverly Hills, CA 90210
Attn: General Counsel
Telecopy: (310) 205-7677
with a copy to:
Latham & Watkins
1001 Pennsylvania, N.W., Suite 1300
Washington, D.C. 20004
Attn: Bruce E. Rosenblum, Esq.
Telecopy: (202) 637-2201
(b) if to Gaming Co. or Merger Sub, to
Gaming Co., Inc.
3930 Howard Hughes Parkway, 4th Floor
Las Vegas, Nevada 89109
Attn: General Counsel
Telecopy: (702) 699-5179
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<PAGE> 74
(c) if to Company or Lakes, to
Grand Casinos, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: General Counsel
Telecopy: (612) 449-8509
with a copy to:
Maslon, Edelman, Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attn: Neil I. Sell, Esq.
Telecopy: (612) 672-8397
Section 10.3. Interpretation. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement," "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to June
30, 1998.
Section 10.4. Counterparts. This Agreement and any amendments
hereto may be executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when two or
more counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
Section 10.5. Entire Agreement; No Third Party Beneficiaries. This
Agreement and all documents and instruments referred to herein (a) constitute
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) except as provided in Section 7.9 are not intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder;
provided that, the Confidentiality Agreement shall remain in full force and
effect until the Effective Time. Each party hereto agrees that, except for the
representations and warranties contained in this Agreement, neither Hilton nor
Company has made or shall be deemed to have made any other representations or
warranties, express or implied, and each hereby disclaims any other
representations and warranties made by itself or any of its officers, directors,
employees, agents, financial and legal advisors or other representatives, with
respect to (i) the execution and delivery of this Agreement, (ii) any financial
projections or schedules (other than the financial schedules, budgets or pro
formas described or referred to in Sections 3.1(c), 4.19, 4.20 or 5.14 of this
Agreement) heretofore or hereafter delivered to or made available to any such
Persons or their counsel, accountants, advisors, representatives or Affiliates
or (iii) the transactions contemplated hereby, notwithstanding the delivery or
disclosure to the other or the other's representatives of
- 69 -
<PAGE> 75
any documentation or other information with respect to any one or more of the
foregoing; it being understood that each party hereto has not and will not rely
on any financial projections or schedules (other than the financial projections
or schedules described or referred to in Sections 3.1(c), 4.19, 4.20 or 5.14 of
this Agreement) in connection with its evaluation of any other party hereto or
the Merger.
Section 10.6. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of New York without regard to
any applicable conflicts of law, including all matters of construction,
validity, and performance, except to the extent that the provisions of the DGCL
or the MBCA and applicable Gaming Laws shall be mandatorily applicable to the
Merger or this Agreement.
Section 10.7. Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
Section 10.8. Headings; References. The article, section and
paragraph headings and table of contents contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. All references herein to "Article," "Sections"
or "Exhibits" shall be deemed to be references to Articles or Sections hereof or
Exhibits hereto unless otherwise indicated.
Section 10.9. Severability; Enforcement. Except to the extent that
the application of this Section 10.9 would have a Material Adverse Effect with
respect to Hilton, Gaming Co. or Company, the invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions hereof.
If it is ever held that any covenant hereunder is too broad to permit
enforcement of such covenant to its fullest extent, each party agrees that a
court of competent jurisdiction may enforce such covenant to the maximum extent
permitted by law, and each party hereby consents and agrees that such scope may
be judicially modified accordingly in any proceeding brought to enforce such
covenant.
Section 10.10. Specific Performance. The parties hereto agree that
the remedy at law for any breach of this Agreement will be inadequate and that
any party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or remedy. Such party
may, in its sole discretion, apply to a court of competent jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof and, to the extent permitted by Applicable Laws, each party hereto waives
any objection to the imposition of such relief.
Section 10.11. Effect of Hilton Distribution. The parties
acknowledge that Hilton may effect the Hilton Distribution in advance of the
Effective Time. From and after the effectiveness of the Hilton Distribution: (i)
the rights and obligations of Hilton contained in each of the Transaction
Documents shall become the rights and obligations solely of Gaming Co., and
Hilton shall have no further obligations under each of the Transaction
Documents; (ii) all covenants
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<PAGE> 76
under each of the Transaction Documents to be performed by Hilton will be
performed by (and appropriately construed as covenants of) Gaming Co.; (iii) all
covenants under each of the Transaction Documents to be performed for the
benefit of Hilton will be performed (and appropriately construed as covenants)
for the benefit of Gaming Co. and all payments to be made to Hilton shall
instead be paid to Gaming Co.; and (iv) the representations and warranties of
Hilton shall be representations and warranties of Gaming Co., unless by their
context such representations and warranties are not appropriate to Gaming Co.,
appropriately modified to give effect to the transactions contemplated by this
Agreement and the Hilton Distribution Agreement.
Section 10.12. Approvals, Consent and Waivers. Any approval,
consent or waiver required or authorized by any provision of this Agreement to
be given or made by any of the parties hereto shall only be valid to the extent
such approval, consent or waiver is in writing and signed by, with respect to
either Hilton, Gaming Co. or Merger Sub, the Executive Vice President & Chief
Financial Officer, the Executive Vice President & General Counsel, the Senior
Vice President & Treasurer or the Senior Vice President & Controller, and with
respect to either Company or Lakes, the Chairman of the Board of Directors, the
President and Chief Executive Officer or the Chief Financial Officer, of the
party to be bound by such approval, consent or waiver.
[Signature Page to Follow]
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<PAGE> 77
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be signed by their respective duly authorized officers as of the date first
written above.
HILTON HOTELS CORPORATION,
a Delaware corporation
/s/ Matthew J. Hart
----------------------------------------
By:
Its:
GRAND CASINOS, INC.,
a Minnesota corporation
/s/ Lyle Berman
----------------------------------------
By: Lyle Berman
Its: Chairman of the Board
GAMING CO., INC.,
a Delaware corporation
/s/ Matthew J. Hart
----------------------------------------
By:
Its:
GCI LAKES, INC.,
a Minnesota corporation
/s/ Lyle Berman
----------------------------------------
By: Lyle Berman
Its: Chairman of the Board
GAMING ACQUISITION
CORPORATION, a Minnesota corporation
/s/ Matthew J. Hart
----------------------------------------
By:
Its:
S-1
<PAGE> 78
Pursuant to Item 601(b)(2) of Regulation S-K, certain Schedules and Exhibits
have been omitted from this Agreement. The Registrant will furnish a copy of any
omitted Schedule or Exhibit to the Commission upon request.
<TABLE>
<CAPTION>
<S> <C> <C>
Schedules:
Schedule 4.2 list of Subsidiaries
Schedule 4.4 list pursuant to Section 4.4(b) of certain agreements for which consent to the
execution of the transaction documents must be obtained
Schedule 4.5 states the Registrant's ownership in Hilton capital stock.
Schedule 4.7 list of certain undisclosed liabilities pursuant to Section 4.7(b)
Schedule 4.8 list of changes or events relating to compensation, employee relocation, financing
arrangements with respect to certain properties and accounting treatment
Schedule 4.9 list of material litigation
Schedule 4.10 list of certain tax matters pursuant to Section 4.10
Schedule 4.11 list of employee benefit plans, complaints regarding employee benefit plans, and
liabilities associated with employee benefit plans in connection with the proposed
transactions
Schedule 4.14 list of certain real property
Schedule 4.15 list of certain Indian Gaming and Debt Agreements and Lakes Agreements pursuant to
Section 4.15
Schedule 4.17 list of transactions with affiliates
Schedule 4.18 list of certain matters relating to Stratosphere and the Lakes Group
Schedule 6.1 list of permitted activities by the Company and Lakes
Schedule 7.18 list of employee benefits to be provided by Gaming Co.
Schedule 5.4(b) list pursuant to Section 5.4(b) of certain agreements for which consent to the
transaction documents must be obtained by Hilton
Schedule 5.9 list of material litigation involving Hilton
The following is a list and description of the omitted Exhibits:
Exhibit A Form of Hilton Distribution Agreement
Exhibit B (Filed as Exhibit 10.1 to this Form 10-Q.)
Exhibit C Form of Affiliate Agreement
Exhibit D Company Retained Business Financial Statements
Exhibit E Lakes Balance Sheet
Exhibit F Company's Capital Expenditure Plans 1998 - 1999
Exhibit G Gaming Co. Business Financial Statement
Exhibit H Form of Opinion of Latham & Watkins
Exhibit I Form of Certificate of Company
Exhibit J Form of Certificate of Gaming Co.
Exhibit K Form of Opinion of Maslon Edelman Borman & Brand, LLP
Exhibit L Form of Non-Competition Agreement
Exhibit M (Filed as Exhibit 10.5 to this Form 10-Q)
Exhibit N (Filed as Exhibit 10.6 to this Form 10-Q)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
DISTRIBUTION AGREEMENT
by and between
GRAND CASINOS, INC.
and
GCI LAKES, INC.
Dated as of [ ], 1998
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS....................................................... 2
Section 1.01. General.............................................. 2
Section 1.02. Terms Defined Elsewhere in Agreement................. 13
ARTICLE II TRANSFER OF ASSETS............................................... 13
Section 2.01. Transfer of Assets to Lakes.......................... 13
Section 2.02. Transfers of Assets from Non-Mississippi
Subsidiaries to Company or Mississippi Subsidiaries.. 14
Section 2.03. Transfers Not Effected Prior to the Distribution..... 14
Section 2.04. Cooperation Re: Assets.............................. 15
Section 2.05. No Representations or Warranties; Consents........... 15
Section 2.06. Conveyancing and Assumption Instruments.............. 16
Section 2.07. Cash Allocations After the Year-End.................. 16
Section 2.08. Cash Allocation; Cash Management..................... 16
Section 2.09. Allocation of Debt................................... 17
ARTICLE III ASSUMPTION AND SATISFACTION OF LIABILITIES....................... 18
Section 3.01. Assumption and Satisfaction of Mississippi Business
and Non-Mississippi Business Liabilities............. 18
Section 3.02 Assumption and Satisfaction of Contingent Company
Liabilities and Transaction Liabilities.............. 18
ARTICLE IV THE DISTRIBUTION................................................. 18
Section 4.01. Cooperation Prior to the Distribution................ 18
Section 4.02. Company Board Action; Conditions Precedent
to the Distribution ................................. 19
Section 4.03. The Distribution..................................... 21
ARTICLE V INDEMNIFICATION.................................................... 21
Section 5.01. Indemnification by Company........................... 21
Section 5.02. Indemnification by Lakes............................. 21
Section 5.03. Insurance Proceeds................................... 21
Section 5.04. Procedure for Indemnification........................ 22
Section 5.05. Remedies Cumulative.................................. 24
Section 5.06. Survival of Indemnities.............................. 24
ARTICLE VI CERTAIN ADDITIONAL MATTERS....................................... 25
Section 6.01. Lakes Board.......................................... 25
Section 6.02. Resignations; Company Board.......................... 25
Section 6.03. Lakes Certificate and Bylaws......................... 25
i
<PAGE> 3
Section 6.04. Certain Post-Distribution Transactions............... 25
Section 6.05. Sales and Transfer Taxes............................. 25
Section 6.06. Settlement of Intercompany Accounts. ............... 26
ARTICLE VII ACCESS TO INFORMATION AND SERVICES.............................. 26
Section 7.01. Provision of Corporate Records....................... 26
Section 7.02. Access to Information................................ 26
Section 7.03. Production of Witnesses.............................. 27
Section 7.04. Corporate Services................................... 27
Section 7.06. Retention of Records................................. 27
Section 7.07. Confidentiality...................................... 28
Section 7.08. Privileged Matters................................... 28
ARTICLE VIII INSURANCE...................................................... 30
Section 8.01. Policies and Rights Included Within the
Non-Mississippi Group Assets......................... 30
Section 8.02. Policies and Rights Included Within the
Mississippi Group Assets ............................ 30
Section 8.03. Administration and Reserves.......................... 31
Section 8.04. Agreement for Waiver of Conflict and Shared Defense.. 32
ARTICLE IX MISCELLANEOUS.................................................... 33
Section 9.01. Entire Agreement; No Third Party Beneficiaries....... 33
Section 9.02. Tax Allocation and Indemnity Agreement;
After-Tax Payments................................... 33
Section 9.03. Expenses............................................. 33
Section 9.04. Governing Law........................................ 33
Section 9.05. Notices.............................................. 33
Section 9.06. Amendments........................................... 34
Section 9.07. Assignments.......................................... 34
Section 9.08. Termination.......................................... 34
Section 9.09. Subsidiaries......................................... 34
Section 9.10. Specific Performance................................. 34
Section 9.11. Headings; References................................. 34
Section 9.12. Counterparts......................................... 35
Section 9.13. Severability; Enforcement............................ 35
Section 9.14. Arbitration of Disputes.............................. 35
Section 9.15. Prompt Payment....................................... 36
ii
<PAGE> 4
INDEX OF SCHEDULES
Schedule 1 - Mississippi Subsidiaries
Schedule 2 - Non-Mississippi Subsidiaries
Schedule 3 - Retained Company Assets
Schedule 4 - Retained Company Liabilities
Schedule 5 - Assigned Lakes Assets
Schedule 6 - Assigned Lakes Liabilities
Schedule 7 - Transferred Corporate Functions
Schedule 8 - Mississippi Group Cash Accounts
Schedule 9 - Non-Mississippi Group Cash Accounts
Schedule 10- Contingent Company Liabilities
INDEX OF EXHIBITS
Exhibit A - Form of Employee Benefits Allocation Agreement
Exhibit B - Form of Lakes Bylaws
Exhibit C - Form of Lakes Articles
Exhibit D - Form of Intellectual Property License Agreement
Exhibit E - Form of Tax Allocation and Indemnity Agreement
iii
<PAGE> 5
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT (the "Agreement"), dated as of [ ], 1998, by and
between GRAND CASINOS, INC., a Minnesota corporation ("Company") and GCI LAKES,
INC., a Minnesota corporation and wholly owned subsidiary of Company ("Lakes").
WHEREAS, Company, directly and through certain wholly-owned
subsidiaries, (a) owns, operates and develops certain gaming and resort
facilities located in the State of Mississippi (as more specifically described
herein, the "Mississippi Business"), and (b) manages and develops certain gaming
facilities located outside the State of Mississippi (as more specifically
described herein, the "Non-Mississippi Business");
WHEREAS, it is necessary to separate the Mississippi Business from the
Non-Mississippi Business in order to satisfy conditions precedent contained in
that certain Agreement and Plan of Merger dated June 29, 1998 (the "Merger
Agreement") by and among Company, Lakes, Hilton Hotels Corporation, a Delaware
corporation ("Hilton"), Gaming Co., Inc., a Delaware corporation and a
wholly-owned subsidiary of Hilton ("Gaming Co."), and Gaming Acquisition Corp.,
a Minnesota corporation and a wholly-owned subsidiary of Gaming Co.
("MergerSub");
WHEREAS, the Board of Directors of Company has determined that it is in
the best interests of Company for Company to merge with MergerSub (the "Merger")
pursuant to the Merger Agreement;
WHEREAS, subject to Company shareholder ratification and certain other
conditions, the Board of Directors of Company has determined that it is in the
best interests of Company and the shareholders of Company to separate the
Non-Mississippi Business from the Mississippi Business through a distribution
(the "Distribution") to the holders of Company Common Stock (as defined herein)
of all of the outstanding shares of Lakes Common Stock (as defined herein) to
accomplish the Merger;
WHEREAS, in order to effect such separation, Company will contribute to
Lakes prior to the Distribution, all of the operations, assets and liabilities
of Company comprising the Non-Mississippi Business and such other assets,
liabilities and operations as are described below;
WHEREAS, in connection with the Distribution, Company and Lakes have
determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect the Distribution, and to set forth the
agreements that will govern certain matters following the Distribution; and
1
<PAGE> 6
WHEREAS, for federal income tax purposes, it is intended that the
Distribution shall qualify as a tax-free distribution solely with respect to
Company's Shareholders within the meaning of Section 355 of the Internal Revenue
Code of 1986, as amended.
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements set forth below, the parties agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01. General. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
Action: Any action, claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: With respect to any specified Person, an affiliate of such
Person within the meaning of Rule 145 promulgated under the Securities Act.
Notwithstanding the foregoing (i) the Affiliates of Company shall not include
Lakes, the Non-Mississippi Subsidiaries or any other Person which otherwise
would be an Affiliate of Company solely by reason of Company's ownership of the
capital stock of Lakes or a Non-Mississippi Subsidiary prior to the Distribution
or the fact that any officer or director of Company or any of the Mississippi
Subsidiaries shall also serve as an officer or director of Lakes or any of the
Non-Mississippi Subsidiaries; and (ii) the Affiliates of Lakes shall not include
Company, the Mississippi Subsidiaries or any other Person which otherwise would
be an Affiliate of Lakes solely by reason of Company's ownership of the capital
stock of Lakes or a Non-Mississippi Subsidiary prior to the Distribution or the
fact that any officer or director of Lakes or any of the Non-Mississippi
Subsidiaries shall also serve as an officer or director of Company or any of the
Mississippi Subsidiaries.
Agent: Norwest Shareholder Services as distribution agent appointed by
Company to distribute the Lakes Common Stock pursuant to the Distribution.
Ancillary Agreements: The License Agreement, Employee Benefits
Allocation Agreement, and Tax Allocation and Indemnity Agreement.
Assigned Lakes Assets: The assets indicated on Schedule 5.
Assigned Lakes Assets Proceeds: The net proceeds of the sales, if any,
of the Assigned Lakes Assets after the date of the Merger Agreement but prior to
the Distribution Date, after deducting any costs and fees associated with such
sales, including, but not limited to, advertising,
2
<PAGE> 7
marketing and transportation costs and sales, transfer, income (if any) and
other taxes; provided, however, if such sale results in capital or ordinary
loss, than such loss shall also be allocated to Lakes along with the subject
Assigned Lakes Assets Proceeds.
Assigned Lakes Liabilities: The liabilities indicated on Schedule 6.
Assumed Debt: The Debt of Company and its Subsidiaries which is assumed
by Lakes and/or retained by the Non-Mississippi Group Subsidiaries in connection
with the Distribution, as determined pursuant to Section 2.09.
Bank of America Revolving Credit Facility: The $100 million Capital
Lease Facility with BA Leasing Capital Corporation, et al. dated September 29,
1997.
Code: The Internal Revenue Code of 1986, as amended, or any successor
thereto as in effect for the taxable year in question.
Company Board: The Board of Directors of Company as it is constituted
prior to the Distribution Date.
Company Common Stock: The common stock, par value $.01 per share, of
Company.
Company Notes: The First Mortgage Notes and the Senior Notes.
Company Group: The meaning specified in the Tax Allocation and
Indemnity Agreement.
Contingent Company Liability: The meaning set forth in Section 3.02.
Conveyancing and Assumption Instruments: Collectively, the various
agreements, instruments and other documents to be entered into to effect the
Preliminary Transfers and the assignment of assets and the assumption of
Liabilities contemplated by this Agreement and the Related Agreements in the
manner contemplated herein and therein.
Debt: All (i) indebtedness for borrowed money and obligations evidenced
by bonds, notes, debentures or similar instruments; (ii) obligations issued or
assumed as the deferred purchase price of property or services; (iii)
obligations under capital leases; and (iv) all guarantees of the obligations of
other persons described in the foregoing clauses (i) - (iii).
Distribution: The distribution to the holders of Company Common Stock
as of the Distribution Record Date of all of the outstanding shares of Lakes
Common Stock.
Distribution Date: The date on which the Distribution is effected.
3
<PAGE> 8
Distribution Record Date: The date established by Company Board as the
date for taking a record of the Holders of Company Common Stock entitled to
participate in the Distribution.
Employee Benefits Allocation Agreement: The Employee Benefits and Other
Employment Matters Allocation Agreement between Lakes and Company, which
agreement shall be entered into on or prior to the Distribution Date in
substantially the form attached hereto as Exhibit A.
Exchange Act: The Securities Exchange Act of 1934, as amended.
First Mortgage Notes: The $450 million 10.125% First Mortgage Notes of
Company due December 1, 2003.
Form 10: The Registration Statement on Form 10 under the Exchange Act
with respect to the Lakes Common Stock.
GAAP: Generally accepted accounting principles.
Gaming Laws: Indian Gaming Laws, Louisiana Gaming Laws, Minnesota
Gaming Laws, Mississippi Gaming Laws, and Nevada Gaming Laws.
Gaming Co.: A Delaware corporation whose wholly-owned subsidiary,
MergerSub, will be merged with Company pursuant to the Merger Agreement.
Governmental Authority: Any court, administrative agency or commission
or other governmental authority or instrumentality.
Hilton: A Delaware corporation which is a party to the Merger
Agreement.
Holders: The holders of record of Company Common Stock as of the
Distribution Record Date.
Indian Debt Guarantees: Shall mean (i) the guarantees of Company and
Grand Casinos of Louisiana, Inc. Tunica-Biloxi pursuant to the Guaranty
Agreement, dated as of August 7, 1994 in favor of Pitney Bowes Credit
Corporation, guaranteeing the debt obligations of the Tunica-Biloxi Tribe of
Louisiana; (ii) the guarantees of Company and Grand Casinos of Louisiana, Inc. -
Coushatta pursuant to the Guaranty Agreement, dated as of January 31, 1995 in
favor of PB Funding Corporation, guaranteeing the lease obligations of the
Coushatta Tribe of Louisiana; (iii) the guarantees of Company and Grand Casinos
of Louisiana, Inc. - Coushatta pursuant to the Guaranty Agreement, dated as of
January 31, 1995 in favor of Sentry Financial Corporation, guaranteeing the
lease obligations of the Coushatta Tribe of Louisiana; (iv) the guarantees of
Company and Grand Casinos of Louisiana, Inc. - Tunica-Biloxi pursuant to the
Commercial Guaranty Agreement, dated as of April 7, 1997 in favor of Cottonport
Bank, guaranteeing the debt obligations of the Tunica-Biloxi Tribe of Louisiana;
(v) the guarantees of Company and Grand Casinos of Louisiana, Inc. -
4
<PAGE> 9
Coushatta pursuant to the Commercial Guaranty Agreement, dated as of May 1, 1997
in favor of Hibernia National Bank, guaranteeing the debt obligations of the
Coushatta Tribe of Louisiana; and (vi) any other guarantees under which Company
or any of its subsidiaries has guaranteed the debt or lease obligations of any
Indian Tribes.
Indian Gaming Laws: Shall mean (i) the Indian Gaming Regulatory Act of
1988 and the rules and regulations promulgated thereunder; (ii) any state laws
and regulations governing gaming operations and facilities on Indian land; and
(iii) any tribal ordinances and regulations governing gaming on land within such
tribe's jurisdiction.
Indian Management Agreements: shall mean the management agreements and
related collateral and other agreements of the Indian tribes, or of Company or
any of its Subsidiaries, relating to (i) Grand Casino Avoyelles; (ii) Grand
Casino Coushatta; (iii) Grand Casino Hinckley; and (iv) any other Indian gaming
operations.
Insurance Administration: With respect to each Policy (including Self
Insurance Programs) shall include, but not be limited to, the accounting for
premiums, retrospectively rated premiums, defense costs, adjuster's fees,
indemnity payments, deductibles and retentions as appropriate under the terms
and conditions of each of the Policies; and the reporting to primary and excess
insurance carriers of any losses, claims and/or audit exposure in accordance
with Policy provisions, and the distribution of Insurance Proceeds as
contemplated by this Agreement.
Insurance Proceeds: Those moneys (i) received by an insured from an
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
Insured Claims: Those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Policies,
whether or not subject to deductibles, co-insurance, uncollectibility or
retrospectively rated premium adjustments, but only to the extent that such
Liabilities are within applicable Policy limits, including aggregates.
IRS: The Internal Revenue Service or any successor thereto, including
but not limited to its agents, representatives and attorneys.
IRS Ruling: The letter ruling issued by the IRS in response to the
Ruling Request.
Lakes Board: The Board of Directors of Lakes.
Lakes Bylaws: The Bylaws of Lakes, substantially in the form of Exhibit
B, to be in effect at the Distribution Date.
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Lakes Articles of Incorporation: The Articles of Incorporation of
Lakes, substantially in the form of Exhibit C, to be in effect at the
Distribution Date.
Lakes Common Stock: The common stock, $.01 par value per share, of
Lakes.
Lakes Group: The meaning specified in the Tax Allocation and Indemnity
Agreement.
Liabilities: Any and all debts, liabilities and obligations, absolute
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, including all costs and expenses
relating thereto, and including, without limitation, those debts, liabilities
and obligations arising under any law, rule, regulation, Action, threatened
Action, order or consent decree of any governmental entity or any award of any
arbitrator of any kind, and those arising under any contract, commitment or
undertaking.
License Agreement: The Intellectual Property License Agreement between
Company and Lakes, which agreement shall be entered into on or prior to the
Distribution Date with substantially such terms as are attached hereto as
Exhibit D.
Louisiana Gaming Laws: The Louisiana Riverboat Economic Development and
Gaming Control Act and the rules and regulations promulgated thereunder.
Louisiana Gaming License: The Company's license to manage
Louisiana-based casinos issued pursuant to Louisiana Gaming Laws.
MBCA: shall mean the Minnesota Business Corporation Act, as amended
from time to time.
Minnesota Gaming Laws: shall mean the Minnesota Lawful Gambling and
Gambling Devices Act and the rules and regulations promulgated thereunder.
Mississippi Business: The business conducted by Company and its
Subsidiaries relating to the management, ownership, operation and development of
all of Company's casinos, hotels, related facilities and all other operations
located within the State of Mississippi, including the Grand Casino Tunica,
Grand Casino Biloxi and Grand Casino Gulfport properties and any operations
located outside the State of Mississippi which relate to the Mississippi Group
Assets.
Mississippi Gaming Laws: shall mean the Mississippi Gaming Control Act
and the rules and regulations promulgated thereunder.
Mississippi Group: Company and the Mississippi Subsidiaries,
collectively.
Mississippi Group Employees: The meaning specified in the Employee
Benefits Allocation Agreement.
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Mississippi Group Assets: (i) All outstanding capital stock of the
Mississippi Subsidiaries and all assets of the Mississippi Subsidiaries other
than the Non-Mississippi Group Assets; (ii) all cash or cash equivalents
generated or derived from the sale or disposition of Mississippi Group
Assets prior to the Distribution Date; (iii) the Mississippi Group Books and
Records; (iv) the rights of Company and the Mississippi Subsidiaries insured
under the Shared Policies; (v) all of the assets expressly to be retained by, or
assigned or allotted to, Company or any of the Mississippi Subsidiaries under
this Agreement or the Related Agreements; (vi) the Retained Company Assets; and
(vii) any other assets of Company and its Subsidiaries used principally in the
Mississippi Business; except, in each case, excluding the assets listed on
Schedule 5.
Mississippi Group Books and Records: The books and records (including
computerized records) of Company and the Mississippi Subsidiaries and any other
books and records of Company's Subsidiaries which relate principally to the
Mississippi Group, are necessary to conduct the Mississippi Business or are
required by law to be retained by Company or a Mississippi Subsidiary,
including, without limitation: (i) all such books and records relating to
Company Employees; (ii) all files relating to any Action being retained by
Company as part of the Mississippi Group Liabilities; and (iii) original
corporate minute books, stock ledgers and certificates and corporate seals, and
all licenses, leases, agreements and filings, relating to Company, the
Mississippi Subsidiaries or the Mississippi Business (but not including the
Non-Mississippi Group Books and Records, provided that Company shall have access
to, and shall have the right to obtain duplicate copies of, the Non-Mississippi
Group Books and Records in accordance with the provisions of Article VII).
Mississippi Group Cash Accounts: The bank accounts of the Mississippi
Group as set forth in Schedule 8 hereto.
Mississippi Group Liabilities: (i) All of the Liabilities of the
Mississippi Group under, or to be retained or assumed by Company or any of the
Mississippi Subsidiaries pursuant to, this Agreement (including Company's
portion of Contingent Company Liabilities and Transaction Liabilities as
provided in Section 3.02 herein) or any of the Related Agreements; (ii) all
Liabilities for payment of outstanding drafts of Company and its Subsidiaries
existing as of the Distribution Date; (iii) the Retained Debt; (iv) all
Liabilities of the Mississippi Subsidiaries, other than the Non-Mississippi
Group Liabilities; (v) all Actions against Company or its Subsidiaries arising
out of, or specifically associated with, any of the Mississippi Group Assets or
the Mississippi Business; (vi) the Retained Company Liabilities indicated on
Schedule 4; and (vii) all other Liabilities of Company and its Subsidiaries
arising out of, or specifically associated with, any of the Mississippi Group
Assets or the Mississippi Business; provided, however, that the Mississippi
Group Liabilities shall not include (1) the Assumed Debt or (2) any claims,
losses, damages, demands, costs, expenses or Liabilities for any Tax (which
shall be governed by Sections 6.05 and 9.02 hereof and by the Tax Allocation and
Indemnity Agreement).
Mississippi Subsidiaries: The Subsidiaries of Company specified in
Schedule 1 and any other Subsidiaries formed after the date hereof to conduct a
portion of the Mississippi Business.
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Nevada Gaming Laws: shall mean the Nevada Gaming Control Act and the
rules and regulations promulgated thereunder, the Clark County, Nevada Code and
the rules and regulations promulgated thereunder, and other applicable local
regulations.
Net Cash: The sum of (i) net cash (used in) or provided by financing
activities; (ii) net cash (used in) or provided by operating activities; and
(iii) net cash (used in) or provided by investing activities.
Non-Mississippi Business: The business conducted by Company and its
Subsidiaries relating to the management, ownership, operation and development of
all Company's casinos, hotels, related facilities and all other operations
located outside the State of Mississippi which relates to the Non-Mississippi
Group Assets.
Non-Mississippi Group: Lakes and the Non-Mississippi Subsidiaries,
collectively.
Non-Mississippi Group Assets: (i) All outstanding capital stock of the
Non-Mississippi Subsidiaries; (ii) the Assigned Lakes Assets, to the extent in
existence on the Distribution Date; (iii) the Non-Mississippi Group Books and
Records; (iv) the rights of a Non-Mississippi Subsidiary insured under the
Shared Policies; (v) all of the assets expressly to be retained by, or assigned
or allocated to, Lakes or any of the Non-Mississippi Subsidiaries under this
Agreement or the Related Agreements; (vi) the Assigned Lakes Assets Proceeds;
and (vii) any other assets of Company and its Subsidiaries used principally in
the Non-Mississippi Business ; except, in each case excluding the assets
included on Schedule 3.
Non-Mississippi Group Books and Records: The books and records
(including computerized records) of Lakes and the Non-Mississippi Subsidiaries
and any other books and records of Company and its Subsidiaries which relate
principally to the Non-Mississippi Group, are necessary to conduct the
Non-Mississippi Business, or are required by law to be retained by Lakes or a
Non-Mississippi Subsidiary, including, without limitation: (i) all such books
and records relating to Transferred Employees; (ii) all files relating to any
Action being assumed by Lakes or retained by a Non-Mississippi Subsidiary as
part of the Non-Mississippi Group Liabilities; and (iii) original corporate
minute books, stock ledgers and certificates, and all licenses, leases,
agreements and filings, relating to Lakes, the Non-Mississippi Subsidiaries or
the Non-Mississippi Business (but not including the Mississippi Group Books and
Records, provided that Lakes shall have access to, and have the right to obtain
duplicate copies of, any of the Mississippi Group Books and Records which
pertain to the Non-Mississippi Business in accordance with the provisions of
Article VII).
Non-Mississippi Group Cash Accounts: The bank accounts of
Non-Mississippi Group as set forth in Schedule 9 hereto.
Non-Mississippi Group Liabilities: (i) All of the Liabilities of the
Non-Mississippi Group under, or to be retained or assumed by Lakes or any of the
Non-Mississippi Subsidiaries pursuant to, this Agreement (including Lakes'
portion of Contingent Company Liabilities and Transaction
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<PAGE> 13
Liabilities as provided in Section 3.02 herein) or any of the Related Agreements
(including the Assumed Debt); (ii) the Stratosphere Liabilities; (iii) all
Liabilities of Lakes and the Non-Mississippi Subsidiaries, other than the
Mississippi Group Liabilities; (iv) all Actions against Company or its
Subsidiaries arising out of, or specifically associated with, any of the
Non-Mississippi Group Assets or the Non-Mississippi Business; (v) the Indian
Debt Guarantees; (vi) all other Liabilities of Company and its Subsidiaries
arising out of, or specifically associated with, any of the Non-Mississippi
Group Assets or the Non-Mississippi Business (including Debt secured by the
Non-Mississippi Group Assets); and (vii) the Assigned Lakes Liabilities
indicated on Schedule 6; provided, however, that the Non-Mississippi Group
Liabilities shall not include (x) any Retained Debt, or (y) any claims, losses,
damages, demands, costs, expenses or Liabilities for any Tax (which shall be
governed by Sections 6.05 and 9.02 hereof and by the Tax Allocation and
Indemnity Agreement).
Non-Mississippi Subsidiaries: The Subsidiaries of Company specified in
Schedule 2 and any other Subsidiaries formed after the date hereof to conduct a
portion of the Non-Mississippi Business.
Non-Mississippi Subsidiaries Note Guarantees: The guarantees of the
Non-Mississippi Subsidiaries of Company Notes and the Bank of America Revolving
Credit Facility.
Non-Mississippi Subsidiaries Note Pledge: The pledge of the outstanding
capital stock of the Non-Mississippi Subsidiaries pursuant to Grand Casinos,
Inc. Security and Pledge Agreement dated November 30, 1995 by Grand Casinos,
Inc. in favor of American Bank National Association (n/k/a Firstar Bank of
Minnesota, National Association) and Grand Casinos Resorts, Inc. Security and
Pledge Agreement dated November 30, 1995 by Grand Casinos Resorts, Inc. in favor
of American Bank National Association (n/k/a Firstar Bank of Minnesota, National
Association) relating to the Notes.
Person: Any individual, corporation, partnership, firm, joint venture,
association, joint-stock company, trust, estate, unincorporated organization,
governmental or regulatory body or other entity.
Policies: Insurance policies and insurance contracts of any kind
relating to the Non-Mississippi Business or the Mississippi Business as
conducted prior to the Distribution Date, including without limitation primary
and excess policies, comprehensive general liability policies, automobile,
aircraft, workers' compensation, property insurance, crime insurance policies
and self-insurance and captive insurance company arrangements, together with the
rights and benefits thereunder.
Preliminary Transfers: The contribution by Company and its Subsidiaries
to Lakes and the Non-Mississippi Subsidiaries, prior to the Distribution, of all
of the assets and liabilities of Company and its Subsidiaries comprising the
Non-Mississippi Business and such other assets, liabilities and operations as
are described herein.
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<PAGE> 14
Privileged Information: All information as to which Company, Lakes or
any of their Subsidiaries are entitled to assert the protection of a Privilege.
Privileges: All privileges that may be asserted under applicable law
including, without limitation, privileges arising under or relating to the
attorney-client relationship (including but not limited to the attorney-client
and work product privileges), the accountant-client privilege, and privileges
relating to internal evaluative processes.
Related Agreements: All of the agreements, instruments, understandings,
assignments or other arrangements set forth in writing, which are entered into
in connection with the transactions contemplated hereby, including, without
limitation, the Conveyancing and Assumption Instruments and the Ancillary
Agreements.
Restricted Payment: (i) the declaration or payment of any dividend or
any distribution on account of Lakes' or any of its Subsidiaries' equity
interests; or (ii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any equity interests of Lakes, without the written
consent of Company, which consent can be given or withheld in Company's sole and
absolute discretion.
Retained Company Assets: The assets indicated in Schedule 3.
Retained Company Liabilities: The liabilities indicated on Schedule 4.
Retained Debt: The Debt of Company and its Subsidiaries which is to be
retained by Company and/or the Mississippi Group Subsidiaries in connection with
the Distribution, as determined pursuant to Section 2.09 and not otherwise
assigned by or transferred to the Non-Mississippi Group.
Ruling Request: The private letter ruling request to be filed by
Company with the Internal Revenue Service as supplemented and amended from time
to time, with respect to certain tax matters relating to the Distribution, the
Merger and other related matters.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended.
Self Insurance Programs: Those self insured programs maintained by
Company and/or any of its Subsidiaries prior to the Distribution for the benefit
of employees, properties and operating businesses, including without limitation
such programs that utilize "fronted policies."
Senior Notes: The $115 million 9% Series B Notes of Company due 2004.
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<PAGE> 15
Shared Policies: All Policies (including Self Insurance Programs),
current or past, which are owned or maintained by or on behalf of Company and/or
any of its Subsidiaries or their respective predecessors which insure both the
Mississippi Business and the Non-Mississippi Business.
Stratosphere: Shall mean Stratosphere Corporation and any of its
Subsidiaries or Affiliates, including Stratosphere Gaming Corp., and any
business or operations conducted by or related to such entities, including the
Stratosphere Tower, Casino & Hotel and adjoining retail-entertainment center.
Stratosphere Contracts: Shall mean any and all contracts, loan
agreements, leases, guaranty agreements, notes, mortgages, indentures,
obligations and other agreements relating to Stratosphere, including, without
limitation, (a) the Standby Equity Commitment, dated as of March 9, 1995, by and
between Company and Stratosphere, (b) the Limited Guaranty, dated as of March
28, 1997, by Company for the benefit of each of the beneficiaries listed
therein, (c) the Indemnification Agreement, dated as of May 1, 1997, by and
between Company and Thomas G. Bell, (d) the Indemnification Agreement, dated as
of May 1, 1997, by and between Company and Andrew S. Blumen, (e) the
Indemnification Agreement, dated as of May 1, 1997, by and between Company and
Robert A. Maheu, (f) the Indemnification Agreement, dated as of May 1, 1997, by
and between Company and David R. Wirshing, and (g) the indemnification
arrangement described in the Minutes of Company's Board of Directors, dated May
3, 1995, relating to the indemnification of Lyle Berman, Neil Sell and Stanley
Taube in connection with their service on the Stratosphere Board of Directors.
Stratosphere Liabilities: Shall mean any and all Liabilities relating
to or arising from Stratosphere, Company's investment in or relationship to
Stratosphere and/or the Stratosphere Litigation and/or the Stratosphere
Contracts.
Stratosphere Litigation: Shall mean any and all actions, suits,
proceedings, claims, arbitrations or investigations relating to Stratosphere,
including the Stratosphere shareholders litigation in the U.S. District Court
for the District of Nevada (In re Stratosphere Corporation Securities Litigation
- -- Master File No. CV-5-96-00708PMP), Grand Casinos, Inc. shareholders
litigation in the U.S. District Court for the District of Minnesota (In Re:
Grand Casinos, Inc. Securities Litigation -- Master Filed No. 4-96-890), the
Stratosphere shareholders litigation in the Nevada State Court (Victor M. Opitz,
et. al. v. Robert E. Stupak, et. al. -- Case No. A363019), the Cohen litigation
in the U.S. District Court for the District of Nevada (Henry Cohen, et al. v.
Stratosphere Corporation, et. al.-- Case No. A349985), the Stratosphere vacation
club litigation in the District Court in Clark County, Nevada (Richard Duncan,
et al. v. Bob and Jane Doe Stupak, et al. -- Case No. A370127), the Standby
Equity Commitment litigation in the U.S. District Court for the District of
Nevada (IBJ Schroeder Bank & Trust Company, Inc. v. Grand Casinos, Inc. -- File
No. CV-S-97-01252-DWH), the Stratosphere Noteholder Committee bankruptcy court
action in the U.S. Bankruptcy Court for the District of Nevada, Stratosphere
Plan of Reorganization in the U.S. Bankruptcy Court for the District of Nevada,
the Las Vegas Downtown Redevelopment Agency litigations in the Nevada Supreme
Court (City of Las Vegas
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Downtown Redevelopment Agency v. Crockett, et al. and City of Las Vegas Downtown
Redevelopment Agency v. Mouldo, et. al.), a derivative litigation in Hennepin
County, Minnesota District Court (Lloyd Drilling, et al. v. Lyle Berman, et al.
- --Court File No. MC97- 002807), and a Stratosphere action for Recovery of
Preferential Transfers Pursuant to Sections 547 and 550 of the Bankruptcy Court
filed with the Bankruptcy Court against Company, and including any actions,
suits, proceedings, claims, arbitrations or investigations relating to the
Litigation LLC described in Stratosphere Corporation's Restated Second Amended
Plan of Reorganization dated February 26, 1998.
Subsidiary: With respect to any Person, (i) each corporation,
partnership, joint venture, limited liability company or other legal entity of
which such Person owns, either directly or indirectly, 50% or more of the stock
or other equity interests the holders of which are generally entitled to vote
for the election of the board of directors or similar governing body of such
corporation, partnership, joint venture or other legal entity; and (ii) each
partnership or limited liability company in which such Person or another
Subsidiary of such Person is the general partner, managing partner or otherwise
controls.
"Tax" or "Taxes": Shall mean all actual taxes and estimated payment of
taxes, charges, fees, imposts, levies and gaming or other assessments, including
all income, gross receipts, capital, sales, use, ad valorem, value added,
transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment excise, severance, stamp,
occupation, property, premium, windfall profits, environmental, disability,
registration, alternative or add-on minimum taxes, custom duties, fees,
assessments and charges of any kind whatsoever, together with any interest and
any penalties, fines, additions to tax or additional amounts imposed by any
taxing authority (domestic or foreign), and including any transferee liability
in respect of Taxes and any liability in respect of Taxes imposed by contract,
tax sharing agreement, tax indemnity agreement or any similar agreement.
Tax Allocation and Indemnity Agreement: The Tax Allocation and
Indemnity Agreement between Company and Lakes pursuant to which such parties
will provide for the allocation of, and indemnification against, certain tax
liabilities, the preparation and filing of certain tax returns and the payment
of taxes related thereto and certain related matters, which agreement shall be
entered into on or prior to the Distribution Date substantially in the form
attached hereto as Exhibit E.
Tax Returns: The meaning specified in the Tax Allocation and Indemnity
Agreement.
Transaction Liabilities: All liabilities relating to any Action or
threatened Action arising out of or pertaining to the transaction contemplated
by the Merger Agreement or this Distribution Agreement.
Transferred Corporate Functions: The corporate level and support
functions of Company to be contributed to Lakes in connection with the
Distribution, as set forth in Schedule 7 hereto.
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<PAGE> 17
Currently expected to include corporate treasury, accounting (including
payroll), internal audit, tax, corporate affairs, legal, human resources and
risk management functions (including claims administration), as well as certain
purchasing and procurement functions.
Transferred Employees: The meaning specified in the Employee Benefits
Allocation Agreement.
Section 1.02. Terms Defined Elsewhere in Agreement. Each of the
following terms is defined in the Recitals or Section set forth opposite such
term:
Term Section
---- -------
Agreement Recitals
Consents 4.01
Dispute 9.14
Company Indemnitees 5.02
Gaming Co. Recitals
Hilton Recitals
Indemnifiable Loss 5.01
Indemnifying Party 5.03
Indemnified Person 5.03
Information 7.02
Insurance Charges 8.03
Lakes Recitals
Lakes Indemnities 5.01
Merger Recitals
MergerSub Recitals
Third Party Claim 5.04
Transaction Taxes 6.05
ARTICLE II.
TRANSFER OF ASSETS
Section 2.01. Transfer of Assets to Lakes. Prior to the Distribution
Date, Company shall take or cause to be taken all actions necessary to cause the
transfer, assignment, delivery and conveyance to Lakes and/or the appropriate
Non-Mississippi Subsidiaries designated by Lakes of all of Company's and its
Subsidiaries' right, title and interest in any Non-Mississippi Group
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<PAGE> 18
Assets held, on or prior to the Distribution Date, by Company or any Mississippi
Subsidiary including:
(a) a contribution to Lakes of all of the outstanding capital
stock of the Non-Mississippi Subsidiaries indicated on Schedule 2;
(b) subject to the provisions of Section 2.07, transfer of $33
million dollars of cash by Company or any Mississippi Subsidiary to Lakes in
order to provide necessary and needed levels of working capital and appropriate
reserve for business investment purposes; provided, however, that;
(i) such amount will be decreased by any amount paid
by the Company prior to the Distribution Date in connection with
Stratosphere up to a maximum of $8 million, and
(ii) such amount shall be increased by the Assigned
Lakes Assets Proceeds.
(c) transfer of the Assigned Lakes Assets, as indicated on
Schedule 5, which have not been sold prior to the Distribution Date; and
(d) transfer of the Transferred Corporate Functions as
indicated on Schedule 7;
Section 2.02. Transfers of Assets from Non-Mississippi Subsidiaries to
Company or Mississippi Subsidiaries. Prior to the Distribution Date, Lakes shall
take or cause to be taken all actions necessary to cause the transfer,
assignment, delivery and conveyance to Company and/or the applicable Mississippi
Subsidiaries designated by Company of all of Lakes's and the Non-Mississippi
Subsidiaries' right, title and interest in any Mississippi Group Assets held, on
or prior to the Distribution Date, by Lakes or any of the Non-Mississippi
Subsidiaries, if any.
Section 2.03. Transfers Not Effected Prior to the Distribution. To the
extent that any transfers contemplated by this Article II shall not have been
fully effected as of the Distribution Date, the parties shall cooperate to
effect such transfers as promptly as shall be practicable following the
Distribution Date. Nothing herein shall be deemed to require the transfer of any
assets or the assumption of any Liabilities which by their terms or operation of
law cannot be transferred or assumed including, without limitation, pursuant to
Gaming Laws; provided, however, that Company and Lakes and their respective
Subsidiaries and Affiliates shall cooperate in seeking to obtain any necessary
consents or approvals for the transfer of all assets and Liabilities
contemplated to be transferred pursuant to this Agreement including, without
limitation, pursuant to Gaming Laws.
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<PAGE> 19
In the event that any such transfer of assets or Liabilities has not
been consummated effective as of the Distribution Date, the party retaining such
asset or Liability shall thereafter hold such asset in trust for the use and
benefit of the party entitled thereto (at the expense of the party entitled
thereto) and retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, and take such other actions as may
be reasonably required in order to place the parties, insofar as reasonably
possible, in the same position as would have existed had such asset been
transferred or such Liability been assumed as contemplated hereby. As and when
any such asset or Liability becomes transferable, such transfer and assumption
shall be effected forthwith. The parties agree that, except as set forth in this
Section 2.03, as of the Distribution Date, each party hereto shall be deemed to
have acquired complete and sole beneficial ownership over all of the assets,
together with all rights, powers and privileges incidental thereto, and shall be
deemed to have assumed in accordance with the terms of this Agreement all of the
Liabilities, and all duties, obligations and responsibilities incidental
thereto, which such party is entitled to acquire or required to assume pursuant
to the terms of this Agreement.
Section 2.04. Cooperation Re: Assets. In the case that at any time
after the Distribution Date, Lakes reasonably determines that any of the
Mississippi Group Assets (other than the assets set forth in Schedule 3) are
essential for the conduct of the Non-Mississippi Business, or Company reasonably
determines that any of the Non-Mississippi Group Assets (other than the assets
set forth in Schedule 5) are essential for the conduct of the Mississippi
Business, and the nature of such assets makes it impracticable for Lakes or
Company, as the case may be, to obtain substitute assets or to make alternative
arrangements on commercially reasonable terms to conduct their respective
businesses, and reasonable provisions for the use thereof are not already
included in the Related Agreements, then Lakes (with respect to the
Non-Mississippi Group Assets) and Company (with respect to the Mississippi Group
Assets) shall cooperate to make such assets available to the other party on
commercially reasonable terms, as may be reasonably required for such party to
maintain normal business operations. However, (a) the usage of such assets by
the other party shall not materially interfere with the use of such assets by
the party holding such assets; and (b) such assets shall be required to be made
available only until such time as the other party can reasonably obtain
substitute assets or make alternative arrangements on commercially reasonable
terms to permit it to maintain normal business operations.
Section 2.05. No Representations or Warranties; Consents. Each of the
parties hereto understands and agrees that no party hereto is, in this
Agreement, in any Related Agreement, or otherwise, representing or warranting in
any way (a) as to the value or freedom from encumbrance of, or any other matter
concerning, any assets of such party; or (b) as to the legal sufficiency to
convey title to any asset transferred pursuant to this Agreement or any Related
Agreement. IT IS ALSO AGREED AND UNDERSTOOD THAT THERE ARE NO WARRANTIES,
EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY OR FITNESS OF ANY OF THE ASSETS
EITHER TRANSFERRED TO OR RETAINED BY THE PARTIES, AS THE CASE MAY BE, AND ALL
SUCH ASSETS SHALL BE "AS IS, WHERE IS" AND "WITH ALL FAULTS"; provided, however,
that the absence of warranties shall have no effect upon the allocation of
Liabilities under this Agreement.
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<PAGE> 20
Each party hereto understands and agrees that no party hereto is, in
this Agreement, in any Related Agreement or otherwise, representing or
warranting in any way that the obtaining of any consents or approvals, the
execution and delivery of any amendatory agreements and the making of any
filings or applications contemplated by this Agreement, any Related Agreement or
otherwise will satisfy the provisions of any or all applicable laws or judgments
or other instruments or agreements relating to such assets, including without
limitation, the Gaming Laws. Notwithstanding the foregoing, the parties shall
use their good faith efforts to obtain all consents and approvals, including,
without limitation, pursuant to the Gaming Laws, to enter into all reasonable
amendatory agreements and to make all filings and applications which may be
reasonably required for the consummation of the transactions contemplated by
this Agreement and the Related Agreements, and shall take all such further
reasonable actions as shall be necessary to preserve for each of the
Non-Mississippi Group and the Mississippi Group, to the greatest extent
feasible, the economic and operational benefits of the allocation of assets and
liabilities provided for in this Agreement. In case at any time after the
Distribution Date any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of each party to
this Agreement shall take all such necessary or desirable action.
Section 2.06. Conveyancing and Assumption Instruments. In connection
with the Preliminary Transfers described in Article II and Article III hereof,
and the assignment of assets and the assumption of Liabilities contemplated by
any Related Agreements, the parties shall execute, or cause to be executed by
the appropriate entities, the Conveyancing and Assumption Instruments in such
forms as the parties shall reasonably agree. The transfer of capital stock and
other equity interests shall be effected by means of delivery of stock
certificates and executed stock powers and notation on the stock record books of
the corporation or other legal entity involved and, to the extent required by
applicable law, by notation on public registries.
Section 2.07. Cash Allocations After the Year-End. Notwithstanding
anything to the contrary herein, (i) Net Cash generated after December 31, 1998
from operations of the Mississippi Business (regardless of whether the
Distribution has occurred) shall be retained by Company; (ii) Net Cash generated
after December 31, 1998 from operations of the Non-Mississippi Business
(regardless of whether the Distribution has occurred) shall be retained by
Lakes; and (iii) the allocations of cash set forth in Section 2.08 (a) shall be
made as of December 31, 1998.
Section 2.08. Cash Allocation; Cash Management.
(a) Cash Allocation on the Distribution Date. Subject to the
provisions of Section 2.01(b) hereof, the allocation between Company and Lakes
of all cash bank balances, short-term investments and outstanding checks and
drafts of Company and its Subsidiaries recorded per the books of Company and its
Subsidiaries shall be in accordance with the following:
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<PAGE> 21
(i) all deposits of cash, checks, drafts or
short-term investments made to accounts, other than the Non-Mississippi Group
Cash Accounts, after the close of business on the Distribution Date shall be
remitted to Company; provided, however, that any such deposits that are
erroneously made to such accounts shall be redeposited to the correct accounts
as promptly as possible;
(ii) all deposits of cash, checks, drafts or
short-term investments made to the Non-Mississippi Group Cash Accounts after the
close of business on the Distribution Date shall be remitted to Lakes and/or the
appropriate Non-Mississippi Subsidiary; provided, however, that any such
deposits that are erroneously made to such accounts shall be redeposited to the
correct accounts as promptly as possible;
(iii) all cash, other than cash allocated pursuant to
Sections 2.01(b), 2.07, 2.08(i) and 2.08(ii), shall be retained by or remitted
to Company and/or the appropriate Mississippi Subsidiaries.
(b) Cash Management After the Distribution Date. All petty
cash, depository and disbursement accounts of Company (other than the
Non-Mississippi Group Cash Accounts) shall be retained by Company. The
Non-Mississippi Group Cash Accounts shall be transferred to Lakes, and Lakes
shall establish and maintain a separate cash management system and separate
accounting records with respect to the Non-Mississippi Group Business effective
as of 12:01 a.m. Minneapolis time on the day following the Distribution Date.
(c) Ordinary Course Operations. The parties contemplate and
agree that the Non-Mississippi Business and the Mississippi Business, including,
but not limited to, the administration, payment and collection of accounts
payable and accounts receivable, will be conducted in the ordinary course of
business and consistent with past practice prior the Distribution Date.
Section 2.09. Allocation of Debt. Debt will be allocated as follows:
(a) Debt secured by Mississippi Group Assets, or otherwise
specifically associated with the Mississippi Business, will be retained by
Company and/or the appropriate Mississippi Subsidiaries. As of the date of this
Agreement, such Debt consists of the First Mortgage Notes.
(b) The Senior Notes will be retained by Company and/or the
appropriate Mississippi Subsidiary.
(c) Debt relating to the Bank of America Revolving Credit
Facility will be retained by Company and/or the appropriate Mississippi
Subsidiary.
(d) Any other of Company's unsecured Debt will be Retained
Debt.
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(e) Debt secured by any Non-Mississippi Group Assets will be
assumed by Lakes and/or the appropriate Non-Mississippi Subsidiaries.
(f) Notwithstanding anything to the contrary herein, (i)
increases (decreases) in Debt incurred (repaid) after December 31, 1998 arising
out of operations of the Mississippi Business (regardless of whether the
Distribution has occurred) shall be allocated to Company and (ii) increases
(decreases) in Debt incurred (repaid) after December 31, 1998 arising out of
operations of the Non-Mississippi Business (regardless of whether the
Distribution has occurred) shall be allocated to Lakes; and, to the extent such
increases (decreases) are not already given effect in the definition of Net
Cash, such increases (decreases) shall increase or decrease (as applicable) the
Debt allocated to Company or Lakes (as applicable).
Section 2.10. Ancillary Agreements Between Company and Lakes. On or
prior to the Distribution Date, Company and Lakes shall enter into the Ancillary
Agreements.
ARTICLE III.
ASSUMPTION AND SATISFACTION OF LIABILITIES
Section 3.01. Assumption and Satisfaction of Mississippi Business and
Non-Mississippi Business Liabilities. From and after the Distribution Date, (a)
Lakes shall, and/or shall cause the Non-Mississippi Subsidiaries to, assume,
pay, perform and discharge in due course all of the Non-Mississippi Group
Liabilities (including the Indian Guarantees and the Stratosphere Liabilities);
and; (b) Company shall, and/or shall cause the Mississippi Subsidiaries to,
assume, pay, perform and discharge in due course all of the Mississippi Group
Liabilities (including the Non-Mississippi Subsidiaries Note Guarantees).
Section 3.02 Assumption and Satisfaction of Contingent Company
Liabilities and Transaction Liabilities. From and after the Distribution Date,
to the extent that there is a Company liability occurring prior to the
Distribution Date that is neither a Mississippi Group Liability nor a
Non-Mississippi Group Liability and cannot in good faith be allocated by the
parties hereto as either a Mississippi Group Liability or a Non-Mississippi
Group Liability, including, but not limited to the Liabilities set forth on
Schedule 10 attached hereto (all such Liabilities "Contingent Company
Liabilities"), then (i) such Contingent Company Liabilities and (ii) all
Transaction Liabilities shall be allocated between Company and Lakes on a pro
rata basis as provided in Section 3.1(c)(1) of the Merger Agreement and shall be
assumed, paid, performed and discharged by each such party based upon such
allocation.
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ARTICLE IV.
THE DISTRIBUTION
Section 4.01. Cooperation Prior to the Distribution.
(a) Lakes and Company shall cooperate in preparing, filing
with the SEC and causing to become effective any registration statements or
amendments thereof which are appropriate to reflect the establishment of, or
amendments to, any employee benefit plans, and other plans contemplated by the
Employee Benefits Allocation Agreement.
(b) Lakes and Company shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement and the Related Agreements.
(c) Lakes and Company shall use all reasonable best efforts to
obtain any governmental or third-party consents or approvals necessary or
desirable in connection with the transactions contemplated hereby, including,
without limitation, pursuant to the Gaming Laws ("Consents").
(d) Lakes and Company will use all reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary or desirable under applicable law, to consummate the
transactions contemplated under this Agreement and the Related Agreements
including, but not limited to, actions relating to the satisfaction of the
conditions indicated in Section 4.02 hereof.
Section 4.02. Company Board Action; Conditions Precedent to the
Distribution. Company Board shall, in its sole discretion, establish the Record
Date and the Distribution Date and any appropriate procedures in connection with
the Distribution. In no event shall the Distribution occur unless the following
conditions shall have been satisfied:
(a) the transactions contemplated in Article II and
Article III shall have been consummated in all material respects;
(b) the Lakes Board, comprised as contemplated by Section
6.01, shall have been elected by Company, as sole shareholder of Lakes, and the
Lakes Articles and Lakes Bylaws shall have been adopted and shall be in effect;
(c) Company shall have received shareholder ratification of
the Distribution at a meeting of shareholders.
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(d) the Merger Agreement shall be in full force and effect and
no material breach shall exist thereunder;
(e) each condition to the consummation of the Merger, other
than the condition set forth in Section 8.1(g) of the Merger Agreement relating
to the consummation of the Distribution, shall have been fulfilled or waived by
the party for whose benefit such condition exists;
(f) with respect to the Louisiana Gaming License:
(i) the Louisiana Gaming License is transferred to
Lakes or a Non-Mississippi Subsidiary;
(ii) the Non-Mississippi Subsidiaries are licensed
pursuant to Louisiana Gaming Laws; or
(iii) Lakes is licensed pursuant to Louisiana Gaming
Laws.
(g) the IRS Ruling shall have been granted in form and
substance satisfactory to Company Board, the IRS Ruling shall not have been
withdrawn by the IRS and the representations made to the IRS therein shall be
true in all material respects;
(h) the Form 10 shall have been declared effective by the SEC;
(i) the Lakes Common Stock shall have been approved for
trading on the NASDAQ National Market (or such other securities exchange
comprising the principal securities exchange or market on which the Lakes Common
Stock is listed or traded), subject to official notice of issuance;
(j) each of Lakes and Company shall have executed and
delivered the Related Agreements to which it is a party and each of the
transactions contemplated by the Related Agreements to be consummated on or
prior to the Distribution Date shall have been consummated;
(k) all necessary regulatory approvals and consents of third
parties shall have been received, including, without limitation, pursuant to the
Gaming Laws, except for any such approvals or consents the failure of which to
obtain would not have a material adverse effect on the business, operations or
condition (financial or otherwise) of either Company or Lakes;
(l) the Board of Directors of Company shall be satisfied that
(i) at the time of the Distribution and after giving effect to the Distribution
and the transactions contemplated under the Related Agreements, Company will not
be insolvent (in that, both before and immediately following the Distribution,
(1) the fair market value of Company's assets would
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exceed Company's liabilities, (2) Company would be able to pay its liabilities
as they mature and become absolute and (3) Company would not have unreasonably
small capital with which to engage in its business); and (ii) the Distribution
would be permitted under the MBCA; and at the Board of Directors' discretion,
Company shall have received the opinion of a financial advisor or other
appraisal or valuation expert selected by Company, in form and substance
satisfactory to Company, as to the matters set forth in clauses (1) through (3)
above, and such opinion shall not have been withdrawn;
provided, however, that (x) any such condition may be waived by Company Board in
its sole discretion, and (y) the satisfaction of such conditions shall not
create any obligation on the part of Company or any other party hereto to effect
the Distribution or in any way limit Company's power of termination set forth in
Section 9.08 or alter the consequences of any such termination from those
specified in such Section.
Section 4.03. The Distribution. On the Distribution Date, or as soon
thereafter as practicable, subject to the conditions and rights of termination
set forth in this Agreement, Company shall deliver to the Agent, for the benefit
of the Holders, a share certificate representing all of the then outstanding
shares of Lakes Common Stock owned by Company, endorsed in blank, and shall
instruct the Agent to distribute to each Holder, on or as soon as practicable
following the Distribution Date, a certification, or if requested by such
Holder, a certificate, representing one share of Lakes Common Stock for each
share of Company Common Stock so held, or such number of shares that may be
issued pursuant to a stock split, stock or dividend, of the Lakes Common Stock
prior to, or simultaneously with, the Distribution Date. Lakes agrees to provide
all share certificates that the Agent shall require in order to effect the
Distribution.
ARTICLE V.
INDEMNIFICATION
Section 5.01. Indemnification by Company. Company shall indemnify,
defend and hold harmless Lakes and each of the Non-Mississippi Subsidiaries, and
each of their respective past or present directors, officers, employees, agents
and Affiliates and each of the heirs, executors, successors and assigns of any
of the foregoing (the "Lakes Indemnitees") from and against any and all losses,
Liabilities, damages and expenses (including, without limitation, the reasonable
costs and expenses, including reasonable attorneys' fees in connection with any
such investigations, Actions, or threatened Actions) (collectively,
"Indemnifiable Losses" and, individually, an "Indemnifiable Loss") incurred or
suffered by any of the Lakes Indemnitees and arising out of or due to the
failure or alleged failure of Company, any Mississippi Subsidiary, or any of
their respective Affiliates to (a) pay, perform or otherwise discharge in due
course any of the Mississippi Group Liabilities, or (b) comply with the
provisions of Section 6.04 hereof.
Section 5.02. Indemnification by Lakes. Lakes shall indemnify, defend
and hold harmless Company and each of the Mississippi Subsidiaries, and each of
their respective past or
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present directors, officers, employees, agents and Affiliates and each of the
heirs, executors, successors and assigns of any of the foregoing (the "Company
Indemnitees") from and against any and all Indemnifiable Losses incurred or
suffered by any of Company Indemnitees and arising out of or due to the failure
or alleged failure of Lakes, any Non-Mississippi Subsidiaries, or any of their
respective Affiliates to (a) pay, perform or otherwise discharge in due course
any of the Non-Mississippi Group Liabilities; or (b) comply with the provisions
of Section 6.04 hereof.
Section 5.03. Insurance Proceeds. The amount which any party (an
"Indemnifying Party") is or may be required to pay to any other Person (an
"Indemnified Person") pursuant to Section 5.01 or Section 5.02 shall be reduced
(including, without limitation, retroactively) by any Insurance Proceeds or
other amounts actually recovered by or on behalf of such Indemnified Person in
reduction of the related Indemnifiable Loss. If an Indemnified Person shall have
received the payment required by this Agreement from an Indemnifying Party in
respect of an Indemnifiable Loss and shall subsequently actually receive
Insurance Proceeds, or other amounts in respect of such Indemnifiable Loss as
specified above, then such Indemnified Person shall pay to such Indemnifying
Party a sum equal to the amount of such Insurance Proceeds or other amounts
actually received.
Section 5.04. Procedure for Indemnification.
(a) If an Indemnified Person shall receive written notice of
the assertion by a Person (including, without limitation, any Governmental
Authority) who is not a party to this Agreement or to any of the Related
Agreements of any claim or of the commencement by any such Person of any Action
with respect to which an Indemnifying Party may be obligated to provide
indemnification pursuant to this Agreement (a "Third-Party Claim"), such
Indemnified Person shall give the Indemnifying Party written notice thereof
promptly after becoming aware of such Third-Party Claim; provided, that the
failure of any Indemnified Person to give notice as required by this Section
5.04 shall not relieve the Indemnifying Party of its obligations under this
Article V, except to the extent that such Indemnifying Party is materially
prejudiced by such failure to give notice. Such notice shall describe the
Third-Party Claim in reasonable detail, and shall indicate the amount (estimated
if necessary) of the Indemnifiable Loss that has been claimed against or may be
sustained by such Indemnified Person.
(b) Within 15 days of the receipt of notice from an
Indemnified Person in accordance with Section 5.04(a) (or sooner, if the nature
of such Third-Party Claim so requires), the Indemnifying Party shall notify the
Indemnified Person of its election whether to assume responsibility for such
Third-Party Claim (provided that if the Indemnifying Party does not so notify
the Indemnified Person of its election within 15 days after receipt of such
notice from the Indemnified Person, the Indemnifying Party shall be deemed to
have elected not to assume responsibility for such Third-Party Claim). An
election not to assume responsibility for such Third-Party Claim may only be
made in the event of a good faith dispute that a Third-Party Claim is not
covered as an Indemnifiable Loss under the grounds specified in Section 5.01 or
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5.02, as the case may be. Subject to Section 5.04(e) hereof, an Indemnifying
Party may elect to defend or to seek to settle or compromise, at such
Indemnifying Party's own expense and by counsel reasonably satisfactory to the
Indemnified Person, any Third-Party Claim, provided that (i) the Indemnifying
Party must confirm in writing that it agrees that the Indemnified Person is
entitled to indemnification hereunder in respect of such Third-Party Claim; and
(ii) no compromise or settlement shall be made without the prior written consent
of the Indemnified Person, which consent shall not be reasonably withheld.
(c) In the event that the Indemnifying Party elects to assume
responsibility for the Third-Party Claim, pursuant to Section 5.04(b) above, (i)
the Indemnified Person shall cooperate in the defense or settlement or
compromise of such Third-Party Claim, including making available to the
Indemnifying Party any personnel and any books, records or other documents
within the Indemnified Person's control or which it otherwise has the ability to
make available that are necessary or appropriate for the defense of the
Third-Party Claim; (ii) the Indemnifying Party shall keep the Indemnified Person
reasonably informed regarding the strategy, status and progress of the defense
of the Third-Party claim; and (iii) the Indemnifying Party shall consider, in
good faith, the opinions and suggestions of the Indemnified Person with respect
to the Third-Party Claim.
After notice from an Indemnifying Party to an Indemnified
Person of its election to assume responsibility for a Third-Party Claim, such
Indemnifying Party shall not be liable to such Indemnified Person under this
Article V for any legal or other costs or expenses (except costs or expenses
approved in advance by the Indemnifying Party) subsequently incurred by such
Indemnified Person in connection with the defense thereof; provided, that if the
defendants in any such claim include both the Indemnifying Party and one or more
Indemnified Persons and in such Indemnified Persons' reasonable judgment a
conflict of interest between such Indemnified Persons and such Indemnifying
Party exists in respect of such claim, such Indemnified Persons shall have the
right to employ separate counsel and in that event the reasonable fees and
expenses of such separate counsel (but not more than one separate counsel
reasonably satisfactory to the Indemnifying Party) shall be paid by such
Indemnifying Party.
(d) If an Indemnifying Party elects not to assume
responsibility for a Third-Party Claim the Indemnified Person may defend or
(subject to the following sentence) seek to compromise or settle such
Third-Party Claim. Notwithstanding the foregoing, an Indemnified Person may not
settle or compromise any claim without prior written notice to the Indemnifying
Party, which shall have the option within ten days following the receipt of such
notice (i) to disapprove the settlement, and to then assume all past and future
responsibility for the claim, including immediately reimbursing the Indemnified
Person for prior expenditures in connection with the claim; (ii) to disapprove
the settlement and continue to refrain from participation in the defense of the
claim, in which event the Indemnified Person may, in its sole discretion,
proceed with the settlement and the Indemnifying Party shall have no further
right to contest the amount or reasonableness of the settlement; (iii) to
approve and pay the amount of the settlement, reserving the Indemnifying Party's
right to contest the Indemnified Person's right to indemnity;
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or (iv) to approve and pay the settlement. In the event the Indemnifying Party
makes no response to such written notice, the Indemnifying Party shall be deemed
to have elected option (ii). When the Indemnifying Party chooses or is deemed to
have chosen option (ii) or (iii), the issue of whether the Indemnified Person
has a right to indemnity under this Article V shall be resolved by arbitration
pursuant to the provisions of Section 9.14 hereof. If the Indemnifying Party
does not prevail at such arbitration, the Indemnifying Party shall promptly
reimburse the Indemnified Person for all Indemnifiable Losses, plus interest on
such amounts at the lower of (i) 10% or (ii) the highest legal interest rate,
accruing from the date of payment by the Indemnified Person.
(e) Notwithstanding the foregoing, if an Indemnified Person
reasonably and in good faith determines that (i) the Indemnifying Party is not
financially capable to defend a Third-Party Claim and to provide full
indemnification with respect to any settlement thereof or (ii) the Indemnifying
Party or such Indemnifying Party's attorney is not adequately representing the
Indemnified Person's interests with respect to such Third-Party Claim, the
Indemnified Person may, by notice to the Indemnifying Party, assume the
exclusive right to defend, compromise or settle such Third-Party Claim and the
Indemnifying Party shall remain responsible for, and be bound by the resolution
of, such Third-Party Claim.
(f) Any claim on account of an Indemnifiable Loss which does
not result from a Third-Party Claim shall be asserted by written notice given by
the Indemnified Person to the applicable Indemnifying Party. Such Indemnifying
Party shall have a period of 15 days after the receipt of such notice within
which to respond thereto. If such Indemnifying Party does not respond within
such 15-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such 15-day period or rejects such claim in whole or in part,
such Indemnified Person shall be free to pursue such remedies as may be
available to such party under applicable law or under this Agreement.
(g) In addition to any adjustments required pursuant to
Section 5.03, if the amount of any Indemnifiable Loss shall, at any time
subsequent to the payment required by this Agreement, be reduced by recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnified
Person to the Indemnifying Party.
(h) In the event of payment by an Indemnifying Party to any
Indemnified Person in connection with any Third-Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnified
Person as to any events or circumstances in respect of which such Indemnified
Person may have any right or claim relating to such Third-Party Claim against
any claimant or plaintiff asserting such Third-Party Claim or against any other
party that may be liable. Such Indemnified Person shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense of such
Indemnifying Party, in prosecuting any subrogated right or claim.
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(i) For so long as Surviving Corporation (as defined in the
Merger Agreement) is required to provide indemnification to any of the
Indemnified Persons (as defined in the Merger Agreement), Lakes shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly, make any
Restricted Payment. If Lakes is unable, within 15 days of request, to repay in
full any claim made for indemnification by Company or any of its Affiliates
pursuant to this Agreement or the Merger Agreement, then for so long as any such
claim or any other claim for indemnification made by Company or any of its
Affiliates remains unpaid, Lakes shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty
or otherwise become directly or indirectly liable with respect to any
indebtedness.
(j) Prior to the Distribution Date, Company and Lakes shall
enter into a Collateral Trust Agreement and a Pledge and Security Agreement.
Company is hereby entitled to all the rights and benefits under those agreements
in order to secure Lakes' indemnification obligations under this Agreement, the
Related Agreements and the Merger Agreement.
Section 5.05. Remedies Cumulative. The remedies provided in this
Article V shall be cumulative and shall not preclude assertion by any
Indemnified Person of any other rights or the seeking of any and all other
remedies against any Indemnifying Party.
Section 5.06. Survival of Indemnities. The obligations of each of Lakes
and Company under this Article V shall survive the sale or other transfer by it
of any assets or businesses or the assignment by it of any Liabilities, with
respect to any Indemnifiable Loss of the other related to such assets,
businesses or Liabilities.
ARTICLE VI.
CERTAIN ADDITIONAL MATTERS
Section 6.01. Lakes Board. Lakes and Company shall take all actions
which may be required to appoint as officers and directors of Lakes those
persons named in the Form 10 (as may be altered or supplemented prior to the
date hereof by Company Board and the Lakes Board) to constitute, effective as of
the Distribution Date, the officers and the directors of Lakes.
Section 6.02. Resignations; Company Board. Lakes shall cause all of its
directors and the Transferred Employees to resign, effective as of the
Distribution Date, from all boards of directors or similar governing bodies of
Company or any of the Mississippi Subsidiaries on which they serve, and from all
positions as officers or employees of Company or any of the Mississippi
Subsidiaries in which they serve. Company shall cause all of its directors and
the Mississippi Group Employees to resign from all boards of directors or
similar governing bodies of Lakes or any of the Non-Mississippi Subsidiaries on
which they serve, and from all positions as officers or employees of Lakes or
any of the Non-Mississippi Subsidiaries in which they serve.
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Section 6.03. Lakes Certificate and Bylaws. On or prior to the
Distribution Date, Lakes shall adopt the Lakes Articles and the Lakes Bylaws,
and shall file the Lakes Articles with the Secretary of State of the State of
Minnesota. Company shall provide all necessary shareholder approvals for the
Lakes Articles prior to the filing of the Lakes Articles with the Secretary of
State of the State of Minnesota.
Section 6.04. Certain Post-Distribution Transactions. Each of Company
and Lakes shall, and shall cause each of their respective Subsidiaries to,
comply in all material respects with each representation, covenant and statement
made, or to be made, to any taxing authority in connection with the IRS Ruling
or any other ruling obtained, or to be obtained, by Company and Lakes acting
together, from any such taxing authority with respect to any transaction
contemplated by this Agreement.
Section 6.05. Sales and Transfer Taxes. Company and Lakes agree to
cooperate to determine the amount of sales, transfer or other Taxes (including,
without limitation, all real estate, patent, trademark and transfer taxes and
recording fees, but excluding any Income Taxes, as defined in the Tax Allocation
and Indemnity Agreement) incurred in connection with the Distribution and other
transactions contemplated by the Agreement (the "Transaction Taxes"). Company
agrees to file promptly and timely the Tax Returns for such Transaction Taxes
and Lakes will join in the execution of any such Tax Returns or other
documentation. Financial responsibility for payment of all such Transaction
Taxes shall be allocated between Company and Lakes on a pro rata basis as
provided in Section 3.1(c)(1) of the Merger Agreement.
Section 6.06. Settlement of Intercompany Accounts. All accounts between
the Company and the Non-Mississippi Subsidiaries and accounts between
Mississippi Subsidiaries and the Non-Mississippi Subsidiaries shall be paid in
full and settled prior to the Distribution Date, provided, however, that nothing
contained in this Section 6.06 shall affect the (i) transfer of assets pursuant
to Article II; (ii) the assumption and satisfaction of Liabilities pursuant to
Article III; or (iii) the indemnification provisions related to the parties
pursuant to this Agreement and the Merger Agreement.
ARTICLE VII.
ACCESS TO INFORMATION AND SERVICES
Section 7.01. Provision of Corporate Records.
(a) Except as may otherwise be provided in a Related
Agreement, Company shall arrange as soon as practicable following the
Distribution Date, to the extent not previously delivered in connection with the
transactions contemplated in Article II, for the transportation (at Lake's cost)
to Lakes of the Non-Mississippi Group Books and Records in its possession,
except to the extent such items are already in the possession of Lakes or a
Non-Mississippi Subsidiary. The Non-Mississippi Group Books and Records shall be
the property of Lakes, but the Non-
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Mississippi Group Books and Records that reasonably relate to Company or the
Mississippi Business shall be available to Company for review and duplication
until Company shall notify Lakes in writing that such records are no longer of
use to Company.
(b) Except as may otherwise be provided in a Related
Agreement, Lakes shall arrange as soon as practicable following the Distribution
Date, to the extent not previously delivered in connection with the transactions
contemplated in Article II, for the transportation (at Company's cost) to
Company of the Mississippi Group Books and Records in its possession, except to
the extent such items are already in the possession of Company or a Mississippi
Subsidiary. The Mississippi Group Books and Records shall be the property of
Company, but the Mississippi Group Books and Records that reasonably relate to
Lakes or the Non-Mississippi Business shall be available to Lakes for review and
duplication until Lakes shall notify Company in writing that such records are no
longer of use to Lakes.
Section 7.02. Access to Information. Except as otherwise provided in a
Related Agreement, from and after the Distribution Date, Company shall afford to
Lakes and its authorized accountants, counsel and other designated
representatives reasonable access (including using reasonable efforts to give
access to persons or firms possessing information) and duplicating rights during
normal business hours to all records, books, contracts, instruments, computer
data and other data and information relating to pre-Distribution operations
(collectively, "Information") within Company's possession or control, insofar as
such access is reasonably required by Lakes for the conduct of its business,
subject to appropriate restrictions for classified or Privileged Information.
Similarly, except as otherwise provided in a Related Agreement, Lakes
shall afford to Company and its authorized accountants, counsel and other
designated representatives reasonable access (including using reasonable efforts
to give access to persons or firms possessing information) and duplicating
rights during normal business hours to Information within Lakes's possession or
control, insofar as such access is reasonably required by Company for the
conduct of its business, subject to appropriate restrictions for classified or
Privileged Information. Information may be requested under this Article VII for
the legitimate business purposes of either party, including without limitation,
audit, accounting, claims (including claims for indemnification hereunder),
litigation and tax purposes, as well as for purposes of fulfilling disclosure
and reporting obligations and for performing this Agreement and the transactions
contemplated hereby.
Section 7.03. Production of Witnesses. At all times from and after the
Distribution Date, each of Lakes and Company shall use reasonable efforts to
make available to the other, upon written request, its and its Subsidiaries'
present and past officers, directors, employees and agents as witnesses to the
extent that such persons may reasonably be required in connection with any
Action.
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Section 7.04. Corporate Services. The parties hereto shall enter into a
corporate services agreement to the extent Lakes requires corporate services to
be provided to it following the Distribution Date. The services shall be
provided for up to one year following the Distribution Date at a fee equal to
the fair value for such services. The corporate services agreement shall be
negotiated on an arms-length basis. The final cost, types and scope of services
to be provided shall be subject to the approval of Company, such approval not to
be unreasonably withheld.
Section 7.05. Reimbursement. Except to the extent otherwise
contemplated in any Related Agreement, a party providing Information or
witnesses to the other party under this Article VII shall be entitled to receive
from the recipient, upon the presentation of invoices therefor, payments of such
amounts, relating to supplies, disbursements and other out-of-pocket expenses
(at cost) of employees who are witnesses or otherwise furnish assistance (at
cost), as may be reasonably incurred in providing such Information or witnesses.
Notwithstanding the foregoing, the parties acknowledge that a party providing
Information or witnesses shall not be entitled to receive reimbursement of
salary or other compensation expenses relating to any employees providing such
Information or acting as such witnesses.
Section 7.06. Retention of Records. Except as otherwise required by law
or agreed to in a Related Agreement or otherwise in writing, each of Lakes and
Company may destroy or otherwise dispose of any of the Information which is
material Information and is not contained in other Information retained by the
other, only after the later to occur of (a) all applicable statutes of
limitations (including any waivers or extensions thereof) with respect to Tax
Returns which Company or Lakes, as the case may be, may be obligated to file on
behalf of any member of the Lakes Group or any member of Company Group, as the
case may be; and (b) any retention period required by law or pursuant to any
record retention agreement, provided, however, that prior to such destruction or
disposal, (x) it shall provide no less than 90 or more than 120 days advance
written notice to the other, specifying in reasonable detail the Information
proposed to be destroyed or disposed of and (y) if a recipient of such notice
shall request in writing prior to the scheduled date for such destruction or
disposal that any of the Information proposed to be destroyed or disposed of be
delivered to such requesting party, the party proposing the destruction or
disposal shall promptly arrange for the delivery of such of the Information as
was requested at the expense of the party requesting such Information.
Section 7.07. Confidentiality. Each of Company and its Subsidiaries on
the one hand, and Lakes and its Subsidiaries on the other hand, shall hold, and
shall cause its consultants and advisors to hold, in strict confidence, all
Information concerning the other in its possession or furnished by the other or
the other's representatives pursuant to this Agreement (except to the extent
that such Information has been (i) in the public domain through no fault of such
party; or (ii) later lawfully acquired from other sources by such party), and
each party shall not release or disclose such Information to any other person,
except its auditors, attorneys, financial advisors, rating agencies, bankers and
other consultants and advisors, unless compelled to disclose by judicial or
administrative process or, as reasonably advised by its counsel, by other
requirements of law, or unless such Information is reasonably required to be
disclosed in connection with (x)
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any litigation with any third-parties or litigation between the Mississippi
Group and the Non-Mississippi Group, (y) any contractual agreement to which
members of the Mississippi Group or the Non-Mississippi Group are currently
parties, or (z) in exercise of either party's rights hereunder.
Section 7.08. Privileged Matters. Lakes and Company recognize that
certain legal and other professional services that have been and will be
provided prior to the Distribution Date have been and will be rendered for the
benefit of both the Mississippi Group and the Non-Mississippi Group and that
both the Mississippi Group and the Non-Mississippi Group should be deemed to be
the client for the purposes of asserting all Privileges. To allocate the
interests of each party in the Privileged Information, the parties agree as
follows:
(a) Company shall be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
which relates solely to the Mississippi Group, whether or not the Privileged
Information is in the possession of or under the control of Company or Lakes.
Company shall also be entitled, in perpetuity, to control the assertion or
waiver of all Privileges in connection with Privileged Information that relates
solely to the subject matter of any claims constituting Mississippi Group
Liabilities, now pending or which may be asserted in the future, in any lawsuits
or other proceedings initiated against or by Company or a Mississippi
Subsidiary, whether or not the Privileged Information is in the possession of or
under the control of Company or Lakes.
(b) Lakes shall be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
which relates solely to the Non-Mississippi Group, whether or not the Privileged
Information is in the possession of or under the control of Company or Lakes.
Lakes shall also be entitled, in perpetuity, to control the assertion or waiver
of all Privileges in connection with Privileged Information which relates solely
to the subject matter of any claims constituting Non-Mississippi Group
Liabilities, now pending or which may be asserted in the future, in any lawsuits
or other proceedings initiated against or by Lakes or a Non-Mississippi
Subsidiary, whether or not the Privileged Information is in the possession of or
under the control of Company or Lakes.
(c) Lakes and Company agree that they shall have a shared
Privilege, with equal right to assert or waive, subject to the restrictions in
this Section 7.07, with respect to all Privileges not allocated pursuant to the
terms of Sections 7.07(a) and (b). All Privileges relating to any claims,
proceedings, litigation, disputes, or other matters which involve both Lakes and
Company, or in respect of which both Lakes and Company retain any responsibility
or liability under this Agreement, shall be subject to a shared Privilege.
(d) No party may waive any Privilege which could be asserted
under any applicable law, and in which the other party has a shared Privilege,
without the consent of the other party, except to the extent reasonably required
in connection with any litigation with third-parties or as provided in
subsection (e) below. Consent shall be in writing, or shall be deemed to
29
<PAGE> 34
be granted unless written objection is made within twenty (20) days after
written notice upon the other party requesting such consent.
(e) In the event of any litigation or dispute between a member
of the Mississippi Group and a member of the Non-Mississippi Group, either party
may waive a Privilege in which the other party has a shared Privilege, without
obtaining the consent of the other party, provided that such waiver of a shared
Privilege shall be effective only as to the use of Information with respect to
the litigation or dispute between the Mississippi Group and the Non-Mississippi
Group, and shall not operate as a waiver of the shared Privilege with respect to
third-parties.
(f) If a dispute arises between the parties regarding whether
a Privilege should be waived to protect or advance the interest of either party,
each party agrees that it shall negotiate in good faith, shall endeavor to
minimize any prejudice to the rights of the other party, and shall not
unreasonably withhold consent to any request for waiver by the other party. Each
party specifically agrees that it will not withhold consent to waiver for any
purpose except to protect its own legitimate interests.
(g) Upon receipt by any party of any subpoena, discovery or
other request which arguably calls for the production or disclosure of
Information subject to a shared Privilege or as to which the other party has the
sole right hereunder to assert a Privilege, or if any party obtains knowledge
that any of its current or former directors, officers, agents or employees have
received any subpoena, discovery or other requests which arguably calls for the
production or disclosure of such Privileged Information, such party shall
promptly notify the other party of the existence of the request and shall
provide the other party a reasonable opportunity to review the Information and
to assert any rights it may have under this Section 7.07 or otherwise to prevent
the production or disclosure of such Privileged Information.
(h) The transfer of the Non-Mississippi Group Books and
Records and the Mississippi Group Books and Records and other Information
between Company and its Subsidiaries and Lakes and its Subsidiaries is made in
reliance on the agreement of Lakes and Company, as set forth in Sections 7.06
and 7.07, to maintain the confidentiality of Privileged Information and to
assert and maintain all applicable Privileges. The access to Information being
granted pursuant to Sections 7.01 and 7.02 hereof, the agreement to provide
witnesses and individuals pursuant to Section 7.03 hereof and the transfer of
Privileged Information between Company and its Subsidiaries and Lakes and its
Subsidiaries pursuant to this Agreement shall not be deemed a waiver of any
Privilege that has been or may be asserted under this Agreement or otherwise.
30
<PAGE> 35
ARTICLE VIII.
INSURANCE
Section 8.01. Policies and Rights Included Within the Non-Mississippi
Group Assets. Without limiting the generality of the definition of the
Non-Mississippi Group Assets or the effect of Section 2.01, the Non-Mississippi
Group Assets shall include any and all rights of an insured party under each of
the Shared Policies, specifically including rights of indemnity and the right to
be defended by or at the expense of the insurer, where applicable, with respect
to all injuries, losses, liabilities, damages and expenses incurred or claimed
to have been incurred on or prior to the Distribution Date by any party in or in
connection with the conduct of the Non-Mississippi Business or, to the extent
any claim is made against Lakes or any of its Subsidiaries, the Mississippi
Businesses, and which injuries, losses, liabilities, damages and expenses may
arise out of insured or insurable occurrences or events under one or more of the
Shared Policies.
Section 8.02. Policies and Rights Included Within the Mississippi Group
Assets. Without limiting the generality of the definition of the Mississippi
Group Assets or the effect of Section 2.01, the Mississippi Group Assets shall
include any and all rights of an insured party under each of the Shared
Policies, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, where applicable, with respect to
all injuries, losses, liabilities, damages and expenses incurred or claimed to
have been incurred on or prior to the Distribution Date by any party in or in
connection with the conduct of the Mississippi Business or, to the extent any
claim is made against Company or any of the Mississippi Subsidiaries, the
Non-Mississippi Business, and which injuries, losses, liabilities, damages and
expenses may arise out of insured or insurable occurrences or events under one
or more of the Shared Policies.
Section 8.03. Administration and Reserves.
(a) General. Notwithstanding the provisions of Article III,
but subject to any contrary provisions of any Related Agreement, from and after
the Distribution Date:
(i) Company shall be responsible for the Insurance
Administration of the Shared Policies; provided, however, that the
administration of the Shared Policies by Company is in no way intended to limit,
inhibit, or preclude any right to insurance coverage for any Insured Claim of a
named insured under the Shared Policies including, but not limited to, Lakes or
any of its Subsidiaries or Affiliates;
(ii) Lakes shall be entitled to any reserves
established by Company or any of its Subsidiaries, or the benefit of reserves
held by any insurance carrier, with respect to the Non-Mississippi Group
Liabilities; and
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(iii) Company shall be entitled to any reserves
established by Company or any of its Subsidiaries, or the benefit of reserves
held by any insurance carrier, with respect to the Mississippi Group
Liabilities.
(b) Insurance Premiums.
(i) Lakes shall have the right but not the
obligation to pay the premiums, to the extent that Company does not pay premiums
with respect to Mississippi Group Liabilities (retrospectively-rated or
otherwise), with respect to Shared Policies as required under the terms and
conditions of the respective Policies, whereupon Company shall forthwith
reimburse Lakes for that portion of such premiums paid by Lakes as are
attributable to the Mississippi Group Liabilities.
(ii) Company shall have the right but not the
obligation to pay the premiums, to the extent that Lakes does not pay premiums
with respect to Non-Mississippi Group Liabilities (retrospectively-rated or
otherwise), with respect to Shared Policies as required under the terms and
conditions of the respective Policies, whereupon Lakes shall forthwith reimburse
Company for that portion of such premiums paid by Company as are attributable to
the Non-Mississippi Group Liabilities.
(c) Allocation of Insurance Proceeds. Insurance Proceeds
received with respect to claims, costs and expenses under the Policies shall be
paid to Lakes with respect to the Non-Mississippi Group Liabilities and to
Company with respect to the Mississippi Group Liabilities. Payment of the
allocable portions of indemnity costs of Insurance Proceeds resulting from the
liability policies will be made to the appropriate party upon receipt from the
insurance carrier. In the event that the aggregate limits on any Policies are
exceeded, the parties agree to provide an equitable allocation of Insurance
Proceeds received after the Distribution Date based upon their respective bona
fide claims taking into account their relative contributions towards premiums
and the Insurance Proceeds used by each party to satisfy Insured Claims. The
parties agree to use their reasonable best efforts to cooperate with respect to
insurance matters.
(d) Insurance Charges.
(i) Notwithstanding anything to the contrary
contained herein, Lakes or an appropriate Non-Mississippi Subsidiary assumes
responsibility for and shall pay to the appropriate insurance carriers or
otherwise any premiums, retrospectively rated premiums, defense costs, indemnity
payments, deductibles, retentions or other charges as appropriate (collectively
"Insurance Charges"), whenever arising, which become due and payable upon the
terms and conditions of any applicable Policy in respect of any Insured Claims
against Lakes or a Non-Mississippi Subsidiary for charges which relate to the
period before the Distribution Date. In the event that Lakes or a
Non-Mississippi Subsidiary fails to pay any insurance charges when due and
payable, whether at the request of the party entitled to payment or upon demand
by Company or a Mississippi Subsidiary, Company or a Mississippi Subsidiary may
(but shall not
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be required to) pay such Insurance Charges for and on behalf of Lakes or a
Non-Mississippi Subsidiary and thereafter Lakes shall forthwith reimburse
Company or such Mississippi Subsidiary for such payment.
(ii) Notwithstanding anything to the contrary
contained herein, Company or an appropriate Mississippi Subsidiary assumes
responsibility for and shall pay to the appropriate insurance carriers or
otherwise any Insurance Charges, whenever arising, which become due and payable
upon the terms and conditions of any applicable Policy in respect of any Insured
Claims against Company or a Mississippi Subsidiary for charges which relate to
the period before the Distribution Date. In the event that Company or a
Mississippi Subsidiary fails to pay any Insurance Charges when due and payable,
whether at the request of the party entitled to payment or upon demand by Lakes
or a Non-Mississippi Subsidiary, Lakes or a Non-Mississippi Subsidiary may (but
shall not be required to) pay such Insurance Charges for and on behalf of
Company or a Mississippi Subsidiary and thereafter Company shall forthwith
reimburse Lakes or such Non-Mississippi Subsidiary for such payment.
Section 8.04. Agreement for Waiver of Conflict and Shared Defense. In
the event that Insured Claims of both Lakes and Company exist relating to the
same occurrence, Lakes and Company agree to jointly defend and to waive any
conflict of interest necessary to the conduct of that joint defense. Nothing in
this paragraph shall be construed to limit or otherwise alter in any way the
indemnity obligations of the parties to this Agreement, including those created
by this Agreement, by operation of law or otherwise.
ARTICLE IX.
MISCELLANEOUS
Section 9.01. Entire Agreement; No Third Party Beneficiaries. This
Agreement and all documents and instruments referred to herein constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and are not intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder.
Section 9.02. Tax Allocation and Indemnity Agreement; After-Tax
Payments.
(a) Other than as provided in this Section 9.02 and Section
6.05, this Agreement shall not govern any Tax matter, and any and all claims,
losses, damages, demands, costs, expenses, liabilities, refunds, deductions,
write-offs, or benefits relating to Taxes shall be exclusively governed by the
Tax Allocation and Indemnity Agreement.
(b) If, at the time Lakes is required to make any payment to
Company under this Agreement, Company owes Lakes any amount under the Tax
Allocation and Indemnity Agreement, then such amounts shall be offset and the
excess shall be paid by the party liable for
33
<PAGE> 38
such excess. Similarly, if, at the time Company is required to make any payment
to Lakes under this Agreement, Lakes owes Company any amount under the Tax
Allocation and Indemnity Agreement, then such amounts shall be offset and the
excess shall be paid by the party liable for such excess.
Section 9.03. Expenses. Except as specifically provided in this
Agreement or in a Related Agreement, all fees and expenses incurred in
connection with this Agreement and the consummation of the transactions
contemplated hereby shall be paid by the party incurring such expenses. In
addition, it is understood and agreed that Lakes shall pay the legal, filing,
accounting, printing and other accountable and out-of-pocket expenditures in
connection with the preparation, printing and filing of the Form 10.
Section 9.04. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of New York, without regard
to any applicable conflicts of laws.
Section 9.05. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
if to Company, to
Gaming Co., Inc.
3930 Howard Hughes Parkway, 4th Floor
Las Vegas, Nevada 89109
Attn: General Counsel
Facsimile: (702) 699-5179
if to Lakes, to
Lakes
130 Cheshire Lane
Minnetonka, MN 55305
Attn: Chief Executive Officer
Facsimile: (612) 449-7003
Section 9.06. Amendments. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties hereto.
Section 9.07. Assignments. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by either of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
34
<PAGE> 39
Section 9.08. Termination. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of Company Board without the approval of Lakes's or of Company's
stockholders. In the event of such termination, no party shall have any
liability to any other party pursuant to this Agreement.
Section 9.09. Subsidiaries. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such party
which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
Section 9.10. Specific Performance. The parties hereto agree that the
remedy at law for any breach of this Agreement will be inadequate and that any
party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or remedy. Such party
may, in its sole discretion, apply to a court of competent jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof and, to the extent permitted by applicable laws, each party waives any
objection to the imposition of such relief.
Section 9.11. Headings; References. The article, section and paragraph
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. All
references herein to "Article", "Sections" or "Exhibits" shall be deemed to be
references to Articles or Sections hereof or Exhibits hereto unless otherwise
indicated.
Section 9.12. Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 9.13. Severability; Enforcement. The invalidity of any portion
hereof shall not affect the validity, force or effect of the remaining portions
hereof. If it is ever held that any restriction hereunder is too broad to permit
enforcement of such restriction to its fullest extent, each party agrees that a
court of competent jurisdiction may enforce such restriction to the maximum
extent permitted by law, and each party hereby consents and agrees that such
scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
Section 9.14. Arbitration of Disputes.
(a) Any dispute, controversy or disagreement ("Dispute")
between the Parties related to the obligations of the parties under this
Agreement in respect of which an amicable resolution cannot be reached shall be
submitted for mediation to a committee made up of an equal number of non-common
members of each company's Board of Directors ("Committee"). If the parties are
unable to reach an amicable resolution of a Dispute within thirty days after
submission to the Committee, then, to the maximum extent allowed by law, the
Dispute shall be
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submitted and resolved by final and binding arbitration in Minnesota or
Mississippi or as the parties may agree upon; provided, however, that any party
may seek injunctive relief and enforcement of any award rendered pursuant to the
arbitration provisions of this Section 9.14 by bringing a suit in any court of
competent jurisdiction. Any award issued as a result of such arbitration shall
be final and binding between the parties thereto and shall be enforceable by any
court having jurisdiction over the party against whom enforcement was sought and
application may be made to such court for judicial acceptance of the award and
order of enforcement. The fees and expenses of arbitration (including reasonable
attorneys' fees) shall be paid by the party that does not prevail in such
arbitration.
(b) Attorneys' Fees. If any party to this Agreement brings an
action to enforce its rights under this Agreement, the prevailing party shall be
entitled to recover its costs and expenses, including without limitation
reasonable attorneys' fees, incurred in connection with such action, including
any appeal of such action.
(c) Specific Performance. Nothing contained in this Section
9.14 shall limit or restrict in any way the right or power of a party at any
time to seek injunctive relief in any court and to litigate the issues relevant
to such request for injunctive relief before such court (i) to restrain the
other party from breaching this Agreement or (ii) for specific enforcement of
this Section 9.14. The parties agree that any legal remedy available to a party
with respect to a breach of this Section 9.14 will not be adequate and that, in
addition to all other legal remedies, each party is entitled to an order
specifically enforcing this Section 9.14.
(d) Consent to Jurisdiction. The Parties hereby consent to the
jurisdiction of the federal and state courts located in the State of Minnesota
for all purposes under this Agreement.
(e) Confidentiality. Neither party nor the arbitrators may
disclose the existence or results of any arbitration under this Agreement or any
evidence presented during the course of the arbitration without the prior
written consent of both parties, except as required to fulfill applicable
disclosure and reporting obligations, or as otherwise required by law.
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Section 9.15. Prompt Payment. Where the terms of this Agreement require
payment of an amount "as promptly as possible," "as soon as practicable," or "as
soon as possible," following a specified event, occurrences or date, such
payment shall be made no later than five (5) business days after such event,
occurrence or date.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE> 42
IN WITNESS WHEREOF, Company and Lakes have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
GRAND CASINOS, INC.
____________________________________
By:
Its:
GCI LAKES, INC.
____________________________________
By:
Its:
38
<PAGE> 43
Pursuant to Item 601(b)(2) of Regulation S-K, certain Schedules and Exhibits
have been omitted from this Agreement. The Registrant will furnish a copy of any
omitted Schedule or Exhibit to the Commission upon request.
Schedules:
Schedule 1 list of Mississippi and GCA Acquisition Subsidiaries
Schedule 2 list of Non-Mississippi Subsidiaries
Schedule 3 Retained company assets
Schedule 4 Retained company liabilities
Schedule 5 Assigned Lakes assets
Schedule 6 Assigned Lakes liabilities
Schedule 7 Transferred Corporate functions
Schedule 8 Mississippi Group cash accounts
Schedule 9 Non-Mississippi Group cash accounts
Schedule 10 Contingent Company Liabilities
The following is a list and description of the omitted Exhibits:
Exhibit A (Filed as Exhibit 10.2 to this Form 10-Q.)
Exhibit B Form of Lakes Bylaws
Exhibit C Form of Lakes Articles
Exhibit D (Filed as Exhibit 10.3 to this Form 10-Q.)
Exhibit E (Filed as Exhibit 10.4 to this Form 10-Q.)
<PAGE> 1
EXHIBIT 10.2
----------------------------------------------
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS
ALLOCATION AGREEMENT
BY AND BETWEEN
GRAND CASINOS, INC.
AND
GCI LAKES, INC.
DATED AS OF _________________, 1998
----------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 - DEFINITIONS...................................................................2
Section 1.1 Definitions............................................................2
ARTICLE 2 - TRANSFER OF EMPLOYEES; EMPLOYMENT ALLOCATION;AND TERMINATION BENEFITS.........6
Section 2.1 Transfer of Employees..................................................6
Section 2.2 Allocations between Company and Lakes..................................8
Section 2.3 Change of Control Benefits; Termination Benefits.......................9
ARTICLE 3 - EMPLOYER STOCK AND COMPENSATION PLANS........................................10
Section 3.1 Stock Option Plans....................................................10
Section 3.2 Stock Purchase Plans..................................................11
Section 3.3 Compensation Plans....................................................11
ARTICLE 4 - SAVINGS PLANS................................................................12
Section 4.1 401(k)Plans...........................................................12
ARTICLE 5 - WELFARE AND OTHER BENEFITS...................................................15
Section 5.1 Company Medical/Dental Plans..........................................15
Section 5.2 Lakes Medical/Dental Plan.............................................16
Section 5.3 Vacation and Sick Pay Liabilities.....................................17
Section 5.4 Payroll Reporting and Withholding.....................................18
Section 5.5 Post-Retirement Welfare Benefits......................................20
Section 5.6 Other Welfare Plans...................................................20
ARTICLE 6 - LABOR AND EMPLOYMENT MATTERS.................................................20
Section 6.1 Separate Employers....................................................21
Section 6.2 Employment Policies and Practices.....................................21
Section 6.3 Collective Bargaining Agreements......................................21
Section 6.4 Notice of Claims......................................................21
Section 6.5 Assumption of Unemployment Tax-Rates..................................21
Section 6.6 Employees on Leave of Absence.........................................21
Section 6.7 Release and Separation Agreements.....................................22
ARTICLE 7 - MISCELLANEOUS................................................................22
Section 7.1 Relationship of Parties...............................................22
Section 7.2 Access to Information; Cooperation....................................22
Section 7.3 Assignment............................................................22
Section 7.4 Headings..............................................................22
Section 7.5 Severability..........................................................22
Section 7.6 Parties in Interest; No Third Party Beneficial Rights.................22
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Section 7.7 Notices...............................................................23
Section 7.8 Further Assurances....................................................24
Section 7.9 Waiver of Conditions..................................................24
Section 7.10 Governing Law.........................................................24
Section 7.11 Preservation of Right To Amend or Terminate Plans.....................24
Section 7.12 Entire Agreement......................................................25
Section 7.13 Counterparts..........................................................25
Section 7.14 Survival..............................................................25
Section 7.15 Dispute Resolution....................................................25
Section 7.16 Reimbursement.........................................................25
Section 7.17 Default...............................................................25
Section 7.18 Force Majeure.........................................................25
Section 7.19 Attorney/Client Privilege.............................................26
Section 7.20 Specific Performance..................................................26
</TABLE>
SCHEDULES
Schedule A Change of Control Agreements
Schedule B Release and Separation Agreements
<PAGE> 4
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS
ALLOCATION AGREEMENT
THIS EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION
AGREEMENT (this "Agreement") is made and entered into as of [_______________],
1998, by and between GRAND CASINOS, INC., a Minnesota corporation ("Company");
and GCI LAKES, INC., a Minnesota corporation and wholly owned subsidiary of
Company ("Lakes"); and shall be effective as of the Distribution Date (as
hereinafter defined).
RECITALS
WHEREAS, Company, through certain wholly-owned subsidiaries, (a) owns,
operates and develops certain gaining and resort facilities located in the State
of Mississippi (as more specifically described herein, the "Mississippi
Business"), and (b) manages and develops certain gaming facilities located
outside the State of Mississippi (as more specifically described herein, the
"Non-Mississippi Business");
WHEREAS, it is necessary to separate the Mississippi Business from the
Non-Mississippi Business in order to satisfy conditions precedent contained in
that certain Agreement and Plan of Merger dated June [ ], 1998 (the "Merger
Agreement"), by and among Company; Lakes; Hilton Hotels Corporation, a Delaware
corporation ("Hilton"); Gaming Co., Inc., a Delaware corporation and a
wholly-owned subsidiary of Hilton ("Gaming Co."); and Gary Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Gary ("Merger Sub"),
providing for the merger of Merger Sub with and into Company (the "Merger");
WHEREAS, subject to Company shareholder ratification and certain other
conditions, the Board of Directors of Company has determined that the separation
of the Non-Mississippi Business from the Mississippi Business shall be
accomplished by distributing all of the issued and outstanding shares of common
stock, par value $.01 per share, of Lakes (the "Lakes Common Stock") to the
holders as of the Record Date (as hereinafter defined) of common stock, par
value $.01 per share, of Company (the "Company Common Stock") on a pro rata
basis (the "Distribution") immediately before the Merger;
WHEREAS, as set forth in the written Distribution Agreement between the
parties, of even date herewith (the "Distribution Agreement"), and subject to
the terms and conditions thereof, Company will contribute to Lakes, prior to the
Distribution, all of the operations, assets and liabilities of the
Non-Mississippi Business and such other assets, liabilities and operations as
are described in the Distribution Agreement; and
WHEREAS, pursuant to, and as contemplated by, the Distribution
Agreement, Company and Lakes have agreed to enter into an agreement allocating
responsibilities with respect to certain matters relating to employees and
employee compensation, benefits, labor and certain other employment matters
pursuant to the terms and conditions set forth herein.
<PAGE> 5
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants,
agreements, undertakings and obligations set forth herein, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement, the following
terms shall have the meanings set forth or as referenced below. Capitalized
terms used and not otherwise defined in this Agreement shall have the meaning
ascribed to them in the Distribution Agreement. All references herein to
"Articles," "Sections" or "Schedules" shall be deemed to be references to
Articles or Sections hereof or Schedules hereto unless otherwise indicated.
"Ancillary Agreement" shall mean any agreement contemplated by the
Distribution Agreement, and such other documents as the parties thereto shall
mutually agree are required to effect the Distribution.
"Change of Control Agreements" shall mean those Change of Control
Agreements of Company identified on Schedule A attached hereto and any and all
other employment or severance agreements of Company that provide severance or
termination benefits to any Employee subsequent to a change of control of
Company.
"COBRA" shall mean the federal statutes designated as Code Section
4980B and ERISA Sections 601 through 608; and any applicable state law that also
establishes employer requirements for continuation of health care, life
insurance or other Welfare Plan benefits for the benefit of certain current and
former employees or dependents thereof and any successor legislation to any of
such laws.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or any
successor legislation.
"Collective Bargaining Agreement" shall mean any collective bargaining
agreement or other labor agreement to which Company or any of its subsidiaries
or affiliates was a party on or before the Distribution Date.
"Company" shall have the meaning set forth in the Preamble.
"Company Common Stock" shall have the meaning set forth in the
Recitals.
"Company Director Option Plan" shall mean the 1995 Director Stock
Option Plan of Company.
2
<PAGE> 6
"Company Employee Stock Option Plan" shall mean the 1991 Grand Casinos,
Inc. Stock Option and Compensation Plan, and amendments thereto, of Company.
"Company 401(k) Plan" shall mean, until the Distribution Date, the
Grand Casinos 401(k) Savings Plan sponsored by Company and dated as of September
1, 1995.
"Company Incentive Compensation Plan" shall mean the management
incentive bonus plan of Company, as amended; and any other incentive or bonus
compensation plans of Company.
"Company Individual" shall mean any individual who (a) is a Retained
Employee, (b) is, as of the Distribution Date, a Company Terminee whose last
employment with Company or any of its subsidiaries was with a Company Retained
Business or (c) is a dependent or beneficiary of any individual specified in
clause (a) or (b).
"Company Medical/Dental Plan" shall mean any Medical/Dental Plan
maintained for or providing benefits to Company Individuals.
"Company Qualified Beneficiary" shall mean a Qualified Beneficiary who,
immediately following the Distribution, is not a Lakes Qualified Beneficiary and
who, immediately prior to the Distribution, was a Qualified Beneficiary under
any Company Medical/Dental Plan.
"Company Retained Business" shall mean the Mississippi Business
described in the Recitals and any other business or operation of Company or its
subsidiaries which is, pursuant to the Distribution Agreement, to be conducted
by Company following the Distribution.
"Company Stock Option" shall mean an option to purchase Company Common
Stock pursuant to any of the Company Stock Option Plans.
"Company Stock Option Plans" shall mean collectively, the Company
Employee Stock Option Plan and the Company Director Option Plan.
"Company Stock Purchase Plan" shall mean the Grand Casinos, Inc.
Associate Stock Purchase Plan established by Company as of March 1, 1997.
"Company Terminee" shall mean any individual who was formerly employed
by Company or any of its subsidiaries and terminated such employment prior to
the Distribution Date.
"Distribution" shall have the meaning set forth in the Recitals.
"Distribution Agreement" shall have the meaning set forth in the
Recitals.
"Distribution Date" shall mean the date on which the Distribution
occurs.
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"Employee" shall mean with respect to any entity, an individual who is
considered, according to the payroll and other records of such entity, to be
employed by such entity, regardless of whether such individual is, at the
relevant time, actively at work or on leave of absence (including vacation,
holiday, sick leave, family and medical leave, disability leave, military leave,
jury duty, layoff with rights of recall, and any other leave of absence or
similar interruption of active employment that is not considered, according to
the policies or practices of such entity, to have resulted in a permanent
termination of such individual's employment), but excluding any individual who
is, as of the relevant time, on long-term disability leave. An employee
includes, without limitation, any individual who is in one of the following
categories: a Retained Employee, a Company Terminee, a Lakes Employee or a
Transferred Employee.
"Employer" shall mean Company or Lakes, as the context so indicates.
"Employer Common Stock" shall mean Company Common Stock with respect to
Company Individuals and Lakes Common Stock with respect to Lakes Individuals.
"Employer Stock Option Plan" shall mean a plan that provides for awards
of additional compensation to eligible Employees in the form of non-qualified or
incentive options to purchase Employer Common Stock, including without
limitation, the Company Stock Option Plans and the Lakes Stock Option Plan.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, or any successor legislation.
"Exercise Date" shall have the meaning set forth in Section 3.2(a).
"Gaming Co. 401(k) Plan" shall mean the defined contribution deferred
profit sharing plan that is intended to qualify under Code Sections 401(a) and
401(k) and is sponsored by Gaming Co. and/or Merger Sub as of the date of
consummation of the Merger.
"HMO" shall mean any health maintenance organization organized under 42
U.S.C. Section 300e-9, or a state health maintenance organization statute that
provides medical services for Company Individuals or Lakes Individuals under any
Plan.
"IRS" shall mean the Internal Revenue Service.
"Lakes" shall have the meaning set forth in the Preamble.
"Lakes Business" shall mean the Non-Mississippi Business described in
the Recitals and any other business or operation of Company or any of its
subsidiaries that is, pursuant to the Distribution Agreement, to be conducted by
Lakes immediately following the Distribution.
"Lakes Common Stock" shall have the meaning set forth in the Recitals.
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"Lakes Compensation Plans" shall have the meaning set forth in Section
3.3(b).
"Lakes Employee" shall mean any individual who is (a) a Transferred
Employee; or (b) not a Transferred Employee, but becomes an employee of Lakes or
any of its subsidiaries on or after the Distribution Date.
"Lakes Employment Agreements" shall have the meaning set forth in
Section 2.1(d).
"Lakes 401(k) Plan" shall have the meaning set forth in Section 4.1
(a).
"Lakes Individual" shall mean any individual who (a) is a Transferred
Employee; (b) is otherwise a Lakes Employee; (c) is, as of the Distribution
Date, a Company Terminee whose last employment with Company or a subsidiary of
Company was with a Lakes Business; or (d) is a dependent or beneficiary of any
individual described in clause (a), (b) or (c).
"Lakes Medical/Dental Plans" shall mean the Medical/Dental Plans
established by Lakes in accordance with Section 5.2(a).
"Lakes Option" shall have the meaning set forth in Section 3.1 (a).
"Lakes Qualified Beneficiary" shall mean any Lakes Individual (or
dependent thereof) who, on or before the Distribution Date, was a Qualified
Beneficiary under any Company Medica/Dental Plan.
"Lakes Stock Option Plan" shall mean the Stock Option Plan of Lakes, as
established by Lakes pursuant to Section 3.1 (b) hereof.
"Lakes Stock Purchase Plan" shall have the meaning set forth in Section
3.2(b).
"Medical/Dental Plan" shall mean a Welfare Plan providing health
benefits to Employees and their dependents; and also includes a "cafeteria" Plan
intended to qualify under Code Section 125.
"Merger" shall have the meaning set forth in the Recitals.
"Plan" shall mean any plan, policy, arrangement, contract or agreement
providing compensation benefits for any group of Employees or individual
Employees (including former Employees), or the dependents or beneficiaries of
any such Employee, whether formal or informal or written or unwritten, and
including, without limitation, any means, whether or not legally required,
pursuant to which any benefit is provided by an Employer to any such Employee or
the beneficiaries of any such Employee, existing as of the Distribution Date or
prior thereto.
"Qualified Beneficiary" shall mean an individual (or dependent thereof)
who either (a) experiences a "qualifying event" (as that term is defined in Code
Section 4980B(f)(3) and ERISA
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Section 603) while a participant in any Medical/Dental Plan, or (b) becomes a
"qualified beneficiary" (as that term is defined in Code Section 4980B(g)(1) and
ERISA 607(3)) under any Medical/Dental Plan.
"Record Date" shall mean 1998.
"Release and Separation Agreements" shall mean those Release and/or
Separation Agreements identified on Schedule B hereto, and any other similar
agreements entered into by Company or any of its subsidiaries, and a Company
Terminee whose last employment with Company or such subsidiary was with either a
Lakes Business or a Company Retained Business.
"Retained Employee" shall mean any individual who, immediately prior to
the Distribution, was an Employee of Company or any of its subsidiaries and who
is an employee of Company or any of its subsidiaries immediately following the
Distribution.
"Rev. Proc. 84-77" shall have the meaning set forth in Section 5.4(a).
"SEC" shall mean the Securities and Exchange Commission.
"Service Credit" shall mean the period taken into account under any
Plan for purposes of determining length of service or plan participation to
satisfy eligibility, vesting, benefit accrual and similar requirements under
such Plan.
"Termination Benefits" shall have the meaning set forth in Section
2.3(a).
"Transferred Employee" shall mean any individual who was an Employee of
Company or any of its subsidiaries immediately prior to the Distribution and who
is or becomes, immediately after the Distribution, an Employee of Lakes or any
of its subsidiaries.
"Welfare Plan" shall mean any Plan that provides medical, health,
disability, accident, life insurance, death, dental or any other welfare
benefit, including, without limitation, any post-employment benefit, but
excluding vacation benefits covered under Section 5.3.
ARTICLE 2
TRANSFER OF EMPLOYEES; EMPLOYMENT ALLOCATION;
AND TERMINATION BENEFITS
Section 2.1 Transfer of Employees.
(a) Company and Lakes shall take all steps necessary or appropriate so that
all of the Employees of Company and its subsidiaries are allocated
between the Company Retained Business and the Lakes Business in
accordance with the principles set forth in Section 2.1 (b) below; and
so that (i) each individual who is so allocated to the Lakes Business
is, as of the Distribution
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Date and immediately following the Distribution, an Employee of Lakes
or any of its subsidiaries in the Lakes Business; and (ii) each
individual who is so allocated to the Company Retained Business is, as
of the Distribution Date and immediately following the Distribution, an
Employee of Company or any of its subsidiaries in the Company Retained
Business.
(b) In making the allocation provided for in this Section , Company and
Lakes shall allocate each Employee who is primarily engaged in the
Company Retained Business to Company and/or its subsidiaries (other
than Lakes and its subsidiaries) and each Employee who is primarily
engaged in the Lakes Business to Lakes and/or its subsidiaries. All
other Employees shall be allocated in a mutually agreeable manner that,
to the extent possible, takes into account (i) the Employees'
expertise, experience and existing positions and duties, (ii) the
likelihood of unreasonably disrupting either the Company Retained
Business or the Lakes Business and (iii) maximizing the ability of each
of Company and Lakes, and their respective subsidiaries to manage and
operate their respective businesses after the Distribution Date, taking
into account the respective needs of such businesses as established by
past practice, and with a view towards maximizing the value and
effectiveness of both the Company Retained Business and the Lakes
Business.
(c) Company and Lakes each agree that, between the date hereof and the
Distribution Date, Employees will not be transferred between the
Company Retained Business or Lakes Business except as (i) necessary to
effect the transfer pursuant to this Section 2.1 or (ii) in the
ordinary course of business consistent with past practice.
Notwithstanding the foregoing allocation, Company and Lakes acknowledge
that (x) Company may need the services of certain Transferred Employees
for a transitional period following the Distribution and (y) Lakes may
need the services of certain Retained Employees for a transitional
period following the Distribution. Company and Lakes agree to enter
into an Ancillary Agreement to this effect and to cooperate to make
such services available on a transitional basis.
(d) Effective as of the Distribution Date, Company shall assume all
obligations and liabilities for, and arising under, all written and
oral employment agreements, if any, in each case with respect to
Retained Employees; and Lakes shall have no liability or obligation
with respect thereto. Effective as of the Distribution Date, Lakes
shall assume all obligations and liabilities for, and arising under,
all written and oral employment agreements, if any, in each case with
respect to Transferred Employees (the "Lakes Employment Agreements");
and Company shall have no liability or obligation with respect thereto.
Lakes shall take, or cause to be taken, all action necessary and
appropriate to assume, as of the Distribution Date, all Lakes
Employment Agreements, with such changes as may be necessary to reflect
the change in the employer thereunder and such other changes as Lakes
shall determine. Such Lakes Employment Agreements shall otherwise have
the same terms and conditions as in effect immediately prior to the
Distribution Date, except that references to employment by or
termination of employment with Company and its affiliates shall be
changed to refer to employment by or termination of employment with
Lakes and its affiliates.
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Section 2.2 Allocations between Company and Lakes.
(a) Allocation of Responsibilities as Employer on Distribution Date. On the
Distribution Date, except to the extent assumed by Company under this
Agreement or any Ancillary Agreement, Lakes and/or its subsidiaries
shall retain or assume, as the case may be, responsibility as employer
for all Transferred Employees. On the Distribution Date, except to the
extent assumed by Lakes under this Agreement or any Ancillary
Agreement, Company and/or its subsidiaries shall retain responsibility
as employer for all Retained Employees.
(b) Assumption of Liabilities on Distribution Date. Except as specifically
provided in this Agreement, or as otherwise agreed by the parties
hereto:
(i) Except as provided in Section 2.2(c), immediately following the
Distribution, Lakes shall assume all benefit obligations and all
related rights in connection with any Plan with respect to the
Transferred Employees and other Lakes Individuals; and Company shall
have no further liability with respect thereto.
(ii) Company shall retain all benefit obligations and all related rights
that accrue after the Distribution Date in connection with any Plan and
with respect to Retained Employees; and Lakes shall have no further
liability with respect thereto; provided, however, that with respect to
any such Retained Employees who become employed by Lakes after the
Distribution, any benefit obligations and all related rights that
accrue after such employment in connection with any Plan with respect
to such employment with Lakes shall be assumed by Lakes.
(c) Service Credits.
(i) Distribution Date Transfers. In connection with the Distribution and
for purposes of determining Service Credits under any Plan, Company
shall credit each Retained Employee and Lakes shall credit each
Transferred Employee with such Employee's Service Credits and original
hire date as reflected in the records of Company or any of its
subsidiaries as of the Distribution Date. Such Service Credits and hire
date shall continue to be maintained as described herein for as long as
the Employee does not terminate such employment or as otherwise may be
required by applicable law or any applicable Plan.
(ii) Service Credits Following the Distribution Date. Subject to the
provisions of applicable law, (x) Lakes may, in the case of Transferred
Employees, in its sole discretion, make such decisions as it deems
appropriate with respect to determining Service Credits accrued after
the Distribution Date; and (y) Company may, in the case of Retained
Employees, in its sole discretion, make such decisions as it deems
appropriate with respect to determining Service Credits accrued after
the Distribution Date.
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Section 2.3 Change of Control Benefits; Termination Benefits.
(a) No Transferred Employee shall be deemed, as a result of any actions
taken pursuant to this Article 11 or otherwise as a result of the
consummation of the transactions contemplated by the Distribution
Agreement, to have become entitled to any benefits under any Plan,
contract, agreement, statute, regulation or other arrangement that
provides for the payment of severance pay, salary continuation, pay in
lieu of notice, unused vacation pay, or similar benefits in connection
with actual or constructive termination or alleged actual or
constructive termination of employment (collectively, "Termination
Benefits").
(b) Notwithstanding Section 2.3(a), effective as of the Distribution Date,
Company shall retain all liabilities relating to or arising out of
claims made by or on behalf of Retained Employees (including the
beneficiary, dependent or alternate payee of such individual) for, or
with respect to, Termination Benefits relating to the actual or
constructive termination or alleged actual or constructive termination
of employment of any Retained Employee with any member of the Lakes
Business or the Company Retained Business, whether before, on or after
the Distribution Date. In addition, Company shall retain all
liabilities and obligations pursuant to any Change of Control
Agreements with respect to Retained Employees.
(c) Notwithstanding Section 2.3(a), and except as provided otherwise in
Section 2.3(b) above, effective as of the Distribution Date, Lakes
shall assume all liabilities relating to or arising out of claims made
by or on behalf of Transferred Employees (including the beneficiary,
dependent or alternative payee of such individual) for, or with respect
to, Termination Benefits relating to the actual or constructive
termination or alleged actual or constructive termination of employment
of any Transferred Employee with Lakes or any of its subsidiaries in
the Lakes Business or Company or any of its subsidiaries in the Company
Retained Business, whether before, on or after the Distribution Date.
In addition, Lakes shall assume all liabilities and obligations
pursuant to any Change of Control Agreements with respect to
Transferred Employees.
ARTICLE 3
EMPLOYER STOCK AND COMPENSATION PLANS
Section 3.1 Stock Option Plans.
(a) Company Stock Option Plans. Company shall continue the Company Stock
Option Plans. Effective as of the Distribution Date, all outstanding
Company Stock Options shall be adjusted to represent options to
purchase an equivalent number of shares of Company Common Stock and
shares of Lakes Common Stock (each such option to purchase Lakes Common
Stock, a "Lakes Option"). Pursuant to such adjustment, the intrinsic
value of the Company Stock Options immediately prior to the
Distribution shall be preserved immediately after the Distribution, the
exercise prices of the Company Stock Options shall be adjusted to
reflect the Distribution and the exercise prices of the Lakes Options
shall be
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determined based upon the relative values of Company Common Stock and
Lakes Common Stock immediately following the Distribution, all as
mutually agreed by Company and Lakes. To the extent necessary, Company
shall amend the Company Stock Option Plans to provide that, with
respect to Lakes Individuals, all references to employment or
termination of employment with Company and its affiliates shall be
changed to references to employment by or termination of employment
with Lakes and its affiliates.
(b) Lakes Stock Option Plans. Lakes shall take, or cause to be taken, all
action necessary and appropriate to assume and adopt, effective as of
the Distribution Date, the Company Stock Option Plans, with such
changes as may be necessary to reflect the change in the issuer of
awards thereunder and such other changes as Lakes shall determine (such
plans as adopted, the "Lakes Stock Option Plans"). All awards under the
Lakes Stock Option Plans will be options with respect to Lakes Common
Stock. Lakes Options that are issued pursuant to the adjustment of the
Company Stock Options under subsection (a) above shall otherwise have
the same terms and conditions as the Company Stock Options with respect
to which they are issued, except that with respect to Company
Individuals receiving any Lakes Options, references to employment by or
termination of employment with Lakes and its affiliates shall be
changed to references to employment by or termination of employment
with Company and its affiliates. From and after the Distribution Date,
Lakes shall assume all obligations with respect to the Lakes Options,
and shall administer the Lakes Stock Option Plans under terms governing
such awards.
Section 3.2 Stock Purchase Plans.
(a) Company Stock Purchase Plan. The Company Stock Purchase Plan shall be
administered and, if necessary, amended to provide that all
contributions withheld from the compensation of participants through
the day before the Distribution Date (the "Purchase Date") shall be
used on the Purchase Date to purchase Company Common Stock under the
terms and conditions set forth in such Plan. From and after the
Distribution Date, Company shall continue the Company Stock Purchase
Plan with respect to Retained Employees. Company shall assume all
obligations with respect to, and shall administer the Company Stock
Purchase Plan under its terms with respect to Retained Employees.
(b) Lakes Stock Purchase Plan. Lakes shall take, or cause to be taken, all
action necessary and appropriate to assume and adopt, effective as of
the Distribution Date, a Plan similar to the Company Stock Purchase
Plan, with such changes as may be necessary to reflect the change in
the issuer of awards thereunder and such other changes as Lakes shall
determine (such plan as adopted, the "Lakes Stock Purchase Plan"). The
Lakes Stock Purchase Plan shall otherwise have the same terms and
conditions as the Company Stock Purchase Plan, except that references
to employment by or termination of employment with Company and its
affiliates shall be changed to references to employment by or
termination of employment with Lakes and its affiliates. From and after
the Distribution Date, Lakes shall administer the Lakes Stock Purchase
Plan under its terms with respect to Transferred Employees.
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Section 3.3 Compensation Plans.
(a) Company Compensation Plans. Company shall pay, or cause to be paid, all
compensation and bonuses earned by each Company Individual who, on the
Distribution Date, is a participant under any of the Company
Compensation Plans for the period prior to the Distribution Date, in
accordance with the terms of the applicable Company Compensation Plan.
From and after the Distribution Date, Company shall retain all
liabilities relating to or arising under the Company Compensation Plans
with respect to any Company Individuals.
(b) Lakes Compensation Plans. Lakes shall assume and shall be solely
responsible for, all obligations to pay all compensation and bonuses
earned by each Lakes Individual who, on the Distribution Date, is a
participant under the Company Compensation Plans. Lakes shall take, or
cause to be taken, all action necessary and appropriate to assume and
adopt, effective as of the Distribution Date, the Company Compensation
Plans that cover Lakes Individuals, with such changes as may be
necessary to reflect the change in the issuer of awards thereunder and
such other changes as Lakes shall determine (such plan as adopted, the
"Lakes Compensation Plans"). From and after the Distribution Date, the
Lakes Compensation Plans shall provide future compensation benefits
thereunder to Lakes Individuals pursuant to the terms therein. The
Lakes Compensation Plans shall otherwise have the same terms and
conditions as the Company Compensation Plans, until such time as Lakes
may determine that any amendment or termination of any Plan is
necessary or desirable.
ARTICLE 4
SAVINGS PLANS
Section 4.1 401(k)Plans.
(a) Transfer and Lakes Assumption of Company 401(k) Plan. Effective as of
the Distribution Date, each of the Company and Lakes shall take, or
cause to be taken, all action necessary and appropriate to allow Lakes
to assume all of the future responsibilities and rights as sponsor of
the Company 401(k) Plan, in lieu of Company; and from and after the
Distribution Date, such Plan shall provide additional benefits only for
eligible Lakes Individuals, subject to the terms and provisions of such
Plan; and the Retained Employees shall not be eligible to participate
in such Plan, except that such Plan shall continue to hold the benefits
of Company Individuals that had accrued before the Distribution until
such time as the transaction described in the following paragraph (b)
is completed. For all periods after the Distribution Date, the Company
401(k) Plan shall be referred to herein as the "Lakes 401(k) Plan."
Lakes shall provide benefits under the Lakes 401(k) Plan after the
Distribution Date for all Lakes Individuals subject to the terms and
provisions of such Plan.
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(b) Possible Spin-off and Merger with Gaming Co. 401(k) Plan. As soon as
practical after the completion of the Distribution and the Merger,
Lakes shall take, or cause to be taken, all action necessary and
appropriate to split up and spin off that portion of the Lakes 401(k)
Plan which is attributable to Company Individuals and transfer that
portion to the Gaming Co. 401(k) Plan pursuant to Section 4.1(d). To
the extent that the Gaming Co. 401(k) Plan does not accept such
transfer, the accrued benefits of the Company Individuals under the
Lakes 401(k) Plan shall become fully vested and nonforfeitable as of
the Distribution Date and Lakes shall cause such accrued benefits to be
payable to the Company Individuals pursuant to the terms of such Plan
and applicable law.
(c) Matching and Profit Sharing Contributions. For periods on or before the
Distribution Date, any matching and discretionary contributions under
the Company 401(k) Plan with respect to Company Individuals will be
made solely by Company pursuant to the terms of the Company 401(k)
Plan. For periods after the Distribution Date, any matching and
discretionary contributions under the Lakes 401(k) Plan with respect to
Lakes Individuals will be made solely by Lakes pursuant to the terms of
the Lakes 401(k) Plan.
(f) Transfer and Acceptance of Account Balances. As soon as practicable
after the Distribution Date, subject to the consent of Gaming Co. and
the trustee of the Gaming Co. 401(k) Plan, Lakes shall cause the
trustees of the Lakes 401(k) Plan to transfer to the trustees or other
funding agent of the Gaming Co. 401(k) Plan, the amounts (in cash,
securities, other property or a combination thereof representing the
account balances of all Company Individuals, said amounts to be
established as account balances or accrued benefits of such individuals
under the Lakes 401(k) Plan. Each such transfer shall comply with
Section 414(l) of the Code and the requirements of ERISA and the
regulations promulgated thereunder. Lakes shall not cause the trustees
or other funding agent of the Lakes 401(k) Plan to complete the
plan-to-plan transfer from the Lakes 401(k) Plan trustees, unless and
until Gaming Co. and the plan administrator of the Gaming Co. 401(k)
Plan agree in writing to credit the accounts of such Company
Individuals under the Gaming Co. 401(k) Plan with any amounts
transferred on their behalf.
(e) Information. Lakes shall (with the cooperation of Company to the extent
that relevant information is in the possession of Company) provide
Gaming Co., as soon as practicable after the transaction described in
subsection (b) of this Section 4.1 and the transfer described in
subsection (d) of this Section 4.1, with a list of Company Individuals
who, to the best knowledge of Lakes, were participants in or otherwise
entitled to benefits under the Lakes 401(k) Plan on the date of such
transaction and transfer, together with a listing of each participant's
Service Credits under such Plan and a listing of each such Company
Individual's account balance thereunder, and each Company Individual's
investment election. Lakes shall, as soon as practicable after the date
of such transaction and transfer, provide Gaming Co. with such
additional information in the possession of Lakes (and not already in
the possession of Gaming Co.) as may be reasonably requested by Gaming
Co. and necessary for Gaming Co. to administer effectively the Gaming
Co. 401(k) Plan.
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(f) Regulatory Filings. Company and Lakes shall, in connection with the
plan-to-plan transfer described in Section 4.1(b) above, cooperate with
each other and Gaming Co. in making any and all appropriate filings
required by the SEC or the IRS, or required under the Code or ERISA or
any applicable securities laws and the regulations thereunder, and take
all such action as may be necessary and appropriate to cause such
plan-to-plan transfer to take place as soon as practicable after the
Distribution and Merger or otherwise when required by law. Further,
Lakes shall seek a favorable IRS determination letter that the Lakes
401(k) Plan as in effect after the Distribution, satisfies all
qualification requirements under Section 401(a) of the Code.
Notwithstanding the foregoing, such change in plan sponsor and
plan-to-plan transfers may take place pending issuance of such
favorable determination letter. Lakes shall make any necessary
amendments on a retroactive basis to the Lakes 401(k) Plan,
respectively, as required by the IRS to issue the favorable
determination letter described above.
(g) Account Balances of Participants. Except as otherwise provided herein,
on the Distribution Date, Lakes shall assume sole responsibility for
all liabilities and obligations accruing after the Distribution Date
under the Lakes 401(k) Plan; and Company shall have no liability or
obligation with respect to the Lakes 401(k) Plan, except for any
liabilities and obligations accruing on or before the Distribution
Date, when it will have been the Company 401(k) Plan.
(h) Qualification of Plans and Other Liabilities. Company shall be
responsible for all liabilities incurred by Company or Lakes as a
result of any failure of the Company 401(k) Plan to be qualified under
Section 401(a) of the Code, or any other liability that might be
incurred with respect to such Plan, with respect to Company
Individuals. Lakes shall be responsible for all liabilities incurred by
Company or Lakes as a result of any failure of the Company 401(k)Plan
to be qualified under Section 401(k) of the Code, or any such other
liability might be incurred with respect to such Plan, with respect to
Lakes Individuals. Notwithstanding the foregoing, to the extent that
any such liabilities incurred by Company or Lakes as a result of any
failure of the Company 401(k) Plan to be qualified under Section 401(a)
of the Code, or any other liability that might be incurred with respect
to such Plan, are not clearly attributable to either Company
Individuals or Lakes Individuals then each of Company and Lakes shall
be responsible for such liabilities in a proportion based on the ratios
of the accrued benefits of Company Individuals and the accrued benefits
of Lakes Individuals to the total accrued benefits under such Plan as
of December 31, 1997.
The parties hereto agree that, to the extent either
of them becomes aware that such Plan fails or may fail to be so qualified,
it shall notify the other party and the parties shall cooperate and use best
efforts to avoid such disqualification, including using the Internal Revenue
Service's Employee Plans Compliance Resolution System or similar programs, and
taking any steps available pursuant to such program to avoid disqualification,
as determined by the party who is made responsible under this Section 4.2(h) for
the liabilities that would result from such disqualification
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(and the liabilities for which such party is responsible shall include all
costs and expenses resulting from such steps, including fines, penalties,
contributions, attorneys' fees and expenses and administrative expenses).
ARTICLE 5
WELFARE AND OTHER BENEFITS
Section 5.1 Company Medical/Dental Plans.
(a) Liability for Claims.
(i) Except as otherwise provided herein, as of the Distribution Date,
Company shall assume or retain and shall be responsible for, or cause
its insurance carriers or HMOs to be responsible for, all liabilities
and obligations related to claims asserted or incurred or premiums owed
as of and after the Distribution Date in respect of any Company
Individual under any Company Medical/Dental Plan and claims asserted or
incurred or premiums due after the Distribution Date in respect of any
Company Individual under any Company Medical/Dental Plan, and Lakes
shall have no liability or obligation with respect thereto.
(ii) Except as otherwise provided herein, as of the Distribution Date, Lakes
shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations related to claims asserted or incurred or premiums owed as
of and after the Distribution Date in respect of any Lakes Individual
under any Company Medical/Dental Plan and claims asserted or incur-red
or premiums due after the Distribution Date in respect of any such
Lakes Individual under any Company Medical/Dental Plan, and Company
shall have no liability or obligation with respect thereto.
(b) Continuation Coverage Administration. As of the Distribution Date,
Company shall retain and shall be solely responsible for, or cause its
insurance carriers or HMOs to be responsible for, providing and
administering the continuation coverage required by COBRA as it relates
to any Company Qualified Beneficiary, and Lakes shall have no liability
or obligation with respect thereto. As of the Distribution Date, Lakes
shall retain and shall be solely responsible for, or cause its
insurance carriers or HMOs to be responsible for, providing and
administering the continuation coverage required by COBRA as it relates
to any Lakes Qualified Beneficiary, and Company shall have no liability
or obligation with respect thereto.
(c) Continuation Coverage Claims. As of the Distribution Date, Company
shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations in connection with claims asserted or incurred or premiums
owed through the Distribution Date under any Company Medical/Dental
Plan in respect of any Company Qualified Beneficiary and claims
asserted or incurred or premiums owed after the Distribution Date under
any Company Medical/Dental Plan in respect of any Company Qualified
Beneficiary, and Lakes shall have no liability or obligation with
respect thereto.
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As of the Distribution Date, Lakes shall assume or retain and shall be
responsible for, or cause its insurance carriers or HMOs to be
responsible for, all liabilities and obligations in connection with
claims asserted or incurred or premiums owed through the Distribution
Date under any Company Medica/Dental Plan in respect of any Lakes
Qualified Beneficiary and claims asserted or incurred or premiums owed
after the Distribution Date under any Company Medical/Dental Plan in
respect of any Lakes Qualified Beneficiary, and Company shall have no
liability or obligation with respect thereto.
Section 5.2 Lakes Medical/Dental Plan.
(a) Establishment of Lakes Medical/Dental Plans. On or prior to the
Distribution Date, Lakes shall take, or cause to be taken, all action
necessary and appropriate to establish and administer the Lakes
Medical/Dental Plans and to provide benefits thereunder for all Lakes
Individuals and Lakes Qualified Beneficiaries (with respect to
continuation coverage under COBRA only) who, immediately prior to the
Distribution Date, were participants in or otherwise entitled to
benefits under the Company Medica/Dental Plans. Each such individual
shall, to the extent applicable, for all purposes under the new Lakes
Medical/Dental Plans (i) have coverage that is substantially comparable
to that provided immediately prior to the Distribution Date, (ii) have
no preexisting condition limitation imposed other than that which is or
was already imposed under the applicable existing Plan and (iii) be
credited with or otherwise have taken into account, to the extent
applicable, Service Credits, any expenses incurred towards deductibles,
out-of-pocket limits, maximum benefit payments, and any benefit usage
towards plan limits credited to such individual as of the Distribution
Date under the terms of the applicable existing Plan as if such service
had been rendered to Lakes and as if such expenses and usage had
originally been credited to such individual under the Lakes
Medical/Dental Plans.
(b) Company to Provide Information. As soon as practicable after the
Distribution Date, Company shall provide Lakes (with the cooperation of
Lakes to the extent that relevant information is in the possession of
Lakes, and in accordance with Section 8.2), with a list of Lakes
Individuals who were, to the best knowledge of Company, participants in
or otherwise entitled to benefits under the Company Medica/Dental Plans
immediately prior to the Distribution Date, together with a listing of
each such individual's Service Credit under such Plans and a listing of
each such individual's expenses incurred towards deductibles,
out-of-pocket limits, maximum benefit payments, and any benefit usage
towards plan limits thereunder. Company shall, as soon as practicable
after the Distribution Date, in accordance with Section 7.2, provide
Lakes with such additional information in the possession of Company
(and not already in the possession of Lakes) as may be reasonably
requested by Lakes and necessary for Lakes to establish and administer
effectively any Lakes Medical/Dental Plan.
Section 5.3 Vacation and Sick Pay Liabilities.
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<PAGE> 19
(a) Division of Liabilities. Effective on the Distribution Date, (i)
Company shall retain and shall be responsible for all accrued
liabilities (whether vested or unvested, and whether funded or
unfunded) for vacation and sick leave in respect of all Company
Individuals as of the Distribution Date, and (ii) Lakes shall assume
and shall be responsible for all accrued liabilities (whether vested or
unvested, and whether funded or unfunded) for vacation and sick leave
in respect of all Lakes Individuals as of the Distribution Date. From
and after the Distribution Date, (x) Company shall be solely
responsible for the payment to Company Individuals of vacation or sick
leave accrued after the Distribution Date and (y) Lakes shall be solely
responsible for the payment to Lakes Individuals of vacation or sick
leave accrued after the Distribution Date.
(b) Post-Distribution Transfers. For a period of 90 days after the
Distribution Date, an Employee who leaves the service of one party to
immediately begin employment with the other party (i.e., leaving
Company employment to work for Lakes or any its subsidiaries, or
leaving Lakes employment to work for Company or any its subsidiaries)
shall be provided by the successor employer with the same balance of
vested and unvested vacation and sick leave hours as had been accrued
by the former Employer through such termination date. The former
Employer shall promptly notify the successor Employer in writing of the
occurrence of any termination subject to the provisions of this Section
5.3(b); and the former Employer shall make a payment to the successor
Employer within thirty (30) days of the aforesaid termination date in
an amount equal to the value of the terminating Employee's vested
balance of vacation leave and sick leave accrued by the former Employer
through such termination date, based on the Employee's final rate of
pay with the former Employer. No payment shall be made by the former
Employer to the successor Employer for any unvested sick leave or
vacation leave balance relating to any post-Distribution transfer,
whether within or after the 90-day period referred to above.
Section 5.4 Payroll Reporting and Withholding.
(a) Form W-2 Reporting. Company and Lakes may adopt the "alternative
procedure" for preparing and filing IRS Forms W-2 (Wage and Tax
Statements), as described in Section 5 of Revenue Procedure 84-77,
1984-2 IRS Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this
procedure Lakes as the successor employer shall provide all required
Forms W-2 to all Lakes Individuals reflecting all wages paid and taxes
withheld by both Company as the predecessor and Lakes as the successor
employer for the entire year during which the Distribution takes place.
Company shall provide all required Forms W-2 to all Company Individuals
reflecting all wages and taxes paid and withheld by Company before and
after the Distribution Date.
In connection with the aforesaid agreement under Rev.
Proc. 84-77, each business unit or business operation of Company shall be
assigned to either Company or Lakes, depending upon whether it is a Company
Retained Business or a Lakes Business, and each Company Individual or Lakes
Individual associated with such business unit or business operation shall be
16
<PAGE> 20
assigned for payroll reporting purposes to Company or Lakes, as the case may be.
Company and Lakes shall be responsible for filing IRS Forms 941 for their
respective Employees.
(b) Forms W-4 and W-5. Company and Lakes may adopt the alternative
procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4
(Employee's Withholding Allowance Certificate) and W-5 (Earned Income
Credit Advance Payment Certificate). Under this procedure, (a) Company
shall provide to Lakes all IRS Forms W-4 and W-5 on file with Company
or any of its subsidiaries in the Company Retained Business and
relating to a Lakes Individual, and Lakes and its subsidiaries in the
will honor these forms until such time, if any, that such Lakes
Individual submits a revised form; and (b) Lakes shall provide to
Company all IRS Forms W-4 and W-5 on file with Lakes or any of its
subsidiaries in the Lakes Business and relating to each Company
Individual, and Company and its subsidiaries will honor these forms
until such time, if any, that such Company Individual submits a revised
form.
(c) Garnishments, Tax Levies, Child Support Orders, and Wage Assignment.
With respect to garnishments, tax levies, child support orders, and
wage assignments in effect with Company and its subsidiaries on the
Distribution Date, Company and its subsidiaries in the Company Retained
Business shall honor such payroll deduction authorizations with respect
to Company Individuals, and Lakes and its subsidiaries in the Lakes
Business shall honor such payroll deduction authorizations with respect
to Lakes Individuals; and each such party will continue to make payroll
deductions and payments to the authorized payee, as specified by the
court or governmental order which was filed with Company or any of its
subsidiaries on or before the Distribution Date. Company shall, as soon
as practicable after the Distribution Date, in accordance with Section
7.2, provide Lakes with such information in the possession of Company
(and not already in the possession of Lakes) as may be reasonably
requested by Lakes and necessary for Lakes to make the payroll
deductions and payments to the authorized payee as required by this
subsection (c).
(d) Authorizations for Payroll Deductions. Unless otherwise prohibited by
this or another agreement entered into in connection with the
Distribution, or by a Plan document, with respect to Lakes Individuals
with authorizations for payroll deductions in effect with Company or
any of its subsidiaries on the Distribution Date, Company and its
subsidiaries in the Company Retained Business will honor such payroll
deduction authorizations relating to each Company Individual, and Lakes
and its subsidiaries in the Lakes Business will honor such payroll
deduction authorizations relating to each Lakes Individual, and no such
party shall require that any such individual submit a new authorization
to the extent that the type of deduction by the employer after the
Distribution Date does not differ from that made by Company or its
applicable subsidiary on or before the Distribution Date. Such
deduction types include, without limitation: contributions to any Plan;
scheduled loan repayments to any Plan or to an employee credit union;
and direct deposit of payroll, bonus advances, union dues, employee
relocation loans, and other types of authorized company receivables
usually collectible through payroll deductions. Company shall, as soon
as practicable after the
17
<PAGE> 21
Distribution Date, in accordance with Section 7.2, provide Lakes with
such information in the possession of Company (and not already in the
possession of Lakes) as may be reasonably requested by Lakes and
necessary for Lakes to honor the payroll deduction authorizations
contemplated by this subsection (d).
Section 5.5 Post-Retirement Welfare Benefits. As of the
Distribution Date, Company shall assume or retain and shall be responsible for,
or cause its insurance carriers or HMOs to be responsible for, all liabilities
and obligations related to claims asserted or incurred or premiums owed as of
and after the Distribution Date for post-retirement medical or life benefits in
respect of any Company Individual under any Plan and claims asserted or incurred
or premiums due after the Distribution Date in respect of any Company Individual
under any such Plan; and Lakes shall have no liability or obligation with
respect thereto. As of the Distribution Date, Lakes shall assume or retain and
shall be responsible for, or cause its insurance carriers or HMOs to be
responsible for, all liabilities and obligations related to claims asserted or
incurred or premiums owed as of and after the Distribution Date for
post-retirement medical or life benefits in respect of any Lakes Individual
under any Plan and claims asserted or incurred or premiums due after the
Distribution Date in respect of any Lakes Individual under any such Plan; and
Company shall have no liability or obligation with respect thereto.
Section 5.6 Other Welfare Plans. As of the Distribution Date,
Company shall assume or retain and shall be responsible for, or cause its
insurance carriers to be responsible for, all liabilities and obligations
related to claims asserted or incurred or premiums owed as of and after the
Distribution Date for its Welfare Plans other than Medical/Dental Plans or
post-retirement medical or life benefit Plans ("Other Welfare Plans") in respect
of any Company Individual under any such Other Welfare Plan and claims asserted
or incurred or premiums due after the Distribution Date in respect of any
Company Individual under any such Other Welfare Plan; and Lakes shall have no
liability or obligation with respect thereto. As of the Distribution Date, Lakes
shall assume or retain and shall be responsible for, or cause its insurance
carriers to be responsible for, all liabilities and obligations related to
claims asserted or incurred or premiums owed as of and after the Distribution
Date for any Other Welfare Plans in respect of any Lakes Individual under any
such Other Welfare Plan and claims asserted or incurred or premiums due after
the Distribution Date in respect of any Lakes Individual under any such Other
Welfare Plan; and Company shall have no liability or obligation with respect
thereto.
ARTICLE 6
LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
agreement between Company and Lakes to the contrary, Company and Lakes
understand and agree that:
Section 6.1 Separate Employers. On and after the Distribution Date
and the separation of Employees into their respective companies, Company and
Lakes will be separate and independent employers.
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<PAGE> 22
Section 6.2 Employment Policies and Practices. Subject to the
provisions of ERISA and the provisions herein governing post-Distribution
transfers, and except as limited by applicable law or agreement, Company and
Lakes may adopt, continue, modify or terminate such employment policies,
compensation practices, retirement plans, welfare benefit plans, and other
employee benefit plans of any kind or description, as each may determine, in its
sole discretion, are necessary or appropriate.
Section 6.3 Collective Bargaining Agreements. With regard to any
Employees covered by a Collective Bargaining Agreement on the Distribution Date
who are or become Retained Employees or are or become Lakes Employees, Company
and Lakes promise and covenant to each other not to take any action that
disrupts or otherwise negatively impacts the labor relations of the other.
Company and, to the extent applicable, Lakes will diligently work to substitute
the appropriate employer for Company in any Collective Bargaining Agreements
with respect to Transferred Employees.
Section 6.4 Notice of Claims. Without limitation to the scope and
application to each party in the performance-Nace of its duties herein, each
party hereto will notify in writing and consult with the other party prior to
making any settlement of an employee claim, for the purpose of avoiding any
prejudice to such other party arising from the settlement.
Section 6.5 Assumption of Unemployment Tax-Rates. Changes in state
unemployment tax experience from that of Company and its subsidiaries as of the
Distribution Date shall be handled as follows. In the event an option exists to
allocate any state unemployment tax experience of Company or any of its
subsidiaries, such experience shall be transferred to Lakes or one or more of
its subsidiaries in the Lakes Business if this results in the lowest aggregate
unemployment tax costs for both Company and Lakes combined; and such experience
shall be retained by Company or one or more of its subsidiaries in the Company
Retained Business if this results in the lowest aggregate unemployment tax costs
for Company, Lakes and their respective subsidiaries combined.
Section 6.6 Employees on Leave of Absence. After the Distribution
Date, Lakes shall assume responsibility, if any, as employer for all Employees
returning from an approved leave of absence who prior to the Distribution Date
were employed in a Lakes Business. After the Distribution Date, Company shall
assume responsibility, if any, as employer for all Employees returning from an
approved leave of absence who prior to the Distribution Date were employed in a
Company Retained Business or otherwise were not employed in a Lakes Business.
Section 6.7 Release and Separation Agreements. Effective as of the
Distribution Date, Company shall assume all obligations and liabilities for, and
arising under those Release and Separation Agreements with respect to Company
Individuals, and Lakes shall have no liability or obligation with respect
thereto. Effective as of the Distribution Date, Lakes shall assume all
obligations and liabilities for and arising under those Release and Separation
Agreements with respect to Lakes Individuals, and Company shall have no
liability or obligation with respect thereto.
19
<PAGE> 23
ARTICLE 7
MISCELLANEOUS
Section 7.1 Relationship of Parties. Nothing in this Agreement
shall be deemed or construed by the parties hereto or any third party as
creating the relationship of principal and agent, partnership or joint venture
between the parties hereto, it being understood and agreed that no provision
contained herein, and no act of the parties hereto, shall be deemed to create
any relationship between such parties other than the relationship set forth
herein.
Section 7.2 Access to Information; Cooperation. Company and Lakes
and their authorized agents shall be given reasonable access to and may take
copies of all information relating to the subjects of this Agreement (to the
extent permitted by federal and state confidentiality laws) in the custody of
the other party, including any agent, contractor, subcontractor, agent or any
other person or entity under the contract of such party. The parties hereto
shall provide one another with such information within the scope of this
Agreement as is reasonably necessary to administer each party's Plans. The
parties hereto shall cooperate with each other to minimize the disruption caused
by any such access and providing of information.
Section 7.3 Assignment. Except as part of the Merger, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other party hereto and any purported
transfer without such consent shall be void.
Section 7.4 Headings. The section and paragraph headings and table
of contents contained herein are for reference purposes only and shall not in
any way affect the meaning or interpretation of this Agreement.
Section 7.5 Severability. If any provision set forth in this
Agreement is determined by any court of competent jurisdiction to be
unenforceable by reason of its being too extensive in any respect, such
provision shall be interpreted to have the broadest application as shall be
enforceable. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the validity of the other provisions hereof,
which shall continue in full force and effect.
Section 7.6 Parties in Interest; No Third Party Beneficial Rights.
(a) This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
Except as specifically provided herein, this Agreement is for the sole
and exclusive benefit of the parties hereto and nothing herein is
intended to give or shall be construed to give to any person or entity
other than the parties hereto any rights or remedies hereunder.
20
<PAGE> 24
(b) No provision of this Agreement shall create any third party beneficiary
rights in any Employee, any beneficiary or dependent thereof, or any
collective bargaining representative thereof, with respect to the
compensation, terms and conditions of employment and benefits that may
be provided to any Employee by either party hereto or under any Plan
which a party may maintain.
(c) Nothing contained in this Agreement shall confer upon any Employee any
right with respect to continuance of employment by either party hereto,
nor shall anything herein interfere with the right of either party
hereto to terminate the employment of any Employee at any time, with or
without cause, or restrict a party in the exercise of its independent
business judgment in modifying any of the terms and conditions of the
employment of an Employee, except as provided by applicable law.
Section 7.7 Notices. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party (or
other person referred to herein) shall be in writing and shall be deemed to be
given and effective (a) upon delivery if delivered in person or by courier, (b)
when sent by electronic transmission (telegraph, telex, telecopy or facsimile
transmission), receipt confirmed, (c) five days after being sent by airmail,
postage prepaid or (d) when receipt is acknowledged if mailed by certified mail,
postage prepaid, return receipt requested. The notice shall be delivered to the
addresses of each party hereto as follows, or to such other persons or addresses
as may be designated in writing by the party to receive such notice:
(a) if to Company:
_____________________________
_____________________________
_____________________________
Attn: _______________________
Fax: ________________________
with a copy to:
_____________________________
_____________________________
_____________________________
Attn: _______________________
Fax: ________________________
(b) if to Lakes:
_____________________________
_____________________________
_____________________________
21
<PAGE> 25
Attn: _______________________
Fax: ________________________
with a copy to:
_____________________________
_____________________________
_____________________________
Attn: _______________________
Fax: ________________________
Section 7.8 Further Assurances. Each of the parties hereto promptly
shall execute such documents and other instruments and take such further actions
as may be reasonably required or desirable to carry out the provisions hereof
and to consummate the transactions contemplated hereby.
Section 7.9 Waiver of Conditions. The conditions to each of the
parties' obligations to effect the transactions contemplated herein are for the
sole benefit of such party. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided.
Section 7.10 Governing Law. This Agreement shall be deemed to be
made in and in all respects shall be interpreted, construed and governed by and
in accordance with the laws of the State of Minnesota, without giving effect to
principles of conflicts of laws thereof.
Section 7.11 Preservation of Right To Amend or Terminate Plans.
Except as otherwise expressly provided herein, no provisions of this Agreement,
including, without limitation, the agreement of Company or Lakes to make a
contribution or payment to or under any Plan referred to herein for any period,
shall be construed as a limitation on the right of Company or Lakes to amend
such Plan or terminate its participation therein which Company or Lakes would
otherwise have under the terms of such Plan or otherwise; and no provision of
this Agreement shall be construed to create a right in any employee or former
employee, or dependent or beneficiary of such employee or former employee under
a Plan which such person would not otherwise have under the terms of the Plan
itself; provided, however, that neither party shall amend any Plan to the extent
that such amendment would have the effect of increasing the liabilities of the
other party under any Plan of the other party, without such other party's
consent.
Section 7.12 Entire Agreement. This Agreement, the Distribution
Agreement and all other Ancillary Agreements constitute the entire understanding
between the parties hereto, and supersede all prior written or oral
communications, relating to the subject matter covered by said agreements. To
the extent that the terms of this Agreement and similar terms of the
Distribution Agreement are in conflict, the interpretation given to the
conflicting terms of the Distribution Agreement shall
22
<PAGE> 26
govern the interpretation and performance of this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement by
either party shall be deemed a waiver of any of its rights herein.
Section 7.13 Counterparts. This Agreement and any amendments hereto
may be executed in two or more counterparts, all of which shall be considered
one and the same agreement and shall become effective when two or more
counterparts have been signed by each of the parties and delivered to the other
party, it being understood that all parties need not sign the same counterpart.
Section 7.14 Survival. Obligations described in this Agreement
shall remain in full force and effect and shall survive the Distribution Date
and the Merger.
Section 7.15 Dispute Resolution. Any dispute arising under this
Agreement shall be resolved by binding arbitration in the manner contemplated by
Section 9.14 of the Distribution Agreement, including without limitation Section
9.14(c) thereof, and including the attorneys' fees provisions referred to
therein
Section 7.16 Reimbursement. Company and Lakes acknowledge that
Company, on the one hand, and Lakes, on the other hand, may incur costs and
expenses, including, but not limited to, contributions to Plans and the payment
of insurance premiums arising from or related to any of the Plans which are, as
set forth in this Agreement, the responsibility of the other party hereto.
Accordingly, Company and Lakes shall reimburse each other, as soon as
practicable, but in any event within thirty (30) days of receipt from the other
party hereto of appropriate verification, for all such costs and expenses.
Section 7.17 Default. In the event of a material default by either
party hereunder, the non-defaulting party shall be entitled to all remedies
provided by law or equity (including reasonable attorneys' fees and costs of
suit incurred).
Section 7.18 Force Majeure. Company and Lakes shall incur no
liability to each other due to a default under the terms and conditions of this
Agreement resulting from fire, flood, war, strike, lock-out, work stoppage or
slow-down, labor disturbances, power failure, major equipment breakdowns,
construction delays, accident, riots, acts of God, acts of United States'
enemies, laws, orders or at the insistence or result of any governmental
authority or any other delay beyond each other's reasonable control.
Section 7.19 Attorney/Client Privilege. The provisions herein
requiring either party hereto to cooperate shall not be deemed to be a waiver of
the attorney/client privilege for either party hereto nor shall it require
either party to waive its attorney/client privilege.
Section 7.20 Specific Performance. The parties hereto agree that
the remedy at law for any breach of this Agreement will be inadequate and that
any party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or
23
<PAGE> 27
remedy. Such party may, in its sole discretion, apply to a court of competent
jurisdiction for specific performance or injunctive or such other relief as such
court may deem just and proper in order to enforce this Agreement or prevent any
violation hereof and, to the extent permitted by applicable laws, each party
waives any objection to the imposition of such relief.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GRAND CASINOS, INC., a Minnesota corporation
By: ______________________________
Name: _____________________________
Title: ____________________________
GCI LAKES, INC., a Minnesota corporation
By: ______________________________
Name: _____________________________
Title: ____________________________
24
<PAGE> 28
SCHEDULE A
CHANGE OF CONTROL AGREEMENTS
The Change of Control Agreements of Company are identified in Schedule
4.8 of the Merger Agreement, as those agreements and plans providing for any
additional payments or benefits to specified employees upon a change of control
of Company, as defined in such agreement or plan.
25
<PAGE> 29
SCHEDULE B
RELEASE AND SEPARATION AGREEMENTS
The Change of Control Agreements of Company are identified in Schedule
4.8 of the Merger Agreement, as those agreements providing for any additional
payments or benefits to specified employees upon termination of employment under
specified conditions.
26
<PAGE> 1
EXHIBIT 10.3
INTELLECTUAL PROPERTY LICENSE AGREEMENT
This Trademark License Agreement (the "Agreement") is made as of this
___ day of ___________, 1998, by and between Grand Casinos, Inc., a Minnesota
corporation ("Licensor"), and GCI Lakes, Inc., a Minnesota corporation
("Licensee").
W I T N E S S E T H:
WHEREAS, Licensor is the owner of various trademarks set forth on
Schedule A attached hereto and incorporated by reference herein (the "Licensed
Marks"), together with all copyrightable subject matter (the "Copyright
Material"), trade dress, and other intellectual property currently used in the
operation of the Facilities (as defined below) (such property, together with the
Licensed Marks, is referred to herein as the "Intellectual Property");
WHEREAS, Licensor's predecessors in interest are obligated in
connection with certain management agreements with the Corporate Commission of
the Mille Lacs Band of Chippewa Indians (the "Minnesota Tribe"), the Coushatta
Tribe of Louisiana (the "Coushatta Tribe") and the Tunica-Biloxi Tribe of
Louisiana (the "Tunica Tribe" and, together with the Coushatta Tribe, the
"Louisiana Tribes"), respectively (the "Tribes"), to ensure the respective
Tribes' licenses to use the Intellectual Property;
WHEREAS, Licensee, through its subsidiaries, on June 30, 1998 manages
various hotels, restaurants, retail and gaming facilities for the Tribes
(collectively, the "Facilities");
WHEREAS, Licensee desires the right to use the Intellectual Property in
connection with its management of the Facilities; and
WHEREAS, Licensor desires to grant to Licensee a non-exclusive license
to use the Intellectual Property on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
I. GRANT OF LICENSE.
Licensor hereby grants to Licensee, subject to the terms and conditions
contained herein, (i) a worldwide, royalty-free, and non-exclusive right and
license (the "Minnesota License") to (A) reproduce, distribute, perform, and
display the Copyright Material and (B) use the other Intellectual Property, in
each case, solely in connection with Licensee's management of the Facilities of
the Minnesota Tribe, and (ii) a worldwide, royalty-free, and non-exclusive right
and license (the "Louisiana License" and, together with the Minnesota License,
the "License") to (Y) reproduce, distribute, perform, and display the Copyright
Material and (Z) use the other
<PAGE> 2
Intellectual Property, in each case, solely in connection with Licensee's
management of the Facilities of the Louisiana Tribes; provided, however, that
Licensee may, in accordance with this Agreement, sublicense the Intellectual
Property to the Minnesota Tribe after the termination of its management
agreement with the Minnesota Tribe for use solely in connection with the
operation of the Facilities of the Minnesota Tribe. The term of the Minnesota
License shall be perpetual and the term of the Louisiana License shall expire
upon the termination (after any renewals and extensions thereof) of the Amended
and Restated Management and Construction Agreement, dated as of February 25,
1992, between the Coushatta Tribe and Grand Casinos of Louisiana--Coushatta, and
the Amended and Restated Management & Construction Agreement, dated as of
November 1, 1991, by and between the Tunica Tribe and Grand Casinos of
Louisiana--Tunica-Biloxi (collectively, the "Louisiana Management Agreements").
THE INTELLECTUAL PROPERTY MAY ONLY BE USED IN A MANNER CONSISTENT WITH THE USE
OF SUCH INTELLECTUAL PROPERTY DURING THE YEAR PRECEDING THIS AGREEMENT. LICENSEE
SHALL NOT USE ANY OF THE INTELLECTUAL PROPERTY ON PRODUCTS OR SERVICES BEYOND
THOSE PRODUCTS OR SERVICES IN USE BY LICENSOR WITH RESPECT TO THE FACILITIES AS
OF THE DATE OF THIS AGREEMENT WITHOUT LICENSOR'S PRIOR WRITTEN CONSENT, WHICH
CONSENT MAY BE WITHHELD AT LICENSOR'S SOLE DISCRETION.
II. QUALITY CONTROL; COVENANTS OF LICENSEE
Section 2.1. Standards. Licensor is familiar with the quality of
the goods and services to be provided by Licensee at the Facilities and finds,
at the present time, the quality of such goods and services to be acceptable.
All goods and services to be provided by the Licensee under a Licensed Mark
shall be provided substantially in accordance with the quality standards of
Licensor now in place, or with such other quality standards as Licensor
reasonably may establish from time to time.
Section 2.2. Limitations on Use of the Licensed Marks. In its use
of any Licensed Mark, Licensee shall faithfully reproduce such mark's design,
coloration and appearance, as such design, coloration and appearance may be
modified from time to time by Licensor. Licensee shall not modify the design,
coloration or appearance of a Licensed Mark unless requested to do so in writing
by the Licensor of such Licensed Mark. Licensor shall provide Licensee with not
less than thirty (30) days advance written notice of any changes to said
specifications. During such thirty (30) day period, Licensee may continue to
follow prior specifications; provided, however, that Licensee shall immediately
cease all use of the prior specifications if Licensor purchases all materials
prepared in accordance with the prior specifications from Licensee at Licensee's
cost for said materials. All displays of a Licensed Mark by Licensee shall bear
such copyright, trademark, service mark and other notices as Licensor shall
reasonably require, and Licensee shall adhere to any other reasonable and
customary posting requirements developed by Licensor with respect to such
Licensed Mark. Licensee shall not use a Licensed Mark as part of, or display
such Licensed Mark in conjunction with, any other names or marks except with
Licensor's prior written approval. Licensee shall not use a Licensed Mark or any
confusingly similar or diluting mark, term or design, except as expressly
authorized in this Agreement, and
2
<PAGE> 3
Licensee shall not attempt to register or aid any third party in using or
attempting to register any such mark, term or design. Licensee shall not use a
Licensed Mark in any manner that will indicate that it is using such Licensed
Mark other than as a licensee.
Section 2.3. Samples. Licensor shall have the right, at reasonable
times and with prior notice, to inspect any Facility and any goods or services
(including any advertising and promotional materials) provided by Licensee that
bear a Licensed Mark at any time for the purpose of determining whether they
have met or are meeting the quality standards required under this Agreement.
Licensee shall promptly produce and deliver (at its own expense) to Licensor
such examples of its use of the Licensed Marks as Licensor reasonably shall
request. All such sample materials shall be deemed to be confidential
information of Licensee that is subject to the conditions of Section 9.1 of this
Agreement.
III. OWNERSHIP, MAINTENANCE, POLICING AND PROTECTION
Section 3.1. Ownership; Enhancements. Licensee acknowledges that
Licensor is the sole and exclusive owner of the Intellectual Property, subject
to the License provided hereunder. Licensee agrees that it has no right, title
or interest in or to any Intellectual Property, except as expressly set forth in
Section 1. Licensee agrees that all uses of any Intellectual Property by
Licensee and third parties and the goodwill associated with such uses shall
inure solely to the benefit of Licensor. Upon termination of its rights to use
any Intellectual Property as provided in this Agreement, all right and interest
of Licensee in and to such Intellectual Property shall revert fully to Licensor.
Licensee agrees, if requested by Licensor, to cooperate fully with Licensor in
recording appropriate documents evidencing Licensor's ownership of any
Intellectual Property. Licensee agrees to take no action inconsistent with
Licensor's ownership of and interest in its Intellectual Property. Licensee
shall not attack the validity of Licensor's ownership of the Intellectual
Property or any of the terms of this Agreement, or assist any third party in
doing any of the same.
Section 3.2. Licensee Intellectual Property. Notwithstanding the
foregoing, Licensee may, from time to time, develop or otherwise acquire
interests in various trademarks, copyrights, trade dress and other intellectual
property in connection with its operation of the Facilities. The parties agree
that such intellectual property shall be the sole property of Licensee,
provided, however, that, to the extent that any new works created by Licensee
constitute a derivative work of authorship based upon the Intellectual Property,
then the same shall become the exclusive property of Licensor and will become a
part of the Intellectual Property subject to the License under this Agreement.
Section 3.3. Maintenance. Licensor shall use reasonable and good
faith efforts at its expense to protect the Intellectual Property such as by
renewing and maintaining, where appropriate, federal trademark registration,
copyright registration, and the protection of trade dress. Neither Licensee nor
Licensor will undertake any action which shall in any manner
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<PAGE> 4
reduce, diminish, eliminate or jeopardize the effect and enforceability of the
Intellectual Property.
IV. PAYMENT OF LICENSE FEE
Licensee agrees to pay, and Licensor agrees to accept, a one-time
license fee in the amount of [_____] Thousand Dollars ($[_____]) as full
consideration for all rights granted to Licensee by this Agreement.
V. NON-COMPETITION
So long as the License remains in effect with respect to any Tribe,
Licensor agrees that it will not itself, and will not authorize any other
individual, corporation, partnership, unincorporated association, or other
entity, to use the Intellectual Property in connection with the operation of any
hotel, restaurant, retail, gaming or other facility of a similar type or nature
within a 20 mile radius of the Facility owned by such Tribe.
VI. LIMITATION OF LIABILITY; INDEMNITY
THE INTELLECTUAL PROPERTY IS PROVIDED TO LICENSEE "AS IS." LICENSOR
DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY, INCLUDING NON-INFRINGEMENT, WITH
RESPECT TO THE INTELLECTUAL PROPERTY. IN NO EVENT SHALL LICENSOR BE LIABLE FOR
ANY MATTER WHATSOEVER RELATING TO THE USE OF THE INTELLECTUAL PROPERTY BY
LICENSEE OR ANY ASSIGNEE OR SUBLICENSEE OF LICENSEE.
Licensee shall indemnify, defend and hold harmless Licensor, its past
and present affiliates, subsidiaries, other related companies, licensees and
properties, and each of the foregoing entities' respective past and present
employees, representatives, directors, officers, partners and agents (each, a
"Licensor Indemnitee"), from and against any and all costs, liabilities and
expenses, including, without limitation, interest, penalties, attorney and third
party fees, and all amounts paid in the investigation, defense and/or settlement
of any claim, action or proceeding (collectively, "Expenses"), that relate to
the provision or promotion of goods or services by any Licensee, or assignee or
sublicensee of Licensee, under any Intellectual Property, notwithstanding any
approval which may have been given by Licensor with respect to the provision or
promotion of such goods or services; provided, however, that Licensee shall have
no obligation to indemnify, defend and hold harmless any Licensor Indemnitee
from any Expenses resulting from any claim of any third party that the use of
such Intellectual Property is infringing upon such third party's proprietary
rights, unless such claim of infringement arises from Licensee's failure to
comply with the terms of this Agreement.
If any claim or action is asserted against Licensor that would entitle
Licensor to indemnification, the indemnification provisions in that certain
Distribution Agreement, dated as
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<PAGE> 5
of ______________, 1998, between Licensor and Licensee (the "Distribution
Agreement") shall govern.
Licensee shall provide Licensor with prompt written notice of any
unauthorized uses by third parties of any Intellectual Property, or of
confusingly similar or diluting trademarks, service marks, trade names, terms or
designs, which come to the attention of Licensee. Licensor shall have the right,
in its sole discretion, to commence infringement or unfair competition actions
regarding any unauthorized use by third parties of the Intellectual Property or
any confusingly similar or diluting devices. Licensee shall cooperate with and
assist Licensor in its investigation and prosecution of any of the foregoing.
VII. TERM AND TERMINATION
Section 7.1. Term. Except as otherwise provided in Section 7.2,
this Agreement shall expire upon the later to occur of the expiration (or
earlier termination) of the Louisiana License and the Minnesota License.
Section 7.2. Termination. This Agreement may be terminated as
follows:
7.2.1. If Licensee makes an assignment of assets or business for
the benefit of creditors, or if a trustee or receiver is appointed to
administer or conduct Licensee's business or affairs, or if Licensee is
adjudged in any legal proceeding to be either a voluntary or
involuntary bankrupt without prior notice or legal action by Licensor.
7.2.2. Licensor may terminate this Agreement upon thirty (30) days'
advance written notice to Licensee in the event of Licensee's material
breach of any provision of this Agreement unless Licensee has cured
such breach during such thirty (30) day period.
7.2.3. Licensee may terminate this Agreement upon ninety (90) days'
advance written notice to Licensor.
Section 7.3. Effect of Termination. Upon termination of this
Agreement, Licensee shall, as soon as is reasonably possible thereafter, and in
any event within sixty (60) days following the date of termination, cease and
desist in Licensee's use of the Intellectual Property; provided, however, if
Licensee makes no reasonable and good faith attempt to cure the breach within 30
days of Licensee's receipt of the notice of the breach such sixty (60) day
period shall be deemed to have begun upon the date Licensee received notice of
the breach. Licensor's and Licensee's respective obligations under Article VI
and Sections 3.1, 3.2, 7.3, 9.1, 9.4, 9.5 and 9.6 shall survive termination of
this Agreement.
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VIII. COOPERATION WITH AND COMPLIANCE WITH GAMING AUTHORITIES
Section 8.1. The parties will cooperate in good faith with, and
will use their best reasonable efforts to comply with the requirements of, any
and all gaming authorities respecting their activities pursuant to this
Agreement.
Section 8.2. Notwithstanding anything to the contrary set forth
herein, all rights of any party hereunder, including any right to terminate the
rights of other parties hereunder, shall be applied as may be required by any
applicable gaming authorities.
IX. MISCELLANEOUS
Section 9.1. Confidential Information. Each party agrees that all
information disclosed by one party to another pursuant to this Agreement (the
"Confidential Information") shall be maintained in confidence and not be
released to any third party for any reason whatsoever, excluding such parties'
counsel, agents, auditors, or lenders. However, a party may release the
Confidential Information to a third party upon the prior approval of the other
party (such approval not to be unreasonably withheld, conditioned, or delayed),
upon court order, or as such party in good faith believes, based upon the advice
of counsel, is required by any rules, regulations, or laws. Notwithstanding the
previous sentence, in the event that a party becomes legally compelled (by
deposition, interrogatory, request for documents, subpoena, civil investigative
demand, or otherwise) to disclose any information, such party shall provide the
other with prompt prior written notice of such requirement so that the other
party may seek a protective order or other appropriate remedy to minimize
disclosure of the Confidential Information. In the event that such protective
order or other remedy is not obtained, or the other party approves the
disclosure, the disclosing party agrees to furnish only that portion of the
Confidential Information that the disclosing party in good faith believes, based
upon the advice of counsel, is legally required, and to exercise reasonable
efforts to obtain assurance that confidential treatment will be accorded to such
information. Each party shall cease use of all Confidential Information that any
party has obtained from the other upon the expiration or earlier termination of
this Agreement. Neither party shall disclose or otherwise make available any
Confidential Information to any person other than employees, consultants, or
auditors of such party with a need-to-know or except as required by court order
or as such party in good faith believes, based upon the advice of counsel, is
required by any rules, regulations, or laws. Each party shall instruct its
employees who have access to the Confidential Information to keep the same
confidential by using the same care and discretion that such party uses with
respect to its own confidential property and trade secrets.
Section 9.2. Assignment. None of the rights, benefits, or
obligations under this Agreement shall be assigned or assignable or transferred
or transferrable or sublicensed or sublicenseable by Licensee (in each case, by
operation of law or otherwise); provided, however, that Licensee may sublicense
the Intellectual Property to the Tribes for use exclusively in connection with
the Facilities. Upon any transfer, assignment or sublicense entered into in
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<PAGE> 7
accordance with this Section 9.2, such assignee or sublicensee shall enter into
an assignment or sublicense agreement with Licensee, in a form reasonably
satisfactory to Licensor, pursuant to which such assignee or sublicensee agrees
to comply with, and be bound by, the terms of this Agreement and acknowledges
the status of Licensor as an intended third party beneficiary of such assignment
or sublicense agreement. If requested by Licensor, such assignee or sublicensee
shall also execute an instrument or instruments pursuant to which such assignee
or sublicensee shall be bound by, and become a party to, this Agreement. Any
purported assignment or sublicense by Licensee not in compliance with the terms
of this Agreement shall be null and void. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns.
Section 9.3. Relationship of Parties. Nothing in the Agreement
shall be construed to create any relationship among the parties of agency,
partnership, franchise, or joint venturers or render any party liable for any
debts or obligation incurred by any other party hereto. No party is authorized
to enter into agreements for or on behalf of any other party hereto, to collect
any obligation due or owed to any such party, or to bind any other party in any
manner whatsoever.
Section 9.4. Arbitration. Any dispute between Licensor and Licensee
under this Agreement shall be resolved by arbitration by an arbitrator selected
under the rules of the American Arbitration Association (located in Minneapolis,
Minnesota or Mississippi, as the parties mutually agree) and the arbitration
shall be conducted in that same location under the rules of said Association.
Licensor and Licensee shall each be entitled to present evidence and argument to
the arbitrator. The arbitrator shall have the right only to interpret and apply
the provisions of this Agreement and may not change any of its provisions. The
arbitrator shall permit reasonable pre-hearing discovery of facts, to the extent
necessary to establish a claim or a defense to a claim, subject to supervision
by the arbitrator. The determination of the arbitrator shall be conclusive and
binding upon the parties and judgment upon the same may be entered in any court
having jurisdiction thereof. The arbitrator shall give written notice to the
parties stating his determination, and shall furnish to each party a signed copy
of such determination.
Section 9.5. Attorneys' Fees. If any party commences an action
against the other with respect to this Agreement, the prevailing party in such
action shall be entitled to an award of reasonable costs and expenses of
mediation, arbitration, and/or litigation, including reasonable attorneys' fees,
to be paid by the non-prevailing party.
Section 9.6. Specific Performance. The parties hereto agree that
the remedy at law for any breach of this Agreement will be inadequate, and that
any party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or remedy. Such party
may, in its sole discretion, apply to a court of competent jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof, and, to the extent permitted by applicable laws, each party waives any
objection to the imposition of such relief.
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<PAGE> 8
Section 9.7. Notices. Any notices required or permitted to be given under
this Agreement shall be deemed sufficiently given if mailed by registered mail,
postage prepaid, addressed to the party to be notified at its address shown
below; or at such other address as may be furnished in writing to the notifying
party:
Licensor: Grand Casinos, Inc.
3930 Howard Hughes Parkway, 4th Floor
Las Vegas, Nevada 89109
Attention: General Counsel
Facsimile: (702) 699-5179
Licensee: GCI Lakes, Inc.
130 Cheshire Lane
Minnetonka, MN 55305
Attention: Lyle Berman
Facsimile: (612) 449-7003
Section 9.8. Entirety of Agreement. This Agreement (including the
schedule hereto) and the Distribution Agreement contain the entire agreement and
understanding between the parties hereto, and supersedes any prior or
contemporaneous agreement or understanding related to the subject matter hereof
and thereof. There are no oral understandings, terms or conditions, and neither
party has relied upon any representations, expressed or implied, not contained
in this Agreement. This Agreement may not be changed orally, but only by
agreement in writing, executed by both parties.
Section 9.9. No Third Party Beneficiaries. Notwithstanding anything
to the contrary herein, this Agreement is for the sole and exclusive benefit of
the parties hereto and nothing herein is intended to give or shall be construed
to give to any person or entity other than the parties hereto any rights or
remedies hereunder.
Section 9.10. Severability. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
Section 9.11. Counterparts. This Agreement may be executed in one
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one and
the same instrument.
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Section 9.12. Governing Law. The internal law, without regard to
conflicts of laws principles, of the State of Minnesota will govern all
questions concerning the construction, validity and interpretation of this
Agreement and the performance of the obligations imposed by this Agreement.
[Signature Page to Follow]
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<PAGE> 10
IN WITNESS WHEREOF, this Agreement has been executed as of the day and
year first above written.
LICENSOR:
By __________________________
Its Chief Executive Officer
LICENSEE:
By __________________________
Its Chief Executive Officer
10
<PAGE> 11
SCHEDULE A
GRAND CASINO/MISSISSIPPI ASSETS, INC. TRADEMARKS
<TABLE>
<CAPTION>
MARK REG/SER. NO. GOODS/SERV. CLASS STATUS
- ---- ------------ ----------- ----- ------
<S> <C> <C> <C> <C>
CAR A DAY GIVEAWAY (Minn.) MN 20,934 Gaming and gambling promotion 35, 42 Registered 6/24/93
GRAND ADVANTAGE PLAYERS CLUB and 1,733,707 Providing casino entertainment 41 Registered 11/17/92
Design services
GRAND ADVANTAGE PLAYERS CLUB 1,954,157 Casino entertainment services 41 Registered 2/6/96
GRAND ADVANTAGE PLAYERS CLUB (Minn.) MN 19,005 Casino services. 41 Registered 3/10/92
GRAND CASINO KID QUEST 1,805,598 For childrens day care and 42 Registered 11/16/93
supervised activity center services
GRAND CASINOS, INC. 1,735,194 Casino planning and management 35 Registered 11/24/92
services
GRAND CASINOS, INC. (Minn.) MN 19,006 Casino planning and management 35, 42 Registered 3/10/92
services
GRAND CASINOS, INC. and Design 2,028,123 Providing casino services 42 Registered 1/7/97
LB'S GRILL 1,943,593 Restaurant 42 Registered 12/26/95
LITTLE WINNERS T-shirts, shirts, dresses, pants, 25 New application
shorts, robes and caps
MARKET PLACE BUFFET 1,922,653 Restaurant 42 Registered 9/26/95
RAPID CHANGE 1,894,870 Currency change making machines as 9 Registered 5/23/95
components of electronic gambling
machines
RAPID CHANGE (Minn.) MN 21,406 Machines applied to gaming 7 Registered 10/20/93
devices that accept paper currency
which is applied toward valid plays
on the gaming devices to which
the machines are attached
SHOW & TELL BLACKJACK 1,740,296 Providing casino entertainment 41 Registered 12/15/92
services
SIMPLY THE BEST! 1,934,446 Casino services 41 Registered 11/7/95
THERE'S MORE THAN ONE 1,857,026 Casinos 41 Registered 12/4/94
REASON TO CALL US GRAND
THERE'S MORE THAN ONE MN 21,463 Casino services 42 Registered 11/2/93
REASON TO CALL US GRAND
(Minn.)
</TABLE>
<PAGE> 1
EXHIBIT 10.4
TAX ALLOCATION AND INDEMNITY AGREEMENT
THIS TAX ALLOCATION AND INDEMNITY AGREEMENT (the "Agreement"), dated as of
[__________], 1998, is by and between GRAND CASINOS, INC., a Minnesota
corporation ("Company"); and GCI LAKES, INC., a Minnesota corporation and wholly
owned subsidiary of Company ("Lakes").
RECITALS AND CERTAIN DEFINITIONS
WHEREAS, Company and its subsidiaries currently are members of an Affiliated
Group (as defined below), of which Company is the common parent corporation; and
such Affiliated Group includes without limitation three subsidiary corporations
incorporated outside the United States;
WHEREAS, Company, directly and through certain wholly-owned subsidiaries,
(a) owns, operates and develops certain gaming and resort facilities located in
the State of Mississippi (as more specifically defined in the Distribution
Agreement referred to below, as the "Mississippi Business"); and (b) manages and
develops certain gaming and resort facilities located outside the State of
Mississippi (as more specifically defined in the same Distribution Agreement, as
the "Non-Mississippi Business");
WHEREAS, subject to Company shareholder ratification and certain other
conditions, the Board of Directors of Company has determined that it is in the
best interests of Company and the shareholders of Company to separate the
Non-Mississippi Business from the Mississippi Business through a pro rata
distribution (the "Distribution") to the holders of the common stock of the
Company of all of the outstanding shares of the common stock, par value $.01 per
share, of Lakes;
WHEREAS, as set forth in the written Distribution Agreement between the
parties, dated as of [____________], 1998 (the "Distribution Agreement"), and
subject to the terms and conditions thereof, Company will contribute to Lakes,
prior to the Distribution, all the operations, assets and liabilities of the
Non-Mississippi Business and such other assets, liabilities and operations as
are described in the Distribution Agreement (the "Lakes Business and Assets");
WHEREAS, as set forth in the Distribution Agreement, and subject to the
terms and conditions thereof, Company will retain, immediately after the
Distribution, all the operations, assets and liabilities of the Mississippi
Business other than certain of such assets, liabilities and operations
contributed to Lakes prior to the Distribution as described in the Distribution
Agreement (the "Mississippi Business and Assets"); and
WHEREAS, in contemplation of the Distribution, pursuant to which Lakes and
its subsidiaries will cease to be members of the Affiliated Group (as defined
below) now including Company, the parties hereto have determined to enter into
this Agreement setting forth their agreement with respect to certain tax
matters;
<PAGE> 2
NOW THEREFORE, in consideration of the foregoing premises, which are an
integral part of this Agreement, and the respective covenants, terms and
conditions set forth below, the parties hereto agree as follows:
AGREEMENT
Section 1. General Definitions. For purposes of this Agreement, the
following terms shall have meanings set forth below:
"Affiliated Group" shall mean either (a) an affiliated group of corporations
within the meaning of Code section 1504(a) (but without regard to the exclusions
contained in Code section 1504(b)) for the Taxable Period; or (b) for purposes
of any state, province, local or foreign Income Tax matters, any consolidated,
combined or unitary group of corporations within the meaning of the
corresponding provisions of Tax law for the applicable jurisdiction.
"Base Stratosphere Loss" shall have the meaning set forth in Section
3(d)(ii).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Distribution" shall mean the Distribution described in the Recitals.
"Distribution Date" shall mean the effective date of the Distribution.
"Final Determination" shall mean the final resolution of any Tax matter. A
Final Determination shall result from the first to occur of:
(i) either (A) the expiration of 30 days after the IRS'
acceptance of a waiver of restrictions on assessment and collection of
deficiency in a federal Tax and acceptance of overassessment on Treasury Form
870, 870-AD or any successor comparable form (the "Waiver"), except as to
reserved matters specified therein; or (B) the expiration of 30 days after
acceptance by any other taxing authority of a comparable agreement or form under
the laws of any other jurisdiction, including state, province, local or foreign
jurisdictions; unless, within such 30-day period, the taxpayer gives notice to
the other party to this Agreement of the taxpayer's intention to attempt to
recover all or part of any amount paid pursuant to the Waiver by the filing of a
timely claim for refund;
(ii) a decision, judgment, decree or other order by a
court of competent jurisdiction that is not subject to further judicial review
(by appeal or otherwise) and has become final;
(iii) the execution of (A) a closing agreement under
Code section 7121, or the acceptance by the IRS of an offer in compromise under
Code section 7122; or (B) any
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<PAGE> 3
comparable agreement under the laws of any other jurisdiction, including state,
province, local or foreign jurisdictions, except as to reserved matters
specified therein;
(iv) the expiration of the time for filing a claim for
refund or for instituting suit in respect of a claim for refund that was
disallowed in whole or part by the IRS or any other taxing authority;
(v) the expiration of the applicable statute of
limitations; or
(vi) an agreement by the parties hereto that a Final
Determination has been made.
"Income Tax Benefit" shall mean a reduction in the Income Tax Liability of a
taxpayer (or of the Affiliated Group of which it is a member) for any Taxable
Period. Except as otherwise provided in this Agreement, an Income Tax Benefit
shall be deemed to have been realized or received from an Income Tax Item in a
Taxable Period, only if and to the extent that the Income Tax Liability of the
taxpayer (or the Affiliated Group of which it is a member) for such Taxable
Period, after taking into account the effect of the Income Tax Item on the
Income Tax Liability of such taxpayer in all prior Taxable Periods, is less than
it would have been if such Income Tax Liability were determined without regard
to such Income Tax Item. If any Income Tax Benefit of an Income Tax Item is
limited for a Taxable Period in a way that creates an Income Tax Benefit in any
other Taxable Period, the latter Income Tax Benefit shall be treated as caused
by the original Income Tax Item.
"Income Tax Detriment" shall mean an increase in the Income Tax Liability of
a taxpayer (or of the Affiliated Group of which it is a member) for any Taxable
Period. Except as otherwise provided in this Agreement, an Income Tax Detriment
shall be deemed to have been realized or suffered from an Income Tax Item in a
Taxable Period, only if and to the extent that the Income Tax Liability of the
taxpayer (or the Affiliated Group of which it is a member) for such Taxable
Period, after taking into account the effect of the Income Tax Item on the
Income Tax Liability of such taxpayer in all prior Taxable Periods, is greater
than it would have been if such Income Tax Liability were determined without
regard to such Income Tax Item. If any Income Tax Detriment of an Income Tax
Item is limited for a Taxable Period in a way that creates an Income Tax
Detriment in any other Taxable Period, the latter Income Tax Detriment shall be
treated as caused by the original Income Tax Item.
"Income Tax Item" shall mean any item of income, gain, loss, deduction,
credit, recapture of credit, or any other item that may have the effect of
increasing or decreasing Income Taxes paid or payable.
"Income Tax Liability" shall mean the net amount of Income Taxes due and
paid or payable for any Taxable Period, determined after applying all income tax
credits and all applicable carrybacks or carryovers permitted hereunder for net
operating losses, net capital losses, unused
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<PAGE> 4
general business tax credits, or any other Income Tax Items arising from a prior
or subsequent Taxable Period, and all other relevant adjustments; and shall
include without limitation the net amount due and paid or payable for
alternative minimum tax imposed under Code section 55 or similar alternative or
add-on minimum taxes.
"Income Taxes" shall mean all federal, state, province, local and foreign
Taxes imposed upon, or measured by, net income, including without limitation,
alternative or add-on minimum taxes (including the alternative minimum tax
imposed under Code section 55); together with all related interest, penalties
and additions to tax.
"Indemnifying Party" shall mean any party that is required to pay or
reimburse any other party pursuant to the terms and conditions of this
Agreement.
"Indemnified Party" shall mean any party that is entitled to receive payment
or reimbursement from an Indemnifying Party pursuant to the terms and conditions
of this Agreement.
"IRS" shall mean the United States Internal Revenue Service or any successor
thereto, including but not limited to its agents, representatives and attorneys.
"Lakes Business and Assets" shall have the meaning set forth in the
Recitals.
"Lakes Group" shall mean Lakes and each other corporation that was a
Pre-Distribution Member and, immediately after the Distribution, will be a
member of the Affiliated Group in which Lakes is the common parent.
"Lakes Business and Assets" shall have the meaning set forth in the
Recitals.
"Lakes Member" shall mean a corporation that is a member of the Lakes Group.
"Mississippi Business and Assets" shall have the meaning set forth in the
Recitals.
"Other Taxes" shall mean any and all Taxes other than Income Taxes, together
with all related interest, penalties and additions to tax.
"Other Tax Item" shall mean any item of sales, other revenues, purchases,
services, other transactions, property valuation, assets, liabilities,
securities, payroll, other compensation, income, gain, loss, deduction, credit,
recapture of credit, or any other item that may have the effect of increasing or
decreasing Other Taxes paid or payable.
"Post-Distribution Company Group" shall mean Company and each other
corporation that was a Pre-Distribution Member and, immediately after the
Distribution, will be a member of the Affiliated Group in which Company is the
common parent. To the extent applicable to any state
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<PAGE> 5
Income Tax matters, the Post-Distribution Company Group shall include all such
corporations joining in the filing of a consolidated, unitary or combined Tax
Return for the state in question.
"Post-Distribution Company Member" shall mean any corporation that is a
member of the Post-Distribution Company Group.
"Post-Distribution Straddle Period" shall mean, with respect to any Straddle
Period, the portion thereof beginning on the day after the Distribution Date and
ending on the last day of such Straddle Period.
"Post-Distribution Taxable Period" shall mean a Taxable Year that begins
after the Distribution Date.
"Pre-Distribution Group" shall mean Company, Lakes and each other
corporation that was a member of the Affiliated Group in which Company was the
common parent during any Pre-Distribution Taxable Period or Pre-Distribution
Straddle Period. For purposes of this Agreement, the Pre-Distribution Group
shall terminate on the Distribution Date. To the extent applicable to any state
Income Tax matters, the Pre-Distribution Group shall include all such
corporations joining in the filing of a consolidated, combined or unitary Income
Tax Return for the state in question.
"Pre-Distribution Member" shall mean a corporation that was a member of the
Pre- Distribution Group.
"Pre-Distribution Straddle Period" shall mean, with respect to any Straddle
Period, the portion beginning on the first day of such Straddle Period and
ending on the Distribution Date.
"Pre-Distribution Taxable Period" shall mean a Taxable Year that ends on or
before the Distribution Date.
"Representative" means, with respect to any person or entity, any of such
person's or entity's directors, officers, employees, agents, consultants,
accountants, attorneys and other advisors.
"Section 355 Tax Liability" means any Income Tax Liability that is incurred
by Company or any other Post-Distribution Company Member solely because the
Distribution is not tax-free with respect to Company under Code section 355.
"Straddle Period" shall mean any Taxable Year beginning before and ending
after the close of business on the Distribution Date.
"Stratosphere Losses" shall mean any losses or Income Tax deductions
occurring at any time and attributable to the ownership (at any time before the
Distribution) by any Pre-Distribution Member of any asset that is a form of
investment in Stratosphere Corporation, a Delaware corporation, Stratosphere
Gaming Corp., a Nevada corporation, or any of their respective
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<PAGE> 6
subsidiaries ("Stratosphere") or any amount receivable from Stratosphere;
including without limitation any capital stock, notes receivable, cash advances
and other debts such as accounts receivable arising from the delivery of goods
or services to Stratosphere or from intercompany expense allocations to
Stratosphere; and also including any expenses relating thereto and incurred by a
Pre-Distribution Member before the Distribution, but excluding any such asset
that did not exist before the Distribution.
"Stratosphere Tax Benefits" shall mean all Income Tax Benefits that are
realized or received at any time by the Pre-Distribution Group, the Lakes Group
or the Post-Distribution Company Group from Stratosphere Losses.
"Tax" (or "Taxes") shall mean all actual (and estimated payments of) taxes,
charges, fees, imposts, levies, gaming or other governmental assessments,
including, all net income, gross receipts, gross income, capital, sales, use,
value added, transfer, franchise, profits, inventory, capital stock, license,
withholding, payroll, employment, social security, unemployment, excise,
severance, stamp, occupation, premium, property, ad valorem, custom duties,
fees, assessments and charges of any kind whatsoever; together with any interest
and any penalties, fines, additions to tax or additional amounts imposed by any
taxing authority (domestic or foreign) with respect to Taxes; and including any
transferee liability in respect of Taxes.
"Tax Item" shall mean, generically, any item that is either an Income Tax
Item or an Other Tax Item, or both.
"Tax Practices" shall mean the most recently applied policies, procedures
and practices employed by the Pre-Distribution Group in the preparation and
filing of, and positions taken on, any Tax Returns of Company or any
Pre-Distribution Member for any Pre-Distribution Taxable Period.
"Tax Returns" shall mean all reports, estimates, declarations of estimated
Tax, information statements, and returns (including without limitation any
amendments thereto) relating to, or required to be filed in connection with any
Taxes, including information returns or reports with respect to backup
withholding and other payments to third parties.
"Taxable Period" shall mean a Pre-Distribution Taxable Period, a Straddle
Period or a Post-Distribution Taxable Period.
"Taxable Year" shall mean a taxable year (which may be shorter than a full
calendar or fiscal year), year of assessment or similar period with respect to
which any Tax may be imposed.
"Transaction Taxes" shall include only those Taxes described in Section 6.05
of the Distribution Agreement.
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<PAGE> 7
Section 2. Filing of Tax Returns. Tax Returns shall be filed by the
parties as follows:
(a) By Company. Company shall prepare and timely file, or cause
to be prepared and timely filed:
(i) all Tax Returns with respect to Taxes (other than
Transaction Taxes) of, or with respect to, the Pre-Distribution Group and each
Pre-Distribution Member for all Pre- Distribution Taxable Periods, except for
Tax Returns that relate solely to any Lakes Member or group of Lakes Members and
are not required to be filed on or before the Distribution Date;
(ii) all Tax Returns with respect to Taxes (other than
Transaction Taxes) of, or with respect to, the Post-Distribution Company Group
and each Post-Distribution Company Member for all Straddle Periods and
Post-Distribution Taxable Periods, including without limitation any Tax Returns
that are required to be filed on a consolidated, combined or unitary basis that
includes any Lakes Member and any Post-Distribution Company Member for a
Straddle Period.
(b) By Lakes. Lakes shall prepare and timely file, or cause to
be prepared and timely filed:
(i) all Tax Returns with respect to Taxes (other than
Transaction Taxes) that relate solely to any Lakes Member or group of Lakes
Members for all Pre-Distribution Taxable Periods that are not required to be
filed on or before the Distribution Date; and
(ii) all Tax Returns with respect to Taxes (other than
Transaction Taxes) of the Lakes Group or any Lakes Member for all Straddle
Periods and Post-Distribution Taxable Periods, other than any Tax Returns that
are required to be filed on a consolidated, combined or unitary basis that
includes any Lakes Member and any Post-Distribution Company Member for a
Straddle Period.
(c) Transaction Taxes. The provisions of Section 6.05 of the
Distribution Agreement and Section 3(e) of this Agreement shall govern (i) the
preparation and filing of all Tax Returns with respect to any Transaction Taxes
and (ii) the payment of such Transaction Taxes.
(d) Taxable Year. Lakes and Company agree that, to the extent
permitted by applicable law, (i) the Taxable Year of each Lakes Member included
in the Tax Return filed for consolidated federal Income Tax purposes of the
Pre-Distribution Group for the Pre-Distribution Taxable Period (or, if
applicable, the Straddle Period) that includes the Distribution Date (and all
Tax Returns for the corresponding consolidated, combined or unitary state,
province, local or foreign Income Taxes of the Pre-Distribution Group) shall end
on the Distribution Date; and (ii) the Lakes Group and each Lakes Member shall
begin a new Taxable Year for purposes of such federal, state, province, local
and foreign Income Taxes on the day after the Distribution Date. The parties
further agree that, to the extent permitted by applicable law, all federal,
state, province, local and foreign Tax Returns shall be filed consistently with
this position.
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<PAGE> 8
(e) Past Tax Practices. Each of Company (including its
Representatives) and Lakes (including its Representatives) shall prepare all Tax
Returns required to be filed by it pursuant to this Section 2 (i) for all
Taxable Years ended on or before December 31, 1999, in a manner consistent with
Company's past Tax Practices, except as otherwise expressly required hereunder,
by changes in applicable law or material underlying facts or as the parties
hereto may otherwise agree in writing; and (ii) in a manner consistent with the
IRS Ruling required by the Distribution Agreement.
(f) Cooperation and Provision of Filing Information. Lakes (or
Company, as the case may be) shall cooperate (as provided in Section 9) and
assist Company (or Lakes) in the preparation and filing of all Tax Returns
subject to this Section 2 and submit to Company (or Lakes): (i) all necessary
filing information in a manner consistent with past Tax Practices and (ii) all
other information reasonably requested by Company (or Lakes) in connection with
the preparation of such Tax Returns promptly after such request. It is expressly
understood and agreed that Company's (or Lakes') ability to discharge its Tax
Return preparation and filing responsibilities is contingent upon Lakes (or
Company) providing Company (or Lakes) with all such cooperation, assistance and
information reasonably necessary or requested for the filing of such Income Tax
Returns and that Lakes (or Company) shall indemnify Company (or Lakes), if, and
to the extent that, Taxes are increased as a result of material inaccuracies in
such information or failures to provide such cooperation, information and
assistance on a timely basis.
(g) Advance Review and Approval of Tax Returns. To facilitate
the rights and obligations of the parties under this Section 2, at least
forty-five (45) days prior to the filing of any Tax Return including Tax Items
to be reported under the following paragraph, and at least thirty (30) days
prior to the filing of any other Tax Return that includes one or more Lakes
Members, Company shall provide Lakes with a copy of such Tax Return. Lakes, its
Representatives and any accountant appointed under the following provisions of
this Section 2(g) shall have the right to review all related work papers at any
reasonable time after such copy is furnished.
Promptly following the receipt by Lakes of an advance copy of a Tax
Return to be filed by Company, Company and Lakes shall first consult with each
other regarding the comments of Lakes and its Representatives with respect to
such Tax Returns and each of them shall in good faith (i) attempt to resolve any
differences with respect to the preparation and accuracy of such Tax Returns and
their consistency with past Tax Practices and (ii) consider the other's
recommendations for alternative positions having a "reasonable basis" (as
defined in Code section 6662) with respect to Income Tax Items or other
information to be reflected on such Tax Return, and alternative positions for
reporting Other Tax Items having reasonable basis under the Tax law governing
Other Taxes. Notwithstanding the preceding sentence, to the extent any such Tax
Items are reasonably anticipated to affect (i) any Tax liability allocated to
the Lakes Group or one or more Lakes Members under Section 3, (ii) any Section
355 Tax Liability, (iii) any Stratosphere Tax Benefits or (iv) any utilization
of Stratosphere Losses by Company or any other Post-Distribution Company Member
or by Lakes or any Lakes Member (except to the extent any Stratosphere Tax
Benefits
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<PAGE> 9
derived from the Stratosphere Losses are to be allocated equally under Section
3(d)(iii), which Tax Item shall remain under the control of Company), and
following such consultation, Company (and its Representatives) shall in good
faith accept the recommendation of Lakes and its Representatives with respect to
the Tax Return reporting of such Tax Items to be reported on such Tax Return;
provided, however, that to the extent such recommendations relate to the Base
Stratosphere Loss defined in Section 3(d)(ii), such recommendations shall have a
reasonable basis (as described above) and, to the extent such recommendations
relate to any other Income Tax Items, such recommendations are supported by
"substantial authority" as defined in Code section 6662.
If the parties are unable to agree whether any recommended position on
a Tax Item to be determined under the preceding sentence has such a reasonable
basis or is supported. by substantial authority, as the case may be, each of
them shall (no later than thirty (30) days before the affected Tax Return is
due, including all allowable extensions of time to file such Tax Return) appoint
a certified public accountant who is a tax partner of one of the six largest
public accounting firms in the United States (other than any firm used by either
of the parties as its primary public accounting firm for Tax consulting matters)
as its representative to determine such matter and, if such accountants are
unable to agree on the matter within ten (10) business days following such
appointments, such accountants shall mutually appoint a third certified public
accountant, who is a tax partner of a neutral accounting firm from among such
remaining firms, who shall finally determine such matter. Such appointed
accountants shall diligently attempt resolve such matter. The fees and expenses
of such accountants shall be allocated between the parties in the same manner as
Transaction Taxes, unless such amounts are otherwise equitably allocated between
the parties by the accountants or accountant making the final determination,
taking into account the relative benefits and detriments of such determination.
Any Tax Return reporting position determined under this Section 2(g) shall
be supported in good faith by Company and Lakes until the position is affirmed
or modified by a Final Determination in which Company (and, if applicable,
Lakes) exerted its reasonable best efforts to support the position.
Section 3. Payment and Allocation of Tax Liabilities.
(a) Tax Liabilities of Company. Company shall, except as
otherwise expressly allocated under the subsequent provisions of this Section 3
or otherwise under this Agreement:
(i) be liable for and pay, or cause to be paid, and shall
indemnify and hold harmless Lakes and each other Lakes Member against all Taxes
(other than Transaction Taxes) that relate to all Tax Returns that Company is
required to prepare and file, or cause to be prepared and filed, pursuant to
Section 2 of this Agreement; and
(ii) be entitled to all refunds of Taxes related
thereto.
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<PAGE> 10
(b) Tax Liabilities of Lakes. Lakes shall, except as otherwise
expressly allocated under the subsequent provisions of this Section 3 or
otherwise under this Agreement:
(i) be liable for and pay, or cause to be paid, and shall
indemnify and hold harmless Company and each other Post-Distribution Company
Member against all Taxes (other than Transaction Taxes) that relate to all Tax
Returns that Lakes is required to prepare and file, or cause to be prepared and
filed, pursuant to Section 2 of this Agreement; and
(ii) be entitled to all refunds of Taxes related
thereto.
(c) Special Allocation of Company Tax Liabilities for Certain
Taxable Periods. The economic cost of the following Taxes (other than
Transaction Taxes) related to any Tax Returns required to be filed by Company
under Section 2(a) and otherwise payable under Section 3(a) shall be allocated
among the parties and their respective subsidiaries in the following manner:
(i) Pre-Distribution Taxable Periods. If any Tax Return
of any Pre-Distribution Member for any Pre-Distribution Taxable Period has not
been filed on or before the Distribution Date, the economic cost of all
liabilities for Taxes related to such Tax Return shall be allocated in the
manner set forth in Section 3(c)(ii); and any refunds of Taxes related thereto
shall be allocated in the same manner.
To the extent that any Tax liabilities related to any Tax
Return filed by any Pre-Distribution Member on or before the Distribution Date
for any Pre-Distribution Taxable Period are changed by a Final Determination or
as a result of an amended Tax Return filed after the Distribution Date, and (A)
any portion of such change is derived solely from any Tax Items reasonably and
equitably related to any of the Lakes Business and Assets, determined by
computing such change with and without such Tax Items, then the economic cost of
such portion shall be allocated to the Lakes Group and Lakes shall indemnify and
hold harmless Company and each other Post-Distribution Company Member against
such cost; or (B) any portion of such change is derived solely from any Tax Item
reasonably and equitably related to any of the Mississippi Business and Assets,
determined by computing such change with and without such Tax Items, then the
economic cost of such portion shall be allocated to the Post-Distribution
Company Group and Company shall indemnify and hold harmless Lakes and each other
Lakes Member against such cost. To the extent that any such Tax allocation
cannot be made because the Tax liability is not reasonably and equitably
traceable in such manner to either the Mississippi Business and Assets or the
Lakes Business and Assets, the economic cost of such liabilities shall be
allocated between Lakes and Company in the manner for allocating Transaction
Taxes.
(ii) Straddle Periods.
(A) Initial Allocation of Straddle Period Taxes
on Separate Corporation Tax Returns. Subject to re-allocation under paragraph
(C) below, all liability for Taxes (other than Transaction Taxes or any Section
355 Tax Liability) for each Straddle Period that relate
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<PAGE> 11
to Tax Returns required to be filed by only one corporation subject to this
Agreement shall be allocated to the corporation named on each such Tax Return.
To the extent that any Tax liabilities allocated under this
Section 3(c)(ii) (A) are changed by a Final Determination or as a result of an
amended Tax Return filed after the Distribution Date, and (A) any portion of
such change is derived solely from any Tax Items reasonably and equitably
related to any of the Lakes Business and Assets, determined by computing such
change with and without such Tax Items, then the economic cost of such portion
shall be allocated to the Lakes Group and Lakes shall indemnify and hold
harmless Company and each other Post-Distribution Company Member against such
cost; or (B) any portion of such change is derived solely from any Tax Item
reasonably and equitably related to any of the Mississippi Business and Assets,
determined by computing such change with and without such Tax Items, then the
economic cost of such portion shall be allocated to the Post-Distribution
Company Group and Company shall indemnify and hold harmless Lakes and each other
Lakes Member against such cost. To the extent that any such Tax allocation
cannot be made because the Tax liability is not reasonably and equitably
traceable in such manner to either the Mississippi Business and Assets or the
Lakes Business and Assets, the economic cost of such liabilities shall be
allocated between Lakes and Company in the manner for allocating Transaction
Taxes.
(B) Initial Allocation of Certain Straddle Period
Taxes Related to Combined, Consolidated or Unitary Tax Returns. All liability
for Income Taxes (other than Transaction Taxes or any Section 355 Tax Liability)
for each Straddle Period that relate to any combined, consolidated or unitary
Tax Return shall be allocated as follows: (1) all federal, state, province,
local and foreign Income Tax Liabilities shall be proportionately allocated
among the corporations with positive taxable income included in each such Tax
Return, based on the ratio in which the taxable income of each corporation with
positive taxable income included in such Tax Return bears to the total positive
taxable income of all corporations with positive taxable income included in such
Tax Return; any refunds of Income Taxes related thereto shall be allocated in
the same manner; and (2) to the extent that any Income Tax Liabilities allocated
under this Section 3(c)(ii)(B) are changed by a Final Determination or as a
result of an amended Tax Return filed after the Distribution Date; and (I) any
portion of such change is derived solely from any Tax Items reasonably and
equitably related to any of the Lakes Business and Assets, determined by
computing such change to the combined, consolidated or unitary Income Tax
Liability with and without such Tax Items, then the economic cost of such
portion shall be allocated to the Lakes Group and Lakes shall indemnify and hold
harmless Company and each other Post-Distribution Company Member against such
cost; or (II) any portion of such change is derived solely from any Tax Item
reasonably and equitably related to any of the Mississippi Business and Assets,
determined by computing such change to the combined, consolidated or unitary
Income Tax Liability with and without such Tax Items, then the economic cost of
such portion shall be allocated to the Post-Distribution Company Group and
Company shall indemnify and hold harmless Lakes and each other Lakes Member
against such cost. To the extent that any such Tax allocation cannot be made
because the Income Tax liability is not reasonably and equitably traceable in
such manner to either the Mississippi Business
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<PAGE> 12
and Assets or the Lakes Business and Assets, the economic cost of such
liabilities shall be allocated between Lakes and Company in the manner for
allocating Transaction Taxes.
All liability for Other Taxes (other than
Transaction Taxes) for each Straddle Period that relate to any combined,
consolidated or unitary Tax Return shall be allocated between Company and Lakes
in a reasonable and equitable manner by first re-computing such Other Taxes on
such other Tax Returns, taking into account only such other Tax Items that
relate to the Mississippi Business and Assets and allocating such re-computed
Other Taxes to Company; and secondly re-computing such Other Taxes on such
other Tax Returns, taking into account only such Other Tax Items that relate to
the Lakes Business and Assets and allocating such re-computed Other Taxes to
Lakes. Any refunds of such Other Taxes related thereto shall be allocated in
the same manner; and any change in such Other Tax liabilities pursuant to a
Final Determination shall be allocated in the same manner.
(C) Re-allocation of Certain Straddle Period Tax
Liabilities. Any liability for Taxes allocated in each Straddle Period under
Section 3(c)(ii)(A) above, and any Income Tax Liabilities allocated under
Section 3(c)(ii)(B) above, but excluding any Tax liabilities allocated under
Section 3(c)(ii)(A) or Section 3(c)(ii)(B) above pursuant to either a Final
Determination or as a result of an amended Tax Return filed after the
Distribution Date, shall be re-allocated between Lakes and Company in a
reasonable and equitable manner by first re-computing such Taxes on such Tax
Returns, taking into account only such Tax Items that relate to the Mississippi
Business and Assets and allocating such re-computed Taxes to Company; and
secondly re-computing such Taxes on such Tax Returns, taking into account only
such Tax Items that relate to the Lakes Business and Assets and allocating such
re-computed Taxes to Lakes; and any refunds related thereto shall be allocated
in the same manner. To the extent that any such Tax allocation cannot be made
because the Tax liability is not reasonably and equitably traceable to either
the Mississippi Business and Assets or the Lakes Business and Assets, the
economic cost of such liabilities shall be allocated between Lakes and Company
in the manner for allocating Transaction Taxes.
(D) Property and Ad Valorem Taxes.
Notwithstanding the foregoing, any property or ad valorem Taxes that are due and
payable on of the Lakes Business and Assets shall be paid by Lakes or another
Lakes Member; and all other property or ad valorem Taxes shall be paid by
Company or another Post-Distribution Company Member and any refunds of such
Taxes shall be allocated in the same manner.
(d) Allocations of Stratosphere Tax Benefits. Notwithstanding
any contrary provisions of this Section 3, the economic costs and benefits of
the Section 355 Tax Liability, the Stratosphere Losses and any Stratosphere Tax
Benefits shall be allocated as follows:
(i) Section 355 Tax Liability. Notwithstanding any
contrary provisions of this Agreement, (1) after the Distribution, Company shall
be entitled to deduct any Stratosphere Losses allowable under the Code to
Company or any other Post-Distribution Company in its Affiliated Group in a
manner that realizes a Stratosphere Tax Benefit in an amount not to exceed the
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<PAGE> 13
Section 355 Tax Liability and shall do so at the earliest time permitted under
the Code; and (2) the economic cost of any Section 355 Tax Liability remaining
after taking into account all Stratosphere Tax Benefits that can be utilized
under the Code to reduce such Section 355 Tax Liability shall be allocated to
Lakes or any other appropriate Lakes Member and Lakes shall indemnify and hold
harmless Company and each other Post-Distribution Company Member against any
such remaining Section 355 Tax Liability, whether included on a Tax Return filed
hereunder by Company or determined or changed by a Final Determination.
(ii) Initial Allocation of Stratosphere Tax Benefits to
Lakes. Lakes shall be entitled to the economic benefit of any and all
Stratosphere Tax Benefits derived from that portion of the Stratosphere Losses
(not to exceed $50,000,000) resulting from the worthlessness of debts owed by
Stratosphere Corporation to any Pre-Distribution Member (the "Base Stratosphere
Loss"), except to the extent any amount of the Base Stratosphere Loss remaining
unused after the Distribution is necessary to reduce the Section 355 Tax
Liability (after all other available Stratosphere Losses are used for such
purpose). To the extent that Company or any other Pre- Distribution Member
realizes or receives any Stratosphere Tax Benefits from the Base Stratosphere
Loss, in excess of any amount required to reduce any Section 355 Tax Liability
remaining after all other available Stratosphere Losses are used for such
purpose, then such excess amount shall be deposited in the Escrow established
pursuant to Section 4 for the benefit of Lakes as security for its obligation to
indemnify Company pursuant to the preceding paragraph; provided, however, that
such Escrow has not already been terminated under Section 4.
(iii) Sharing of Any Remaining Stratosphere Tax Benefits.
If Company, any other Post-Distribution Company or any Lakes Member realizes or
receives any Stratosphere Tax Benefits derived from any remaining portion of the
Stratosphere Losses that has not been allocated to Lakes under the preceding
paragraph or utilized to reduce the Section 355 Tax Liability, the economic
benefit of such remaining portion shall be allocated equally between Lakes and
Company as and when it is so realized or received.
(iv) Payments to Satisfy Allocations. To the extent that
any portion of the Stratosphere Tax Benefits allocated to the Lakes Group is
realized or received at any time by Company or any other Post-Distribution
Company Member that is not entitled to the economic benefit of such portion,
then Company shall pay to Lakes the amount of such portion; provided, however,
that if the Escrow under Section 4 has not been funded to the full extent
provided in Section 4, such payment shall be paid into such Escrow.
(v) Actions required by Certain Final Determinations.
If, pursuant to any Final Determination, all or any portion of the Stratosphere
Tax Benefits is disallowed to the Post-Distribution Company Group because any
portion of the Stratosphere Losses is found or agreed by IRS to have been
incurred by a Lakes Member, then Company shall give Lakes written notice of the
particulars of such disallowance and, to the extent permitted by applicable law,
the appropriate Lakes Member shall claim any deductions or losses that would
result in realization of the Stratosphere Tax Benefits and (a) Lakes (or, if
applicable, the Escrow Agent described in Section 4) shall promptly
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<PAGE> 14
repay to Company any amount of such portion that Company has previously paid to
Lakes or such Escrow Agent, and (B) if and when any Lakes Member thereafter
realizes any portion of the Stratosphere Tax Benefits in any Taxable Period as a
result of such a deduction or loss, Lakes shall pay Company any amount of such
portion necessary to reduce any remaining Section 355 Tax Liability, except to
the extent of any amount of Stratosphere Tax Benefits that have already been
realized or received by Company for that purpose pursuant to this Agreement or
otherwise.
(e) Transaction Taxes. Each of Company and Lakes shall pay, or
cause to be paid, and indemnify and hold harmless the other against all
Transaction Taxes that each of Company and Lakes, respectively, have agreed to
pay pursuant to Section 6.05 of the Distribution Agreement.
(f) Carrybacks. If the Lakes Group or one or more Lakes Members
generates a Carryback Item (as defined below) that can be carried back to a
Straddle Period or Pre-Distribution Taxable Period, then Company shall, upon
receiving written notice thereof and at Lakes' expense, promptly prepare and
file (or cause to be filed) all Income Tax refund claims and Tax Returns
necessary to obtain the full amount of the Income Tax Benefits resulting from
such Carryback Item, and shall pay to Lakes any resulting Income Tax Benefits
realized or received by Company or any other Post-Distribution Company Member.
Otherwise, any Income Tax Benefit resulting from a Carryback Item shall belong
to the party to which it would be assigned under applicable Income Tax law. Each
party hereto that is in an Affiliated Group generating a Carryback Item that may
create an Income Tax Benefit in the other Affiliated Group containing a party to
this Agreement shall promptly provide the common parent of the Affiliated Group
that may be entitled to the Income Tax Benefit with a written notice concerning
the particulars thereof.
For purposes of this subsection (f), "Carryback Item" shall mean any
net operating loss, net capital loss, unused general business tax credit, or any
other Income Tax Item of the Lakes Group that, under the Code or any other
applicable Income Tax law, may be carried back to a Taxable Period, the Tax
Return of which is required to be filed by Company under Section 2.
(g) Lakes Payroll and Unemployment Compensation Tax Experience.
Company shall make available to Lakes sufficient data to facilitate a
determination of the desirability of the transfer to the Lakes Group of any
payroll Tax experience and/or any favorable unemployment compensation Tax
experience rating of Company. At the election of Lakes, Company shall cooperate
to effect a transfer of such payroll Tax experience and/or any favorable
experience rating to the Lakes Group within one hundred and twenty (120) days of
Lakes's written request therefor, to extent that any such experience transfer is
usable in a favorable manner within the Lakes Group for any Post-Distribution
Periods or Straddle Periods; provided, however, that unemployment compensation
Tax experience shall be allocated pursuant to the Employee Benefits and Other
Employment Matters Allocation Agreement between Lakes and Company, of even date
herewith.
(h) Allocation of Taxes for Purposes of Pro Forma Statements.
For purposes of the pro forma financial statements described in Section 4.19 of
the Merger Agreement (as defined in the Distribution Agreement) the parties
agree that nothing in this Agreement shall change the
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<PAGE> 15
allocation of Taxes between Company (including its subsidiaries) and Lakes
(including its subsidiaries), as set forth in such statements.
Section 4. Escrow of Certain Stratosphere Tax Benefits.
(a) Creation and Purpose of Escrow. As provided in Section 3(d)
(ii), to the extent that Company or any other Pre-Distribution Member realizes
or receives any Stratosphere Tax Benefits from the Base Stratosphere Loss, the
parties shall cause such amount to be deposited for the benefit of Lakes, as
security for its obligation to indemnify Company pursuant to Section 3(d)(i),
into an escrow account established by Lakes and Company (the "Escrow") with a
bank having trust powers and reasonably acceptable to them (the "Escrow Agent"),
pursuant to a written escrow agreement intended to carry out the purposes of
this Section 4 and to be entered into (immediately before any such deposit) by
and among Lakes, Company, the Escrow Agent and Gaming Co., Inc., a Delaware
corporation (the "Escrow Agreement"), in a form to be mutually agreed upon in
good faith by them within thirty (30) days after the date on which the Merger
Agreement (as defined in the Distribution Agreement) is executed and delivered,
and such form of escrow agreement shall thereupon be attached hereto as Exhibit
A. The Escrow shall serve as collateral security solely for any remaining
obligation of Lakes to indemnify Company pursuant to Section 3(d)(i). Lakes will
be entitled to periodically receive any investment income earned by any assets
invested under the Escrow Agreement.
(b) Termination of Escrow. The Escrow shall terminate upon the
earliest of the following events:
(i) Company (and its Representatives) and Lakes (and its
Representatives) shall have mutually agreed, in the manner provided in Section
2(g), that the amount of the Section 355 Tax Liability is reasonably
ascertainable, that the amount of Stratosphere Losses remaining after any
pre-Distribution realization of Stratosphere Tax Benefits under Section 3(d) is
sufficient for the realization of Stratosphere Tax Benefits that will reduce the
Section 355 Tax Liability to zero and that Company will have a "reasonable
basis" (as defined in Code section 6662) for doing so in the applicable Tax
Return to be filed by Company for federal Income Tax purposes. The parties shall
diligently attempt in good faith to reach such agreement as soon as practicable
after the Distribution, but in no event later than sixty (60) days after the
Distribution Date and, if the parties are unable to agree on such matter within
that period, they shall use the dispute resolution procedures in Section 2(g) to
determine such issues. If the determination described in this paragraph is not
made because the facts and/or applicable Tax law prevents such a determination,
the Escrow shall terminate upon the earliest of the events described in the
following two paragraphs.
(ii) The indemnification obligation of Lakes under
Section 3(d)(i) shall have expired as a result of a Final Determination or the
expiration of the latest applicable Income Tax statute of limitation; and the
date of such any such expiration shall have been either agreed upon by Company
and Lakes in writing or otherwise determined in the manner provided in Section
2(g).
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<PAGE> 16
(iii) Lakes shall have satisfied its indemnification
obligation under Section 3(d)(i), from the Escrow or otherwise; and Company and
Lakes shall have either agreed that such obligation has been satisfied or such
issue shall have been determined in the manner provided in Section 2(g).
Upon termination of the Escrow, Company and Lakes shall promptly and
jointly notify the Escrow Agent in writing concerning such termination and the
amount (if any) to be paid to Company to satisfy the indemnification obligation
of Lakes under Section 3(d)(i). To the extent that any assets remain in the
Escrow after such indemnification obligation expires or is satisfied, any assets
remaining in the Escrow shall be disbursed to Lakes after the Escrow Agent has
been paid, from the Escrow or otherwise, any fees and expenses due the Escrow
Agent under the Escrow Agreement.
If the parties do not agree on any such matter and the Escrow Agent
does not receive a written determination under Section 2(g) with respect to any
such matter, the Escrow Agent shall disburse the assets of the Escrow pursuant
to the final, non-appealable order of a court of competent jurisdiction.
Section 5. Taxability and Reporting of Stock Options. Each of Company
and Lakes shall be responsible for making all reports required to be made to any
relevant taxing authority with respect to any grants or exercises of stock
options with respect to such party's capital stock in any Post-Distribution
Straddle Periods or Post-Distribution Taxable Periods. The appropriate Post-
Distribution Company Member shall be entitled to the economic benefit of, and to
the extent permitted by applicable law shall take, any Income Tax deductions
arising by reason of exercises of options to purchase shares of Company stock or
dispositions of such stock. the appropriate Lakes Member shall be entitled to
the economic benefit of, and to the extent permitted by applicable law, shall
take any Income Tax deductions arising by reason of exercises of options to
purchase shares of Lakes stock or dispositions of such stock.
If, pursuant to a Final Determination, all or any part of a Income Tax
deduction required to be taken pursuant to this Section 5 is either not
permitted by applicable law, or is disallowed to a Post-Distribution Company
Member (or a Lakes Member), then, to the extent permitted by applicable law, the
party first aware of such condition shall notify the other in writing of the
particulars; and the appropriate Lakes Member (or Post-Distribution Company
Member) shall take such Income Tax deduction and shall pay, to the party
entitled to economic benefit of such Income Tax deduction under this Agreement,
the amount of any Income Tax Benefit resulting from such deduction.
Section 6. Severance Pay. Payments made for and as severance pay shall
be deducted for Income Tax purposes, to the extent permitted by applicable Tax
law, by the corporation that makes the severance payment.
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<PAGE> 17
If, pursuant to a Final Determination, all or any part of an Income Tax
deduction for severance pay is disallowed to any Post-Distribution Company
Member, then, to the extent permitted by applicable law, the appropriate member
of the Lakes Group shall claim such deduction. If any Lakes Member receives an
Income Tax Benefit in any Taxable Period as a result of such an Income Tax
deduction, Lakes shall pay to Company the amount of such Income Tax Benefit.
If, pursuant to a Final Determination, all or any part of an Income Tax
deduction for severance pay is disallowed to any Lakes Member, then, to the
extent permitted by applicable law, the appropriate Post-Distribution Company
Member shall claim such deduction. If any Post-Distribution Company Member
receives an Income Tax Benefit in any Taxable Period as a result of such an
Income Tax deduction, Company shall pay to Lakes the amount of such Income Tax
Benefit.
Section 7. Cancellation of Other Tax Allocation or Tax-Sharing
Agreements. Effective upon the Distribution, Company and Lakes hereby agree to
cancel or cause to be canceled all agreements (other than this Agreement and the
Distribution Agreement) providing for the allocation or sharing of Taxes to
which any Lakes Member would otherwise be bound following the Distribution. Such
cancellation shall be retroactive to the extent any such agreement is
inconsistent with any provision of this Agreement that affects any Straddle
Period or Pre-Distribution Taxable Period.
Section 8. Indemnification Procedures.
(a) Unless otherwise specified in this Agreement, all
indemnification and reimbursement payments to be made pursuant to this Agreement
shall be made within thirty (30) days of written notice of a request for
indemnification or reimbursement by the Indemnified Party, which notice shall be
accompanied by a computation of the amount due.
(b) If an indemnification or reimbursement is required to be
made under this Agreement only upon the realization or receipt by the
Indemnifying Party of an Income Tax Benefit, such payment shall be made no later
than thirty (30) days after the earlier of (i) the filing or (ii) the due date
(including extensions) of the Tax Return with respect to which such Income Tax
Benefit is realized; or, if the Income Tax Benefit was realized or received on a
Tax Return that was due or filed prior to the time the indemnification or
reimbursement obligation arose, no later than thirty (30) days after such
obligation arose. The parties shall cooperate in good faith in enforcing the
provisions of this paragraph (b), which cooperation shall include the provision
of reasonable access to the Tax Returns of the Indemnifying Party by the
Indemnified Party pursuant to Section 9 in order to determine the amount of any
indemnification or reimbursement payment to be made pursuant to this paragraph
(b).
(c) If an Indemnified Party realizes or receives an Income Tax
Benefit in any Taxable Period as a result of making a payment or suffering a
loss with respect to which an indemnification or reimbursement payment is
required to be made to it by an Indemnifying Party
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<PAGE> 18
(including any payment due under the next paragraph), after taking into account
any Income Tax Detriment the Indemnified Party would incur upon receipt of such
payment, the Indemnified Party shall pay the amount of such Income Tax Benefit
to the Indemnifying Party or, if the Indemnifying Party has not yet satisfied
such obligation, the Indemnified Party may notify the Indemnifying Party in
writing that the amount of such Income Tax Benefit shall be set off against any
such indemnification or reimbursement payment then due.
(d) If an Indemnifying Party realizes or receives an Income
Tax Benefit in any Taxable Period as a result of making an indemnification or
reimbursement payment to an Indemnified Party, after taking into account any
Income Tax Detriment that would result from any related payment due the
Indemnifying Party under the preceding paragraph, the Indemnifying Party shall
also pay to the Indemnifying Party the amount of any such Income Tax Benefit.
(e) Any payment (other than interest) made hereunder by any
Indemnifying Party to any Indemnified Party shall be treated by all parties for
all purposes, to the extent permitted by applicable law, as a non-taxable
dividend distribution or a capital contribution made on the Distribution Date.
(f) If any indemnification or reimbursement payment required
to be made pursuant to this Agreement is not made when due, such payment shall
bear interest at a rate equal to the prevailing federal short-term interest rate
as determined from time to time under Code section 6621.
Section 9. Procedures for Sharing of Information and Settlement of Tax
Disputes.
(a) Tax Return Information. Company and Lakes agree to fully
cooperate with each other in connection with preparation of all Tax Returns
required to be filed by them, any audits thereof and any determination of the
amount of an indemnification or reimbursement payment requested hereunder. Such
cooperation shall include making personnel and records available promptly and
within twenty (20) days (or such other period as may be reasonable under the
circumstances) after a request for such personnel or records is made by the
taxing authority or the other party. If any member of the Post-Distribution
Company Group or the Lakes Group, as the case may be, unreasonably fails to
provide any information requested pursuant to Section 2, Section 8 or this
Section 9, then the requesting party shall have the right to engage an
independent certified public accountant of its choice to gather such
information. Company or Lakes, as the case may be, agrees to permit any such
independent certified public accountant full access to the Tax Return
information in the possession of any Post-Distribution Company Member or any
Lakes Member, as the case may be, during reasonable business hours; and to
reimburse or pay directly all costs and expenses in connection with the
engagement of such independent certified public accountant.
(b) Accuracy of Information. If any Post-Distribution Company
Member or Lakes Member, as the case may be, supplies information to a member of
the other group in connection with the preparation of any Tax Return and an
officer of the requesting party is required
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<PAGE> 19
by applicable law to sign a statement or other document under penalties of
perjury in reliance upon the accuracy of such information, then a duly
authorized officer of the party supplying such information shall certify, under
penalties of perjury, the accuracy and completeness of the information so
supplied within twenty (20) days of supplying such information. Company shall
indemnify and hold harmless each member of the Lakes Group and its
Representatives; and Lakes shall indemnify and hold harmless each
Post-Distribution Company Member and its Representatives, against any cost,
fine, penalty or other expenses of any kind attributable to the negligence
(other than intentional misconduct) of a Post-Distribution Company Member or a
Lakes Member, as the case may be, in supplying a member of the other group with
inaccurate or incomplete information, in connection with the preparation any Tax
return.
(c) Tax Research Credit. Within 180 days after the Distribution,
Company will furnish Lakes, pursuant to Code section 41, with any base period
information any Lakes Member will need to properly compute its Tax research
credits, if applicable, for years beginning after the Distribution Date.
(d) Tax Audits. Except as otherwise provided below in subsection
9(e), Company shall have sole responsibility for and control over all audits
with respect to any Tax Return it is required to file under Section 2; and Lakes
shall have sole responsibility and control over all audits with respect to any
Tax Return it is required to file under Section 2.
(e) Tax Dispute and Settlement Procedures. The parties shall
follow the procedures set forth below:
(i) For purposes of this subsection (e), "Adjustment"
shall mean any proposed or final change in the Tax liability of a taxpayer.
(ii) To the extent any Tax authority (a) reviews, formally
or informally in any examination; or (B) proposes an Adjustment to, any Tax Item
or Tax liability properly allocable to any Lakes Member under this Agreement,
Lakes and Company shall mutually agree with respect to all issues raised in any
such examination and the negotiation and settlement or litigation concerning
such Tax Item or Tax liability; and any disputes with respect to such matters
shall be resolved as provided in Section 2(g), except that the standard for
determining such dispute shall be the result that a reasonable and well-advised
investor owning both parties would determine, taking into account the
minimization of Taxes of both parties taken as a whole. If any such review or
proposed Adjustment involves a Tax Return required to be filed by Company under
Section 2, Company shall notify Lakes in writing of the particulars as soon as
possible, so that Lakes and its Representatives may diligently exercise its
rights hereunder with respect to such Tax Item or Tax Liability, but in no case
less than ten (10) days before either party is required to respond to the IRS or
other applicable taxing authority.
(iii) To the extent any Tax authority (a) reviews,
formally or informally in any examination; or (B) proposes an Adjustment to,
any Tax Item or Tax liability properly
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<PAGE> 20
allocable to any Post-Distribution Company Member under this Agreement, Company
shall control the examination, negotiation and settlement or litigation
concerning such Tax Item or Tax liability, except as provided otherwise in
paragraph (iv) below. If any such review or proposed Adjustment involves a Tax
Return required to be filed by Lakes under Section 2, Lakes shall notify Company
in writing of the particulars as soon as possible, so that Company and its
Representatives may diligently respond and take such control with respect to
such Tax Item or Tax Liability, but in no case less than ten (10) days before
either party is required to respond to the IRS or other applicable taxing
authority.
(iv) Notwithstanding paragraphs (ii) and (iii) above, to
the extent any Tax authority (a) reviews, formally or informally in any
examination; or (B) proposes an Adjustment to, any Income Tax Item that affects
the Section 355 Tax Liability, any Stratosphere Tax Benefits or is related to
any Stratosphere Losses, Lakes and Company shall mutually agree with respect to
all issues raised in any such examination and the negotiation and settlement or
litigation concerning such Income Tax Item or related Tax liability; and any
disputes with respect to such matters shall be resolved as provided in Section
2(g), except that the standard for determining such dispute shall be the result
that a reasonable and well-advised investor owning both parties would determine,
taking into account the minimization of Taxes of both parties taken as a whole.
If such dispute or proposed Adjustment involves a Tax Return required to be
filed by Company under Section 2, Company shall notify Lakes in writing of the
particulars as soon as possible so that Lakes and its Representatives may
diligently exercise its rights hereunder, but in no case less than ten (10) days
before either party is required to respond to the IRS or other applicable taxing
authority.
(v) Notwithstanding the foregoing, any party (and its
Representatives) that is not in partial or complete control of any such matter
shall be entitled, at such party's expense, to participate in all conferences,
meetings and proceedings with respect thereto and shall be entitled to consult
with the controlling party with respect to all such matters. Notwithstanding the
foregoing, if the IRS or any other taxing authority proposes an Adjustment that
would disallow any of the deductions required to be taken by a Post-Distribution
Company Member (or a Lakes Member) pursuant to this Agreement, Company (or
Lakes) shall diligently contest such proposed disallowance, or shall cause such
disallowance to be contested, to the extent reasonable.
(vi) Company may consult with Lakes, and Lakes agrees to
fully cooperate with Company, in the negotiation, Adjustment, settlement or
litigation of any Tax Item or Tax liability allocated under this Agreement to
any Post-Distribution Company Member regardless of the effect (or lack of
effect) of any such matter upon any Tax Item or Tax liability allocated under
this Agreement to any Lakes Member; provided, however, that such Tax Item or Tax
liability relates to a Pre-Distribution Taxable Period or Straddle Period.
(vii) Lakes may consult with Company, and Company agrees
to fully cooperate with Lakes, in the negotiation, Adjustment, settlement or
litigation of Tax Item or Tax liability allocated under this Agreement to any
Lakes Member, regardless of the effect (or lack of effect) of any such matter
upon any Tax Item or Tax liability allocated under this Agreement to any
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<PAGE> 21
Post-Distribution Company Member; provided, however, that such Tax Item or Tax
liability relates to a Pre-Distribution Taxable Period or Straddle Period.
(viii) Company will notify Lakes in writing of any
Adjustment (and any Final Determination thereof) to the Income Tax basis of any
item included in the Lakes Business and Assets, specifying the nature of the
Adjustment, such that the appropriate Lakes Member will be able to reflect the
revised basis in its Income Tax books and records for Post-Distribution Taxable
Periods.
(f) Except as otherwise provided in this Agreement, if as a
result of a Final Determination after the Distribution Date with respect to any
Income Tax Item (including, without limitation, any Income Tax Item relating to
depreciation or amortization) of one party or any member of its Affiliated Group
(the "First Party") that results in an Income Tax Detriment to the First Party
in any Taxable Period, any other party to this Agreement or any member of its
Affiliated Group that is not then in the First Party's Affiliated Group (the
"Second Party") becomes entitled to take a reporting position with respect to
the same Income Tax Item that is consistent with the Final Determination and
would result in an Income Tax Benefit to the Second Party, then (i) the Second
Party shall take such position on an appropriate Tax Return, including an
amended Tax Return, unless the Second Party has already taken a reporting
position consistent with such Final Determination; and (ii) if the Second Party
does realize or has realized an Income Tax Benefit in any Taxable Period as a
result of taking or having taken such position, then the Second Party shall pay
to the First Party the amount of such Income Tax Benefit (net of any Income Tax
Detriment suffered by the Second Party as a result of taking or having taken
such position) within six months after the Tax year in which such realization
occurs or, if later, within sixty days after the Second Party receives written
notice from the First Party that it has suffered such an Income Tax Detriment in
any past Tax year.
Section 10. Retention of Records.
(a) Company and Lakes agree to retain all the appropriate
records that may affect the determination of the liability for Taxes of any
Post-Distribution Company Member or Lakes Member, respectively, until such time
as there has been a Final Determination with respect to such liability for
Taxes.
(b) Any party intending to destroy any materials, records, or
documents shall provide the other party with ninety (90) days advance notice of
such destruction and shall offer the other party the opportunity to copy or take
possession of such records and documents.
(c) Company and Lakes will notify each other in writing of any
waivers or extensions of the applicable statute of limitations for any Tax that
may affect the period of time for which any materials, records, or documents
must be retained for purposes of such Tax.
Section 11. Miscellaneous.
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<PAGE> 22
(a) Term of the Agreement. This Agreement shall become effective
as of the date of its execution and, except as otherwise expressly provided
herein, shall continue in full force and effect indefinitely.
(b) Injunctions. The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof in any court having competent
jurisdiction, such remedy being in addition to any other remedy to which they
may be entitled at law or in equity.
(c) Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect, and shall
in no way be affected, impaired, or invalidated. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, void or unenforceable. In the event
that any such term, provision, covenant or restriction is held to be invalid,
void or unenforceable, the parties hereto shall use their best efforts to find
and employ an alternate means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or restriction.
(d) Assignment. Except by operation of law or in connection with
the sale of all or substantially all the assets of a party hereto, this
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the advance written consent of the other party; and
any attempt to assign any rights or obligations arising under this Agreement
without such consent shall be void; provided, however, that the provisions of
this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors and permitted
assigns.
(e) Further Assurances. Subject to the provisions hereof, the
parties hereto shall make, execute, acknowledge, and deliver such other
instruments and documents; and take all such other actions as may be reasonably
required in order to effectuate the purposes of this Agreement and to consummate
the transactions contemplated hereby. Subject to the provisions hereof, each of
the parties shall, in connection with entering into this Agreement, performing
its obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders, and decrees, obtain all required
consents and approvals and make all required filings with any governmental
agency, other regulatory or administrative agency, commission or similar
authority, and promptly provide the other party with all such information as it
may reasonably request in order to be able to comply with the provisions of this
paragraph.
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<PAGE> 23
(f) Parties in Interest. Except as herein otherwise specifically
provided, nothing in this Agreement expressed or implied is intended to confer
any right or benefit upon any person, firm, corporation or other entity, other
than the parties and their respective successors and permitted assigns.
(g) Waivers, Etc. No failure or delay on the part of the parties
in exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such right or power, preclude
any other or further exercise thereof or the exercise of any other right or
power. No modification or waiver of any provision of this Agreement, nor consent
to any departure by the parties therefrom, shall in any event be effective
unless the same shall be in writing, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
(h) Set Off. Except as otherwise expressly provided in this
Agreement, all payments to be made by any party under this Agreement shall be
made without set off, counterclaim, or withholding, all of which are expressly
waived.
(i) Change of Law. If, due to any change in applicable law or
regulations or their interpretation by any court of law or other governing body
having competent jurisdiction subsequent to the date of this Agreement,
performance of any provision of this Agreement or any transaction contemplated
thereby shall become impracticable or impossible, the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such provision.
(j) Confidentiality. Subject to any contrary requirement of
applicable law and the right of each party to enforce its rights hereunder in
any legal action, each party agrees that it shall keep strictly confidential,
and shall cause its employees and agents to keep strictly confidential, any
information that it or any of its employees or agents may require pursuant to,
or in the course of performing its obligations under, any provision of this
Agreement.
(k) Headings. The descriptive headings in this Agreement are
intended for convenience only and shall not control or affect the meaning or
construction of any provision of this Agreement.
(l) Counterparts. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto;
and each such executed counterpart shall be, and shall be deemed to be, an
original instrument.
(m) Notices. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be validly given,
made, or served, if in writing and delivered personally, by telegram or sent by
certified mail, postage prepaid, or by facsimile transmission to:
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<PAGE> 24
If to Company at: GRAND CASINOS, INC.
______________, MS _______
Attn: Chief Financial Officer
FAX: (612) ____________
Telephone: (612) ___________-
If to Lakes at: GCI LAKES, INC.
Minneapolis, Minnesota ________
Attn: Chief Financial Officer
FAX: (___) ____________
Telephone: (___) ____________
or to such other address as either party may, from time to time, designate in a
written notice given in a like manner. Notice given by telegram shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by facsimile transmission shall be deemed delivered on the
day of transmission; provided, however, that telephone confirmation of receipt
is obtained promptly after completion of the transmission.
(n) Costs and Expenses. Unless otherwise specifically provided
herein, each party agrees to pay its own costs and expenses resulting from the
fulfillment of its respective obligations hereunder.
Section 12. Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the domestic substantive laws of the
State of Minnesota without regard to any choice or conflict of laws, rules, or
provisions that would cause the application of the domestic substantive laws of
any other jurisdiction.
[Signature Page to Follow]
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<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective duly authorized officers as of the date first
written above.
GRAND CASINOS, INC.
By: ____________________________
Its:
"COMPANY"
GCI LAKES, INC.
By: ____________________________
Its:
"LAKES"
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<PAGE> 1
EXHIBIT 10.5
TRUST AGREEMENT
This TRUST AGREEMENT (this "Agreement"), dated as of _____________, 1998,
is entered into by and among GCI LAKES, INC., a Minnesota corporation
("Lakes"), GRAND CASINOS, INC., a Minnesota corporation ("Company"), and
_____________________________________, a New York banking corporation with
offices at _____________________________________, as Trustee (the "Trustee").
RECITALS
A. Lakes and Company have entered into a Distribution Agreement, dated as
of ____________, 1998 and certain ancillary agreements thereto (collectively,
the "Distribution Agreement"), which provide for, among other things, (i) the
transfer by Company to Lakes of all of the operations, assets and liabilities
of Company and its subsidiaries comprising the Non-Mississippi Business (as
defined therein) and (ii) the distribution (the "Distribution") to the holders
of Company's common stock of all of the outstanding shares of Lakes' common
stock.
B. Lakes, Company, Hilton Hotels Corporation, Gaming Co., Inc. and Gaming
Acquisition Corporation ("Merger Sub") have entered into an Agreement and Plan
of Merger, dated as of June 30, 1998 (the "Merger Agreement" and, together with
the Distribution Agreement, the "Agreements"), which provides for, among other
things, the merger of Merger Sub with and into Company (the "Merger") with
Company as the surviving corporation.
C. The Agreements provide that Lakes shall indemnify, save and hold
harmless Company and certain of its related parties, with respect to certain
matters upon the terms and subject to the conditions provided in the respective
Agreements and that as a source of payment therefor (and not in lieu thereof) a
trust estate shall be established for the protection of Company, its affiliates
and subsidiaries.
D. A material condition to the consummation of the transactions
contemplated by both of the Agreements is that the parties hereto enter into
this Agreement and that Lakes, Company and the Trustee enter into a Pledge and
Security Agreement of even date (the "Pledge and Security Agreement").
E. The Trustee has agreed to hold the Trust Estate (as defined herein) in
accordance with the terms and provisions contained herein, which Trust Estate
shall be held for the benefit of Company with a reversionary interest in Lakes.
AGREEMENT
In consideration of the foregoing and the mutual promises contained herein
and for other good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, the parties, intending to be legally bound, hereby
agree as follows:
<PAGE> 2
1. Defined Terms.
For purposes of this Agreement:
"Action" means any action, claim, suit, arbitration, inquiry, proceeding
or investigation by or before any court, any governmental or other regulatory
or administrative agency or commission or any arbitration tribunal.
"cash" means United States Dollars in such form as may, at the time, be
legal tender for the payment of debts in the United States.
"Cash Equivalents" means Short-Term Treasuries or Joint Approval Cash
Equivalents.
"Claim" has the meaning set forth in Section 5(a).
"Counter Notice" has the meaning set forth in Section 5(a).
"Event of Default" has the meaning assigned in the Pledge and Security
Agreement.
"Joint Approval Cash Equivalents" means United States Dollar indebtedness
in any of the following forms, if and to the extent the Trustee has been
directed to invest in such indebtedness in a joint written investment direction
signed both by the Representative and by the Indemnitee's Agent: (i) the
outstanding short-term debt Securities of any corporation so long as such debt
securities are rated at least "A" by Standard & Poor's Corporation and are not
"restricted securities" within the meaning of Rule 144(a)(3) under the
Securities Act of 1933, as amended, (ii) marketable direct obligations
guaranteed by the United States Government and backed by the full faith and
credit of the United States, issued after July 18, 1984 and maturing within 90
days from the date of acquisition thereof, (iii) marketable direct obligations
issued by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing
within 90 days from the date of acquisition thereof and, at the time of
acquisition, having a rating in one of the two highest rating categories
obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, Inc. (or, if at any time, neither of such rating services shall be
rating such obligations, then from such other nationally recognized rating
services as may be acceptable to Company), (iv) certificates of deposit
maturing within 90 days from the date of acquisition thereof and issued by any
commercial bank which accepts deposits insured by the Federal Deposit Insurance
Corporation and which has a combined capital and surplus greater than $500
million and a long term certificate of deposit rating in one of the two highest
rating categories obtainable from either Standard & Poor's Corporation or
Moody's Investors Service, Inc. (or, if at any time, neither of such rating
services shall be rating such obligations, then from such other nationally
recognized rating services as may be acceptable to Company) (any such
commercial bank, an "Acceptable Bank"); (v) repurchase agreements, Eurodollar
deposits and bankers acceptances maturing within 90 days from the date of
acquisition thereof and issued by an Acceptable Bank; (vi) investments in money
market funds that invest solely in (a) Short-Term Treasuries or repurchase
agreements
2
<PAGE> 3
secured by Short-Term Treasuries or (b) Joint Approval Cash Equivalents of the
type described in clauses (i) and (ii) above or repurchase agreements secured by
such Joint Approval Cash Equivalents; or (vii) any other instrument that is
specifically approved in writing by Lakes and Company, if the Trustee receives
opinions of counsel reasonably satisfactory to it stating that such writing has
been duly authorized, executed and delivered by each of them and is binding upon
and enforceable against each of them. Notwithstanding the foregoing provisions
of this definition, any investment or security which otherwise would be a Joint
Approval Cash Equivalent but for the fact such investment or security has a
maturity date more than 90 days after the acquisition thereof, shall be deemed a
Joint Approval Cash Equivalent if it is otherwise convertible, at the option and
discretion of Trustee, into cash within 90 days of the date that the Trustee
provides a conversion notice to the issuer of the security.
"Liabilities" means any and all debts, liabilities and obligations,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including all costs
and expenses relating thereto, and including, without limitation, those debts,
liabilities and obligations arising under any law, rule, regulation, Action,
threatened Action, order or consent decree of any governmental entity or any
award of any arbitrator of any kind, and those arising under any contract,
commitment or undertaking.
"Notice" has the meaning set forth in Section 5(a).
"Polo Plaza Project Liabilities" means any and all Liabilities relating to
or arising from the Nevada Resort Properties Polo Plaza Limited Partnership or
the purchase and/or development of the properties commonly known as the Polo
Plaza Property, the Shark Club Property, the Travelodge Property and the Cable
Center Property, including, but not limited to any and all Liabilities under
the Polo Plaza Partnership Purchase Agreement, dated as of October 3, 1996, by
and among Grand Casinos Nevada I, Inc. ("Nevada Sub") and Cloobeck Enterprises,
Normie Gagerman, Stephen J. Cloobeck, Polo Limited Group, Polo Limited Group
II, Samuel S. Lionel, and Bette Sawyer; Consulting Agreement by and between
Nevada Sub and Stephen J. Cloobeck, dated as of July 12, 1996; Consulting
Agreement by and among Nevada Sub and Nevada Resort Properties Polo Plaza
Limited Partnership (the "Polo Partnership") and Cloobeck Enterprises, dated as
of July 12, 1996; Polo Plaza FINOVA (Construction) Loan Agreement, dated as of
April 16, 1993, by and between Greyhound Financial Corporation, as Lender and
the Polo Partnership, as Borrower; Leasehold Termination Agreement, dated as of
June 23, 1997, by and among Cloobeck Enterprises, the Polo Partnership and
Nevada Sub; Ground Lease, dated as of July 31, 1996, by and between MacGregor
Income Properties West I, Inc. and Cloobeck Enterprises; Option Agreement,
dated as of October 3, 1996, by and among the Polo Partnership, Cloobeck
Enterprises and Nevada Sub; Option Agreement, dated as of October 3, 1996, by
and among Polo Partnership, Cloobeck Enterprises and Nevada Sub; Brooks Family
Trust Lease, dated as of June 17, 1996, by and among Nevada Sub and Cloobeck
Enterprises, as Tenants, and the Brooks Family Trust and Nevada Brooks Cook, as
Landlords; Assignment of Lease, dated as of September __, 1996, whereby
Cloobeck Enterprises assigned its rights and obligations under the Brooks Lease
to Nevada Sub; Guaranty, dated as of June 17, 1996, by Company in favor of
Brooks Landlords; Lease Termination Agreement, dated as of October 29, 1997, by
and between Nevada Sub (as successor Lessor) and Chartwell Vegas Corp. (as
successor Lessee); Lease
3
<PAGE> 4
Agreement, dated as of May 1, 1992, by and between Brooks Family Trust, as
Lessor and Moving Forward, Inc., as Lessee, as amended; Hotel Management
Agreement, dated as of February 1, 1998, by and between Nevada Sub and Chartwell
Lodging, Inc., as Manager; and the Option Agreement, dated as of November 1,
1997, by and among Martin J. Cable and Olga B. Cable, as Trustees of the Cable
Family Trust and Nevada Sub.
"Short-Term Treasuries" means United States Dollar indebtedness consisting
of marketable direct obligations issued by the United States Government or any
agency thereof and backed by the full faith and credit of the United States, in
the form of Book-entry Securities maintained by the Trustee or any nominee
acting for it, solely in its name, in an account at the Federal Reserve Bank of
New York under the Treasury/Reserve Automated Debt Entry System, issued after
July 18, 1984 and maturing within 90 days from the date of acquisition thereof.
"Stratosphere Liabilities" has the meaning set forth for such term in the
Distribution Agreement.
"Tax Liabilities" all Liabilities of Lakes arising out of its
indemnification obligations under that certain Tax Allocation and Indemnity
Agreement, dated ________, 1998, between Company and Lakes, to the extent such
indemnification obligations are not satisfied pursuant thereto.
"Termination Date" has the meaning set forth in Section 6.
2. Declaration of Trust. As a non-exclusive source of payment with
respect to the observance and performance by Lakes of each and all of its
present and future indemnities, liabilities and obligations at any time arising
under, pursuant to or in respect of any of the Agreements (collectively, the
"Indemnification Obligations"), and the covenants and conditions of this
Agreement and the Pledge and Security Agreement (collectively, including the
Indemnification Obligations, the "Secured Obligations"), Company grants and
transfers to the Trustee to hold, and the Trustee is hereby authorized and
directed by Lakes to accept, and the Trustee hereby accepts, in trust under this
Agreement, for the benefit of Company, its affiliates, subsidiaries and all
other present and future holders of any of the Secured Obligations and each and
all of their members, successors and assigns, all right, title and interest in
the following property:
an agreement to pay, substantially in the form of Exhibit A,
executed by Lakes in favor of the Trust Estate pursuant to which Lakes is
obligated to pay to the Trust Estate: (a) $7.5 million in cash on the
first anniversary of the date thereof, (b) an additional $7.5 million in
cash on the second anniversary of the date thereof, (c) an additional
$7.5 million in cash on the third anniversary of the date thereof and (d)
an additional $7.5 million in cash on the fourth anniversary of the date
thereof.
(collectively, the "Initial Trust Estate," and together with (i) all rights and
interests of the Trustee under the Pledge and Security Agreement, (ii) any and
all other property at any time hereafter transferred to the Trustee in trust
under this Agreement, and (iii) any and all present and future income,
distributions, substitutions, replacements and proceeds of or from the Initial
Trust Estate
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<PAGE> 5
and any other such property, the "Trust Estate"). The Trustee, its successors
in trust under this Agreement and its assigns and the assigns of its successors
and assigns in trust shall have and hold the foregoing Trust Estate until
released to Company or Lakes in accordance with the terms hereof, in trust under
and subject to the terms and conditions set forth herein for the benefit of
Company and as a source of funds for and for the enforcement of the payment,
observance and performance of all Secured Obligations. Company and Lakes hereby
consent to the foregoing declaration of trust and agree that the Trust Estate is
to be held and applied by the Trustee subject to the further covenants,
conditions and trust set forth herein.
3. Appointment of Representative and Indemnitee's Agent.
(a) Lakes hereby designates its:
Chairman of the Board,
President and Chief Executive Officer
and Chief Financial Officer
each of whom is authorized to act alone, as their duly appointed agents and
attorneys-in-fact, with full power of substitution, in any and all capacities,
for all purposes of this Agreement (each, the "Representative"). Actions and
inactions by such Representatives under this Agreement shall be binding and
conclusive on Lakes and may be conclusively relied upon by the other parties
hereto. Lakes, upon 10 days' written notice to the other parties, may remove
any person appointed as Representative or appoint another person as
Representative. No Representative shall be liable for any action taken or
omitted by it, or any action suffered by it to be taken or omitted, in good
faith, and in the exercise of its own best judgment.
(b) Company hereby appoints its:
Executive Vice President and Chief Financial Officer,
Senior Vice President and Treasurer,
Senior Vice President and Controller,
and General Counsel
each of whom is authorized to act alone, as their duly appointed agents and
attorneys-in-fact, with full power of substitution, in any and all capacities,
for all purposes of this Agreement (each, the "Indemnitee's Agent"). Actions
and inactions by the Indemnitee's Agent under this Agreement shall be binding
and conclusive on Company and may be conclusively relied upon by the other
parties hereto. Company, upon 10 days' written notice to the other parties, may
remove any person appointed as Indemnitee's Agent or appoint another person as
Indemnitee's Agent. No Indemnitee's Agent shall be liable for any action taken
or omitted by it, or any action suffered by it to be taken or omitted, in good
faith, and in the exercise of its own best judgment.
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<PAGE> 6
4. Investment and Valuation of Trust Estate.
(a) The Trustee hereby acknowledges receipt of the Initial Trust
Estate.
(i) The Trustee shall keep all cash at any time held by it as
part of the Trust Estate, from whatever source such cash may be
derived, in an interest-bearing account in United States Dollars
maintained by the Trustee solely in the name of the Trustee, as
Trustee hereunder, except that:
(1) Such cash shall be invested and reinvested by the
Trustee in Short-Term Treasuries, (i) if the Trustee is so
directed in writing by the Indemnitee's Agent and if the
Indemnitee's Agent states in such writing that an Event of
Default has occurred and is continuing, and (ii) after the
Trustee receives written directions from the Representative,
stating that any and all cash held by the Trustee as part of
the Trust Estate shall be kept invested in Short-Term
Treasuries, and
(2) Notwithstanding the foregoing, such cash shall be
invested by the Trustee in Joint Approval Cash Equivalents if
and to the extent so directed by the Representative and the
Indemnitee's Agent, acting jointly; and
(ii) Such cash and Cash Equivalents shall be invested and
reinvested solely in the name of the Trustee or its nominee.
(b) The Trustee shall be entitled to sell or redeem any such
investment as necessary to make any distributions required under this Agreement
and shall not be liable or responsible for any loss resulting from any such sale
or redemption or from any investment or failure to invest made in accordance
with this Agreement.
(c) Income, if any, resulting from the investment of the
Trust Estate shall be for the account of Lakes, but shall be held as part of the
Trust Estate, subject to the provisions of this Agreement.
5. Payment of Claims.
(a) From time to time on or before the termination of this
Agreement, the Indemnitee's Agent may deliver a notice (a "Notice") to the
Representative and the Trustee specifying in reasonable detail the nature and
dollar amount of any claim (a "Claim") that Company has under the Merger
Agreement and/or the Distribution Agreement; Company may make more than one
Claim with respect to any underlying state of facts. If Representative gives
notice to the Indemnitee's Agent and the Trustee disputing any Claim (a "Counter
Notice") within 15 days following its receipt of the Notice, such Claim shall be
resolved as provided in Section 5(b). Lakes must have a reasonable basis in
giving any such Counter Notice and shall set forth in reasonable detail the
basis of its objection to the Claim in the Counter Notice. If no
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<PAGE> 7
Counter Notice is received by the Trustee within such 15-day period, then (i)
the dollar amount of the Claim, as set forth in the Notice, shall be deemed
established for purposes of this Agreement and the agreement(s) under which the
Claim arose and (ii) at the end of such 15-day period, the Trustee shall pay to
Company the dollar amount claimed in the Notice from the Trust Estate; provided,
however, to the extent that the Trust Estate does not contain sufficient funds
to pay the Claim (after the liquidation of the assets comprising the Trust
Estate), such Claim shall be paid by Trustee to the extent of such funds and the
remaining portion of the Claim shall be paid by Trustee, with no further notice
to or consent required by the Representative, as soon as further deposits are
made by Lakes into the Trust Estate.
(b) If a Counter Notice is received with respect to a Claim,
the parties (other than the Trustee) shall promptly meet and confer and attempt
in good faith to resolve the objection. If they succeed, the parties (other
than the Trustee) shall promptly and jointly notify the Trustee in writing and
the Trustee shall act in accordance with such joint written notice. If the
parties shall not succeed within 5 business days of Company's receipt of the
Counter Notice, they shall, within an additional 10 business days, commence and
thereafter promptly complete an arbitration proceeding in accordance with the
provisions of Section 21 hereof. Thereafter, unless the parties shall otherwise
jointly instruct the Trustee in writing, the Trustee shall make payment with
respect to the Claim, if any, in accordance with the arbitrator's award when
received.
(c) The Trustee (i) shall not be obligated to give any notice
under any of the foregoing provisions in this Section 5 and (ii) shall not be
entitled to object to any Notice given under any such provisions.
6. Termination of Agreement.
(a) This Agreement shall terminate on the date after (i)
Company determines that all known material Indemnification Obligations with
respect to the Polo Plaza Project Liabilities, the Stratosphere Liabilities and
the Tax Liabilities have been completely settled (and with respect to any
settlement subject to court approval, such settlement shall have become final
and non-appealable) and satisfied, (ii) Company determines that no additional
material Indemnification Obligations are reasonably likely to arise out of, or
be asserted with respect to, the Polo Plaza Project Liabilities or the
Stratosphere Liabilities and (iii) Company and Lakes determine that no material
Indemnification Obligations are likely to arise out of, or be asserted with
respect to, any material Tax Liabilities (such date of termination, the
"Termination Date"). As promptly as practical after the Termination Date, the
Trustee shall release any remaining property (after the payment of (A) any and
all taxes owing with respect to the Trust Estate, if any, and (B) all of the
Trustee's fees, expenses and costs) in the Trust Estate to Lakes.
(b) Upon the final distribution of all of the Trust Estate in
accordance with the terms of this Agreement, this Agreement shall terminate,
except that the provisions of Sections 10, 11, 14, 21 and 22 hereof shall
survive such termination.
(c) Notwithstanding the foregoing, the Trustee shall not be
obligated to release or deliver any assets of the Trust Estate pursuant to this
Section 6 except if and to the extent (i) the Trustee receives joint written
instructions from the Representative and the
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<PAGE> 8
Indemnitee's Agent, directing such release or delivery, (ii) the Trustee (x)
receives notice from the Representative directing that such release or delivery
to be made on any date occurring after the Termination Date, (y) has given the
Indemnitee's Agent notice of the Trustee's receipt of such direction from the
Representative, and at least 30 days have elapsed since such notice was given to
the Indemnitee's Agent, and (z) has not received notice of objection to such
release or delivery from the Indemnitee's Agent, or (iii) in accordance with an
arbitrator's award, directing that such release or delivery be made on any date
occurring after the Termination Date, delivered in an arbitration proceeding
conducted in accordance with the provisions of Section 21 hereof.
7. Directions to Trustee. Both prior to and after the occurrence
of any Event of Default, the Trustee shall (subject to Sections 9 and 10 hereof)
cooperate with Company, as Secured Party under the Pledge and Security
Agreement, in its efforts to exercise and enforce its rights and remedies under
the Pledge and Security Agreement in accordance with such instructions as the
Trustee from time to time may receive from Company, so long as such instructions
do not, in the good faith opinion of the Trustee, require it to engage in any
action which would violate any applicable law, regulation, judgment, order or
decree or expose it to liability for which it has not received indemnification
from Company pursuant to Section 11 hereof.
8. Tax Matters. Each party to this Agreement shall provide a
completed IRS Form W-8 or Form W-9 to the Trustee upon request by the Trustee.
9. Duties of the Trustee. The Trustee shall have no duties or
responsibilities other than those expressly set forth in this Agreement and the
Pledge and Security Agreement, and no implied duties or obligations shall be
read into this Agreement or the Pledge and Security Agreement against the
Trustee. The Trustee shall have no duty to enforce any obligation of any
person, other than as provided herein. The Trustee shall be under no liability
to anyone by reason of any breach or failure on the part of any party hereto or
any maker, endorser or other signatory of any document or any other person to
perform such person's obligations under any such document.
10. Liability of the Trustee; Withdrawal.
(a) The Trustee shall not be liable for any action taken or
omitted by it, or any action suffered by it to be taken or omitted, in good
faith (except as provided in the immediately succeeding sentence), and may rely
conclusively and shall be protected in taking or omitting to take any action
based upon any order, notice, demand, certificate, opinion or advice of counsel
(including counsel chosen by the Trustee), statement, instrument, report or
other paper or document (not only as to its due execution and the validity and
effectiveness of its provisions, but also as to the truth and acceptability of
any information therein contained) which is believed by the Trustee to be
genuine and to be signed or presented by the proper person(s). The Trustee
shall not be held liable for any error in judgment made in good faith by an
officer of the Trustee unless it shall be proved that the Trustee was grossly
negligent in ascertaining the pertinent facts or acted intentionally in bad
faith. The Trustee shall not be bound by any notice or demand, or any waiver,
modification, termination or rescission of this Agreement or any of the terms
hereof,
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<PAGE> 9
unless evidenced by a writing delivered to the Trustee signed by the proper
party or parties and, if the duties or rights of the Trustee are affected,
unless it shall give its prior written consent thereto.
(b) Without limitation of any other provision of this
Agreement, the Trustee shall not be responsible for and may conclusively rely
upon and shall be protected, indemnified and held harmless by Lakes or Company,
as the case may be, for the sufficiency or accuracy of the form of, or the
execution, validity, value or genuineness of any document or property received
(from any party), held or delivered by such party hereunder, or of the signature
or endorsement thereon, or for any description therein; nor shall the Trustee be
responsible or liable in any respect on account of the identity, authority or
rights of the persons executing or delivering or purporting to execute or
deliver an document, property or this Agreement.
(c) No provision of this Agreement or the Pledge and Security
Agreement shall require the Trustee to expend or risk its own funds or incur any
liability. The Trustee may refuse to perform any duty or exercise any right or
power hereunder or thereunder unless it receives indemnity reasonably
satisfactory to it against any loss, liability or expense.
(d) The Trustee makes no statement, promise, representation
or warranty whatsoever, and shall have no liability whatsoever, to Company or
its successors or assigns as to the authorization, execution, delivery,
legality, enforceability or sufficiency of this Agreement or the Pledge and
Security Agreement or as to the creation, perfection, priority or enforceability
of any security interest granted, or deemed to be granted, hereunder or
thereunder or as to the existence, ownership, quality, condition, value or
sufficiency of any of the Trust Estate or as to any other matter whatsoever,
except only that the Trustee represents and warrants to the other parties hereto
that (i) it has the right, power and authority, and all required licenses and
consents, to execute, deliver and perform its duties under this Agreement and
the Pledge and Security Agreement, and (ii) this Agreement and the Pledge and
Security Agreement have been duly executed and delivered by it, upon due
authorization, and (without representing as to the legality, binding effect or
sufficiency of any provision herein or therein) are binding upon and legally
enforceable against it, subject to laws generally affecting the enforcement of
creditors' rights and the effect of equitable principles, whether considered in
a court of law or equity.
(e) In the event that the Trustee shall become involved in
any arbitration or litigation relating to the Trust Estate, the Trustee is
authorized to comply with any final, binding and nonappealable decision reached
through such arbitration or litigation.
(f) The Trustee may resign at any time and be discharged from
its duties and obligations hereunder and under the Pledge and Security
Agreement, by giving notice to the other parties. Such resignation shall not
discharge or otherwise effect the Trust Estate or any property comprising part
of the Trust Estate or any beneficial interest therein or the rights, powers and
liens created by or arising under this Agreement and the Pledge and Security
Agreement. Such resignation shall take effect when a successor Trustee has been
appointed by Company and has accepted the trusts herein provided. If a
successor Trustee does not take office
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<PAGE> 10
within 60 days after the retiring Trustee resigns, the retiring Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(g) A successor Trustee shall deliver a written acceptance of
its appointment to Lakes, the retiring Trustee and to Company. Thereupon, the
resignation of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Agreement and all of the rights, powers and liens granted to the Trustee under
the Pledge and Security Agreement. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee provided all sums
owing to the retiring Trustee have been paid.
(h) Notwithstanding the replacement of the Trustee pursuant
to this Section 10, the resigning Trustee shall continue to be entitled to the
rights, immunities and benefits provided under Sections 9, 10, 11 and 21 hereof.
11. Trustee's Fees and Indemnification. All fees (as may from time
to time be agreed in writing by the Trustee and Lakes) and reasonable expenses
and disbursements of the Trustee for its services hereunder and under the Pledge
and Security Agreement, shall be paid by Lakes. Company and Lakes, jointly and
severally, hereby agree to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of the Trustee, including legal or other fees
arising out of or in connection with its entering into this Agreement and the
Pledge and Security Agreement and carrying out its duties hereunder or
thereunder, including the costs and expenses of defending itself against any
claim of liability in the premises or any action for interpleader. The Trustee
shall be under no obligation to institute or defend any action, suit, or legal
proceeding in connection with this Agreement or the Pledge and Security
Agreement, unless first indemnified and held harmless to its satisfaction in
accordance with the foregoing, except that the Trustee shall not be indemnified
against any loss, liability or expense arising out of its bad faith, gross
negligence or willful misconduct. Such indemnity shall survive the termination
or discharge of this Agreement or resignation of the Trustee.
12. Inspection. All funds or other property held as part of the
Trust Estate shall at all times be clearly identified on the Trustee's accounts
as being held by the Trustee hereunder. Any party hereto may at any time during
the Trustee's business hours (with reasonable notice) inspect any records or
reports relating to the Trust Estate.
13. Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given (i) when received if
personally delivered, (ii) when receipt is automatically acknowledged if
transmitted by telecopy, electronic or digital transmission method, (iii) the
day after it is sent, if sent for next day delivery to an address within the
United States and Puerto Rico by recognized overnight delivery service (e.g.
Federal Express), (iv) the third day after it is sent, if sent for next day
delivery to any other address by recognized international delivery service, and
(v) and upon receipt, if sent by certified or registered mail, return receipt
requested. In each case notice shall be sent to:
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<PAGE> 11
(a) If to Lakes or the Representative:
GCI Lakes, Inc.
130 Cheshire Lane
Minnetonka, Minnesota 55305
Attn: Chairman of the Board
Telecopy: (612) 449-8509
with a copy to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attn: Neil I. Sell
Telecopy: (612) 672-8397
(b) If to Company or Indemnitee's Agent:
Grand Casinos, Inc.
3930 Howard Hughes Parkway, 4th Floor
Las Vegas, Nevada 89109
Attn: General Counsel
Telecopy: (702) 699-5179
with a copy to:
(c) If to the Trustee:
14. Non-Exclusive Remedy. Company and Lakes agree and acknowledge
that the Trust Estate shall not be Company's exclusive method of receiving
indemnification from Lakes pursuant to the Agreements and Lakes shall be and
remain in all respects personally liable for all Indemnification Obligations and
each liability may be enforced by any lawful means.
15. Modification: Waiver. Subject to applicable law, this
Agreement may be amended, modified or supplemented, with respect to any of the
terms contained herein, only by
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<PAGE> 12
written agreement of the parties and the rights, remedies, immunities and
benefits created hereby or arising hereunder in favor of any person may be
waived by it only by and instrument in writing signed by it. No such right,
remedy, immunity or benefit shall be deemed waived by reason of such person's
failure to act, oral statements or course of conduct, including any grant of a
waiver on a different or prior occasion.
16. Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the word "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation". This Agreement shall not be construed for or against either party
by reason of the authorship or alleged authorship of any provision hereof or by
reason of the status of the respective parties.
17. Assignment. This Agreement, and the rights, interests and
obligations hereunder, shall not be assigned by Lakes (whether by operation of
law or otherwise) without the prior written consent of Company. Subject to the
foregoing provisions of this Section 17, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
18. Governing Law. This Agreement shall be construed and
interpreted, and the rights of the parties shall be determined, in accordance
with the laws of the State of New York (without reference to the choice of law
provisions).
19. Interest in Trust Estate. Lakes has no interest in the Trust
Estate except only as to any property which has been released from the Trust
Estate and delivered to Lakes after the Termination Date as herein provided,
effective upon such release and delivery.
20. Severability. Each party agrees that, should any court or
other competent authority hold any provision of this Agreement or part hereof to
be null, void or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the remaining provisions
and obligations contained or set forth herein shall not in any way be affected
or impaired thereby. Upon any such holding that any provision of this Agreement
is null, void or unenforceable, the parties will negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated by this Agreement are consummated to the extent possible. Except
as otherwise contemplated by this Agreement, to the extent that a party hereto
took an action inconsistent herewith or failed to take action consistent
herewith or required hereby pursuant to an order or judgment of a court or other
competent authority, such party shall incur no liability unless such party did
not in good faith seek to resist or object to the imposition or entering of such
order or judgment; provided, however, that nothing in this Section 20 shall be
deemed to limit or otherwise modify the Trustee's rights under Sections 10, 11
and 21 hereof.
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<PAGE> 13
21. Arbitration. The parties hereto agree that any dispute,
controversy or disagreement between the parties related to the obligations of
the parties under this Agreement in respect of which resolution cannot be
reached shall be submitted for mediation and final and binding arbitration in
accordance with Section 9.14 of the Distribution Agreement, including Section
9.14(c) thereof regarding the parties' ability to seek specific performance or
injunctive relief thereof.
Notwithstanding anything in the preceding paragraph of this Section
21 to the contrary, the parties shall have the right to submit to a court, in
accordance with the following provisions of this Section 21, (i) any claim
asserted by the Trustee, in its personal capacity, for the payment of fees,
expenses, disbursements or indemnification due to the Trustee under Section 14
hereof (or due under any indemnity given to the Trustee pursuant to Section 14
hereof), (ii) any claim asserted against the Trustee personally, seeking damages
or other relief against the Trustee (and not for purposes of binding the Trust
Estate) based on or relating to any alleged breach of any duty or other
actionable conduct of the Trustee, and (iii) any claim asserted by or against
the Trustee personally (and not for purposes of binding the Trust Estate)
otherwise relating in any manner to the rights, immunities and benefits granted
to the Trustee under Sections 12, 13 and 14 hereof (each of the claims described
in the foregoing clauses (i), (ii) and (iii) is a "Trustee Claim"); and, with
respect to solely to such claims:
(a) No party shall be obligated or entitled to submit any
Trustee Claim to arbitration or be bound by any arbitrator's award that might in
any manner relate to any Trustee Claim;
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO ANY
TRUSTEE CLAIM MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE
UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO CONSENTS, FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THOSE COURTS FOR PURPOSES OF
ADJUDICATION OF ANY TRUSTEE CLAIM. EACH PARTY IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION
OR PROCEEDING IN SUCH JURISDICTION FOR PURPOSES OF ADJUDICATION OF ANY TRUSTEE
CLAIM. SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS MAY BE MADE BY ANY
MEANS PERMITTED BY NEW YORK LAW.
(c) EACH PARTY HERETO WAIVES ALL RIGHTS TO A TRIAL BY JURY OF
ANY TRUSTEE CLAIM AND AGREES THAT ANY TRUSTEE CLAIM SHALL BE TRIED BY A COURT
TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, EACH PARTY FURTHER AGREES
THAT ITS RIGHT TO A TRIAL BY JURY IS HEREBY WAIVED AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE
THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE PLEDGE AND
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<PAGE> 14
SECURITY AGREEMENT OR ANY PROVISION HEREOF OR THEREOF, INSOFAR AS IT MAY CREATE
A DEFENSE TO ANY TRUSTEE CLAIM. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE
PLEDGE AND SECURITY AGREEMENT.
22. Remedies Cumulative. All rights and remedies of each party
hereto are cumulative of each other and of every other right or remedy such
party may otherwise have at law or in equity, 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.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be considered one and the same instrument and
shall become effective when executed and delivered by each of the parties.
24. Specimen Signature. Each person at any time appointed as the
Representative or the Indemnitee's Agent shall present a specimen signature to
the Trustee within a reasonable time.
[Signature page to follow]
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<PAGE> 15
"Company"
GRAND CASINOS, INC.,
a Minnesota corporation
By:_______________________
Name:
Title:
"Lakes"
GCI LAKES, INC,
a Minnesota corporation
By:_______________________
Name:
Title:
"Trustee"
[NAME OF TRUSTEE],
a [national banking association]
By:_______________________
Name:
Title:
<PAGE> 16
EXHIBIT A
AGREEMENT TO PAY
THIS AGREEMENT TO PAY (this "Agreement"), dated as of ___________ ___,
1998, is entered into by and among GCI LAKES, INC., a Minnesota corporation
("Lakes") and [NAME OF TRUSTEE], a [_________________] ("Payee"), in Payee's
capacity as (i) Trustee under that certain Trust Agreement, dated of even date
herewith (the "Trust Agreement"), by and among Lakes, Payee and GRAND CASINOS,
INC., a Minnesota Corporation ("Company") and (ii) a party to that certain
Pledge and Security Agreement, dated of even date herewith (the "Pledge and
Security Agreement") and, together with the Trust Agreement, the
"Indemnification Trust Agreements") among Lakes, and Payee and Company.
In consideration for the consummation of the transactions contemplated by
the Merger Agreement (as defined in the Indemnification Trust Agreements) and
for other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, Lakes hereby agrees to pay to Payee the aggregate sum of
$30,000,000. Such amount shall be payable as follows: (a) $7.5 million in cash
on the first anniversary of the date of this Agreement, (b) an additional $7.5
million in cash on the second anniversary of the date of this Agreement, (c) an
additional $7.5 million in cash on the third anniversary of the date of this
Agreement, and (d) an additional $7.5 million in cash on the fourth anniversary
of the date of this Agreement, payable pursuant to and in accordance with the
Indemnification Trust Agreements.
Capitalized terms used, but not otherwise defined, herein shall have the
meanings set forth in the Merger Agreement.
Each of this Agreement and the payments contemplated hereby is subject and
entitled to the benefits of the Indemnification Trust Agreements, the Merger
Agreement and the Distribution Agreement (as defined in the Indemnification
Trust Agreements), reference to each of which is hereby made for a more
complete statement of the terms and conditions under which the obligations
evidenced hereby are made and are to be paid.
All payments due pursuant to this Agreement shall be made without defense,
set off or counterclaim, in lawful money of the United States of America, and
in same day funds and delivered to Payee in accordance with the terms of the
Indemnification Trust Agreements.
Lakes acknowledges and agrees that Secured Party (as defined in the Pledge
and Security Agreement) is an intended third party beneficiary of this
Agreement. Upon the occurrence of an Event of Default (as defined in the
Pledge and Security Agreement), Secured Party may exercise and enforce each and
all of its rights and remedies under the Pledge and Security Agreement.
<PAGE> 17
THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.
Whenever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision of this
Agreement.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which shall together constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
executed and delivered by its duly authorized officer, as of the day and year
first written above.
"LAKES"
GCI LAKES, INC.,
a Minnesota corporation
By: __________________________
Name:
Title:
"PAYEE"
[__________]
a [__________]
By: __________________________
Name:
Title:
2
<PAGE> 1
EXHIBIT 10.6
PLEDGE AND SECURITY AGREEMENT
This PLEDGE AND SECURITY AGREEMENT (this "Agreement"), dated as of
[__________ ___], 1998, is entered into by GCI LAKES, INC., a Minnesota
corporation ("Debtor"), and [____________], a [_____________], as Trustee under
the Trust Agreement described below ("Trustee"), in favor of Grand Casinos,
Inc., a Minnesota corporation ("Secured Party").
RECITALS
A. Debtor and Secured Party are parties to a Distribution Agreement, dated
as of [__________ ___], 1998, and certain ancillary agreements thereto
(collectively, the "Distribution Agreement").
B. Debtor, Secured Party, Hilton Hotels Corporation, a Delaware
corporation, Gaming Co., Inc., a Delaware corporation, and Gaming Acquisition
Corporation, a Minnesota corporation, are parties to an Agreement and Plan of
Merger, dated as of June 30, 1998 (the "Merger Agreement" and, together with
the Distribution Agreement, the "Agreements").
C. The Agreements provide that Debtor shall indemnify, save and hold
harmless Secured Party and certain of its related parties, with respect to
certain matters upon the terms and subject to the conditions provided in the
respective Agreements and that as security therefor (and not in lieu thereof) a
trust estate shall be established for the protection of Secured Party, its
affiliates and subsidiaries.
D. Pursuant to, and as a condition of, the Merger Agreement, (i) Debtor
and Secured Party have entered into a Trust Agreement with Trustee, as Trustee,
dated as of [__________ ___], 1998 (as from time to time amended, the "Trust
Agreement"), under which Trustee owns and holds in trust, as set forth in the
Trust Agreement, the Trust Estate (as defined in the Trust Agreement), and (ii)
Debtor and Trustee are executing and delivering to Secured Party this
Agreement.
AGREEMENT
In consideration of the foregoing and the mutual promises contained herein
and for other good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, Secured Party and Debtor, intending to be legally
bound, hereby agree as follows:
<PAGE> 2
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1. Trust Agreement Definitions. The following terms shall have
the meanings assigned to them in the Trust Agreement:
"Cash Equivalents"
"Initial Trust Estate"
"Trust Estate"
Section 1.2. U.C.C. Definitions. Where applicable and except as otherwise
expressly provided herein, terms used herein (whether or not capitalized) shall
have the respective meanings assigned to them in the Uniform Commercial Code as
in effect in the State of New York on the date of the Merger Agreement (the
"UCC").
Section 1.3. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"Agreement to Pay" means the agreement to pay an amount of $30,000,000
executed by Debtor in favor of Trustee, which agreement to pay comprises part
of the Trust Estate.
The "Agreements" is defined in Recital B of this Agreement.
This "Agreement" means this Pledge and Security Agreement.
"Cash Collateral Account" means the bank or other account into which cash
portions of the Trust Estate are to be deposited pursuant to and in accordance
with the terms of the Trust Agreement.
"Collateral" is defined in Section 2.1 of this Agreement.
"Collateral Agreement" is defined in Recital B of this Agreement.
"Trust Agreement" is defined in Recital C of this Agreement.
"Debtor" is defined in the Preamble of this Agreement.
"Debtor Collateral" is defined in Section 2.1 of this Agreement.
"Distribution Agreement" is defined in Recital A of this Agreement.
"Event of Default" means any of the following events: (i) Debtor's failure
to pay any Secured Obligation (other than any obligations under the Agreement to
Pay) when due, and such failure continues for five calendar days after either
(A) it is acknowledged in writing by Debtor or (B) such Secured Obligation is
determined to be due and payable in arbitration proceedings conducted in
accordance with Section 21 of the Trust Agreement or by order of a
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court of competent jurisdiction; (ii) Debtor's failure to pay any obligation
under the Agreement to Pay when due (iii) any representation or warranty made by
Debtor in this Agreement proves to have been inaccurate in any material respect
when made, and such inaccuracy continues for 10 calendar days after written
notice thereof is given to Debtor by Secured Party; (iv) Debtor and/or Trustee
fails to perform or observe any term, covenant or agreement contained in the
Trust Agreement or this Agreement, and such failure continues for 10 calendar
days after either (A) it is acknowledged in writing by Debtor or Trustee or (B)
such failure is determined to have occurred and such term, covenant or agreement
is determined to be enforceable in arbitration proceedings conducted in
accordance with Section 21 of the Trust Agreement or by order of a court of
competent jurisdiction; (v) Debtor admits in writing its inability to pay its
debts generally or makes a general assignment for the benefit of creditors; (vi)
any proceeding is instituted by or against Debtor seeking an order for relief
under the United States Bankruptcy Code or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition of
it or its debts or the appointment of a receiver, trustee, custodian or other
similar official for it or for any substantial part of its property under any
law relating to bankruptcy, insolvency, liquidation or reorganization or relief
of debtors and either (A) any such relief in any such proceeding is sought or
consented to by Debtor or an order for any such relief is entered against
Debtor, or (B) any such proceeding instituted against Debtor remains undismissed
and unstayed for a period of 60 calendar days; (vii) Debtor takes any corporate
action to authorize any of the actions described in clause (vi) above; (viii)
any provision of the Trust Agreement or this Agreement for any reason ceases to
be valid and binding on Debtor and/or Trustee in any respect materially adverse
to Secured Party or the holders of Secured Obligations, and a valid and binding
reasonably equivalent substitute is not offered to Secured Party, to be held in
trust as part of the Trust Estate, within 10 calendar days after written notice
thereof is given by Secured Party; (ix) Debtor repudiates or purports to revoke
or terminate, in any material respect, any of its obligations under the Trust
Agreement or this Agreement, and such event continues for 10 calendar days after
written notice thereof is given to Debtor by Secured Party; or (x) this
Agreement for any reason does not create or this Agreement ceases to create a
valid and perfected first priority security interest in any property described
herein as part of the Collateral, and such event continues for 10 calendar days
after written notice thereof is given to Debtor and Trustee by Secured Party.
"Lien" means any mortgage, deed of trust, lien, pledge, charge, security
interest, hypothecation, assignment, deposit arrangement or encumbrance of any
kind in respect of any asset, whether or not filed, recorded or otherwise
perfected or effective under applicable law, as well as the interest of a
vendor or lessor under any conditional sale agreement, capital or finance lease
or other title retention agreement relating to such asset.
"Merger Agreement" is defined in Recital B of this Agreement.
"Proceeds" includes (i) any and all payments, dividends, cash, options,
warrants, rights, instruments and other property of any type or nature at any
time received, receivable or otherwise distributed, voluntarily or
involuntarily, on account of, in respect of or in replacement, substitution or
exchange for any item of Collateral or upon the collection, sale, or other
disposition of any item of Collateral; (ii) any and all insurance or payments
under any indemnity,
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warranty or guaranty now or hereafter payable in respect of any item of
Collateral or any proceeds thereof or any loss relating thereto; (iii) any and
all claims against any person or entity based on or in any respect relating to
or arising from any item of Collateral; (iv) any and all "proceeds" of any
Collateral, as the term "proceeds" is used in the UCC; and (v) any and all
property and interests in property acquired with or in exchange for any of the
foregoing.
"Secured Obligations" means (i) each and all present and future
indemnities, liabilities and obligations of every type and description of
Debtor at any time arising under, pursuant to or in respect of (A) the Merger
Agreement, (B) the Distribution Agreement; (C) this Agreement, or (D) the Trust
Agreement (in each case whether now outstanding or hereafter arising or
incurred, whether sole, joint, several, or joint and several) and (ii) each and
all present and future indemnities, liabilities and obligations of every type
and description of Trustee at any time arising under, pursuant to or in respect
of the Trust Agreement (in each case whether now outstanding or hereafter
arising or incurred, whether sole, joint, several, or joint and several) and,
in each case, all costs and expenses incurred by Secured Party in asserting,
collecting, enforcing or protecting its security interest in any Collateral in
any bankruptcy case or insolvency proceeding to which Debtor may be party and
all collection costs and enforcement expenses incurred by Secured Party in
retaking, holding, preparing for sale, selling or otherwise disposing of or
realizing on any Collateral or otherwise exercising or enforcing any of its
rights or remedies hereunder, together with Secured Party's reasonable
attorneys' fees and disbursements and court costs related thereto.
"Secured Party" means the person identified as such in the preamble of
this Agreement and any of its successors or assigns.
"Securities Act" is defined in Section 6.5 of this Agreement.
"Trustee" means the person identified as such in the preamble of this
Agreement, acting as Trustee under the Trust Agreement, and any successor
Trustee thereunder.
"Trustee Collateral" is defined in Section 2.1 of this Agreement.
ARTICLE II.
SECURITY INTEREST AND COLLATERAL
Section 2.1. Creation of Security Interest.
(a) Debtor Collateral. As security for the due and punctual payment and
performance of each and all of the Secured Obligations, Debtor hereby
irrevocably grants Secured Party a security interest in all right, title and
interest of Debtor, to the extent Debtor has any such right, title or interest,
in, to, under or derived from the following property (collectively, the "Debtor
Collateral"), in each case whether now owned or hereafter acquired by Debtor and
wherever located:
(1) CASH, CASH EQUIVALENTS AND OTHER ASSETS OF THE TRUST ESTATE:
All cash, Cash Equivalents and other property of every type
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and description now or at any time hereafter constituting part of
the Trust Estate or required by the terms of the Trust Agreement to
constitute part of the Trust Estate;
(2) INTEREST IN THE TRUST ESTATE OR UNDER THE TRUST AGREEMENT:
All rights and interests of every type and description, whenever and
however arising, in or to the Trust Estate or in, to or under the
Trust Agreement (including, without limitation, the Agreement to
Pay); and
(3) PROCEEDS: All Proceeds, except Proceeds that have been
released from the Trust Estate and delivered to Debtor pursuant to
the Trust Agreement.
(b) Trustee Collateral. As security for the due and punctual
payment and performance of each and all of the Secured Obligations, Trustee
hereby irrevocably grants Secured Party a security interest in all right, title
and interest of Trustee, in, to, under or derived from the following property
(collectively, the "Trustee Collateral" and, together with the Debtor
Collateral, the "Collateral"), in each case whether now owned or hereafter
acquired by Debtor and wherever located:
(4) CASH, CASH EQUIVALENTS AND OTHER ASSETS OF THE TRUST ESTATE:
All cash, Cash Equivalents and other property of every type and
description now or at any time hereafter constituting part of the
Trust Estate or required by the terms of the Trust Agreement to
constitute part of the Trust Estate;
(5) INTEREST IN THE TRUST ESTATE OR UNDER THE TRUST AGREEMENT:
All rights and interests of every type and description, whenever and
however arising, in or to the Trust Estate or in, to or under the
Trust Agreement (including, without limitation, the Agreement to
Pay); and
(6) PROCEEDS: All Proceeds, except Proceeds that have been
released from the Trust Estate and delivered to Debtor pursuant to
the Trust Agreement.
Section 2.2. Delivery of Instruments; Deposit of Funds. All stock
certificates, notes, bonds, debentures and other instruments, if any,
constituting Collateral shall be delivered to and held by Secured Party, without
any notice from or demand by Secured Party, in each case in suitable form for
transfer by delivery or accompanied by duly executed instruments of transfer or
assignments in blank or with appropriate endorsements, in form and substance
satisfactory to Secured Party. All cash (including Proceeds in the form of
cash) constituting Collateral shall be deposited (in a manner acceptable to
Secured Party) in the Cash Collateral Account, to be held by Secured Party,
without notice from or demand, by Secured Party.
Section 2.3. Further Assurances. Each of Debtor and Trustee will
promptly (and in no event later than five days after request by Secured Party)
execute and deliver, and use its reasonable best efforts to obtain from others,
any and all instruments, certificated securities and documents (including,
without limitation, assignments, transfer documents and transfer
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notices, financing statements and other lien notices), in form and substance
satisfactory to Secured Party, and take all other actions (including, without
limitation, the deposit of funds) which are necessary or, in the good faith
judgment of Secured Party, desirable or appropriate to create, perfect, protect,
or enforce Secured Party's security interests in the Collateral, to enable
Secured Party to exercise and enforce its rights and remedies hereunder with
respect to any Collateral, to protect the Collateral against the rights, claims
or interests of third persons, or to effect or to assure further the purposes
and provisions of this Agreement, and Debtor will pay all costs related thereto
and all reasonable expenses incurred by Secured Party in connection therewith.
Section 2.4. Survival of Security Interest. Except as otherwise required
by law, the security interest granted hereby shall, except as to property
released from the Trust Estate and delivered to or for account of Debtor by
Trustee pursuant to, and in accordance with, the Trust Agreement, (i) remain
enforceable as security for any and all Secured Obligations, whether now
outstanding or created or incurred at any future time, until all of the Secured
Obligations have been indefeasibly paid, retired and discharged in full, and
(ii) survive any sale, exchange or other disposition by Debtor or Trustee of its
interest in any Collateral and remain enforceable against each transferee and
subsequent owner of such interest (to the fullest extent permitted under
applicable law), even if such sale, exchange or other disposition is permitted
at the time under the Trust Agreement.
Section 2.5. Reinstatement. If at any time any payment on any Secured
Obligation is set aside, avoided, or rescinded or must otherwise be restored or
returned, this Agreement and the security interest created hereby shall remain
in full force and effect and, if previously released or terminated, shall be
automatically and fully reinstated, without any necessity for any act, consent
or agreement of Debtor, as fully as if such payment had never been made and as
fully as if any such release or termination had never become effective.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Section 3.1. Representations and Warranties. Each of Debtor and Secured
Party represents and warrants, severally and not jointly, that with respect to
itself only:
(a) Debtor's chief executive office is located in Hennepin County,
Minnesota. Trustee's chief executive office is located in __________,
__________.
(b) It at all times is (or, as to any item of Collateral acquired after
the date hereof, will be) the sole legal and beneficial owner of all Collateral
reflected on its books and records as belonging to it and has exclusive
possession and control thereof free and clear of any and all Liens, subject to
the Trust Agreement and this Agreement and the interests, possession and control
granted thereunder. No financing statement, notice of lien, mortgage, deed of
trust or instrument similar in effect covering the Collateral, any portion
thereof, or any proceeds thereof, exists or is on file in any public office,
except as may have been filed in favor of Secured Party.
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(c) Except for the UCC, neither it nor any Collateral purported to
be granted by it is subject to any requirement of law or contractual obligation
which prohibits, restricts, or limits the execution, delivery or performance of
this Agreement or the creation, perfection or enforcement of the security
interest purported to be created hereby.
(d) Debtor's United States federal taxpayer identification number
is: [__________]. Trustee's United States federal taxpayer identification
number is: [__________].
(e) It is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction in which it is organized and is
duly qualified to do business and in good standing in each jurisdiction where
its assets are located or its operations are conducted, except where the failure
to be so qualified could not reasonably be expected to cause a change that would
be material and adverse to it or to Secured Party's rights under this Agreement.
(f) It has the corporate power to execute, deliver and perform
its obligations under the Trust Agreement and this Agreement.
(g) Its execution, delivery and performance of each of the Trust
Agreement and this Agreement (i) have been duly authorized by all necessary
action of its board of directors, (ii) do not contravene its certificate or
articles of incorporation or by-laws or any other governing document, and (iii)
do not and will not result in or require the creation of any Lien (other than
pursuant to the Trust Agreement and this Agreement) upon any of its property or
assets.
(h) No authorization or approval or other action by, and no notice
to or filing with, any governmental officer, department, agency or authority is
required for the due execution, delivery and performance by it of each of the
Trust Agreement and this Agreement, except the filing of required financing
statements, if any, to perfect Secured Party's security interest which have been
duly filed.
(i) Each of the Trust Agreement and this Agreement is a legal,
valid and binding obligation of it, enforceable against it in accordance with
its respective terms, subject to applicable laws generally affecting the
enforcement of creditors' rights.
(j) Its execution, delivery and performance of each of the Trust
Agreement and this Agreement (i) does and will comply with all applicable laws,
(ii) does and will comply with, and does not and will not conflict with,
constitute a breach of or give rise to any Lien, default, event of default or
other adverse consequence under, any note, indenture, undertaking, agreement or
other contractual obligation that is binding upon Debtor or secured by or
enforceable against any property of Debtor, except for such conflicts, breaches,
Liens, defaults, events of default or other adverse consequences that could not,
individually or in the aggregate, have a material adverse effect on Debtor or,
with respect to the Secured Party, on Secured Party's rights under this
Agreement.
(k) Secured Party holds an enforceable and perfected first Lien in
the Collateral. No other Liens are outstanding against the Collateral.
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ARTICLE IV.
COVENANTS
Section 4.1. Covenants. Each of Debtor and Trustee covenants and agrees
that so long as the security interest created hereby remains outstanding and/or
so long as required by the Trust Agreement:
(a) As and when required by the Trust Agreement, it will (i) deliver to
Secured Party each instrument and certificated security included in the
Collateral as set forth in Article II and (ii) deposit in the Cash Collateral
Account all cash (including Proceeds in the form of cash) constituting
Collateral included in the Collateral as set forth in Article II or required to
be deposited or otherwise delivered to the Secured Party pursuant to the terms
of this Agreement or the Trust Agreement.
(b) It will (i) notify, in a reasonably prompt manner, the Secured Party
of any change in its name, identity or corporate structure, or in the location
of its chief executive office, or (ii) not keep any tangible Collateral or any
records relating to any Claim owned by it, or permit or suffer any such
Collateral or records to be moved, to any other location unless (in each case)
an appropriate financing statement has been filed in the proper office and in
the proper form, and all other requisite actions have been taken, to perfect or
continue the perfection (without loss of priority) of Secured Party's security
interest in the Collateral.
(c) It will defend, at Debtor's expense, the Collateral against all claims
and demands of all persons at any time claiming the same or any interest
therein.
(d) It will not encumber, sell, exchange or otherwise dispose of any item
of Collateral or any interest therein, or permit or suffer any such item to be
encumbered, sold, exchanged or otherwise disposed of, unless (i) such action is
permitted at the time under the Trust Agreement and (ii) it makes all payments
on account of the Secured Obligations required to be made therefrom, or in
exchange or substitution therefor, and it takes all other actions required to be
taken in connection therewith, under the Trust Agreement.
(e) Secured Party is hereby authorized to file one or more financing
statements or fixture filings, and continuations thereof and amendments thereto,
relative to all or any part of the Collateral, without the signature of Debtor
or Trustee where permitted by law. A copy of this Agreement may be filed as a
financing statement wherever permitted by law.
(f) Secured Party may at any time (but shall not be obligated to) (i)
perform any of the obligations of Debtor or Trustee under this Agreement if
Debtor or Trustee fails to perform such obligation within five calendar days
after written demand by Secured Party and (ii) make any payments and do any
other acts Secured Party may deem necessary or desirable to protect its security
interest in the Collateral, including, without limitation, the right to pay,
purchase, contest or compromise any Lien that attaches or is asserted against
any Collateral and to appear in and defend any action or proceeding relating to
the Collateral, and Debtor will promptly reimburse Secured Party for all
payments made by Secured Party in doing so, together
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with interest thereon at the judgment rate and all costs and expenses related
thereto as set forth in Section 9.10.
ARTICLE V.
INTEREST AND DISTRIBUTIONS
Section 5.1. Distributions and Payments. Trustee shall be entitled to
hold as part of the Trust Estate, subject to the Trust Agreement, all income,
interest or distributions from cash, Cash Equivalents and all Proceeds, provided
that such income, interest or distributions shall be pledged as Collateral
hereunder.
ARTICLE VI.
DEFAULTS AND REMEDIES
Section 6.1. Remedies. Upon and at any time after the occurrence of any
Event of Default, and from time to time on each occasion when an Event of
Default has occurred and is continuing, Secured Party may exercise and enforce
each and all of the rights and remedies available to a secured party upon
default under the UCC or other applicable law.
(a) Secured Party may cause any or all instruments or investment
securities, if any, constituting part of the Trust Estate to be transferred into
Secured Party's name and exercise and enforce any or all of the rights,
interests, privileges and remedies of a holder against the issuer thereof, as
freely and fully as if Secured Party were the absolute owner but as a secured
party and as part of the Trust Estate.
(b) Secured Party may sell or otherwise dispose of any or all of the
Collateral or any part thereof in one or more parcels and from time to time in
any quantity or portion and on any number of occasions, at a public sale or in a
private sale or transaction, on any exchange or market or at Secured Party's
offices or at any other location, for cash, on credit or for future delivery,
and may enter into all contracts necessary or appropriate in connection
therewith, without any notice whatsoever unless required by law.
(c) Debtor agrees that at least 10 calendar days' written notice to Debtor
of the time and place of any public sale or the time after which any private
sale is to be made shall be commercially reasonable. The giving of notice of
any such sale or other disposition shall not obligate Secured Party to proceed
with the sale or disposition, and any such sale or disposition may be postponed
or adjourned from time to time, without further notice.
Section 6.2. Remedies Cumulative. Secured Party may exercise and
enforce each right and remedy available to it upon the occurrence of an Event of
Default either before or concurrently with or after, and independently of, any
exercise or enforcement of any other right or remedy of Secured Party or any
holder of any Secured Obligation against any person, entity or property. All
such rights and remedies shall be cumulative, and no one of them shall exclude
or preclude any other.
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Section 6.3. Surplus: Deficiency. Any surplus proceeds of any sale or
other disposition of Collateral by Secured Party remaining after all the Secured
Obligations are indefeasibly paid in full and discharged shall be paid over to
Debtor or to whomever may be lawfully entitled to receive such surplus or as a
court of competent jurisdiction may direct, except that if any contingent,
unliquidated or unmatured Secured Obligation then remains outstanding, such
surplus proceeds may be retained by Secured Party and held as Collateral until
such time as all outstanding Secured Obligations have been determined,
liquidated and indefeasibly paid in full and discharged. Debtor shall be and
remain liable for any deficiency.
Section 6.4. No Recourse to Trustee. As to Trustee only (without in any
way affecting Secured Party's rights as to Debtor), upon and Event of Default,
Secured Party shall look solely to the Collateral, and not to Trustee's other
assets or property, for relief and Secured Party shall have no recourse to any
of Trustee's other assets or property.
ARTICLE VII.
THE SECURED PARTY
Section 7.1. No Liability. Secured Party makes no statement, promise,
representation or warranty whatsoever, and shall have no liability whatsoever,
to any holder of any Secured Obligations as to the authorization, execution,
delivery, legality, enforceability or sufficiency of this Agreement or as to the
creation, perfection, priority or enforceability of any security interest
granted hereunder or as to the existence, ownership, quality, condition, value
or sufficiency of any Collateral or as to any other matter whatsoever.
Section 7.2. Holders Bound. Except where the consent of others may be
required pursuant to the express provisions of the Trust Agreement, any
modification, amendment, waiver, termination or discharge of any security
interest, right, remedy, power or benefit conferred upon Secured Party hereby
that is effectuated in a writing signed by Secured Party shall be binding upon
all holders of Secured Obligations if it is authorized in the Trust Agreement.
Section 7.3. Duty of Care. Neither Secured Party nor any director,
officer, employee, attorney or agent of Secured Party shall be obligated to care
for the Collateral hereunder or to collect, enforce, vote, or protect the
Collateral or any rights or interests of Debtor related thereto or to preserve
or enforce any rights which Debtor or any other Person may have against any
third party, except only that Secured Party shall exercise reasonable care in
physically safekeeping any item of Collateral that was delivered into Secured
Party's possession. Secured Party shall be deemed to have exercised such
reasonable care if the Collateral is accorded treatment substantially equal to
that which Secured Party accords to its own property or if it selects, with
reasonable care, a custodian or agent to hold such Collateral for Secured
Party's account.
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ARTICLE VIII.
EXONERATION AND WAIVERS
Section 8.1. Rights and Interests Not Prejudiced, Affected or Impaired.
None of (i) the security interests granted hereby, (ii) the trusts and interests
created under the Trust Agreement, (iii) any power, privilege, right or remedy
of Secured Party relating thereto, or (iv) the beneficial interest of Secured
Party and other holders of Secured Obligations therein and thereunder shall at
any time in any way be prejudiced, affected or impaired by any act or failure to
act on the part of Debtor or by any act or failure to act on the part of Trustee
or Secured Party or any other holder of Secured Obligations or by any breach or
default by any of them in the performance or observance of any promise, covenant
or obligation enforceable by Debtor, regardless of any knowledge thereof that
Trustee or Secured Party or any such other holder may have or otherwise be
charged with.
(a) Without in any way limiting the generality of the foregoing, Secured
Party and each other holder of any Secured Obligations may at any time and from
time to time without incurring any responsibility or liability to Debtor or
Trustee and without in any manner prejudicing, affecting or impairing any such
security interest, trust, interest, power, privilege, right or remedy or the
obligations of Debtor or Trustee to Secured Party and the other holders of
Secured Obligations:
(i) Make loans and advances to Debtor, or issue, guaranty or
obtain letters of credit for account of Debtor or otherwise extend
credit to Debtor, in any amount and without any limitation or
restriction whatsoever, on any terms, whether pursuant to a
commitment or as a discretionary advance and whether or not any
default or Event of Default or failure of condition is then
continuing;
(ii) Change the manner, place or terms of payment or extend
the time of payment of, or renew or alter, compromise, accelerate,
extend, refinance, release or discharge, any Secured Obligation or
any other indebtedness or liability of Debtor or Trustee or any
agreement, guaranty, lien or obligation of Debtor or Trustee or any
other person or entity in any manner related thereto, or otherwise
amend, supplement or change in any manner any Secured Obligation or
any such indebtedness or liability or any such agreement, guaranty,
lien or obligation;
(iii) In any manner modify, transform, change, refinance,
replace, reclassify, subordinate or recharacterize any such
indebtedness or liability;
(iv) Without the consent of or notice to Debtor or Trustee,
release or discharge any guaranty or any other Lien, right, remedy
or claim against any person or entity;
(v) Without the consent of or notice to Debtor or Trustee,
take or fail to take any collateral security for any Secured
Obligation or take or fail to
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take any action which may be necessary or appropriate to ensure that
any lien upon any property securing any Secured Obligation is duly
enforceable or perfected or entitled to priority as against any
other Lien or to ensure that any proceeds of any property subject to
any Lien are applied to the payment of any Secured Obligation;
(vi) Without the consent of or notice to Debtor or Trustee,
release, discharge or permit the lapse of any or all Liens upon any
property at any time securing any Secured Obligation;
(vii) Without the consent of or notice to Debtor or Trustee
(except as required by applicable law), exercise or enforce, in any
manner, order or sequence, or fail to exercise or enforce, any
right or remedy against Debtor or Trustee or in respect of the
Collateral or the Trust Estate or any other collateral security or
any other person, entity or property in respect of any Secured
Obligation or Lien securing any Secured Obligation or any right
under this Agreement or the Trust Agreement; or
(viii) Without the consent of or notice to Debtor or Trustee,
sell, exchange, release, foreclose upon or otherwise deal with any
property that may at any time be subject to any Lien securing any
Secured Obligation.
(b) No exercise, delay in exercising or failure to exercise any
right arising under this Agreement or the Trust Agreement, no act or omission of
Secured Party or any other holder of any Secured Obligation in respect of Debtor
or any other person or entity or the Collateral or the Trust Estate or any other
collateral security for any Secured Obligation or any right arising under this
Agreement or the Trust Agreement, no change, impairment, or suspension of any
right or remedy of Secured Party or any other holder of any Secured Obligation,
and no other act, failure to act, circumstance, occurrence or event which, but
for this provision, would or could act as a release or exoneration of the
obligations of Debtor or Trustee shall in any way affect, decrease, diminish or
impair any of the obligations of Debtor or Trustee under this Agreement or give
Debtor or any other person or entity any recourse or defense against Secured
Party or any other holder of Secured Obligations in respect of any security
interest, trust, interest, power, privilege, right or remedy arising under this
Agreement or the Trust Agreement.
ARTICLE IX.
MISCELLANEOUS PROVISIONS
Section 9.1. Notices. All notices, requests, approvals, consents and
other communications required or permitted to be made hereunder shall, except as
otherwise provided, be given in the manner specified and to the addresses set
forth in Section 13 of the Trust Agreement.
Section 9.2. Headings. The various headings in this Agreement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Agreement or any provision hereof.
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Section 9.3. Changes. This Agreement or any provision hereof may be
changed, waived, or terminated only by a statement in writing signed by the
party against which such change, waiver or termination is sought to be enforced.
Any such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
Section 9.4. Debtor Remains Liable. Debtor shall remain liable under all
contracts and agreements, if any, included in the Collateral to the extent set
forth therein to perform all of its duties and obligations thereunder to the
same extent as if this Agreement had not been executed. The exercise or
enforcement by Secured Party of any of its rights and remedies under this
Agreement or in respect of the Collateral shall not release Debtor from any of
its duties or obligations under any such contracts or agreements. Neither
Secured Party nor Trustee shall be obligated to perform any such duties or
obligations or shall be liable for any breach thereof.
Section 9.5. No Waiver. No failure by Secured Party to exercise, or
delay by Secured Party in exercising, any power, right or remedy under this
Agreement shall operate as a waiver thereof. No waiver by Secured Party shall
be effective unless given in a writing signed by it. No waiver so given shall
operate as a waiver in respect of any other matter or in respect of the same
matter on a future occasion. Acceptance of or acquiescence in a course of
performance in respect of this Agreement shall not waive or affect the
construction or interpretation of the terms of this Agreement even if the
accepting or acquiescing party had knowledge of the nature of the performance
and opportunity for objection.
Section 9.6. Entire Agreement. This Agreement and the Trust Agreement
are intended by the parties as a final expression of their agreement and a
complete and exclusive statement of the terms and conditions related to the
subject matter thereof.
Section 9.7. Severability. If any provision of this Agreement is
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions hereof, or of such provision in
any other application, shall not be in any way affected or impaired thereby and
such other provisions and applications shall be enforceable to the fullest
extent lawful.
Section 9.8. Power of Attorney. Each of Debtor and Trustee hereby
appoints and constitutes Secured Party or any delegate, nominee or agent acting
for Secured Party as Debtor's and Trustee's attorney-in-fact with the power and
authority (but not the duty), in the name of Debtor or Trustee or in the name
of Secured Party or such delegate, nominee or agent, to (i) execute, deliver and
file such financing statements, agreements, deeds and writings as Debtor or
Trustee is required to execute, deliver or file hereunder, (ii) endorse, collect
or transfer any item of Collateral which Debtor or Trustee is required to
endorse, collect or transfer hereunder or which Secured Party is permitted to
endorse, collect or transfer hereunder, (iii) make any payments or take any
action under Section 2.3 or Section 4.1(f), (iv) take any other action required
of Debtor or Trustee or permitted to Secured Party hereunder, and (v) take any
action reasonably necessary or incidental to any of the foregoing. This power
of attorney is coupled
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with an interest and is irrevocable as to Debtor and Trustee. Secured Party
shall have no duty whatsoever to exercise any power herein granted it.
Section 9.9. Counterparts. This Agreement and any amendments, waivers,
consents or supplements may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original, but all of
which shall together constitute one and the same agreement.
Section 9.10. Costs and Expenses; Indemnification. Debtor hereby agrees
(i) to pay or reimburse Secured Party for all reasonable costs and expenses
(including, without limitation, reasonable attorneys' fees and disbursements and
court costs) incurred in connection with or as a result of the exercise or
enforcement by Secured Party of any right or remedy available to it or the
protection or enforcement of Secured Party's interest in the Collateral in any
bankruptcy case or insolvency proceeding and (ii) to indemnify Secured Party
for, and defend and hold it harmless against, any loss, liability or expense
incurred by it in connection with its entering into this Agreement or carrying
out any of its duties or exercising any of its rights hereunder, on the terms
and subject to the limitations set forth in Section 11 of the Trust Agreement.
Section 9.11. GOVERNING LAW; ARBITRATION; LIMITATION OF LIABILITY; WAIVER
OF BOND.
(a) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED
UNDER THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE
PERFECTION OF THE SECURITY INTERESTS HEREUNDER IN RESPECT OF ANY PARTICULAR
COLLATERAL IS GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW
YORK.
(b) ARBITRATION. The parties hereto agree that any dispute, controversy
or disagreement between the parties related to the obligations of the parties
under this Agreement in respect of which resolution cannot be reached shall be
submitted for mediation and final and binding arbitration in accordance with
Section 9.14 of the Distribution Agreement, including Section 9.14(c) thereof
regarding the parties' ability to seek specific performance or injunctive relief
thereof.
(c) LIMITATION OF LIABILITY. NO CLAIM MAY BE MADE BY DEBTOR OR TRUSTEE
AGAINST SECURED PARTY OR THE AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES,
ATTORNEYS OR AGENTS OF SECURED PARTY FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR
PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM (WHETHER BASED UPON BREACH OF CONTRACT,
TORT, BREACH OF STATUTORY DUTY OR ANY OTHER THEORY OF LIABILITY) ARISING OUT OF
OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, AND DEBTOR HEREBY WAIVES,
RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER OR
NOT NOW
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ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR.
(d) WAIVER OF BOND. EACH OF DEBTOR AND TRUSTEE WAIVES THE POSTING OF ANY
BOND OTHERWISE REQUIRED OF SECURED PARTY IN CONNECTION WITH THE ENFORCEMENT OF
ANY OF ITS REMEDIES HEREUNDER, INCLUDING, WITHOUT LIMITATION, ANY ORDER OR WRIT
FOR REPLEVIN OR DELIVERY OF POSSESSION OF ANY COLLATERAL.
Section 9.12. Successors and Assigns. This Agreement is binding upon and
enforceable against Debtor and its successors and assigns. This Agreement is
binding upon and enforceable against Trustee and its successors and assigns.
This Agreement shall inure to the benefit of and may be enforced by Secured
Party and its successors and assigns and each and every other person or entity
which at any time holds or is entitled to enforce any of the Secured Obligations
and each of their respective heirs, representatives, successors and assigns.
Trustee reserves the right to resign as Trustee under the Trust Agreement, in
the manner and with the effect set forth in Section 10(f) and 10(g) thereof.
[signature page to follow]
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IN WITNESS WHEREOF, the parties have caused this Pledge and Security
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.
"DEBTOR"
GCI LAKES, INC., a Minnesota corporation
By:_________________________
Name:
Title:
"SECURED PARTY"
GRAND CASINOS, INC., a Minnesota
corporation
By:_________________________
Name:
Title:
"TRUSTEE"
[_________], a [__________],
as Trustee
By:_________________________
Name:
Title:
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