-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DV3ePGde2Zcz/rlr3olPwES3QqSOEHYC5Pwh6a4zRRytdR/zhyp7HJIS/I5nfTFE OXoDSPI3Ftj1zio6oOFpDQ== 0000950117-98-001879.txt : 19981021 0000950117-98-001879.hdr.sgml : 19981021 ACCESSION NUMBER: 0000950117-98-001879 CONFORMED SUBMISSION TYPE: S-11 PUBLIC DOCUMENT COUNT: 30 FILED AS OF DATE: 19981020 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EL CONQUISTADOR PARTNERSHIP LP CENTRAL INDEX KEY: 0001070648 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 061288145 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11 SEC ACT: SEC FILE NUMBER: 333-65889 FILM NUMBER: 98727924 BUSINESS ADDRESS: STREET 1: 1000 EL CONQUISTADOR AVE CITY: FAJARDO STATE: PR ZIP: 00738 BUSINESS PHONE: 7877912000 MAIL ADDRESS: STREET 1: 1000 EL CONQUISTADOR AVE CITY: FAJARDO STATE: PR ZIP: 00738 S-11 1 EL CONQUISTADOR PARTNERSHIP L.P. S-11 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1998 REGISTRATION NO. 333- ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ EL CONQUISTADOR PARTNERSHIP L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS) ------------------------ EL CONQUISTADOR RESORT & COUNTRY CLUB 1000 EL CONQUISTADOR AVENUE FAJARDO, PUERTO RICO 00738 (787) 863-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ NOEL VERA-RAMIREZ WYNDHAM RESORTS 6063 EAST ISLA VERDE AVENUE CAROLINA, PUERTO RICO 00979 (787) 791-2000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JAIME E. SANTOS, ESQ. JULIO L. AGUIRRE, ESQ. PAMELA E. FLAHERTY, ESQ. JULIO PIETRANTONI, ESQ. PIETRANTONI MENDEZ & ALVAREZ FIDDLER GONZALEZ & RODRIGUEZ, LLP SHACK & SIEGEL, P.C. McCONNELL VALDES BANCO POPULAR CENTER, SUITE 1901 254 MUNOZ RIVERA AVENUE 530 FIFTH AVENUE 270 MUNOZ RIVERA AVENUE SAN JUAN, PUERTO RICO 00918 SAN JUAN, PUERTO RICO 00918 NEW YORK, NEW YORK 10036 SAN JUAN, PUERTO RICO 00918
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] - ---------------------------------------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION TITLE OF SECURITIES BEING REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE Undivided interests in the Loan Agreement between Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority ('AFICA') and Registrant relating to certain AFICA tourism development bonds.............................. $100,000,000 $5,000 $100,000,000 $ 29,500
(1) Estimated solely for the purpose of calculating the registration fee. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ________________________________________________________________________________ CROSS REFERENCE SHEET
CAPTION IN OFFICIAL STATEMENT AND ITEM AND CAPTION IN FORM S-11 PROSPECTUS --------------------------------------------------------------- ------------------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........................................... Front Cover Page of Registration Statement and Outside Front Cover Page of Official Statement and Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus........ Inside Front Cover Page of Official Statement and Prospectus and Outside Back Cover Page of Official Statement and Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges................................................ Summary, Risk Factors and Selected Financial Data 4. Determination of Offering Price................................ Not applicable 5. Dilution....................................................... Not applicable 6. Selling Security Holders....................................... Not applicable 7. Plan of Distribution........................................... Underwriting 8. Use of Proceeds................................................ Use of Proceeds 9. Selected Financial Data........................................ Selected Financial Data 10. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ Management's Discussion and Analysis of Financial Condition and Results of Operations 11. General Information as to Registrant........................... The Resort and The Partnership 12. Policy with Respect to Certain Activities...................... The Resort, The Partnership and Policies with Respect to Certain Activities 13. Investment Policies of Registrant.............................. Investment Objectives and Policies 14. Description of Real Estate..................................... The Resort 15. Operating Data................................................. The Resort 16. Tax Treatment of Registrant and its Security Holders........... The Bonds and Tax Matters 17. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.............................. Not applicable 18. Description of Registrant's Securities......................... The Bonds 19. Legal Proceedings.............................................. Legal Proceedings 20. Security Ownership of Certain Beneficial Owners and Management................................................... Security Ownership of Certain Beneficial Owners and Management 21. Directors and Executive Officers............................... Management of the Partnership 22. Executive Compensation......................................... Management of the Partnership 23. Certain Relationships and Related Transactions................. Certain Relationships and Related Transactions and The Partnership 24. Selection, Management and Custody of Registrant's Investments.................................................. The Resort and The Partnership 25. Policies with Respect to Certain Transactions.................. The Partnership and Policies with Respect to Certain Transactions 26. Limitations of Liability....................................... The Partnership 27. Financial Statements and Information........................... Financial Statements 28. Interests of Named Experts and Counsel......................... Not applicable 29. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................... Management of the Partnership and Underwriting 30. Quantitative and Qualitative Disclosures about Market Risk..... Not applicable
THE INFORMATION IN THIS OFFICIAL STATEMENT AND PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS OFFICIAL STATEMENT AND PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE OR JURISDICTION WHERE THE OFFER IS NOT PERMITTED. PRELIMINARY OFFICIAL STATEMENT AND PROSPECTUS DATED OCTOBER 20, 1998 SUBJECT TO COMPLETION AND AMENDMENT PUERTO RICO INDUSTRIAL, TOURIST, EDUCATIONAL, MEDICAL AND ENVIRONMENTAL CONTROL FACILITIES FINANCING AUTHORITY ('AFICA') TOURISM REVENUE BONDS, 1998 SERIES A (EL CONQUISTADOR RESORT PROJECT) - ---------------------------------------------------------- TERMS OF SALE The final pricing of the bonds is shown on the inside cover page of this Official Statement and Prospectus. For more detail, see 'THE BONDS.' Out of total gross proceeds of $100,000,000*, El Conquistador Partnership L.P. will receive $ (before the payment of offering expenses), and the underwriter will retain the balance of $ as an underwriting discount. The following terms will apply to the bonds when issued: The bonds will be issued in denominations which are multiples of $5,000. Interest will be a fixed rate ranging from % to %, depending upon the maturity date of the bond. The bonds will be due on varying dates as set forth on the inside cover. El Conquistador Partnership L.P. expects that Moody's Investors Service, Inc. will rate the bonds 'Baa2.' Interest on the bonds will accrue from the date the bonds are issued and will be payable monthly on the first day of each month, commencing , 1999. The bonds are subject to mandatory and optional redemption. The bonds are limited obligations of AFICA payable solely from moneys paid to AFICA by El Conquistador Partnership L.P. under a loan agreement between AFICA and El Conquistador Partnership L.P. The bonds are secured by a first mortgage on El Conquistador Resort & Country Club and a first priority security interest on the personal property of El Conquistador Partnership L.P. - ---------------------------------------------------------- TAX RAMIFICATIONS OF THE BONDS AND THE INTEREST ON THE BONDS Provided El Conquistador Partnership L.P. complies with certain terms of its loan agreement with AFICA, it is the opinion of bond counsel that the bonds and the interest on the bonds are exempt from or not subject to: (1) Puerto Rico income taxes and municipal property and license taxes, (2) under certain circumstances, Puerto Rico gift and estate taxes, and (3) United States income tax when received by: (a) individuals who are bona fide residents of Puerto Rico during the entire taxable year in which such interest is received, or (b) under certain circumstances, foreign corporations, including Puerto Rico corporations. CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 9 IN THIS OFFICIAL STATEMENT AND PROSPECTUS. - ---------------------------------------------------------- THE EL CONQUISTADOR PARTNERSHIP L.P. AND AFICA DO NOT INTEND TO APPLY FOR LISTING OF THE BONDS ON A SECURITIES EXCHANGE. THERE IS CURRENTLY NO SECONDARY MARKET FOR THE BONDS. THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET WILL DEVELOP, OR IF IT DOES DEVELOP, THAT IT WILL PROVIDE YOU WITH LIQUIDITY FOR YOUR INVESTMENT OR THAT IT WILL CONTINUE FOR THE LIFE OF THE BONDS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION OR THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS OFFICIAL STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ---------------------------------------------------------- CITICORP FINANCIAL SERVICES CORPORATION , 1998 ------------ * Preliminary, subject to change. $100,000,000* PUERTO RICO INDUSTRIAL, TOURIST, EDUCATIONAL, MEDICAL AND ENVIRONMENTAL CONTROL FACILITIES FINANCING AUTHORITY TOURISM REVENUE REFUNDING BONDS, 1998 SERIES A (EL CONQUISTADOR RESORT PROJECT) $ Serial Bonds Issued as Follows:
PRINCIPAL INTEREST AMOUNT RATE MATURITY DATE PRICE - ---------- -------- --------------------------------- ----- $ % , 2002 100.0% $ % , 2002 100.0% $ % , 2003 100.0% $ % , 2003 100.0% $ % , 2004 100.0% $ % , 2004 100.0% $ % , 2005 100.0% $ % , 2005 100.0% $ % , 2006 100.0% $ % , 2006 100.0% $ % , 2007 100.0% $ % , 2007 100.0% $ % , 2008 100.0% $ % , 2008 100.0%
$ Term Bonds, Issued as Follows:
PRINCIPAL INTEREST AMOUNT RATE MATURITY DATE PRICE - ---------- -------- --------------------------------- ----- Term Bonds Due , $ % 2013 100.0% Term Bonds Due , $ % 2018 100.0% Term Bonds Due , $ % 2023 100.0% Term Bonds Due , $ % 2023 100.0%
- ------------ * Preliminary, subject to change TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION.......................... 1 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS................................... 1 SUMMARY........................................ 2 The Bonds................................. 2 The Resort................................ 3 The Manager............................... 4 The Partnership........................... 4 Risk Factors.............................. 4 Tax Matters............................... 5 Rating.................................... 5 Underwriter............................... 5 Continuing Disclosure..................... 6 Effect of Hurricane Georges............... 6 Summary Financial Information............. 7 RISK FACTORS................................... 9 Payment Risks............................. 9 Hotel Industry Risks...................... 10 Uncontrollable Events..................... 11 Real Estate Investment Risks.............. 12 Dependence on the Hotel Operator and Potential Conflicts of Interest Between the Partnership and the Hotel Operator................................ 13 Risks of Operating a Hotel under a Brand Affiliation............................. 14 Tourism Tax Exemptions.................... 14 Casino Gaming Regulation.................. 15 Dependence on Key Personnel............... 15 Competition............................... 15 Reliance on Single Market................. 15 Absence of Secondary Market for the Bonds; Rating Maintenance...................... 16 USE OF PROCEEDS................................ 17 THE RESORT..................................... 18 General................................... 18 Access.................................... 19 Casino Credit Policy...................... 20 Government Regulation and Licensing....... 20 Seasonality............................... 20 Competition............................... 20 Employees................................. 21 Property.................................. 21 Management and Marketing of the Resort.... 22 Golden Door'r' Spa........................ 24 Las Casitas Village Arrangements.......... 24 THE PARTNERSHIP................................ 24 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS............................ 25 PAGE ---- MANAGEMENT OF THE PARTNERSHIP.................. 28 Executive Officers of the Partnership..... 28 Officers and Directors of the Managing General Partner......................... 29 Compensation of Executive Officers of the Partnership............................. 29 Limitations on the Liability of Affiliated Persons................................. 30 SELECTED FINANCIAL DATA........................ 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 33 General................................... 33 Results of Operations..................... 33 Financial Condition....................... 35 Taxes..................................... 36 Inflation................................. 37 Seasonality............................... 37 Recent Developments....................... 37 Impact of Year 2000....................... 37 LEGAL PROCEEDINGS.............................. 39 POLICY WITH RESPECT TO CERTAIN ACTIVITIES...... 39 INVESTMENT OBJECTIVES AND POLICIES............. 40 POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS................................. 40 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................. 40 THE BONDS...................................... 42 General................................... 42 Trustee................................... 42 Book-Entry Only System.................... 42 Redemption................................ 44 Sources of Payment and Security for the Bonds................................... 47 SUMMARY OF THE LOAN AGREEMENT.................. 49 Bond Proceeds............................. 49 Maintenance and Operation of the Resort... 49 Disposition of Project; Assignment of Loan Agreement; Merger or Consolidation of the Partnership......................... 49 Maintenance of Source of Income; Additional Interest Upon Event of Taxability.............................. 50 Covenants................................. 51 Events of Default and Remedies............ 51 Limitation on Partner's Liability......... 52 Amendments................................ 52
i
PAGE ---- SUMMARY OF THE TRUST AGREEMENT................. 53 Project Fund.............................. 53 Bond Fund................................. 53 Reserve Fund.............................. 53 Investment of Funds....................... 53 Events of Default......................... 55 Acceleration of Maturities................ 55 Enforcement of Remedies................... 55 Amendments and Supplements to the Trust Agreement............................... 56 Amendments and Supplements to the Loan Agreement and the Related Documents..... 56 Defeasance................................ 57 AFICA.......................................... 57 General................................... 57 Governing Board........................... 57 PAGE ---- Outstanding Revenue Bonds and Notes of AFICA................................... 58 GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO.... 59 TAX MATTERS.................................... 59 RATING......................................... 60 LEGAL INVESTMENT............................... 60 UNDERWRITING................................... 60 LEGAL MATTERS.................................. 61 CONTINUING DISCLOSURE COVENANT................. 61 REPORTS TO BONDHOLDERS......................... 63 EXPERTS........................................ 63 MISCELLANEOUS.................................. 63 INDEX TO FINANCIAL STATEMENTS.................. F-1 FORM OF OPINION OF BOND COUNSEL................ A-1
ii AVAILABLE INFORMATION El Conquistador Partnership L.P. (the 'Partnership') has filed a Registration Statement (which term shall include any amendment thereto) on Form S-11 (the 'Registration Statement') under the Securities Act of 1933, as amended (the 'Securities Act'), with the Securities and Exchange Commission (the 'Commission') with respect to the offering (the 'Offering') of the undivided interests in the Loan Agreement between Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority ('AFICA') and the Partnership relating to certain AFICA tourism revenue bonds (the 'Bonds'). This Official Statement and Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which have been omitted in accordance with the rules and regulations of the Commission, and reference is hereby made to the Registration Statement, including the exhibits and schedules thereto, for further information with respect to the Bonds. Summaries and other statements contained herein concerning the provisions of any document are not necessarily complete, and in each instance reference is hereby made to the copy of the document included in this Official Statement and Prospectus or filed as an exhibit to the Registration Statement. The Registration Statement and the exhibits and schedules thereto can be inspected and copied at the public reference facilities maintained by the Commission in Washington, DC, Chicago, IL and New York, NY. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. Following consummation of the Offering, the Partnership will be subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), during the current fiscal year by reason of the public offering and the issuance of the Bonds. In accordance with the Exchange Act, the Partnership will file with the Commission the reports and other information required to be filed under the Exchange Act. The Partnership anticipates, however, that it will not be subject to the reporting requirements of the Exchange Act in future fiscal years pursuant to Section 15(d) of the Exchange Act; however, the Partnership will continue to file copies of its annual reports and certain other information, documents and reports specified in Rule 15c2-12 promulgated under the Exchange Act so long as the Bonds are outstanding. See 'CONTINUING DISCLOSURE COVENANT.' DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS THIS OFFICIAL STATEMENT AND PROSPECTUS INCLUDES 'FORWARD-LOOKING STATEMENTS' WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS OFFICIAL STATEMENT AND PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE PARTNERSHIP'S FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS 'MAY,' 'WILL,' 'EXPECT,' 'INTEND,' 'ESTIMATE,' 'ANTICIPATE,' 'BELIEVE,' OR 'CONTINUE' OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE PARTNERSHIP BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. THE PARTNERSHIP'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE COMPETITION FOR GUESTS FROM OTHER HOTELS, DEPENDENCE UPON GROUP AND LEISURE TRAVELERS AND TOURISM, ADVERSE WEATHER CONDITIONS AND OCCURRENCES, AND THE SEASONALITY OF THE HOTEL INDUSTRY. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PARTNERSHIP'S EXPECTATIONS ('CAUTIONARY STATEMENTS') ARE DISCLOSED UNDER 'RISK FACTORS' AND ELSEWHERE IN THIS OFFERING STATEMENT AND PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS OFFICIAL STATEMENT AND PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE PARTNERSHIP, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. 1 SUMMARY This Summary highlights selected information from this Official Statement and Prospectus. It may not contain all of the information that is important to you. To understand the terms of the Bonds, you should carefully read this Official Statement and Prospectus, including the financial statements and the notes to the financial statements of the Partnership. No person is authorized to detach this Summary from this Official Statement and Prospectus or otherwise to use it without the entire Official Statement and Prospectus. The Partnership changed its fiscal year-end to December 31 from March 31 effective for the fiscal year ended December 31, 1997. The Partnership has provided information for the 12-month period ended March 31, 1998 throughout this Official Statement and Prospectus. The Partnership believes that information for the 12-month period ended March 31 is a more accurate reflection of its results of operations and makes the information more easily compared to prior years. This belief is based on the fact that the Partnership's business is seasonal with the high season occurring primarily in the fiscal quarter ended March 31. THE BONDS Title of Security. $100,000,000* Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority Tourism Revenue Bonds, 1998 Series A (El Conquistador Resort Project) (the 'Bonds'). The Issuer. Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority ('AFICA'), a governmental instrumentality of Puerto Rico. See 'AFICA.' Use of Proceeds. AFICA will issue the Bonds and lend the proceeds thereof to the Partnership pursuant to the loan agreement (the 'Loan Agreement'). The Partnership will use the loan proceeds to repay an interim loan and interest thereon (the 'Interim Financing') made by Citicorp Real Estate, Inc. ('CRE'), to fund certain reserves and to pay certain costs and expenses of issuing the Bonds. The proceeds of the Interim Financing were used to repay The Bank of Tokyo-Mitsubishi, Ltd. for advances made by it to redeem outstanding bonds issued by AFICA in 1991 as part of the financing for the development and construction of the El Conquistador Resort & Country Club (the 'Resort'). Details of Bonds. The Bonds will be issued in the total principal amount of $100,000,000. The Bonds will consist of serial bonds (the 'Serial Bonds') and term bonds (the 'Term Bonds'). The Bonds will be issued in the principal amounts, bear interest at the rates, and mature on the dates shown on the inside front cover page of this Official Statement and Prospectus. The Bonds will be issued pursuant to a trust agreement (the 'Trust Agreement') between AFICA and Banco Santander Puerto Rico, as trustee (the 'Trustee'). The Bonds will be issued in registered form, without coupons, in denominations which are multiples of $5,000. The Bonds will be registered under The Depository Trust Company Book-Entry Only System. This means that you will not receive a certificate for any Bonds you purchase. Your ownership interest in the Bonds will be recorded in the Book-Entry Only System. See 'THE BONDS -- Book-Entry Only System.' Interest on the Bonds. Interest on the Bonds will be paid monthly on the first day of each month, commencing on , 1999. Additionally, interest will be paid upon maturity or redemption. Interest will be computed using a 360-day year of twelve 30-day months. Interest will be paid to the registered owners of the Bonds (the 'Bondholders' or 'Holders'). Sources of Payment. The Bonds are payable solely from monies paid by the Partnership pursuant to the Loan Agreement and from such other amounts payable to the Trustee (as defined) - ------------ * Preliminary, subject to change. 2 pursuant to the Trust Agreement (as defined) and the Security Agreements (as defined). See 'RISK FACTORS -- Sources of Payment and Security for the Bonds.' Bonds are Limited Obligations of AFICA. The Bonds do not constitute an indebtedness of Puerto Rico or any of its political subdivisions. Neither Puerto Rico nor any of its subdivisions will be liable for payment of the Bonds, except that AFICA is required to pay the Bonds solely out of payments made by the Partnership under the Loan Agreement. Security for the Bonds. The Bonds will be secured by a lien on substantially all the assets of the Partnership. Mandatory Redemption of Bonds. Some or all of the Bonds may be required to be redeemed if all or a portion of the Resort is condemned or damaged. Some or all of the Bonds are required to be redeemed if the Resort stops operating or if there is a second occurrence of an Event of Taxability. See 'THE BONDS -- Redemption.' An Event of Taxability will occur when AFICA and the Trustee receive an accountants' report stating that the Partnership failed to comply with certain of its obligations under the Loan Agreement and as a result of such failure interest on the Bonds is taxable to you. See 'SUMMARY OF THE LOAN AGREEMENT -- Maintenance of Source of Income; Additional Interest Upon Event of Taxability.' In addition, the Term Bonds are subject to mandatory redemption in part. See 'THE BONDS -- Redemption -- Mandatory Redemption Other than Upon Event of Taxability' for a schedule of Term Bond redemptions. The Serial Bonds mature as set forth on the inside front cover of this Official Statement and Prospectus. Optional Redemption of Bonds. The Partnership has the right to redeem all or part of the Bonds, on and after , 2008, at the redemption prices set forth below (expressed as a percentage of the outstanding principal amount of such Bonds), plus accrued interest to the redemption date:
REDEMPTION REDEMPTION PERIOD PRICE - --------------------------------------------------------------------------------- ---------- , 2008 - , 2009.................................... 102.0% , 2009 - , 2010.................................... 101.0% , 2010 and thereafter............................................. 100.0%
THE RESORT The Resort is a world class destination resort complex. The Resort consists of 751 guest rooms, an 18-hole championship golf course, a marina, seven tennis courts, 90,000 square feet of convention and meeting facilities, six lounges and nightclubs, 12 restaurants, a 10,000 square foot casino, 25 retail shops, a fitness center and five pool areas, situated on a bluff overlooking the convergence of the Atlantic Ocean and the Caribbean Sea in Fajardo, Puerto Rico. The Resort also features a secluded beach located on a private island three miles offshore ('Palominos'). The Resort also generally has available 90 condominium units known as Las Casitas Village, which provides up to another 167 rooms to the inventory of luxury rooms available to the Resort, bringing the total available rooms at the Resort to 918. (The Resort, excluding Las Casitas Village, is referred to as the 'Hotel.') Las Casitas Village condominium units are owned by third parties who make the units available to the Resort through individual rental agreements which are renewed annually. 3 The Hotel's average occupancy and average room rate for certain periods were as follows:
AVERAGE AVERAGE ROOM PERIOD OCCUPANCY RATE - ----------------------------------------------------------------------- --------- ------- 12-months ended 3/31/98................................................ 72.7% $207.56 Fiscal year ended 3/31/97.............................................. 72.0% $202.86 Fiscal year (9-months) ended 12/31/97.................................. 69.3% $175.59 Nine months ended 12/31/96............................................. 67.6% $175.01 Six months ended 6/30/98............................................... 81.8% $243.35 Six months ended 6/30/97............................................... 82.4% $229.54
THE MANAGER The Resort has historically been managed by Williams Hospitality Group Inc. ('WHGI'), an affiliate of the Partnership. As of January 16, 1998, Wyndham International, Inc. ('Wyndham'), the owner of the Wyndham Resorts'r' and Grand Bay'r' brands, acquired the majority interest in WHGI and in March 1998 acquired the remaining interests. Prior to consummation of the Offering, the Partnership will enter into an amended and restated management agreement with WHGI (the 'Management Agreement'). Prior to consummation of the Offering, WHGI will enter into an agreement with Wyndham Management Corporation ('Wyndham Management') with respect to the management of the Resort and the marketing of the Hotel as a Wyndham Resort'r'. WHGI will also enter into a marketing agreement with Grand Bay Management Company ('Grand Bay') providing for the marketing of Las Casitas Village as a Grand Bay'r' hotel and the use of the Grand Bay reservation system for Las Casitas Village. WHGI, Wyndham Management and Grand Bay are referred to collectively as the 'Hotel Operator.' THE PARTNERSHIP The Hotel is owned by the Partnership. The Partnership's sole asset is the Hotel and its sole business is the Resort. The Partnership is a Delaware limited partnership organized on January 16, 1990 under the Delaware Revised Uniform Limited Partnership Act. The Partnership's mailing address in Puerto Rico is 1000 El Conquistador Avenue, Fajardo, Puerto Rico 00738. The Partnership's telephone number at this location is (787) 863-1000. The Managing General Partner of the Partnership is Conquistador Holding, Inc. The Partnership is beneficially owned approximately 77% by Patriot American Hospitality, Inc. ('Patriot') and approximately 23% by Wyndham. For a complete discussion concerning ownership of the Partnership, see 'THE PARTNERSHIP' and 'SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.' The shares of common stock of Patriot and Wyndham are traded together as 'paired' on the New York Stock Exchange. Patriot and Wyndham are referred to collectively as 'Patriot/Wyndham.' Patriot is a real estate investment trust specializing in the ownership of hotels. Wyndham owns and operates hotels under several brand names including the Wyndham Resorts'r' and Grand Bay'r' brands. RISK FACTORS The Bonds are subject to certain risks that could affect the ability of the Partnership to pay the principal of and interest on the Bonds. You should review the section entitled 'RISK FACTORS' for a discussion of certain risks associated with an investment in the Bonds. Some of these risks are: The ability of the Partnership to meet its debt service obligations is dependent on the future performance of the Resort. 4 The Partnership is not diversified: it has a single asset -- the Hotel, in a single location -- Puerto Rico, and operates in a single industry -- the resort hotel industry. The operations and revenues of the Resort are affected by a number of factors that are outside of the control of the Partnership, including competition, seasonality of the hotel industry, potential overbuilding in the industry, general economic conditions, weather conditions, droughts and water shortages, hurricanes and other natural disasters, and the cost and availability of labor, insurance and utilities. Properties like the Hotel are relatively difficult to sell, which may affect the ability of Bondholders to foreclose on and sell the Hotel in the event such actions were necessary to pay the Bonds. There is no assurance that there will be a secondary market for the Bonds. The Hotel Operator is an affiliate of the Partnership, also operates other hotel and resort properties in Puerto Rico and the Caribbean and, therefore, there is a potential for conflicts of interest to arise. TAX MATTERS Provided the Partnership complies with certain terms of the Loan Agreement, it is the opinion of Fiddler Gonzalez & Rodriguez, LLP, Bond Counsel, that the Bonds and the interest on the Bonds are exempt from or not subject to: (1) Puerto Rico income taxes and municipal property and license taxes, (2) under certain circumstances, Puerto Rico gift and estate taxes, and (3) United States income tax when received by: (a) individuals who are bona fide residents of Puerto Rico during the entire taxable year in which such interest is received, or (b) under certain circumstances, foreign corporations, including Puerto Rico corporations. If you have to pay United States income tax on the interest paid on the Bonds because the Partnership fails to comply with certain provisions of the Loan Agreement, the Partnership will be required to pay an additional amount to you. The additional amount plus the actual interest paid on the Bonds will not exceed 12% of the outstanding principal amount of the Bonds during any taxable year of the Partnership. The additional amount that the Partnership may be required to pay to you if the interest on the Bonds becomes taxable in the United States may not be enough for you to have as much income after payment of taxes as you would have had if the interest remained tax free. See 'THE BONDS -- Mandatory Redemption Upon Event of Taxability' and 'SUMMARY OF THE LOAN AGREEMENT Maintenance -- of Source of Income; Additional Interest Upon Event of Taxability.' RATING The Bonds are expected to be rated 'Baa2' by Moody's Investors Service, Inc. ('Moody's' or the 'Rating Agency'). There is no assurance that such rating will remain in effect for any given period of time or that it will not be revised downward or withdrawn entirely by Moody's if, in its sole judgment, circumstances so warrant. UNDERWRITER The Underwriter of the Bonds is Citicorp Financial Services Corporation, Citibank Center, Lomas Verdes Avenue, Cupey, Puerto Rico. The Underwriter has agreed to purchase the Bonds at an aggregate discount of $ from the initial offering price of the Bonds shown (or derived 5 from information shown) on the inside front cover page of this Official Statement and Prospectus. See 'UNDERWRITING.' CONTINUING DISCLOSURE The Partnership will enter into an undertaking for the benefit of the Holders and the Beneficial Owners (as defined) of the Bonds to file certain financial information on an annual basis with and to provide notice of certain events to certain nationally recognized municipal securities information repositories and any Puerto Rico state information depository pursuant to Rule 15c2-12 promulgated by the Commission under the Exchange Act. See 'CONTINUING DISCLOSURE COVENANT.' EFFECT OF HURRICANE GEORGES Hurricane Georges passed through Puerto Rico on September 21 and 22, 1998. The Hurricane caused approximately $36,000,000 of property related damage to the Resort. As a result of the damage, the Resort was closed from September 21, 1998 until October 3, 1998. The Partnership believes that its physical damage and business interruption are fully covered by insurance, subject to a deductible. See 'RISK FACTORS -- Uncontrollable Events' and 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent Developments.' 6 SUMMARY FINANCIAL INFORMATION The following table sets forth selected income data and balance sheet data of the Partnership. The selected income data and balance sheet data are derived from the financial statements and notes thereto of the Partnership, which for the fiscal year (9 months) ended December 31, 1997 and the fiscal years ended March 31, 1994, 1995, 1996 and 1997 have been audited by Ernst & Young LLP, independent auditors, are included in this Official Statement and Prospectus, and includes an explanatory paragraph which describes an uncertainty about the Partnership's ability to continue as a going-concern. The information set forth below for other periods is unaudited. The Partnership changed its fiscal year-end to December 31 from March 31 effective for the fiscal year ended December 31, 1997. The data below should be read in conjunction with the financial statements, related notes and other financial information included herein.
TWELVE MONTHS TWELVE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, ENDED MARCH 31, ------------------------------------------ MARCH 31, 1998 1994 1995 1996 1997 1998 PRO FORMA(1) -------- -------- --------- -------- ------------- ------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT ROOM AND OCCUPANCY DATA) Selected Statement of Income Data: Hotel revenues, net............................ $ 30,486 $ 78,688 $ 83,035 $ 86,953 $ 92,116 $ 92,116 Casino revenues................................ 2,488 6,055 6,179 6,005 4,931 4,931 -------- -------- --------- -------- ------------- ------------- Total revenues............................. $ 32,974 $ 84,743 $ 89,214 $ 92,958 $ 97,047 $ 97,047 -------- -------- --------- -------- ------------- ------------- -------- -------- --------- -------- ------------- ------------- Operating expenses before depreciation and amortization................................. $ 33,559 $ 85,427 $ 74,163 $ 76,251 $ 78,706 $ 75,473(2) -------- -------- --------- -------- ------------- ------------- EBITDA......................................... (585) (684) 15,051 16,707 18,341 21,574 Depreciation and amortization.................. 4,274 11,124 10,499 9,147 9,221 9,387(3) -------- -------- --------- -------- ------------- ------------- Income (loss) from operations (EBIT)........... (4,859) (11,808) 4,552 7,560 9,120 12,187 Interest income................................ 109 468 229 199 172 200(4) Interest expense............................... (5,298) (16,137) (17,022) (17,162) (17,229) (10,830)(5) -------- -------- --------- -------- ------------- ------------- Net income (loss).......................... $(10,048) $(27,477) $ (12,241) $ (9,403) $ (7,936) $ 1,557 -------- -------- --------- -------- ------------- ------------- -------- -------- --------- -------- ------------- ------------- (Deficiency in) partners' capital beginning of period....................................... $ 46,189 $ 36,191 $ 8,716 $ (3,525) $(12,928) $ (12,928) Partner capital contributions.................. 50 2 -- -- 71,977 86,598 (Deficiency in) partners' capital end of period....................................... 36,191 8,716 (3,525) (12,928) 51,113 75,227 Ratio of earnings to fixed charges............. 0.3X 0.5X 0.6X 1.1X Other Financial Data: Available Hotel rooms(#)....................... 751 751 751 751 751 751 Hotel occupancy................................ 72.1% 73.3% 71.0% 72.0% 72.7% 72.7% Hotel average rate............................. $ 220.99 $ 188.87 $ 198.99 $ 202.86 $ 207.56 $ 207.56 Hotel revenue PAR(6)........................... $ 159.37 $ 138.42 $ 141.22 $ 146.01 $ 150.87 $ 150.87 Room revenue per available Hotel room.......... NA $112,840 $ 118,794 $123,779 $129,224 $ 129,224 Cash flow from operating activities............ $ 2,283 $ (4,712) $ 1,906 $ 5,855 $ 4,376 Selected Balance Sheet Data: Current assets................................. $ 25,270 $ 15,316 $ 11,823 $ 13,618 $ 16,154 20,448 Land, building and equipment, net.............. 197,139 194,557 188,994 183,960 228,817 230,141 Total assets................................... 243,587 225,191 211,691 205,430 248,701 255,992 Long-term debt, including current maturities... 181,989 193,034 197,154 199,709 178,599 164,504(7) Total liabilities and (deficiency in) partners' capital...................................... 243,587 225,191 211,691 205,430 248,701 255,992
- ------------ (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on April 1, 1997. Also assumes that the Management Agreement became effective as of April 1, 1997. (2) Reflects the reduction in base management fees from 3.5% to 2.5% of gross revenues of the Resort, implementation of a trade name fee of 0.5% of gross room revenues of the Hotel, and the elimination of incentive fees which were accrued at a rate of 10% of the Resort's gross operating profit, and interest thereon. No adjustment has been made with respect to the new marketing fee of 1.5% of gross room revenues of the Hotel and 1.0% gross room revenues of Las Casitas Village payable pursuant to the Management Agreement. The Partnership believes that the Hotel's historical marketing expenses will not increase and that a portion of such expenses will be reallocated from a Hotel expense to a fee for marketing services. (3) Reflects an adjustment for amortization of Offering costs, estimated at $5.0 million, amortized on the straight-line method over the 30-year term of the Bonds at a rate of $166,667 per year. (4) Reflects additional interest income at an assumed rate of 4.0%, or of $200,000 on the amount deposited in the Reserve Fund. (5) Reflects an assumed interest rate of 6.35% for the Bonds. (6) Revenue PAR is equal to the average rate multiplied by occupancy percentage. (7) Reflects the reduction in long-term debt of $25,000,000 related to the GDB debt which will be assumed by Patriot and the addition of the gross proceeds from the Offering. 7
NINE MONTHS NINE MONTHS NINE MONTHS ENDED SIX MONTHS ENDED JUNE 30, ENDED ENDED DECEMBER 31, ---------------------------------- DECEMBER 31, DECEMBER 31, 1997 1998 1996 1997 PRO FORMA(1) 1997 1998 PRO FORMA(2) -------------- ------------ ------------ -------- -------- ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT ROOM AND OCCUPANCY DATA) Selected Statement of Income Data: Hotel revenues, net...................... $ 54,158 $ 56,573 $ 56,573 $ 55,909 $ 61,662 $ 61,662 Casino revenues.......................... 4,011 3,554 3,554 3,272 2,724 2,724 ------------ ------------ ------------- -------- -------- ------------- Total revenues....................... $ 58,169 $ 60,127 $ 60,127 $ 59,181 $ 64,386 $ 64,386 ------------ ------------ ------------- -------- -------- ------------- ------------ ------------ ------------- -------- -------- ------------- Operating expenses before depreciation and amortization....................... $ 53,572 $ 55,253 $ 53,909(3) $ 42,746 $ 44,350 $ 41,429(3) ------------ ------------ ------------- -------- -------- ------------- EBITDA................................... 4,597 4,874 6,218 16,435 20,036 22,957 Depreciation and amortization............ 6,856 6,887 7,012(4) 4,597 3,865 3,949(4) ------------ ------------ ------------- -------- -------- ------------- Income (loss) from operations (EBIT)..... (2,259) (2,013) (794) 11,838 16,171 19,008 Interest income.......................... 139 128 150(5) 105 85 100(5) Interest expense......................... (12,691) (13,157) (8,413)(6) (8,871) (8,670) (5,609)(6) ------------ ------------ ------------- -------- -------- ------------- Net income (loss).................... $(14,811) $(15,042) $ (9,057) $ 3,072 $ 7,586 $ 13,499 ------------ ------------ ------------- -------- -------- ------------- ------------ ------------ ------------- -------- -------- ------------- (Deficiency in) partners' capital beginning of period.................... $ (3,525) $(12,928) $ (12,928) $(18,336) $(27,970) $ (27,970) Partner capital contributions............ -- -- 91,256 -- 71,977 90,422 (Deficiency in) partners' capital end of period................................. (18,336) (27,970) 69,271 (15,264) 51,593 75,951 Ratio of earnings to fixed charges....... 1.3X 1.8X 3.4X Other Financial Data: Available Hotel rooms(#)................. 751 751 751 751 751 751 Hotel occupancy.......................... 67.6% 69.3% 69.3% 82.4% 81.8% 81.8% Hotel average rate....................... $ 175.01 $ 175.59 $ 175.59 $ 229.54 $ 243.35 $ 243.35 Hotel revenue PAR(8)..................... $ 118.24 $ 121.68 $ 121.68 $ 189.17 $ 199.14 $ 199.14 Room revenue per available Hotel room.... $ 77,456 $ 80,062 $ 80,062 $ 78,804 $ 85,733 $ 85,733 Cash flow from operating activities...... $ 13 $ (1,415) $ 4,073 $ 10,445 Selected Balance Sheet Data: Current assets........................... $ 12,517 $ 13,953 $ 17,356 $ 13,360 $ 12,926 $ 16,763 Land, building and equipment............. 185,822 181,127 229,664 182,659 229,726 229,726 Total assets............................. 206,755 200,422 253,580 202,896 246,075 253,154 Long-term debt, including current maturities............................. 202,969 204,624 164,159(8) 202,366 177,263 163,168(8) Total liabilities and (deficiency in) partners' capital...................... 206,755 200,422 253,580 202,896 246,075 253,154
- ------------ (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on April 1, 1997. Also assumes that the Management Agreement became effective as of April 1, 1997. (2) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on January 1, 1998. Also assumes that the Management Agreement became effective as of January 1, 1998. (3) Reflects the reduction in base management fees from 3.5% to 2.5% of gross revenues of the Resort, the implementation of a trade name fee of 0.5% of gross room revenues of the Hotel, and the elimination of incentive fees which were accrued at a rate of 10% of the Resort's gross operating profit, and interest thereon. No adjustment has been made with respect to the new marketing fee of 1.5% of gross room revenues of the Hotel and 1.0% of gross room revenues of Las Casitas Village payable pursuant to the Management Agreement. The Partnership believes that the Hotel's historical marketing expenses will not increase and that a portion of such expenses will be reallocated from a Hotel expense to a fee for marketing services. (4) Reflects an adjustment for amortization of Offering costs, estimated at $5.0 million, amortized on the straight-line method over the 30-year term of the Bonds at a rate of $125,000 and $83,333 for the 9 months ended December 31, 1997 and 6 months ended June 30, 1998, respectively. (5) Reflects additional interest income at an assumed rate of 4.0%, or of $150,000 and $100,000 for the 9 months ended December 31, 1997 and 6 months ended June 30, 1998, respectively, on the amount deposited in the Reserve Fund. (6) Reflects an assumed interest rate of 6.35% for the Bonds. (7) Revenue PAR is equal to the average rate multiplied by occupancy percentage. (8) Reflects the reduction in long-term debt of $25,000,000 related to the GDB debt which will be assumed by Patriot and the addition of the gross proceeds from the Offering. 8 RISK FACTORS In considering whether to purchase the Bonds, you should consider the matters discussed in this section in addition to the other information in this Official Statement and Prospectus. Any statements in this Official Statement and Prospectus that are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act. These statements include, among other things, statements regarding the intent, belief or expectations of the Partnership with respect to (1) the ownership, management and operation of the Resort, (2) risks associated with the hotel industry and real estate markets in general, (3) the availability of debt and equity financing, (4) interest rates, (5) general economic conditions and (6) trends affecting the Partnership's financial condition or results of operations. You are cautioned that any such forward-looking statements reflect the Partnership's good faith beliefs and they are not guarantees of future performance. They involve known and unknown risks, and actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information contained in this Official Statement and Prospectus, including the information set forth below, identify important factors that could cause such differences. PAYMENT RISKS Substantial Debt Service. At June 30, 1998, after making pro forma adjustments to the actual balance sheet of the Partnership to give effect to the Offering, the repayment of the Interim Financing and certain related transactions, total short-term and long-term indebtedness of the Partnership was approximately $160,679,000 consisting of the following: $100,000,000 of the Bonds, which are secured by substantially all of the assets of the Partnership; $32,021,172 owed to Posadas de Puerto Rico Associates, Incorporated, an affiliate of the Partnership and the Hotel Operator; $726,208 of equipment financing debt; $13,064,496 of loans and accrued interest owed to the partners of the Partnership; $8,805,874 of incentive management fees owed to WHGI; $951,441 of interest on the incentive management fees owed to WHGI; and $5,110,052 of loans and accrued interest owed to WHGI. The aggregate annual interest costs and expenses in respect of such indebtedness is approximately $10,830,000, of which approximately $6,388,000 is paid on a current basis and the balance of $4,442,000 is deferred. All of the amounts set forth above other than with respect to the Bonds and equipment financing debt are subordinate to the payment of principal of and interest on the Bonds. That means that current interest and principal on the Bonds must be paid first and if the Partnership defaults on its obligations to pay the Bonds, interest and principal on the Bonds must be paid first. The principal of and interest on the Bonds are payable at the times set forth on the inside front cover of this Official Statement and Prospectus. There can be no assurance that at the time such payments become due the Partnership will have the funds necessary to make such payments. If the Resort is unable to generate sufficient cash flow from operations, the Partnership may be required to obtain additional equity contributions or refinance its outstanding debt or obtain additional financing. There can be no assurance that any such equity contributions or refinancing would be possible or that any additional financing, if available, could be obtained on terms that would be favorable or acceptable to the Partnership. Restrictive Provisions in the Loan Agreement and Related Documents. The Loan Agreement and the related collateral documents restrict in certain circumstances incurrence of additional indebtedness, creation of additional liens, disposition of certain assets, engagements in mergers and the entry into additional transactions with affiliates. These restrictions could limit the ability of the 9 Partnership to respond to changing market and economic conditions and provide for capital expenditures or additional financing. Limitation on Additional Interest Upon an Event of Taxability. The additional amount that the Partnership may be required to pay to you if the interest on the Bonds becomes taxable in the United States may not be enough for you to have as much income after payment of taxes as you would have had if the interest remained tax free. There can be no assurance that the Partnership, if required, will have the necessary cash to make any such additional payments. See 'SUMMARY OF THE LOAN AGREEMENT -- Maintenance of Source of Income; Additional Interest Upon Event of Taxability.' Enforcement of Remedies. In the case of an event of default under the Trust Agreement, the Trustee may proceed to enforce any remedies under the Trust Agreement, the Loan Agreement, or the Security Agreements. Any foreclosure and other proceedings are dependent, in many respects, upon judicial action which is subject to discretion or delay. Under existing laws and judicial decisions, including the United States Bankruptcy Code, the remedies specified under the Trust Agreement, the Loan Agreement and the Security Agreements may not be readily available or may be limited. In addition, no assurances can be given that the proceeds of any sale of the Resort upon a foreclosure will be sufficient to pay principal of and interest on the Bonds. See 'SUMMARY OF THE LOAN AGREEMENT -- Events of Default and Remedies.' Prepayment. The Bonds may be required to be prepaid following an acceleration upon the occurrence of certain events of default under the Loan Agreement and the Trust Agreement. See 'THE BONDS -- Redemption.' HOTEL INDUSTRY RISKS Operating Risks. The sole business of the Partnership is the ownership of the Hotel. The Resort's ability to generate sufficient revenues to pay expenses of operation and the Partnership's debt service obligations, including the Bonds, has certain risks. These risks include, among other things: competition for guests from other hotels, a number of which may have greater marketing and financial resources and experience than the Partnership or the Hotel Operator; increases in operating costs due to inflation and other factors which may not be offset in the future by increased room rates; dependence on business and commercial travelers and tourism, which may fluctuate and is seasonal; increases in costs of travel, which may deter travelers; adverse effects of general and local economic conditions; and dependence on the Hotel Operator for the marketing and management of the Resort. These factors could adversely affect the ability of the Resort to generate revenues and, therefore, for the Partnership to make payments with respect to principal of and interest on the Bonds. Operating Costs and Capital Expenditures; Hotel Renovations. The Resort requires substantial ongoing expenditures to replace furniture and equipment and redecorate or upgrade the Hotel in order to continue to provide first-class facilities to its guests. Capital expenditures in the past have been as follows: 12 months ended March 31, 1998.................................................. $2,554,000 Fiscal year ended March 31, 1997................................................ $1,428,000 Fiscal year ended March 31, 1996................................................ $ 864,000 Fiscal year (9 months) ended December 31, 1997.................................. $1,890,000 Nine months ended December 31, 1996............................................. $1,623,000 Six months ended June 30, 1998.................................................. $2,800,000 Six months ended June 30, 1997.................................................. $ 58,000
10 Capital expenditures at the Hotel in 1996 were low due to the newness of the facility. Capital expenditures at the Hotel have been budgeted as follows: Fiscal year ending December 31, 1998............................................ $8,200,000 Fiscal year ending December 31, 1999............................................ $4,000,000
As of August 31, 1998, $5,134,576 of this year's capital expenditure budget had been spent. The capital expenditure budget for fiscal year 1998 includes amounts budgeted for the construction of a spa at the Resort. See 'THE RESORT -- Golden Door'r' Spa.' There can be no assurance that cash provided from operations will be available in amounts sufficient to meet the Hotel's future capital expenditure requirements. Additionally, as a result of Hurricane Georges, approximately $36,000,000 is required to make repairs and replacements to the Hotel. All but approximately $100,000 of such amount is covered by insurance. For a complete description of the damage caused by Hurricane Georges at the Resort, see ' -- Uncontrollable Events' and 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent Developments.' Under the terms of the Loan Agreement, the Partnership is obligated to establish a reserve to pay the cost of capital expenditures at the Hotel and pay for periodic replacement or refurbishment of furniture, fixtures and equipment. If capital expenditures exceed the Partnership's expectations, additional costs could have an adverse effect on the Partnership's cash available for payment of principal and interest on the Bonds. Seasonality. Tourism in Puerto Rico is at its peak during the months of December through April. Occupancy levels and room rates are lower during the balance of the year. Successful operation of the Resort is dependent in large part to a successful high season, the ability of the Resort to attract guests during the off-season months and careful management of costs throughout the year. Efforts are made by the Hotel Operator to actively market during off-season months so as to minimize the effects of seasonality. There can be no assurance that such efforts will be successful. UNCONTROLLABLE EVENTS Hurricanes and other natural disasters, airline strikes, droughts and water shortages, civil unrest, acts of war, and other uncontrollable events may adversely affect occupancy levels at the Resort. Such events could adversely affect cash flows and profits of the Partnership. The Hotel is particularly vulnerable to these types of events because of its high debt service requirements. The Partnership cannot predict the effect an uncontrollable event may have on the Resort or the Partnership's financial condition. Hurricane Georges passed through Puerto Rico on September 21 and 22, 1998. Hurricane Georges caused approximately $36,000,000 of property related damage at the Hotel, substantially all of which is covered by insurance. The Resort has also lost approximately 2,500 group room nights as a result of Hurricane Georges. The Partnership believes such room night losses will be covered by its business interruption insurance. As a result of Hurricane Georges, the Resort was closed from September 21, 1998 through October 3, 1998. Additionally, the majority of condominium units of Las Casitas Village were damaged and will not be available to the Resort until approximately November 1, 1998. Puerto Rico itself and other hotel properties on the island also suffered extensive damage from Hurricane Georges. As a result, travelers' perception of Puerto Rico as a leisure destination may be adversely affected for the 1998/1999 tourist season. The Resort could lose additional room nights as a result of this perception, which may or may not be covered by its business interruption insurance. The Partnership believes that the Resort will be completely repaired in time for its high season which begins in December. However, the Partnership cannot predict the effect that Hurricane Georges will have on its future bookings. To the extent that additional group and leisure travelers with reservations cancel their plans to come to the Resort or additional travelers do not make reservations as a result of Hurricane Georges, such lost bookings could have a material adverse effect on the Partnership's financial condition and 11 results of operations. See 'MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent Developments.' REAL ESTATE INVESTMENT RISKS General Risks. The Partnership's investment in the Resort is subject to varying degrees of risk generally incident to the ownership of real property. The underlying value of the Partnership's investment in the Resort and its income and ability to make payments of principal and interest on the Bonds will depend on the ability of the Hotel Operator to operate the Resort in a manner sufficient to maintain or increase revenues and to generate sufficient income in excess of operating expenses for payment of principal of and interest on the Bonds. Income from the Resort may be adversely affected by changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws, and other events (which may result in uninsured losses), which are beyond the control of the Partnership. Property Taxes. The Resort is subject to real property taxes. The real property taxes on the Resort may increase or decrease as property tax rates change and as the value of the property is assessed or reassessed by taxing authorities. If property taxes increase as a result of such reassessments, the Partnership's ability to make payments on the Bonds could be adversely affected. Currently, the Partnership is in negotiations with the Municipal Revenue Collection Center ('CRIM') in Fajardo, Puerto Rico concerning the real property taxes on the Hotel. The negotiations concern the valuation computation used by CRIM to assess real property taxes. The Partnership has accrued amounts with respect to real property taxes for the fiscal years ended March 31, 1995, 1996 and 1997 and the fiscal year ended (9 months) December 31, 1997, which the Partnership believes will be sufficient to pay its real property taxes once negotiations with CRIM are completed. Environmental Matters. The operating costs of the Partnership may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. Under various federal and Puerto Rico environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Persons who arrange for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances. Certain environmental laws and common law principles could be used to impose liability for releases of hazardous materials into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released hazardous materials. In connection with the ownership and operation of the Resort, the Partnership or the Hotel Operator may be potentially liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect the Partnership's results of operations and financial condition. The Partnership is not aware of any potential environmental liability or compliance concerns that it believes would have a material adverse effect on its business, assets, results of operations or liquidity. Compliance with Americans with Disabilities Act. Under the Americans with Disabilities Act (the 'ADA'), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that the Resort is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. If the Partnership were required to make material modifications to the Hotel to comply with the ADA, the ability of the Partnership to make payments on the Bonds could be adversely affected. The 12 Partnership has not been notified, and it has no other knowledge of, any material non compliance, liability or claim under the ADA with respect to the Resort. Uninsured and Underinsured Losses. The Loan Agreement specifies comprehensive insurance to be maintained on the Hotel, including liability, fire and extended coverage. If such insurance is not maintained, the Bonds may be accelerated. The Partnership believes that its insurance is adequate for its business. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, that may be uninsurable or not economically insurable. The Partnership currently has hurricane insurance and anticipates making a claim of approximately $36,000,000 as a result of Hurricane Georges for property related damage to the Hotel. Additionally, the Partnership will make a claim under its business interruption insurance policy as a result of the loss of business caused by Hurricane Georges. The Partnership believes that after such claims are made it will continue to be covered for damages and business interruptions as a result of future hurricanes. However, there can be no assurance that such insurance will continue to be available or affordable. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the loss. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by the Partnership might not be adequate to restore its economic position with respect to Hotel. Additionally, in the event the Hotel is damaged or destroyed to the extent that a mandatory prepayment of the Bonds is required pursuant to the Loan Agreement, the insurance proceeds received by the Partnership together with other funds available to it might not be sufficient to repay the principal of and interest on the Bonds to the extent so required. Limited Use of Resort. The Resort may not be suitable for purposes other than a vacation and convention resort. As a result, in the event of a default, acceleration of the Bonds and any resulting foreclosure sale of the Resort, the Trustee's remedies and the number of entities which could purchase the Resort would be limited, and the sales price generated thereby might be adversely affected. DEPENDENCE ON THE HOTEL OPERATOR AND POTENTIAL CONFLICTS OF INTEREST BETWEEN THE PARTNERSHIP AND THE HOTEL OPERATOR The Partnership has historically been managed by WHGI. Concurrently with the acquisition of its interest in the Partnership, Wyndham acquired a majority interest in WHGI. Although the executive employees of WHGI have remained, both the Partnership and WHGI have had a change in ownership: WHGI is wholly owned by Wyndham and the Partnership is owned by Patriot/Wyndham. Prior to consummation of the Offering, the Partnership will enter into the Management Agreement with WHGI which will provide for different terms, including different management fees, from the prior management agreement. WHGI will enter into an agreement with Wyndham Management with respect to the management of the Resort and the marketing of the Hotel as a Wyndham Resort and the use of the Wyndham reservation system for the Hotel. WHGI will also enter into a marketing agreement with Grand Bay for the marketing of Las Casitas Village as a Grand Bay hotel. The Management Agreement imposes on the Partnership certain obligations to maintain the Resort and related facilities at certain quality levels. The failure of the Partnership to adhere to such standards could result in the cancellation of the Management Agreement or the loss of one or more of the brand names. Such cancellation could have a material adverse effect on the Partnership. The Partnership depends solely on the Hotel Operator to manage and operate the Resort. If the Management Agreement is terminated as a result of a default or other reason, or if the Hotel Operator decides not to renew the Management Agreement or the respective marketing agreements, the Hotel Operator would have to be replaced. There is a possibility that a new hotel operator would be obtained on terms not as favorable to the Partnership as those set forth in the Management Agreement. The Managing General Partner has the responsibility for obtaining the 13 services of an operator. However, the Managing General Partner is not itself obligated to operate the Resort. Neither of the General Partners nor any of their affiliates (other than the Hotel Operator) is legally responsible for the performance of the obligations of WHGI under the Management Agreement and Wyndham Management and Grand Bay under their arrangements with WHGI. The terms and provisions of the Management Agreement were not negotiated on an arm's-length basis; rather such terms and conditions have been set by the Managing General Partner and the Hotel Operator, both of which are controlled by Wyndham. Accordingly, the terms, provisions and compensation contained in the Management Agreement may not reflect the fair market value of the services rendered by the Hotel Operator. The Partnership is subject to various conflicts of interest arising out of its relationship with the Managing General Partner and the Hotel Operator, and their respective affiliates. The Hotel Operator or one of its affiliates operates other hotel and resort properties in Puerto Rico and the Caribbean, as well as other resort destinations. The management of multiple hotel and resort properties could result in conflicts with respect to: the direction of guests to properties other than the Resort; the desire to maximize overall results of the Hotel Operator and its affiliates rather than the results of the Resort; and the availability to the Resort of personnel employed by the Hotel Operator best suited to manage the Resort. Such conflicts could result in certain actions or decisions that could have an adverse effect on the Partnership. See 'CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.' RISKS OF OPERATING A HOTEL UNDER A BRAND AFFILIATION The Hotel will soon begin operating under the Wyndham Resorts'r' brand name and Las Casitas Village will soon begin operating under the Grand Bay'r' brand name. The continued use of a brand is generally contingent upon the continuation of the management arrangements related to the property with the branded operator. If a brand affiliation is terminated, the Partnership may seek to obtain a suitable replacement brand affiliation, or to operate the Hotel and/or Las Casitas Village independent of a brand affiliation. The loss of a brand affiliation could have a material adverse effect upon the operations or the underlying value of the property covered by the brand affiliation because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the brand owner. Operating under a brand name is different from operating more or less independently as the Resort has done in the past. The reputation and customer perception of the Resort will be influenced by customers' experiences at other hotels having the same brand. There is no assurance that the branding of the Hotel and Las Casitas Village will have a positive affect on the Resort's operations or that the results of operations in the past are necessarily indicative of future results of operations. See 'THE RESORT -- Management and Marketing of the Resort.' TOURISM TAX EXEMPTIONS The Resort enjoys certain tax exemptions under the Puerto Rico Tourism Incentive Acts. The grants provided under such acts accord tax exemptions to the grantees for 10 years, which may be extended for an additional 10 years. The Partnership was granted a tax exemption under the provisions of the Puerto Rico Tourism Incentives Act of 1993. The exemptions do not apply to casino revenues. The grants are conditioned upon continued compliance with various terms and conditions set forth in the grants. Failure of the Partnership to comply with these requirements could result in the revocation of the grant resulting in the elimination of the exemptions. There can be no assurance that these exemptions will continue to be available, and if changed, what effect a change would have on the Partnership's financial condition or results of operations. See Note 10 to the Partnership's Financial Statements included elsewhere herein. 14 CASINO GAMING REGULATION The ownership and operation of casinos in Puerto Rico is heavily regulated. WHGI, on behalf of the Resort, was granted a casino franchise as an operator of the casino at the Hotel. Additionally, certain of the individuals employed at the Hotel are licensed to work in the casino. The casino is required to renew its casino franchise quarterly. Unless a change of ownership of a franchisee has occurred or regulators have reason to believe that reinvestigation of a franchisee is necessary, renewal is generally automatic. Although WHGI has no reason to believe that its current casino franchise will not be renewed, there can be no assurance of such renewal. See 'THE RESORT -- Government Regulation and Licensing.' DEPENDENCE ON KEY PERSONNEL The success of the Resort depends to a significant extent upon the performance of the Hotel Operator and its ability to continue to attract, motivate and retain highly-qualified employees. The loss of services of the Hotel Operator or key employees could have a material adverse effect on the Partnership. Competition for highly-skilled employees with management, marketing and other specialized training in the hotel and casino business is intense, especially in Puerto Rico and other parts of the Caribbean, and there can be no assurance that the Hotel Operator will be successful in attracting and retaining such personnel. Specifically, the Partnership may experience increased costs in order to attract and retain skilled employees. COMPETITION The hotel and casino business in the Caribbean region is highly competitive. The Resort competes with numerous hotels and resorts on the island of Puerto Rico (including 18 other hotels and resorts with casinos) and on other Caribbean and Bahamian islands as well as those in the southeastern United States, Hawaii and Mexico. The Hotel competes with such chains as Hyatt, Marriott, Hilton and Westin as well as numerous other hotel and resort chains and independent hotel and motel operators. Las Casitas Village competes with such chains as The Four Seasons Resorts and the Ritz Carlton. During the past three years, five new hotels and casinos have opened in Puerto Rico alone and an additional hotel and casino is expected to open in Puerto Rico during 1999. The Resort is a large destination resort and competes for much of its group business with other destination resorts located in Puerto Rico, the Caribbean, the continental United States and Hawaii. The ability of the Resort to effectively compete in this market depends on a number of factors including: high quality service aggressive marketing competitive rates varied facilities and accommodations Continuous capital improvement programs are essential to stay current with industry trends and maintain the Resort's market share. Many hotels with which the Resort competes are owned or managed by hotel chains possessing substantially greater financial and marketing resources than those of the Partnership and Hotel Operator. There can be no assurance that the Resort will effectively compete in the future. See 'THE RESORT -- Competition.' RELIANCE ON SINGLE MARKET The Resort is located in Fajardo, Puerto Rico. Any adverse events such as hurricanes and other natural disasters, droughts and water shortages, labor strikes and the like which may affect Puerto Rico generally will adversely affect the Resort's entire business. Additionally, Puerto Rico is served by a small number of airlines and the market is dominated by American Airlines. Any adverse events in the airline industry as a whole, and especially to American Airlines, including 15 airline strikes, increased fuel prices or accidents could have a material adverse effect on the Partnership's business and financial condition. The Partnership lacks asset diversification since the Resort is, and will remain, its only property. The ability of the Partnership to comply with its obligations under the Loan Agreement and the Trust Agreement, including its obligation to pay principal and interest on the Bonds, depends primarily upon the future operating revenues and expenses of the Resort. The Partnership's financial condition may be affected by factors such as competition from other resort hotels, seasonality of the hotel industry, potential over-building in the hotel industry, inflation and other economic conditions, the existence of favorable and economical air travel services, the cost and availability of labor, the cost and availability of utilities, the cost and availability of adequate insurance for risks such as property damage and general liability, and other events beyond the Partnership's control. ABSENCE OF SECONDARY MARKET FOR THE BONDS; RATING MAINTENANCE The Partnership and AFICA do not intend to apply for listing of the Bonds on a securities exchange. There is currently no secondary market for the Bonds. There can be no assurance that a secondary market will develop, or if it does develop, that it will provide you with liquidity for your investment or that it will continue for the life of the Bonds. If such a market were to exist, the Bonds could trade at prices that may be lower than the initial market values thereof depending on many factors, including prevailing interest rates and the markets for similar securities. The liquidity of, and trading market for, the Bonds also may be adversely affected by general declines in the market for similar securities. Such a decline may adversely affect such liquidity and trading markets independent of the financial performance of, and prospects for, the Partnership. There can be no assurance that the investment rating initially assigned to the Bonds will not be lowered or withdrawn. Such a rating change could adversely affect the value of and market for the Bonds. See 'RATING.' 16 USE OF PROCEEDS The Bonds will be issued to provide for the repayment of the Interim Financing, funding certain reserves and paying certain costs and expenses of issuing the Bonds. The proceeds of the Interim Financing were used to repay The Bank of Tokyo-Mitsubishi, Ltd. for advances it made to the Partnership to redeem a portion of AFICA s Tourism Revenue Bonds, 1991 Series A and 1991 Series C (El Conquistador Resort Project), in the aggregate outstanding principal amount of $120,000,000 (the 'Refunded Bonds') and to pay fees and expenses in connection with the Interim Financing. The Refunded Bonds would have matured on March 9, 1999 and bore interest at floating rates. The Refunded Bonds were secured by, among other things, a letter of credit issued by The Bank of Tokyo-Mitsubishi, Ltd. The Refunded Bonds were subject to mandatory redemption on the interest payment date preceding the expiration date of the letter of credit. The letter of credit was scheduled to expire September 9, 1998 and the Refunded Bonds were therefore redeemed on August 3, 1998. The Interim Financing is due on November 3, 1998 and bears interest at the LIBOR Rate (as defined in the Interim Financing documents) plus 225 basis points (rounded to the nearest one-eighth percent (.125%)) per annum. The Interim Financing may be extended under certain circumstances until March 15, 1999. Due to the damage to the Resort from Hurricane Georges, the offering of the Bonds has been delayed. Accordingly, the Partnership has requested an extension of the Interim Financing. The Partnership is indebted to the Government Development Bank for Puerto Rico ('GDB') in the aggregate principal amount of $25,000,000 pursuant to a term loan. It is anticipated that contemporaneously with the issuance of the Bonds, the indebtedness of the Partnership to GDB will be assumed by Patriot, which beneficially owns approximately 77% of the Partnership. Set forth below are the estimated sources and uses of proceeds with respect to the sale of the Bonds: Source Gross Bond proceeds.............................................................. $100,000,000 Total sources............................................................... $ ------------ ------------ Uses Repayment of the Interim Financing............................................... $ 90,000,000 Accrued interest on the Interim Financing........................................ Reserve Fund..................................................................... Cost of Issuance: Commission registration fee.................................. $ 29,500 Printing expenses............................................ Accounting fees and expenses................................. Legal fees and expenses...................................... Trustee fees................................................. Miscellaneous expenses....................................... Subtotal.......................................................... AFICA fee........................................................................ $ 500,000 Underwriter's discount........................................................... Underwriter's structuring/management fee......................................... ------------ Total uses.................................................................. $100,000,000 ------------ ------------
17 THE RESORT GENERAL The Resort, a world class destination resort complex, is one of the leading hotel and casino properties in Puerto Rico. The Hotel portion of the Resort has 751 guest rooms, an 18-hole championship golf course, a marina, seven tennis courts, 90,000 square feet of convention and meeting facilities, six lounges and nightclubs, 12 restaurants, a 10,000 square foot casino, 25 retail shops, a fitness center and five pool areas, situated on a bluff overlooking the convergence of the Atlantic Ocean and the Caribbean Sea in Fajardo, Puerto Rico. The Resort also features a secluded beach located on a private island three miles offshore commonly known as Palominos. In addition, the Resort generally has available 90 condominium units known as Las Casitas Village. Almost all of the owners of these condominiums have entered into rental arrangements with the Partnership pursuant to which the units are made available as additional guest rooms of the Resort. Las Casitas Village provides up to another 167 rooms to the inventory of luxury rooms available to the Resort, bringing the total available rooms at the Resort to 918. Guests at Las Casitas Village are able to enjoy all the facilities of the Resort. The Resort offers group and conference facilities for groups of up to 2,000 and also attracts the individual upscale leisure traveler. The upscale leisure traveler is attracted to the Resort by the Caribbean climate and resort amenities including the casino, swimming pools, whirlpools, tennis, golf and water sports facilities, a health club and entertainment lounges. 'Blue Chip' corporate and incentive groups comprise a significant portion of the Resort's clientele due to its convention and meeting facilities as well as the other Resort amenities. The Resort has received the Gold Key Award by Meetings & Conventions Magazine and the Paragon Award by Corporate Meetings & Incentives Magazine for excellence in meetings and conventions. It has been awarded the American Automobile Association 'Four Diamond' rating for each of its five years of operation. Las Casitas Village at the Resort was awarded a 'Five Diamond' rating (the highest rating) by the American Automobile Association commencing in the fourth quarter of 1997. The Hotel is expected to be marketed as a Wyndham Resort'r' commencing with the 1998-99 winter season. As a Wyndham Resort, the Hotel will be included in Wyndham's national and worldwide marketing campaigns and will be included in the Wyndham reservation system. Las Casitas Village is expected to be marketed as a Grand Bay'r' hotel also commencing with the 1998-99 winter season and will likewise be included in Grand Bay's national and worldwide marketing campaigns. Wyndham Management and Grand Bay have substantially greater marketing resources than were available to the Resort in the past. The PricewaterhouseCoopers Lodging Research Network has independently ranked more than 40 U.S. hotel brands owned by publicly traded companies by growth in revenue per available room for the second quarter of 1998 vs. the year-earlier period. The Wyndham Resorts'r' brand was the top-performing upper upscale hotel brand with revenues per available room growth of 37.5% in the second quarter of 1998 versus the second quarter of 1997. The Grand Bay'r' brand was the second-best performing upper upscale brand, with revenues per available room growth of 12.3% during the period. During the 12-month period ended March 31, 1998, the Hotel had an average occupancy of 72.7% and gross revenues of $97,893,000. The Hotel finished its third full fiscal year ended March 31, 1997 with an average occupancy of 72.0% and gross revenues of $94,423,000. This compares to an average occupancy of 71.0% and gross revenues of $90,351,000 for the fiscal year ended March 31, 1996 and an average occupancy of 73.3% and gross revenues of $85,948,000 for the fiscal year ended March 31, 1995. During the fiscal year (9 months) ended December 31, 1997, the Hotel had an average occupancy of 69.3% and gross revenues of $60,713,000 compared to an average occupancy of 67.6% and gross revenues of $59,158,000 during the corresponding 9-month period ended December 31, 1996. During the 6-month periods ended June 30, 1998 and 1997, the Hotel had an average occupancy of 81.8% and 82.4%, respectively, and gross revenues of $64,859,000 and $59,904,000, respectively. 18 During the 12-month period ended March 31, 1998 and the fiscal years ended March 31, 1997, 1996 and 1995 daily room rates at the Hotel were $207.56, $202.86, $198.99 and $188.87, respectively. The average daily room rates at the Hotel during the fiscal year (9 months) ended December 31, 1997 and the 9-month period ended December 31, 1996 were $175.59 and $175.01, respectively. During the 6-month periods ended June 30, 1998 and 1997, the average daily room rate at the Hotel was $243.35 and $229.54, respectively. During the 12-month period ended March 31, 1998 and the fiscal years ended March 31, 1997, 1996 and 1995, the Hotel's capital expenditures for the purchase of property and equipment were $2,554,000, $1,428,000, $864,000 and $3,002,000, respectively. During the fiscal year (9 months) ended December 31, 1997 and the 9-month period ended December 31, 1996, the Hotel's capital expenditures for the purchase of property and equipment were $1,890,000 and $1,623,000, respectively. During the 6-month periods ended June 30, 1998 and 1997, the capital expenditures at the Hotel were $2,800,000 and $58,000, respectively. The Resort has historically been managed by WHGI, an affiliate of the Partnership. WHGI's sole business was the operation of the Resort and two other Puerto Rico hotel properties owned by affiliates of the Partnership. As of January 16, 1998, Wyndham acquired the majority interest in WHGI and in March 1998 acquired the remaining interests. Prior to consummation of the Offering, the Partnership will enter into the Management Agreement with WHGI. Prior to the Offering, WHGI will enter into an agreement with Wyndham Management with respect to the management of the Resort and the marketing of the Hotel as a Wyndham Resort'r'. WHGI will also enter into a marketing agreement with Grand Bay with respect to the marketing of Las Casitas Village as a Grand Bay'r' hotel. Set forth below is a chart which contains certain historical and financial information concerning the Hotel:
ROOM REVENUE AVERAGE AVERAGE PER RENOVATION PERIOD OCCUPANCY DAILY RATE AVAILABLE ROOM EXPENDITURES - ----------------------------------------------- --------- ---------- -------------- ------------ April 1, 1997 - March 31, 1998(1).............. 72.7% $ 207.56 $ 55,065 $2,554,000 April 1, 1996 - March 31, 1997................. 72.0% $ 202.86 $ 53,294 $1,428,000 April 1, 1995 - March 31, 1996................. 71.0% $ 198.99 $ 51,687 $ 864,000 April 1, 1994 - March 31, 1995................. 73.3% $ 188.87 $ 50,523 $3,002,000
- ------------ (1) Financial information for this period is unaudited. The Partnership changed its fiscal year-end to December 31 from March 31 effective for the fiscal year ended December 31, 1997. ACCESS The Resort is located on the northeast coast of Puerto Rico, approximately 35 miles east of the Luis Munoz Marin International Airport. Access from San Juan and the Luis Munoz Marin International Airport to the Resort is provided by Puerto Rico Highway 3, a four lane thoroughfare. The Luis Munoz Marin International Airport is currently served by approximately 30 United States and international airlines, including American Airlines, which uses San Juan as a hub for its intra-Caribbean service. Frequent, scheduled passenger air services connects Puerto Rico to the mainland United States, Europe and South America. Flying time is 3 1/4 hours to New York, 2 1/4 hours to Miami, 1 1/2 hours to Caracas and 8 hours to Europe. At present, according to the Official Airline Guide, a recognized travel industry source, there is daily non-stop service between San Juan and 17 United States cities, including, New York, Chicago, Dallas, Miami, Atlanta, Boston and numerous others. There is also regularly scheduled service between Puerto Rico and other Caribbean islands and major Latin American and European cities. The Partnership believes that the abundance of non-stop flights to San Juan provides a major competitive advantage for resorts in Puerto Rico over those elsewhere in the Caribbean. 19 CASINO CREDIT POLICY The Resort's casino extends credit to qualified players who satisfy its credit review procedures. The procedures include external credit verification and internal management level approvals. Credit play at the Resort has not been significant since its opening in November 1993 and credit losses have been immaterial. Gaming debts are enforceable in Puerto Rico and the majority of states in the United States. Those states that do not enforce gaming debts will nonetheless generally allow enforcement of a judgment obtained in a jurisdiction such as Puerto Rico. Due to the unenforceability generally of gaming debts in Latin America, procedures have been established to obtain promissory notes from most Latin American credit casino clients. GOVERNMENT REGULATION AND LICENSING Puerto Rico legalized gambling by the adoption of Law No. 221 on May 15, 1948 (the 'Gaming Act'). The Office of the Commissioner of Financial Institutions of Puerto Rico is responsible for investigating and licensing casino owners and the Gaming Division (the 'Gaming Division') of the Tourism Company of Puerto Rico (the 'TCPR') regulates and supervises casino operations. A government inspector must be on-site whenever a casino is open. Among its responsibilities, the Gaming Division licenses all casino employees and enforces regulations relating to method of play and operation of the casino. The casino at the Resort is subject to strict internal controls imposed by the Partnership and the Hotel Operator over all facets of its operations, including the handling of cash and security measures. Each casino pays the government of Puerto Rico a casino franchise fee depending on total play or drop in the casino, which fee ranges from $50,000 to $200,000. The Resort pays an annual casino franchise fee of $150,000 in equal quarterly installments. The casino is required to renew its casino franchise quarterly; and, unless a change of ownership of the franchisee has occurred or the gaming authorities have reason to believe that reinvestigation of the franchisee is necessary, renewal is generally automatic. The Resort is also subject to various local laws and regulations affecting its business, including provisions relating to fire safety, sanitation, health and the sale of alcoholic beverages. SEASONALITY Tourism in Puerto Rico is at its peak during the months of December through April. Most hotels, despite reducing their room rates during the off-season months, experience decreased occupancy and lower revenues. The Resort expects that group business developed during the off-season and the shoulder-season will reduce the effect of seasonality on its operations. During the 12-month period ended March 31, 1998 and the fiscal year ended March 31, 1997, the Hotel's monthly occupancy ranged from 54.7% to 85.0% and 47.1% to 85.5%, respectively, with an average occupancy of 72.7% and 72.0%, respectively. During the fiscal year (9 months) ended December 31, 1997, the Hotel's monthly occupancy ranged from 54.7% to 85.0% with an average occupancy of 69.3% compared to monthly occupancy ranging from 47.1% to 84.2% and an average occupancy of 67.6% for the 9-month period ended December 31, 1996. During the 6-month periods ended June 30, 1998 and 1997, the Hotel's monthly occupancy ranged from 73.6% to 86.9% and 74.2% to 88.2%, respectively, with an average occupancy of 81.8% and 82.4%, respectively. The in-season average occupancy for December 1997 to April 1998 was 78.5% compared to 79.8% and 77.1% for the corresponding periods ending in April 1997 and April 1996, respectively. COMPETITION The hotel and casino business in the Caribbean region is highly competitive. The Resort competes with other hotels and resorts on the island of Puerto Rico and on other Caribbean and Bahamian islands and in the southeastern United States, Hawaii and Mexico. The Resort competes with such chains as Hyatt, Marriott, Hilton and Westin as well as numerous other hotel and resort chains and independent hotel and motel operators. Las Casitas Village competes with such chains as The Four Seasons Resorts and the Ritz Carlton. Some of these competing properties are owned 20 or managed by hotel companies possessing substantially greater financial and marketing resources than those of the Partnership and Hotel Operator. The Partnership believes that Puerto Rico offers many advantages over geographical areas in which competing properties are located. Unlike most other Caribbean islands, Puerto Rico is served by many direct air flights from the continental United States and has a highly developed economy and a well-educated population. Moreover, Puerto Rico is a Commonwealth of the United States, freeing mainland visitors from concerns about foreign currencies or customs and immigration laws. Unlike resort areas in the southeastern United States, Puerto Rico enjoys a mild subtropical climate throughout the year and offers legalized gambling. The resort hotels in Puerto Rico that most directly compete with the Resort are the Hyatt Regency Cerromar Beach Resort & Casino with, according to the Official Hotel Guide, 506 rooms, the Hyatt Dorado Beach Resort & Casino with, according to the Official Hotel Guide, 298 rooms, and the Westin Rio Mar Beach Resort & Country Club, which is also located in the northeastern section of Puerto Rico with, according to the Official Hotel Guide, 600 rooms, all of which offer services, meeting space and recreational facilities comparable to those offered by the Resort. The Caribe Hilton Hotel located in San Juan, Puerto Rico has recently announced significant renovation and expansion plans to position it to compete with the Resort for group business. All of these hotels are beach and, with the exception of the Caribe Hilton Hotel, golf resorts and have an experienced hotel operator that has available to it major hotel chain resources. The Resort competes with the foregoing resort hotels (as well as those in other destination resort locales) on the basis of price, service, the extent and quality of facilities, ease of access, and its ability to promote the Resort to travel agents, meeting planners, and directly to the public. In this regard, the Partnership expects to benefit from the marketing programs and reservation services of Wyndham Management and Grand Bay. EMPLOYEES Approximately 1,490 persons are employed at the Resort, of whom 120 are casino employees. None of the employees at the Resort is represented by labor unions. The number of persons employed at the Resort varies from season to season and is at its highest during the high season of December through April when occupancy is at its highest. Under the Management Agreement all of the persons employed at the Resort will be employees of the Hotel Operator, not the Partnership. The Partnership will continue to bear all costs with respect to employees at the Resort. The Partnership considers the current relationships between the Resort and its employees to be satisfactory. PROPERTY The Hotel is situated on approximately 220 acres in Fajardo, Puerto Rico. Additionally, an affiliate of the Partnership owns approximately 42 additional acres of land in the vicinity of the Resort which has various uses including employee parking facilities for the Resort. The following table sets forth the material properties which constitute the Hotel as of the date hereof. The Partnership believes that the properties listed in the following table are in good repair and are adequate for their respective purposes. The Partnership owns substantially all of the machinery, equipment, furnishings, goods and fixtures used in its business, all of which are well maintained and satisfactory for the purposes intended. Some of the Partnership's personal property utilized at the Resort is subject to security interests held by third parties who financed the acquisition of such property. The Partnership believes that its properties are adequately covered by insurance.
APPROXIMATE LOCATION PRINCIPAL USE SIZE INTEREST ENCUMBRANCES - ------------------------------------ ----------------- ------------------ ------------ ------------ Fajardo, PR......................... Hotel 854,000 sq. ft.(1) Fee simple (2) Palominos Island Fajardo, PR....................... Beach/Watersports 90 acres Leasehold(3) (4)
(foonotes on next page) 21 (foonotes from previous page) (1) The approximate size represents the square footage size of the structures, which constitute the Hotel. (2) Assuming completion of the Offering, will be subject to a first mortgage lien securing a mortgage note in the principal amount of $ securing the Bonds. (3) Leased by the Partnership pursuant to a Deed of Lease dated December 15, 1990. The term of the Deed of Lease is for 32 years, expiring November 30, 2022, with two options to extend the term for additional five-year periods. Annual rent for Palominos is $210,000 for the year ending November 30, 1998, which annual rent increases $30,000 every five years thereafter commencing December 1, 2002, including during extensions of the original term. (4) Assuming completion of the Offering, the Deed of Lease will be subject to a first leasehold mortgage lien securing a mortgage note in the principal amount of $ securing the Bonds. MANAGEMENT AND MARKETING OF THE RESORT The Partnership is a party to a management agreement with WHGI which requires the Partnership to pay to WHGI a base management fee equal to 3.5% of the Resort's gross revenues and an incentive management fee equal to 10% of the Resort's gross operating profit. Payment of the incentive management fees are subordinate to all obligations of the Partnership to third parties as well as certain obligations to its partners. To date, payment of all incentive management fees has been deferred. Prior to the acquisition of WHGI by Wyndham, WHGI's sole business was primarily to manage three hotels in Puerto Rico: the Resort, the El San Juan Hotel & Casino and the Condado Plaza Hotel & Casino. Following Wyndham's acquisition of WHGI during 1998, the employees of WHGI became employees of Wyndham and in many cases their responsibilities have increased to include other properties operated by Wyndham. For the 12-month period ended March 31, 1998 and the fiscal year ended March 31, 1997, WHGI was paid $3,426,000 and $3,305,000, respectively, in basic management fees and earned $2,457,000 and $2,376,000, respectively, in incentive management fees. For the fiscal year (9 months) ended December 31, 1997 and the 9-month period ended December 31, 1996, WHGI was paid $2,125,000 and $2,071,000, respectively, in basic management fees and earned $860,000 and $899,000, respectively, in incentive management fees. For the 6-month periods ended June 30, 1998 and 1997, WHGI was paid $2,272,000 and $2,097,000, respectively, in basic management fees and earned $2,403,000 and $2,064,000, respectively, in incentive management fees. WHGI was also reimbursed for certain administrative expenses incurred in connection with its management of the Resort. Prior to the consummation of the Offering, the Partnership will enter into the Management Agreement with WHGI, an affiliate of the Partnership, which will expire in September 2013 for the management and marketing of the Resort. WHGI will enter into an agreement with Wyndham Management with respect to the management of the Resort and the marketing of the Resort (excluding Las Casitas Village) as a Wyndham Resort. The term of the agreement between WHGI and Wyndham Management will coincide with the term of the Management Agreement. WHGI will also enter into a marketing agreement with Grand Bay with respect to the marketing of Las Casitas Village as a Grand Bay hotel. The agreement between WHGI and Grand Bay will be for a term of one year and will be renewable on a yearly basis if both WHGI and Grand Bay consent to such renewal. Under the Management Agreement, the Partnership will be required to pay to WHGI a base management fee of 2.5% of the gross revenues of the Resort, exclusive of room revenues from Las Casitas Village, and 3.0% of the gross room revenues from Las Casitas Village. The Partnership is also required to pay a trade name fee of 0.5% of gross room revenues of the Hotel, and marketing fees of 1.5% of gross room revenues of the Hotel and 1.0% of the gross room revenues of Las Casitas Village. In addition, the Partnership is solely responsible for all of the expenses incurred by the Hotel Operator in connection with managing and operating the Resort 22 and is solely responsible for its allocable share of the cost of the Hotel Operator's national sales office efforts. The Management Agreement provides that WHGI has exclusive supervision, control and discretion in the management, maintenance and operation of the Hotel and limited management responsibilities with respect to Las Casitas Village. The Hotel Operator has sole responsibility and total discretion on all matters with respect to the employees of the Resort and all such employees are employees of the Hotel Operator or its affiliates, not the Partnership. All leases and concession agreements relating to the Resort require the approval of each of the Hotel Operator and the Partnership. The Hotel Operator is responsible for providing repairs to and maintenance of the Resort, exclusive of Las Casitas Village, the payment for which is reimbursed by the Partnership. The Hotel Operator will notify the Partnership of the need for all capital improvements of the Resort, exclusive of Las Casitas Village. However, completion of such capital improvements is the responsibility of the Partnership. The Hotel Operator may use its affiliates to furnish goods or services to the Resort, but the terms of such arrangements must be no less favorable than those reasonably obtainable from an unrelated party. The Hotel Operator's business strategy is to maximize the economic potential of the Resort. The Hotel Operator is constantly seeking new ways to reduce operating costs as well as upgrade or add amenities to the Resort to enhance the overall experience of its guests. One new restaurant and four new retail shops were recently opened at the Resort. Additionally, the Resort will be enhanced by a Golden Door'r' spa scheduled to open in time for the 1998/1999 winter season. The Partnership believes that the Resort will benefit significantly from the use of the Wyndham Resorts'r' and Grand Bay'r' trade names in the marketing of the Resort and Las Casitas Village. The Hotel Operator promotes the multiple products of Wyndham under a series of unified marketing programs and the proprietary reservation system. As a result, Wyndham hotels enjoy a large market presence significant enough to yield cost savings by leveraging functions such as sales, marketing, reservations and advertising. According to industry studies, the Wyndham Resorts'r' brand was the top performing upper upscale hotel brand with respect to revenue per available room growth of 37.5% in the second quarter of 1998 versus the second quarter of 1997. With respect to the luxury Grand Bay hotels, the Hotel Operator's aim is to consistently deliver excellent and personalized service and 'seek opportunities to create memories.' To better position the Grand Bay'r' brand and to develop a unified luxury concept and brand, the Hotel Operator developed and is currently implementing a unified marketing program designed to position this brand as a collection of distinctive, luxury hotels and resorts competing with other high-end products. The Hotel Operator intends to initiate a multi-million dollar advertising campaign during January 1999 (the 'Advertising Campaign'). The Advertising Campaign will predominately feature the Resort as the flagship of the Wyndham Resorts. The Hotel's portion of the cost of the Advertising Campaign will be funded by the marketing fees paid by the Partnership to the Hotel Operator. The Hotel Operator expects that the Advertising Campaign will increase the exposure and awareness of the Resort and its amenities and, as a result, will increase the occupancy rate and revenues of the Resort. There is no assurance, however, that the Advertising Campaign will be a success with respect to either the Wyndham Resorts as a whole or to the Resort specifically. The Advertising Campaign may feature other Wyndham Resorts that compete directly or indirectly with the Resort such as the Wyndham Aruba Beach Resort & Casino in Palm Beach, Aruba, the Wyndham Rose Hall Golf & Beach Resort in Montego Bay, Jamaica, the El San Juan Hotel & Casino in San Juan, Puerto Rico and the Buena Vista Palace in Orlando, Florida. There are no assurances that the Advertising Campaign will not result in a loss of Resort guests to other Wyndham hotels. Las Casitas Village will be branded as a Grand Bay hotel and, like other Grand Bay hotels, will be marketed to the upper upscale traveler. All Grand Bay hotels intend to install Golden Door'r' spas on the hotel premises. An aggressive marketing campaign for Grand Bay hotels will be launched in early 1999 promoting Las Casitas Village as well as other Grand Bay hotels such as the Grand Bay Hotel in Miami, Florida, the Peaks in Telluride, Colorado, the Boulders in 23 Boulder, Colorado, the Grand Bay Hotel in Scottsdale, Arizona and La Paloma in Tucson, Arizona. This campaign will be part of Wyndham's strategy to consolidate the marketing of the properties acquired by Patriot/Wyndham during the past two years and enhance the Grand Bay brand. Las Casitas Village portion of the campaign will be funded by the marketing fees paid to the Hotel Operator with respect to Las Casitas Village. The Resort will now have available the resources of the extensive sales and marketing networks of Wyndham Resorts and Grand Bay. Prior to 1998, the Resort had an in-house marketing staff of approximately 8 employees, a U.S. mainland exclusive marketing service with 40 employees located primarily in Miami, Florida and New York, New York and sales agents in South America and Europe. The Partnership has agreed to indemnify and hold harmless the Hotel Operator and its shareholders and affiliates and their respective partners, shareholders, directors, officers, employees and agents from and against any and all liabilities relating to the operation of the Resort except for the gross negligence or willful misconduct of its executive employees. GOLDEN DOOR'r' SPA The Hotel Operator has determined that each Grand Bay hotel will contain a Golden Door spa. The Partnership has initiated construction of a Golden Door'r' spa to be marketed as an amenity to Las Casitas Village but which will also be available to guests of the Hotel. The Partnership will own the spa and the Hotel Operator will manage and market the spa. The estimated cost of construction of the spa is $4.7 million, which will be borne by the Partnership. The Partnership will pay Grand Bay a management fee of 6% of the gross revenues of the spa and an incentive fee of 25% of the operating income of the spa. The Hotel Operator anticipates the spa opening in time for the 1998/1999 winter season. LAS CASITAS VILLAGE ARRANGEMENTS The Partnership has entered into separate, year-to-year agreements with the owners of almost all of the condominium units of Las Casitas Village with respect to the management and marketing of the condominium units. The Partnership has full discretion in fixing room rates for each unit in Las Casitas Village. Each unit must be made available to the Partnership for at least 11 months per calendar year and 23 of 25 weeks during the Resort's high season. The Partnership receives 50% of the net rental income of each condominium unit, which is equal to the gross rental income of each condominium unit less certain administrative, marketing, maintenance, operational and other costs associated with the condominium units individually and Las Casitas Village as a whole. THE PARTNERSHIP The Partnership is a Delaware limited partnership organized on January 16, 1990 under the Delaware Revised Uniform Limited Partnership Act. The Partnership's mailing address in Puerto Rico is 1000 El Conquistador Avenue, Fajardo, Puerto Rico 00738. The Partnership's registered office in the State of Delaware is c/o Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The general partners and limited partners of the Partnership are WKA El Con Associates, a New York general partnership ('WKA'), and Conquistador Holding, Inc., a Delaware corporation ('CHI'). Each of WKA and CHI owns a 35% limited partnership interest and a 15% general partnership interest in the Partnership. CHI is the managing general partner (the 'Managing General Partner') of the Partnership with the authority to make all decisions on behalf of the Partnership without the consent of WKA. As of the date of issuance of the Bonds, the Partnership will be governed by an Amended and Restated Agreement of Limited Partnership (the 'Partnership Agreement'). Immediately prior to the issuance of the Bonds (i) WKA will transfer its general and limited partnership interests in the Partnership to a newly-formed, wholly-owned, single-purpose subsidiary of WKA ('WKA Sub') and such general partnership interests will be converted to limited partnership interests, and (ii) CHI will transfer its 24 general and limited partnership interests in the Partnership to a newly-formed, wholly-owned, single-purpose subsidiary of CHI ('CHI Sub'). CHI Sub will become the Managing General Partner at the time of the transfer referred to in (ii) above. The term of the Partnership will continue until March 31, 2030, provided that the Partnership may be dissolved prior to such date upon (i) mutual agreement of all the partners of the Partnership; (ii) the sale or abandonment of all or substantially all of the Hotel; or (iii) the bankruptcy of the sole remaining general partner unless the remaining partners agree in writing to continue the business of the Partnership and to replace the bankrupt general partner. No regular meetings of the partners of the Partnership are required under the Partnership Agreement. However, the partners meet once per year to review and approve the forthcoming year's budget for the Resort as prepared and presented by the Hotel Operator. The partners also meet from time-to-time as required to discuss various matters pertaining to the Partnership. In 1990, WHG Resorts & Casinos Inc. ('WHG'), together with certain other individuals ('the Other Owners'), caused the formation of WKA. The Partnership was formed by WKA and Kumagai Caribbean, Inc. ('Kumagai'), a subsidiary of Kumagai Gumi Co., Ltd., a large Japanese construction company, for the purpose of acquiring and renovating the hotel and casino property now known as the Resort. The Partnership was originally owned 50% by WKA and 50% by Kumagai. The Resort was originally built as a 388 room hotel in 1962. In January 1990, WHGI entered into an agreement with the Partnership for the management of the Resort. The Resort was substantially renovated and expanded during 1991 and 1992 with Kumagai acting as construction manager and rendering technical development services during the construction phase and WHGI rendering management services in preparation of opening of the Resort. The completed Resort, excluding Las Casitas Village, opened for business in November 1993. In April 1993, WKA became a limited partner in Las Casitas Development Company I, S en C (S.E.) which acquired certain land from the Partnership for the purpose of developing and selling approximately 90 condominiums known as Las Casitas Village. The project was substantially completed in or about January 1995. On January 16, 1998, WHG was acquired by a wholly-owned subsidiary of Wyndham. WHGI was owned by WHG and the Other Owners. Wyndham acquired WHG's interest in WHGI concurrently with its acquisition of WHG. Wyndham is an operating company which manages and operates hotels. On March 31, 1998, Patriot acquired the interests of certain of the Other Owners in WKA and Kumagai in the Partnership and Wyndham acquired the remaining interests in WHGI. Patriot is a real estate investment trust which owns hotel properties. On July 13, 1998, Patriot acquired the balance of the Other Owners' interests in WKA. Subsequently, Patriot transferred its ownership interest in WKA and the Partnership to CHI. WKA is beneficially owned 46.54% by Wyndham and 53.46% owned by CHI. Patriot beneficially owns approximately 77% of the Partnership by reason of its 99% equity ownership interest in CHI. Wyndham beneficially owns approximately 23% of the Partnership by reason of its equity ownership in WKA. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The Partnership's partnership interests are comprised of 30% general partnership interests and 70% limited partnership interests. The beneficial ownership of the Partnership as of September 30, 1998 is set forth below:
NAME AND ADDRESS AMOUNT AND NATURE OF OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS - ------------------------------------- ---------------------------------------- ---------------- WKA El Con Associates 50.00% General Partnership Interest (1) 50.00% 1000 El Conquistador Avenue Fajardo, PR 00738 Conquistador Holding, Inc. 76.73% General Partnership Interest (2) 76.73% 1000 El Conquistador Avenue Fajardo, PR 00738
(table continued on next page) 25 (table continued from previous page)
NAME AND ADDRESS AMOUNT AND NATURE OF OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS - ------------------------------------- ---------------------------------------- ---------------- WKA El Con Associates 50.00% Limited Partnership Interest (3) 50.00% 1000 El Conquistador Avenue Fajardo, PR 00738 Conquistador Holding, Inc. 76.73% Limited Partnership Interest (4) 76.73% 1000 El Conquistador Avenue Fajardo, PR 00738
- ------------ (1) WKA directly owns 50% of the general partnership interests of the Partnership which is equal to 15% of the total partnership interests of the Partnership. WKA is 46.54% indirectly owned by Wyndham and 53.46% owned by CHI. (2) CHI directly owns 50% of the general partnership interests of the Partnership and indirectly owns 26.73% of the general partnership interests of the Partnership by reason of its 53.46% ownership of WKA, resulting in direct and indirect ownership of 76.73% of the general partnership interests in the Partnership which is equal to 23.02% of the total partnership interests of the Partnership. Wyndham International Operating Partnership, L.P. owns 100% of the Class A voting stock of CHI, which represents 1% of the equity of CHI, and Patriot owns 100% of the Class B non-voting stock of CHI, which represents 99% of the equity of CHI. (3) WKA directly owns 50% of the limited partnership interests of the Partnership which is equal to 35% of the total partnership interests of the Partnership. (4) CHI directly owns 50% of the limited partnership interests of the Partnership and indirectly owns 26.73% of the limited partnership interests of the Partnership by reason of its 53.46% ownership of WKA, resulting in direct and indirect ownership of 76.73% of the limited partnership interests in the Partnership which is equal to 53.71% of the total partnership interests of the Partnership. ------------------------ The Partnership Agreement will restrict the Partnership's activities to the ownership of the Resort, prohibit the incurrence of obligations not related to the Resort and limit its ability to file bankruptcy. Each of WKA Sub and CHI Sub, the newly-formed, single-purpose entities which will become the partners of the Partnership immediately prior to consummation of the Offering, will be similarly restricted and will be required to have an independent director whose approval will be required for the Partnership or either of its partners to file bankruptcy. The outstanding shares of common stock, $.01 par value per share, of Patriot ('Patriot Common Stock') are 'paired' with the outstanding shares of common stock, $.01 par value per share, of Wyndham ('Wyndham Common Stock') so that they are transferable and tradable only in combination as units, each unit consisting of one share of Patriot Common Stock and one share of Wyndham Common Stock ('Paired Common Stock'). Patriot, through its wholly-owned subsidiaries PAH GP, Inc. and PAH LP, Inc., is the sole general partner of Patriot American Hospitality Partnership, L.P. (the 'REIT Partnership'). In addition, Patriot is the holder of a 90.3% economic interest in the REIT Partnership as of September 22, 1998. The REIT Partnership was formed in connection with the initial public offering on October 2, 1995 of Patriot's predecessor ('Old Patriot'). Old Patriot contributed its assets to the REIT Partnership in exchange for units of limited REIT Partnership interest ('OP Units') of the REIT Partnership. Wyndham was the holder of an 89.1% economic interest in Wyndham Hospitality Operating Partnership, L.P. (formerly known as Patriot American Hospitality Operating Partnership, L.P.) as of September 22, 1998. As of October 15, 1998, there were outstanding: 170,313,097 shares of Paired Common Stock; 4,860,876 shares of Preferred Stock of Patriot; 1,781,173 shares of Series A Preferred of Wyndham; 1,781,181 shares of Series B Preferred of Wyndham; 12,537,193 Paired OP Units (excluding OP Units held by subsidiaries of Patriot) 1,109,186 Preferred Series A Wyndham OP Units; 1,324,804 26 Preferred Series B Wyndham OP Units; and 633,545 Preferred Series C Wyndham OP Units. The beneficial ownership of the executive officers of the Partnership in Paired Common Stock as of September 30, 1998 is set forth below:
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNER OF CLASS - -------------------------------------------------------------------------------- -------------------- -------- Karim Alibhai .................................................................. 4,787,938(1) 2.77% 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207 James D. Carreker .............................................................. 1,890,063(2) 1.09% 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207 Stanley M. Koonce, Jr. ......................................................... 567,940(3) * 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207 William W. Evans, III .......................................................... 488,225(4) * 590 Madison Avenue, New York, NY 10022 Thomas W. Lattin ............................................................... 287,432(5) * 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207 Lawrence S. Jones .............................................................. 40,000(6) * 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207 Carla S. Moreland .............................................................. 64,578(7) * 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207 Brian R. Gamache ............................................................... 32,803(8) * 1950 Stemmons Freeway, Suite 6001, Dallas, TX 75207
- ------------ * Less than 1%. (1) Includes options to purchase 280,000 shares of Paired Common Stock issued to Mr. Alibhai, of which 93,333 shares are currently exercisable. The number of shares beneficially held by Mr. Alibhai includes 633,545 shares of Preferred Series C Wyndham OP Units, 85,600 shares of Series A Preferred Stock of Wyndham (beneficially owned by CHC Investor Partners, Ltd.), 85,600 shares of Series B Preferred Stock of Wyndham (beneficially owned by CHC Investor Partners, Ltd.) and an aggregate of 421,161 OP Units (beneficially owned by Gencom Interests, Inc., a family corporation for which he serves as Vice President and of which he owns 30% of the outstanding capital stock). Mr. Alibhai disclaims beneficial ownership of the OP Units referred to above, except to the extent of his 30% ownership interest in such corporation. Mr. Alibhai also disclaims beneficial ownership of the Series A Preferred Stock of Wyndham and the Series B Preferred Stock of Wyndham referred to above to the extent they exceed his pecuniary interest in CHC Investor Partners, Ltd. (2) Includes options to purchase 72,716 shares of Paired Common Stock issued to Mr. Carreker, all of which are currently exercisable. (3) Includes options to purchase 120,290 shares of Paired Common Stock issued to Mr. Koonce, of which 27,440 shares are currently exercisable. (4) Includes options to purchase 560,009 shares of Paired Common Stock issued to Mr. Evans, of which 280,005 shares are currently exercisable. (5) Includes options to purchase 262,633 shares of Paired Common Stock issued to Mr. Lattin, of which 116,682 shares are currently exercisable. (6) Includes options to purchase 80,000 shares of Paired Common Stock issued to Mr. Jones, of which 10,000 shares are currently exercisable. (7) Includes options to purchase 87,950 shares of Paired Common Stock issued to Ms. Moreland, of which 51,450 shares are currently exercisable. (8) Includes options to purchase 12,351 shares of Paired Common Stock issued to Mr. Gamache, none of which are currently exercisable. 27 MANAGEMENT OF THE PARTNERSHIP EXECUTIVE OFFICERS OF THE PARTNERSHIP The following table sets forth the names, ages and principal occupations of each of the Partnership's executive officers and the year in which each was elected an officer.
NAME AGE TITLE OFFICER SINCE - ----------------------------------------- --- ----------------------------------------- ------------- James D. Carreker........................ 51 Chief Executive Officer 1998 Brian R. Gamache......................... 41 President 1995 Lawrence S. Jones........................ 51 Executive Vice President and Treasurer 1998 Karim Alibhai............................ 34 Executive Vice President 1998 William W. Evans, III.................... 46 Executive Vice President 1998 Stanley M. Koonce, Jr.................... 50 Executive Vice President 1998 Thomas W. Lattin......................... 54 Executive Vice President and Director 1998 Carla S. Moreland........................ 39 Secretary 1998
JAMES D. CARREKER became the Chief Executive Officer of the Partnership in 1998. Mr. Carreker also became the Chairman of the Board of Directors and Chief Executive Officer of Wyndham and a director of Patriot in 1998. He has also been Chief Executive Officer and a Director of CHI since 1998. Prior to such time, he had served as President and Chief Executive Officer of Wyndham Hotel Corporation, the predecessor corporation to Wyndham ('Old Wyndham'). He also served as Chief Executive Officer of Trammell Crow Company, a national real estate company, from August 1994 to December 1995. Mr. Carreker currently serves as a director of Trammel Crow Company. Mr. Carreker is 51 years old. Mr. Carreker holds a B.S. and a Master of Business Administration from Oklahoma State University. BRIAN R. GAMACHE became the President of the Partnership and CHI in 1998. Mr. Gamache was President of the Resort from May 1995 until November 1997. He was also President and Chief Operating Officer of WHG from April 1997 until January 1998. Mr. Gamache has been President of WHGI since March 1996 and he was Chief Operating Officer of WHGI from March 1996 until January 1998. Prior to such time, Mr. Gamache served as the Vice President -- Sales and Marketing of WHGI from September 1990 until May 1995. Prior to joining WHGI, Mr. Gamache held various positions for Hyatt Hotels Corp. from 1983 until 1990, including Corporate Director of Sales and Marketing -- Resorts from 1987 until 1990 and he held various positions at Marriott Hotels Corporation from 1980 until 1983, including Director of Sales at the Marriott Camelback Resort and Country Club in Scottsdale, Arizona. Mr. Gamache is 41 years old. LAWRENCE S. JONES became the Executive Vice President and Treasurer of the Partnership and CHI in 1998. Mr. Jones also became the Executive Vice President and Treasurer of each of Patriot and Wyndham in 1998. Prior to such time, Mr. Jones joined Coopers & Lybrand in 1972 and continued there as a partner until March 1998 where he served as Chairman of the firm's REIT industry practice. Mr. Jones is 51 years old. Mr. Jones holds a B.S. from the University of California, Berkeley and a M.S. from UCLA. Mr. Jones is a certified public accountant. KARIM ALIBHAI became an Executive Vice President of the Partnership and CHI in 1998. Mr. Alibhai has been the President and the Chief Operating Officer and a director of Wyndham since 1997. For the prior 11 years, Mr. Alibhai was a principal of the Gencom Group, an affiliated group of companies that acquired, developed, renovated, leased and managed hotel properties in the United States and Canada through Gencom American Hospitality. Most recently, Mr. Alibhai was the President and Chief Executive Officer of the Gencom Group. Mr. Alibhai is 34 years old. He holds a B.A. from Rice University. WILLIAM W. EVANS, III became an Executive Vice President of the Partnership and CHI in 1998. Mr. Evans also serves as Executive Vice President of Wyndham and President and Chief Operating Officer of Patriot since 1998 and as a director of Patriot since 1997. Prior to such time, Mr. Evans served in the Office of the Chairman of Patriot or Old Patriot since 1997. Previously, 28 Mr. Evans was a Managing Director in PaineWebber's Real Estate Group with responsibility principally for the organization and structuring of principal transactions. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody and Co. Incorporated in December 1994. Mr. Evans is 46 years old. Mr. Evans is a graduate of the University of Virginia. STANLEY M. KOONCE, JR. became an Executive Vice President of the Partnership and CHI in 1998. Mr. Koonce also has been the Executive Vice President -- Marketing and Strategic Planning of Wyndham since 1998. Prior to such time, he served as Executive Vice President -- Marketing, Planning and Technical Services of Old Wyndham since October 1994, was elected a director of Old Wyndham in January 1997 and served as Senior Vice President of Sales and Marketing of Old Wyndham from October 1989 until October 1994. Mr. Koonce is 50 years old. Mr. Koonce holds a B.S. in Mathematics and an M.B.A. from the University of North Carolina. THOMAS W. LATTIN became an Executive Vice President of the Partnership and Executive Vice President and a Director of CHI in 1998. Mr. Lattin also has been an Executive Vice President of Wyndham since October 1997. Prior to such time, he became President of Chief Operating Officer of Old Patriot in April 1995 and continues in such capacity for Patriot. From 1987 through 1994, he served as the National Partner of the hospitality industry consulting practice of Leventhal & Horwath and subsequently as a partner in the national hospitality consulting group of Coopers & Lybrand L.L.P. In 1994, he joined the Hospitality Group of Kidder, Peabody & Co. Incorporated as a Senior Vice President and later served as a Senior Vice President with PaineWebber Incorporated. Mr. Lattin is 54 years old. Mr. Lattin holds a B.S. and a M.S. in Hotel Management from the Cornell School of Hotel Administration. He is a certified public accountant. CARLA S. MORELAND became Secretary of the Partnership and Senior Vice President and Secretary of CHI in 1998. Ms. Moreland also has been Senior Vice President, General Counsel and Secretary of Wyndham since 1998. Ms. Moreland was Vice President, General Counsel and Secretary of Old Wyndham from 1994 until 1998. From 1988 until 1994 Ms. Moreland was an attorney at Weil Gotshal & Manges. Ms. Moreland is 39 years old. OFFICERS AND DIRECTORS OF THE MANAGING GENERAL PARTNER Certain information is set forth below concerning the directors and principal executive officers of CHI, each of whom has been elected or appointed to serve until his or her successor is duly elected and qualified.
POSITION(S) NAME AGE POSITION(S) HELD SINCE - ---------------------------------------------- --- ---------------------------------------------- ---------- James D. Carreker............................. 51 Chief Executive Officer and Director 1998 Brian R. Gamache.............................. 41 President 1998 Lawrence S. Jones............................. 51 Executive Vice President and Treasurer 1998 Karim Alibhai................................. 34 Executive Vice President 1998 William W. Evans, III......................... 46 Executive Vice President 1998 Stanley M. Koonce, Jr......................... 50 Executive Vice President 1998 Thomas W. Lattin.............................. 54 Executive Vice President and Director 1998 Carla S. Moreland............................. 39 Senior Vice President and Secretary 1998
For biographical information with respect to the individuals listed above, see ' -- Executive Officers of the Partnership' above. The individuals set forth above will also serve as the directors and principal executive officers of each of WKA Sub and CHI Sub at the time of the Offering. CHI intends to designate two additional directors after completion of the Offering. COMPENSATION OF EXECUTIVE OFFICERS OF THE PARTNERSHIP The executive officers of the Partnership received no compensation from the Company during the fiscal year (9 months) ended December 31, 1997 or the fiscal years ended March 31, 1997 or 1996. 29 LIMITATIONS ON THE LIABILITY OF AFFILIATED PERSONS The Partnership Agreement will provide that no general partner and none of its officers, directors, partners, employees or agents, whether acting as a general partner or otherwise, will have any liability to the Partnership or any other partner for any acts performed by such general partner, officer, director, partner, employee or agent, by or on behalf of the Partnership in its capacity as such except for gross negligence or willful misconduct. The Partnership Agreement also provides that the liability of each limited partner is limited to its capital contribution and that no limited partner as such has any other liability to contribute money to, or in respect of the liabilities or obligations of, the Partnership, nor is any limited partner as such personally liable for any obligations of the Partnership except as otherwise provided by law. IN THE OPINION OF THE COMMISSION, INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT IS AGAINST PUBLIC POLICY AND THEREFORE UNENFORCEABLE. A successful indemnification of any general partner or an affiliate could deplete the assets of the Partnership, unless the Partnership's indemnification obligation is covered by insurance. The Partnership does not anticipate obtaining such insurance. The Management Agreement provides that the Partnership will indemnify and hold harmless WHGI and its shareholders and affiliates and their respective partners, shareholders, directors, officers, employees and agents from and against any and all liabilities (including those caused by the simple negligence of the indemnitee and those as to which the indemnitee may be strictly liable) (i) arising out of or incurred in connection with the construction, renovation, management or operation of the Resort or (ii) arising out of or resulting from the environmental condition of the Resort or the applicability of any legal requirements relating to hazardous materials, except, in the case of both (i) and (ii) above, those liabilities caused by the gross negligence or willful misconduct of executive personnel. 30 SELECTED FINANCIAL DATA The following table sets forth selected income data and balance sheet data of the Partnership. The selected income data and balance sheet data are derived from the financial statements and notes thereto of the Partnership, which for the fiscal year (9 months) ended December 31, 1997 and the fiscal years ended March 31, 1994, 1995, 1996 and 1997 have been audited by Ernst & Young LLP, independent auditors, and are included in this Official Statement and Prospectus, and includes an explanatory paragraph which describes an uncertainty about the Partnership's ability to continue as a going-concern. The information set forth below for other periods is unaudited. The Partnership changed its fiscal year end to December 31 from March 31 effective for the fiscal year-ended December 31, 1997. The data below should be read in conjunction with the financial statements, related notes and other financial information included herein.
TWELVE MONTHS TWELVE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, ENDED MARCH 31, ------------------------------------------ MARCH 31, 1998 1994 1995 1996 1997 1998 PRO FORMA(1) -------- -------- --------- -------- ------------- ------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT ROOM AND OCCUPANCY DATA) Selected Statement of Income Data: Hotel revenues, net............................... $ 30,486 $ 78,688 $ 83,035 $ 86,953 $ 92,116 $ 92,116 Casino revenues................................... 2,488 6,055 6,179 6,005 4,931 4,931 -------- -------- --------- -------- ------------- ------------- Total revenues................................ $ 32,974 $ 84,743 $ 89,214 $ 92,958 $ 97,047 $ 97,047 -------- -------- --------- -------- ------------- ------------- -------- -------- --------- -------- ------------- ------------- Operating expenses before depreciation and amortization.................................... $ 33,559 $ 85,427 $ 74,163 $ 76,251 $ 78,706 $ 75,473(2) -------- -------- --------- -------- ------------- ------------- EBITDA............................................ (585) (684) 15,051 16,707 18,341 21,574 Depreciation and amortization..................... 4,274 11,124 10,499 9,147 9,221 9,387(3) -------- -------- --------- -------- ------------- ------------- Income (loss) from operations (EBIT).............. (4,859) (11,808) 4,552 7,560 9,120 12,187 Interest income................................... 109 468 229 199 172 200(4) Interest expense.................................. (5,298) (16,137) (17,022) (17,162) (17,229) (10,830)(5) -------- -------- --------- -------- ------------- ------------- Net income (loss)............................. $(10,048) $(27,477) $ (12,241) $ (9,403) $ (7,936) $ 1,557 -------- -------- --------- -------- ------------- ------------- -------- -------- --------- -------- ------------- ------------- (Deficiency in) partners' capital beginning of period.......................................... $ 46,189 $ 36,191 $ 8,716 $ (3,525) $ (12,928) $ (12,928) Partner capital contributions..................... 50 2 -- -- 71,977 86,598 (Deficiency in) partners' capital end of period... 36,191 8,716 (3,525) (12,928) 51,113 75,227 Ratio of earnings to fixed charges................ 0.3X 0.5X 0.6X 1.1X Other Financial Data: Available Hotel rooms(#).......................... 751 751 751 751 751 751 Hotel occupancy................................... 72.1% 73.3% 71.0% 72.0% 72.7% 72.7% Hotel average rate................................ $ 220.99 $ 188.87 $ 198.99 $ 202.86 $ 207.56 $ 207.56 Hotel revenue PAR(6).............................. $ 159.37 $ 138.42 $ 141.22 $ 146.01 $ 150.87 $ 150.87 Room revenue per available Hotel room............. NA $112,840 $ 118,794 $123,779 $ 129,224 $ 129,224 Cash flow from operating activities............... $ 2,283 $ (4,712) $ 1,906 $ 5,855 $ 4,376 Selected Balance Sheet Data: Current assets.................................... $ 25,270 $ 15,316 $ 11,823 $ 13,618 $ 16,154 $ 20,448 Land, building and equipment, net................. 197,139 194,557 188,994 183,960 228,817 230,141 Total assets...................................... 243,587 225,191 211,691 205,430 248,701 255,992 Long-term debt, including current maturities...... 181,989 193,034 197,154 199,709 178,599 164,504(7) Total liabilities and (deficiency in) partners' capital......................................... 243,587 225,191 211,691 205,430 248,701 255,992
- ------------ (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on April 1, 1997. Also assumes that the Management Agreement became effective as of April 1, 1997. (2) Reflects the reduction in base management fees from 3.5% to 2.5% of gross revenues of the Resort, implementation of a trade name fee of 0.5% of gross room revenues of the Hotel, and the elimination of incentive fees which were accrued at a rate of 10% of the Resort's gross operating profit, and interest thereon. No adjustment has been made with respect to the new marketing fee of 1.5% of gross room revenues of the Hotel and 1.0% gross room revenues of Las Casitas Village payable pursuant to the Management Agreement. The Partnership believes that the Hotel's historical marketing expenses will not increase and that a portion of such expenses will be reallocated from a Hotel expense to a fee for marketing services. (3) Reflects an adjustment for amortization of Offering costs, estimated at $5.0 million, amortized on the straight-line method over the 30-year term of the Bonds at a rate of $166,667 per year. (4) Reflects additional interest income at an assumed rate of 4.0%, or of $200,000 on the amount deposited in the Reserve Fund. (5) Reflects an assumed interest rate of 6.35% for the Bonds. (6) Revenue PAR is equal to the average rate multiplied by occupancy percentage. (7) Reflects the reduction in long-term debt of $25,000,000 related to the GDB debt which will be assumed by Patriot and the addition of the gross proceeds from the Offering. 31
PRO FORMA(1) NINE MONTHS NINE MONTHS NINE MONTHS SIX MONTHS ENDED JUNE 30, ENDED EMDED DECEMBER 31, --------------------------------- DECEMBER 31, DECEMBER 31, 1997 1998 1996 1997 PRO FORMA(1) 1997 1998 PRO FORMA(2) ------------ ------------ -------------- ------- -------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT ROOM AND OCCUPANCY DATA) Selected Statement of Income Data: Hotel revenues, net....................... $ 54,158 $ 56,573 $ 56,573 $ 55,909 $ 61,662 $ 61,662 Casino revenues........................... 4,011 3,554 3,554 3,272 2,724 2,724 ------------ ------------ ------------- -------- -------- ------------ Total revenues........................ $ 58,169 $ 60,127 $ 60,127 $ 59,181 $ 64,386 $ 64,386 ------------ ------------ ------------- -------- -------- ------------ ------------ ------------ ------------- -------- -------- ------------ Operating expenses before depreciation and amortization............................ $ 53,572 $ 55,253 $ 53,909(3) $ 42,746 $ 44,350 $ 41,429(3) ------------ ------------ ------------- -------- -------- ------------ EBITDA.................................... 4,597 4,874 6,218 16,435 20,036 22,957 Depreciation and amortization............. 6,856 6,887 7,012(4) 4,597 3,865 3,949(4) ------------ ------------ ------------- -------- -------- ------------ Income (loss) from operations (EBIT)...... (2,259) (2,013) (794) 11,838 16,171 19,008 Interest income........................... 139 128 150(5) 105 85 100(5) Interest expense.......................... (12,691) (13,157) (8,413)(6) (8,871) (8,670) (5,609)(6) ------------ ------------ ------------- -------- -------- ------------ Net income (loss)..................... $(14,811) $(15,042) $ (9,057) $ 3,072 $ 7,586 $ 13,499 ------------ ------------ ------------- -------- -------- ------------ ------------ ------------ ------------- -------- -------- ------------ (Deficiency in) partners' capital beginning of period..................... $ (3,525) $(12,928) $ (12,928) $(18,336) $(27,970) $ (27,970) Partner capital contributions............. -- -- 91,256 -- 71,977 90,422 (Deficiency in) partners' capital end of period.................................. (18,336) (27,970) 69,271 (15,264) 51,593 75,951 Ratio of earnings to fixed charges........ 1.3X 1.8X 3.4X Other Financial Data: Available Hotel rooms(#).................. 751 751 751 751 751 751 Hotel occupancy........................... 67.6% 69.3% 69.3% 82.4% 81.8% 81.8% Hotel average rate........................ $ 175.01 $ 175.59 $ 175.59 $ 229.54 $ 243.35 $ 243.35 Hotel revenue PAR(8)...................... $ 118.24 $ 121.68 $ 121.68 $ 189.17 $ 199.14 $ 199.14 Room revenue per available Hotel room..... $ 77,456 $ 80,062 $ 80,062 $ 78,804 $ 85,733 $ 85,733 Cash flow from operating activities....... $ 13 $ (1,415) $ 4,073 $ 10,445 Selected Balance Sheet Data: Current assets............................ $ 12,517 $ 13,953 $ 17,356 $ 13,360 $ 12,926 $ 16,763 Land, building and equipment.............. 185,822 181,127 229,664 182,659 229,726 229,726 Total assets.............................. 206,755 200,422 253,580 202,896 246,075 253,154 Long-term debt, including current maturities.............................. 202,969 204,624 164,159(8) 202,366 177,263 163,168(8) Total liabilities and (deficiency in) partners' capital....................... 206,755 200,422 253,580 202,896 246,075 253,154
- ------------ (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on April 1, 1997. Also assumes that the Management Agreement became effective as of April 1, 1997. (2) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on January 1, 1998. Also assumes that the Management Agreement became effective as of January 1, 1998. (3) Reflects the reduction in base management fees from 3.5% to 2.5% of gross revenues of the Resort, the implementation of a trade name fee of 0.5% of gross room revenues of the Hotel, and the elimination of incentive fees which were accrued at a rate of 10% of the Resort's gross operating profit, and interest thereon. No adjustment has been made with respect to the new marketing fee of 1.5% of gross room revenues of the Hotel and 1.0% of gross room revenues of Las Casitas Village payable pursuant to the Management Agreement. The Partnership believes that the Hotel's historical marketing expenses will not increase and that a portion of such expenses will be reallocated from a Hotel expense to a fee for marketing services. (4) Reflects an adjustment for amortization of Offering costs, estimated at $5.0 million, amortized on the straight-line method over the 30-year term of the Bonds at a rate of $125,000 and $83,333 for the 9 months ended December 31, 1997 and 6 months ended June 30, 1998, respectively. (5) Reflects additional interest income at an assumed rate of 4.0%, or of $150,000 and $100,000 for the 9 months ended December 31, 1997 and 6 months ended June 30, 1998, respectively, on the amount deposited in the Reserve Fund. (6) Reflects an assumed interest rate of 6.35% for the Bonds. (7) Revenue PAR is equal to the average rate multiplied by occupancy percentage. (8) Reflects the reduction in long-term debt of $25,000,000 related to the GDB debt which will be assumed by Patriot and the addition of the gross proceeds from the Offering. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Partnership's results of operations are highly seasonal with the highest revenues occurring from December through April. During the months of May through November, efforts are made to actively market the Resort in order to minimize the adverse effects of seasonality. See ' -- Seasonality' and 'RISK FACTORS -- Seasonality.' Accordingly, results for any single quarter are not necessarily indicative of the results for any other quarter or for the full fiscal year. Results can also be negatively affected by circumstances beyond the Partnership's control such as hurricanes, airline strikes, droughts and water shortages, and the like. The impact of such events, if any, will depend, in part, upon the time of year when such events occur. The Partnership and the Hotel Operator have taken steps to improve the operating performance of the Resort by strengthening its management and reducing operating costs primarily through implementation of better cost controls and more efficient staffing. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------- 1998 1997 ------- ------- (IN THOUSANDS) Revenues: Hotel and casino revenues, net............................... $64,386 $59,181 Operating expenses........................................... 48,215 47,343 ------- ------- Operating income........................................ $16,171 $11,838 ------- ------- ------- -------
Hotel and casino revenues increased $5,205,000 or 8.8% in the six months ended June 30, 1998 to $64,386,000 from $59,181,000 in the six months ended June 30, 1997. The increase was due to a greater occupancy mix of group rooms which generated higher average rates and additional room revenue as well as additional food and beverage revenues. Additional revenues were also generated from transportation and golf greens fee price increases implemented on January 1, 1998. Operating income increased by $4,333,000 or 36.6% from $11,838,000 to $16,171,000 for the six months ended June 30, 1998 compared with the six months ended June 30, 1997 due to improved operating efficiencies and lower food and beverage costs. Amortization expenses decreased as the five-year pre-opening marketing expenses were fully amortized in March 1998 with the acquisition of WHG by a wholly-owned subsidiary of Wyndham. The net income for the six month period ended June 30, 1998 increased by $4,514,000 to $7,586,000 versus $3,072,000 for the six month period ended June 30, 1997 due to the combination of successful price increases and management's ability to maintain or reduce costs in the hotel operating divisions. FISCAL YEAR (NINE MONTHS) ENDED DECEMBER 31, 1997 COMPARED WITH NINE MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, ----------------------- 1997 1996 ------- ------- (IN THOUSANDS) Revenues: Hotel and casino revenues, net............................... $60,127 $58,169 Operating expenses........................................... 62,140 60,428 ------- ------- Operating income (loss)................................. $(2,013) $(2,259) ------- ------- ------- -------
33 Hotel and casino revenues increased by $1,958,000 or 3.4% in the nine months ended December 31, 1997 to $60,127,000 from $58,169,000 in the nine months ended December 31, 1996. Despite this increase, the additional travel agent commissions paid and greater sales and marketing expenses to attract summer business negated this revenue gain. The Hotel extended additional discounts and marketing promotional monies to stimulate demand in other markets. For the nine primarily off-season months of April 1, 1997 to December 31, 1997, operating loss was $2,013,000 as compared to a loss of $2,259,000 for April 1, 1996 to December 31, 1996. Operating income increased $246,000 notwithstanding the slow summer convention season and higher marketing expenses for the 9 months ended December 31, 1997 as compared to the same 9 months ended December 31, 1996. The net loss in the nine months ended December 31, 1997 was $15,042,000 compared to a net loss of $14,811,000 in the nine months ended December 31, 1996. The net loss increased due to increased travel agent commissions and higher marketing expenses along with increased interest charges for the deferred WHGI management fees and the 1991 AFICA Refunded Bonds. TWELVE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1997
TWELVE MONTHS ENDED MARCH 31, ----------------------- 1998 1997 ------- ------- (IN THOUSANDS) Revenues: Hotel and casino revenues, net............................... $97,047 $92,958 Operating expenses........................................... 87,927 85,398 ------- ------- Operating income........................................ $ 9,120 $ 7,560 ------- ------- ------- -------
Hotel and casino revenues increased by $4,089,000 or 4.4% in the 12 months ended March 31, 1998 to $97,047,000 from $92,958,000 in the fiscal year ended March 31, 1997. This revenue growth was due to increased group room nights sold, transportation and golf price increases, and higher concession rents collected in the 12 months ended March 31, 1998. Operating income increased by $1,560,000 or 20.6% for the 12 months ended March 31, 1998 to $9,120,000 from $7,560,000 in the period ended March 31, 1997. Except for the additional expenses incurred to promote summer business through local advertising and increasing commissions paid to travel agents, operating expenses remained constant for the periods ended March 31, 1998 and March 31, 1997. The net loss for the 12 month period ended March 31, 1998 totaled $7,936,000 versus $9,403,000 for the fiscal year ended March 31, 1997. The $1,467,000 improvement was due to the higher operating profits generated on increased revenues over the 12 months ended March 31, 1998 as compared to the period ended March 31, 1997. FISCAL YEAR ENDED MARCH 31, 1997 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1996
TWELVE MONTHS ENDED MARCH 31, ----------------------- 1997 1996 ------- ------- (IN THOUSANDS) Revenues: Hotel and casino revenues, net............................... $92,958 $89,214 Operating expenses........................................... 85,398 84,662 ------- ------- Operating income........................................ $ 7,560 $ 4,552 ------- ------- ------- -------
Hotel and casino revenues were $92,958,000 in the fiscal year ended March 31, 1997 compared to $89,214,000 for the fiscal year ended March 31, 1996, an increase of $3,744,000 or 4.2%. 34 Combined 1997 fiscal year revenues increased by $3,744,000 or 4.2% over fiscal 1996 as the Hotel was able to pass on higher room rates as well as increasing occupancy by 1% in fiscal 1997. In addition, transportation price increases as well as increased concession rents contributed to the revenue increase for fiscal 1997 over fiscal 1996. Operating income increased by $3,008,000 or 66.0% for the 12 months ended March 31, 1997 as management continued to improve the operating efficiency and profit margins in the rooms, food and beverage departments. Undistributed expenses increased in sales and marketing due to increased advertising and promotions necessary to stimulate summer demand. Depreciation and amortization expenses declined for the period ended March 31, 1997 versus March 31, 1996 by $1,352,000 as the 24-month pre-opening expenses became fully amortized at the end of fiscal 1996. Net loss for the 12 months ended March 31, 1997 was $9,403,000 compared to a net loss of $12,241,000 for the 12 months ended March 31, 1996. This $2,838,000 or 23.2% reduction can be attributed to increased volume and pricing as well as the decrease in amortization in fiscal 1997 of certain pre-opening marketing expenses. FINANCIAL CONDITION The Resort's cash needs during the high-season months of December through April are provided from cash generated at the Resort. The Resort's cash needs during the off-season months of May through November have historically been provided from cash generated at the Resort and by the Hotel Operator, and from a revolving credit facility. The revolving credit facility was terminated in May 1998. Additionally, during the fiscal year ending December 31, 1998, a portion of the Resort's cash needs were funded from short-term borrowings from Patriot. Such borrowings were necessary to fund a portion of the spa construction and to pay certain costs and expenses related to the Interim Financing. The Partnership believes that after completion of the Offering its cash needs throughout the year will be provided by cash generated at the Resort. Annual capital expenditures are provided for each year as part of the Hotel's annual budgeting process. Capital expenditures are incurred taking into account available cash and available financing, if necessary. The Loan Agreement will permit the Partnership to borrow funds for capital expenditures subject to satisfaction of certain conditions. See 'SUMMARY OF THE LOAN AGREEMENT -- Covenants.' The Management Agreement will provide for reduced fees on an overall basis as compared to the management agreement which was in effect through , 1998. The base fee will be reduced by 1.0%, from 3.5% to 2.5%, of gross revenue of the Resort. There will be a new trade name fee of 0.5% of gross revenue of the Hotel. The incentive fee of 10.0% of the Resort's gross operating profit will be eliminated. Although there will be a new marketing fee of 1.5% of gross room revenues of the Hotel as well as 1.0% of gross room revenues of Las Casitas Village, the Partnership believes that such fee will not increase the overall marketing expense of the Resort. 12 Months Ended March 31, 1998 (unaudited) Compared With the Fiscal Year Ended March 31, 1997. Cash flows from the operating, investing and financing activities of the property for the 12 months ended March 31, 1998 resulted in net cash used of $724,000 compared with net cash provided of $1,523,000 for the fiscal year ended March 31, 1997. Cash provided by operating activities was $4,376,000 for the 12 months ended March 31, 1998 versus $5,855,000 for the fiscal year ended Mach 31, 1997. This decline was due to higher accounts receivable and an increase in prepaid expenses associated with a short-term loan extension. Cash used by investing activities was $2,553,000 for the 12 months ended March 31, 1998 versus $1,428,000 for March 31, 1997. Cash used for the purchase of property and equipment was $2,486,000 in the 12 months ended March 31, 1998 versus $1,306,000 in 1997. Cash used for the purchase of operating equipment was $68,000 in the 12 months ended March 31, 1998 versus $123,000 in fiscal 1997. Cash used by financing activities during the 12 months ended March 31, 1998 was $2,546,000 compared with $2,903,000 for the period ended March 31, 1997. Cash used for payment of long 35 term chattel mortgages and capital lease obligations totaled $3,046,000 versus $2,429,000 in comparing the periods ending March 31, 1998 and 1997, respectively. Net cash proceeds provided from bank notes for the 12 months ended March 31, 1998 totaled $500,000 versus $1,273,000 net cash used in the 12 months ended March 31, 1997. Fiscal Year (Nine Months) Ended December 31, 1997 Compared With Nine Months Ended December 31, 1996 (unaudited). Cash flows from the operating, investing and financing activities of the property for the nine months ended December 31, 1997 resulted in net cash used of $1,252,000 compared with net cash provided of $191,000 for the nine months ended December 31, 1996. Cash used by operating activities was $1,415,000 for the nine months ended December 31, 1997 as compared to $13,000 provided by operations during the nine months ended December 31, 1996. The increase of cash used was due to accounts receivable and prepaid expense increases along with the reduction of balances due to affiliates. Cash used by investing activities was $1,890,000 for the nine months ended December 31, 1997 versus $1,623,000 for the period ended December 31, 1996. Cash used for the purchase of property and equipment was $1,994,000 in the nine months ended December 31, 1997 versus $1,625,000 for the nine months ended December 31, 1996. Cash provided in the reduction of operating equipment was $104,000 in the nine month ended December 31, 1997 versus $2,000 in the nine month period ended December 31, 1996. Cash provided by financing activities during the nine months ended December 31, 1997 was $2,053,000 versus $1,802,000 for the period ended December 31, 1996. Cash used for the payment of long term chattel mortgages and capital lease obligations totaled $2,447,000 and $1,698,000 in the periods ended December 31, 1997 and December 31, 1996, respectively. Net cash proceeds provided from bank notes totaled $4,500,000 in the nine month period ended December 31, 1997 compared to $3,500,000 for the nine month period ended December 31, 1996. Six Months Ended June 30, 1998 (unaudited) Compared With Six Months Ended June 30, 1997 (unaudited). Cash flows from the operating, investing and financing activities of the property for the six months ended June 30, 1998 resulted in net cash provided of $478,000 compared with net cash used of $111,000 for the six months ended June 30, 1997. Cash provided by operating activities was $10,445,000 for the six months ended June 30, 1998 compared to $4,073,000 in the six months ended June 30, 1997. The increase was primarily due to the change from the net income of $3,072,000 in the six months ended June 30, 1997 to $7,586,000 for the same period in 1998. Cash used by investing activities was $2,800,000 for the six months ended June 30, 1998 versus $58,000 for the same period in 1997. Cash used for the purchase of property and equipment was $2,687,000 in the first six months of 1998 versus $62,000 in the first six months of 1997. Cash used for the purchase of operating equipment was $113,000 in the first six months of 1998 compared to $4,000 of cash provided during the same period in 1997. Cash used by financing activities during the six months ended June 30, 1998 totaled $7,167,000 versus $4,126,000 during the corresponding period ended June 30, 1997. Cash used for the payment of long term chattel mortgages and capital lease obligations totaled $1,167,000 versus $1,353,000 comparing the periods ended June 30, 1998 and June 30, 1997. Net cash used for bank note payments totaled $6,000,000 compared to $2,773,000 for the six month periods ended June 30, 1998 and 1997. TAXES As the Partnership is not a taxable entity for Puerto Rico income tax purposes and as each partner reports its distributive share of profits and losses in its respective income tax return, no provision for income taxes has been made in the Partnership's financial statements. 36 INFLATION During the past three fiscal years, the level of inflation affecting the Resort has been relatively low. The ability of the Resort to pass on future cost increases in the form of higher room rates and other price increases will continue to be dependent on the prevailing competitive environment and the acceptance of the Resort's services in the market place. SEASONALITY The hotel and casino business in Puerto Rico is highly seasonal. From December through April the occupancies of the Resort and Las Casitas Village are greater than other months and the average room rates are higher than other months resulting in higher revenues and net income primarily in the first calendar quarter. During the calendar quarter of July 1 through September 30 the Partnership normally has a net loss. RECENT DEVELOPMENTS Hurricane Georges passed through Puerto Rico on September 21 and 22, 1998. Hurricane Georges caused approximately $36,000,000 of property related damage at the Hotel, substantially all of which is covered by insurance. The Resort has also lost approximately 2,500 group room nights as a direct result of Hurricane Georges. The Partnership believes such room night losses will be covered by its business interruption insurance. As a result of Hurricane Georges, the Resort was closed from September 21, 1998 through October 3, 1998. Additionally, the majority of condominium units of Las Casitas Village were damaged and will not be available to the Resort until approximately November 1, 1998. Puerto Rico itself and other hotel properties on the island also suffered extensive damage from Hurricane Georges. As a result, travelers' perception of Puerto Rico as a leisure destination may be adversely affected for the 1998/1999 tourist season. The Resort could lose additional room nights as a result of this perception, which may or may not be covered by its business interruption insurance. The Partnership believes that the Resort will be completely repaired in time for its high season which begins in December. However, the Partnership cannot predict the effect that Hurricane Georges will have on its future bookings. To the extent that additional group and leisure travelers with reservations cancel their plans to come to the Resort or additional travelers do not make reservations as a result of Hurricane Georges, such lost bookings could have a material adverse effect on the Partnership's financial condition and results of operations. The Puerto Rico Tourism Company plans to launch a $1.7 million advertising campaign to negate the negative perception created by media images of Hurricane Georges. The campaign will be entitled 'Puerto Rico Now' and will include three new 30 second commercials and a 20 minute video. The campaign commenced on October 14, 1998 with the airing of television commercials in key media markets in the Northeastern United States during early prime time programming periods. The video will be shown at tourism industry trade shows as well as be distributed to approximately 2,000 travel agents around the United States. The Partnership believes that the Advertising Campaign together with the 'Puerto Rico Now' campaign will limit the adverse effects of the perception of damage caused by Hurricane Georges. IMPACT OF YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Resort's computer programs that have time-sensitive software may recognize a date using '00' as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, temporary inability to process transactions, send invoices, record reservations or engage in similar normal business activities. The Partnership has completed an assessment and will modify or replace a portion of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Partnership estimated that its Year 2000 project cost at approximately 37 $1,000,000, which includes approximately $950,000 for the purchase of new hardware and software that will be capitalized and approximately $50,000 that will be expensed as incurred. To date, the Partnership has incurred approximately $20,000 for assessment of the Year 2000 issue. The project is estimated to be completed not later than November 1999. The Partnership believes that with the modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer system. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Resort. The Partnership has initiated formal communications with all of its significant vendors and service providers to determine the extent to which the Resort's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. There is no guarantee that the systems of other companies on which the Resort's systems rely will be timely converted and would not have an adverse effect on the Resort's systems. The costs of the project and the date on which the Partnership believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The Resort also utilizes certain computer systems and programs of Patriot/Wyndham and its subsidiaries. Patriot/Wyndham has reported the following on the Year 2000 issue: Patriot/Wyndham recognizes the importance of minimizing the number and seriousness of any disruptions that may occur as a result of Year 2000 and has adopted an extensive compliance program. Patriot/Wyndham is completing the inventory of its information technology and other electronic assets (such as, but not limited to, automated time clocks, point-of-sale, non-information technology systems, including embedded systems that operate security systems, phone systems, energy management systems and other systems) used in its businesses that may be affected by Year 2000 issues and the related assessment of those assets' Year 2000 compliance. Patriot/Wyndham has completed its assessment of its primary information technology infrastructure and the inventory and assessment of substantially all of its hotels, other than certain hotels acquired in 1998, other than the Resort. Patriot/Wyndham is also surveying its vendors and service providers that are critical to its businesses to determine whether they are Year 2000 compliant. Patriot/Wyndham expects that these surveys will be completed in the fourth quarter of 1998, but cannot guarantee that all vendors or service providers will comply with Patriot/Wyndham's surveys, and therefore Patriot/Wyndham may not be able to determine Year 2000 compliance of those vendors or service providers. At that time, Patriot/Wyndham will determine the extent to which it will be able to replace non-compliant vendors. Due to the lack of an alternative source, there may be instances in which Patriot/Wyndham will have no alternative but to remain with non-compliant vendors or service providers. Patriot/Wyndham is presently negotiating with the vendor that is expected to perform the remediation of Patriot/Wyndham's systems. The scope and cost of this work is not yet known. Patriot/Wyndham believes that its reprogramming, upgrading and systems replacements will be implemented and tested by June 30, 1999. Patriot/Wyndham believes that this should provide adequate time to further correct any problems that did not surface during the implementation and testing for those systems. In addition to those systems within Patriot/Wyndham's control and the control of its vendors and suppliers, there are other systems that could have an impact on Patriot/Wyndham's businesses and which may not be Year 2000 compliant by January 1, 2000. These systems could affect the operations of the air traffic control system and airlines or other segments of the lodging and travel industries, or the economy and travel generally. These 38 systems are outside of Patriot/Wyndham's control or influence and their compliance may not be verified by Patriot/Wyndham. However, these systems could adversely affect Patriot/Wyndham's financial condition or results of operation. If Patriot/Wyndham is not successful in implementing its Year 2000 compliance plan, it may suffer a material adverse impact on its consolidated results of operations and financial condition. Because of the importance of addressing the Year 2000 problem, Patriot/Wyndham expects to develop contingency plans if it determines that the compliance plans will not be implemented by June 30, 1999. To date, Patriot/Wyndham has expended approximately $1.8 million in connection with the inventory and assessment of its information technology and other electronics assets. LEGAL PROCEEDINGS The Partnership currently and from time to time is involved in litigation incidental to the conduct of its business. In the opinion of the Partnership, none of the existing litigations is likely to have a material adverse effect on the Partnership or its business. POLICY WITH RESPECT TO CERTAIN ACTIVITIES The Loan Agreement will prohibit the Partnership from issuing any securities which are senior to the Bonds. During the past three years, the Partnership has not issued any senior securities. From time to time during the past three years, the Partnership has borrowed monies from third-parties, its affiliates and its partners in order to fund day-to-day operations at the Resort as well as for capital improvements and furniture, fixtures and equipment. Additionally, the Partnership maintained a revolving credit facility with GDB of up to $6,000,000 during the period of July 1995 through May 1998. As a condition to entering into the revolving credit facility, GDB required the partners of the Partnership to lend the Partnership $800,000. To date, $65,000 of these loans has been repaid and $735,000 remains outstanding and will be subordinate to the Bonds. Additionally, the Partnership is currently indebted to the Posadas de Puerto Rico Associates, Incorporated ('PPRA') in the aggregate principal amount of $32,021,172. Such loan will be subordinate to the Bonds. PPRA is an indirect wholly-owned subsidiary of Wyndham and is the owner of the Condado Plaza Hotel & Casino. The Partnership's ability to borrow funds in the future will be governed by the Loan Agreement. See 'SUMMARY OF THE LOAN AGREEMENT -- Covenants.' To the extent that the Partnership is able to borrow in the future, such borrowing decisions will be made solely by the Managing General Partner. The Loan Agreement will prohibit the Partnership from making loans to other persons, offering securities in exchange for property and to repurchasing or otherwise acquiring its partnership interests or other securities, including the Bonds. Additionally, the Partnership does not engage in the purchase and sale (or turnover) of investments, investing in securities of other persons or underwriting securities of other issuers. The Partnership has not engaged in any of the aforementioned activities during the past three years. Following consummation of the Offering, the Partnership will be subject to the informational reporting requirements of the Exchange Act during the current fiscal year by reason of the public offering and the issuance of the Bonds. In accordance with the Exchange Act, the Partnership will file with the Commission the reports and other information required to be filed under the Exchange Act. The Partnership anticipates, however, that it will not be subject to the reporting requirements of the Exchange Act in future fiscal years pursuant to Section 15(d) of the Exchange Act; however, the Partnership will continue to file copies of its annual reports and certain other information, documents and reports specified in Rule 15c2-12 promulgated under the Exchange Act so long as the Bonds are outstanding. See 'CONTINUING DISCLOSURE COVENANT.' 39 INVESTMENT OBJECTIVES AND POLICIES The purpose of the Partnership is limited to the ownership of the Resort. The Partnership was formed in order to develop the Resort and own the Hotel, and to generate income therefrom. The Partnership and the Managing General Partner, on behalf of the Partnership, are authorized to enter into any agreements necessary or desirable for the operation of the Resort and ownership of the Hotel. The Resort will be operated by the Hotel Operator. For a complete discussion concerning the management of the Resort, see 'THE RESORT -- Management and Marketing and the Resort.' The Partnership does not anticipate any additional long-term financing other than the Offering. The Partnership believes that its cash flows from future operations will be sufficient to meet short-term working capital needs. Additional financing may be required for specific projects at the Resort, including the purchase of replacement furniture, fixtures and equipment. The Loan Agreement will limit the Partnership's ability to obtain additional financing, including secured financing, in certain circumstances. For a description of such limitations, see 'SUMMARY OF THE LOAN AGREEMENT -- Covenants.' The Partnership will not invest in real estate mortgages or securities of or interests in persons primarily engaged in real estate activities. POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS The Partnership was formed solely to operate the Resort and own the Hotel. The Partnership will be prohibited from making other investments or disposing of its assets pursuant to the Loan Agreement, and, therefore, a policy with respect to such matters for executive officers and partners of the Partnership is not necessary. The Partnership Agreement will prohibit the partners of the Partnership from engaging in any other business activities other than those as partners of the Partnership. WKA Sub and CHI Sub will be the only two partners of the Partnership upon consummation of the Offering. Each will be a single purpose entity which will only be permitted to engage in the business of acting as a partner of the Partnership. WKA Sub and CHI Sub will be prohibited from any other business activities. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership is subject to various conflicts of interest arising out of its relationship with the General Partners and their affiliates. Because the Partnership will be operated by the Managing General Partner, these conflicts will not be resolved through arm's-length negotiations, but through the exercise of the Managing General Partner's judgment consistent with its fiduciary responsibility to WKA Sub, the only other General and Limited Partner other than the Managing General Partner. WHGI, an affiliate of the Partnership, has historically and will continue to manage the Resort. The arrangements between the Partnership and WHGI, including those contained in the Management Agreement, were not negotiated at arm's-length. There can be no assurances that the terms of the Management Agreement, including the Hotel Operator's fees, are as favorable to the Partnership as those that could reasonably be obtained in an arm's-length negotiation with an unrelated third party. See 'THE RESORT -- Management and Marketing of the Resort' for a detailed description of these arrangements. The Partnership is also an affiliate of Wyndham Management, which will manage the Resort and market the Hotel. The Partnership is also an affiliate of Grand Bay, which will market Las Casitas Village. Each of Wyndham Management and Grand Bay market other resorts, some of which compete directly with the Resort. There can be no assurance that either Wyndham Management or Grand Bay will not take actions which favor other properties that they market to the detriment the Resort. Wyndham has a responsibility to its shareholders to maximize the economic return of all of the Wyndham Resorts that it manages, not only the Resort. There can be no assurance that 40 Wyndham will not take actions or cause Wyndham Management or Grand Bay to take such actions to benefit another Wyndham Resort or Grand Bay Resort to the detriment of the Resort. Such actions may include, without limitation, shifting key employees from the Resort to another Wyndham Resort, marketing other Wyndham Resorts or Grand Bay Resorts more prominently than the Resort and not providing the financial support to the Resort that it provides to other Wyndham Resorts. In order to repay a portion of the Refunded Bonds, the Partnership borrowed $32,021,172 from PPRA. The loan is evidenced by a demand promissory note bearing interest at the prime rate. This loan will be subordinate to the Bonds. Historically from time to time, the Partnership borrowed funds from the partners of the Partnership. Such loans were Deficiency Loans and Additional Loans (as those terms are defined in the Partnership Agreement) and are subordinate to the Bonds. As of June 30, 1998, such partner loans and related interest totalled $13,064,496. The most recent of such loans was in the aggregate principal amount of $800,000 and is described under 'POLICY WITH RESPECT TO CERTAIN ACTIVITIES' above. 41 THE BONDS GENERAL The Bonds will be issued pursuant to the Trust Agreement in the aggregate principal amount of $100,000,000. The Bonds will be dated the date of the initial delivery and payment for the Bonds (the 'Date of Issuance') and will bear interest at such rates and will mature (subject to the rights of redemption described below) in such amounts on and of such years, as set forth on the inside front cover page of this Official Statement and Prospectus. Interest on the Bonds will be payable monthly on the first day of each month commencing on , 1999 until maturity or prior redemption (each a 'Payment Date'). The Bonds are issuable as fully registered bonds without coupons in denominations of $5,000 or any integral multiple thereof. The Bonds will be registered under The Depository Trust Company Book-Entry Only System described below. The principal or redemption price of and interest on the Bonds will be payable as described below under 'Book-Entry Only System.' TRUSTEE The Trustee will be Banco Santander Puerto Rico. The Trustee's corporate trust office is located at 221 Ponce de Leon Avenue, Lobby Level, Hato Rey, Puerto Rico 00918. BOOK-ENTRY ONLY SYSTEM The following information concerning The Depository Trust Company ('DTC') and DTC's book-entry system has been obtained from DTC, and none of AFICA, the Partnership, or the Underwriter take any responsibility for the accuracy thereof. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered bonds in the name of Cede & Co., DTC's partnership nominee. One fully registered Bond will be issued for each maturity of the Bonds in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a 'banking organization' within the meaning of the New York Banking Law, a member of the Federal Reserve System, a 'clearing corporation' within the meaning of the New York Uniform Commercial Code, and a 'clearing agency' registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants (the 'Direct Participants') deposit with DTC. DTC also facilitates the settlement of securities transactions among Direct Participants, such as transfers and pledges, in deposited securities through electronic book-entry changes in accounts of the Direct Participants, thereby eliminating the need for physical movement of securities. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of the Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear transactions through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the 'Indirect Participants;' and together with the Direct Participants, the 'Participants'). The rules applicable to DTC and its Participants are on file with the Commission. Purchases of Bonds under the DTC system must be made by or through Direct Participants which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ('Beneficial Owner') is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates 42 representing their ownership interests in the Bonds, except in the event that use of the DTC system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of Bonds with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds. DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to Cede & Co. If less than all of the Bonds of any maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds. Under its usual procedures, DTC mails an 'Omnibus Proxy' to AFICA as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal of and redemption premium, if any, and interest payments on the Bonds will be made to DTC. DTC's practice is to credit Direct Participants' accounts on each Payment Date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on such date. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in 'street name,' and will be the responsibility of such Participant and not of DTC, the Trustee, the Partnership or AFICA, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the Trustee, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. Each person for which a Participant acquires an interest in the Bonds, as nominee, may desire to make arrangements with such Participant to receive a credit balance in the records of such Participant, and may desire to make arrangements with such Participant to have all notices of redemption or other communications to DTC, which may affect such persons, forwarded in writing by such Participant and to have notification made of all interest payments. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to AFICA or the Trustee. In such event, AFICA will try to find a substitute securities depository and, if unsuccessful, definitive Bonds will be printed and delivered. In addition, AFICA, in its sole discretion and without the consent of any other person, may terminate the services of DTC as securities depository with respect to the Bonds if AFICA determines that Beneficial Owners of such Bonds shall be able to obtain definitive Bonds. In such event, definitive Bonds will be printed and delivered as provided in the Trust Agreement and registered in accordance with the instructions of the Beneficial Owners. So long as Cede & Co., as nominee of DTC (or any other nominee of DTC), is the registered owner of the Bonds, all references herein to the Bondholders or registered owners of the Bonds (other than under the heading 'Tax Matters') shall mean Cede & Co., or such other nominee, in the capacity of nominee for DTC, and shall not mean the Beneficial Owners of the Bonds. When reference is made to any action which is required or permitted to be taken by the Beneficial Owners, such reference shall only relate to those permitted to act (by statute, regulation 43 or otherwise) on behalf of such Beneficial Owners for such purposes. When notices are given, they shall be sent by AFICA or the Trustee to DTC only. For every registration of transfer or exchange of the Book-Entry Bonds, the Beneficial Owner may be charged a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. NONE OF AFICA, THE TRUSTEE OR THE PARTNERSHIP SHALL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANT OR ANY BENEFICIAL OWNER WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT, AS DESCRIBED ABOVE; (2) THE PAYMENT OR TIMELINESS OF PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OR REDEMPTION PRICE OF OR INTEREST ON THE BONDS; (3) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE TRUST AGREEMENT TO BE GIVEN TO BONDHOLDERS; (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE BONDS; OR (5) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS BONDHOLDER. In the event that the book-entry only system is discontinued and the Beneficial Owners become registered owners of the Bonds, the following provisions will apply: The principal of the Bonds and premium, if any, thereon when due will be payable upon presentation of the Bonds at the corporate trust office of the Trustee in San Juan, Puerto Rico, and interest on the Bonds will be paid by check mailed to the persons who were the registered owners, or in the case of Beneficial Owners holding at least $1,000,000 aggregate principal amount of Bonds who so request by wire transfer, as of the 15th day of the month immediately preceding the related Payment Date, as provided in the Trust Agreement. Bonds may be exchanged for an equal aggregate principal amount of Bonds in other authorized denominations and of the same maturity and interest rate, upon surrender thereof at the Trustee's corporate trust office in San Juan, Puerto Rico. The transfer of any Bond may be registered only upon surrender thereof to the Trustee along with a duly executed assignment in form satisfactory to the Trustee. Upon any such registration of transfer, a new Bond or Bonds of authorized denominations in an equal aggregate principal amount, of the same maturity, bearing interest at the same rate and registered in the name of the transferee will be executed by AFICA and authenticated by the Trustee. No charge may be made to the Bondholders for any exchange or registration of transfer of the Bonds, but any Bondholder requesting any such exchange shall pay any tax or other governmental charge required to be paid with respect to such exchange or registration of transfer. The Trustee will not be required to exchange or to register the transfer of any Bond during the period of 15 days preceding the date of giving of notice of redemption or after any Bond or portion thereof has been selected for redemption. REDEMPTION Mandatory Redemption Other Than Upon Event of Taxability. The Bonds will be subject to mandatory redemption at a price equal to the principal amount thereof plus accrued and unpaid interest up to the redemption date, without premium, (i) in whole or in part, to the extent of any condemnation, casualty or insurance proceeds received upon the occurrence of an event of condemnation, taking or destruction of, or damage to the Resort under the conditions set forth in the Loan Agreement, and (ii) in whole upon cessation of operations of the Resort. See ' -- Selection and Notice of Redemption' below. A cessation of operation of the Hotel will not be deemed to have occurred (i) until 30 days have elapsed after notice has been given to the Partnership by AFICA that operations at the Resort have ceased and the Partnership has not demonstrated to the satisfaction of AFICA that the Resort is being operated as 'Industrial Facilities' within the meaning of Act No. 121 of June 27, 1977 of Puerto Rico, as amended (the 'Act'), or that the Partnership is, in good faith, seeking to cause the resumption of an economically reasonable operation of the Resort as Industrial Facilities or (ii) until receipt by AFICA and the Trustee of notice from the Partnership that the Partnership has no present intention of causing the resumption of operations of the Resort as 44 Industrial Facilities or of seeking, in good faith, to cause the resumption of an economically reasonable operation of the Resort as Industrial Facilities. A cessation of operation of the Resort will not be deemed to exist on account of an occurrence of an event of condemnation, damage or destruction of the Resort. In addition, the Term Bonds (unless previously redeemed or purchased for cancellation), are subject to mandatory redemption, in amounts equal to the following amortization requirements:
YEAR [DATE] [DATE] ------ ------------ ------------ Term Bonds maturing , 2013.......................... 2009 $ $ 2010 2011 2012 2013 Term Bonds maturing , 2018.......................... 2014 2015 2016 2017 2018 Term Bonds maturing , 2023.......................... 2019 2020 2021 2022 2023 Term Bonds maturing , 2028.......................... 2024 2025 2026 2027 2028
The Serial Bonds mature as set forth on the inside front cover of this Official Statement and Prospectus. Mandatory Redemption Upon Event of Taxability. The Bonds are further subject to mandatory redemption in whole at a price equal to the principal amount thereof plus accrued and unpaid interest to the redemption date upon the second occurrence of an Event of Taxability. An Event of Taxability will occur upon receipt by AFICA and the Trustee of an accountants' report to the effect that because of the failure of the Partnership to comply with certain provisions of the Internal Revenue Code of 1986, as amended (the 'Code'), as in effect on the Date of Issuance interest paid or accrued on the Bonds to a Beneficial Owner that is (i) an individual who during the entire taxable year in which he receives or accrues interest on the Bonds that due to the occurrence of an Event of Taxability is not income from within Puerto Rico under the Code, was a bona fide resident of Puerto Rico or (ii) a Puerto Rico corporation or other foreign corporation (for purposes of the Code) that is not engaged in trade or business in the United States (each a 'Qualifying Bondholder') is includable in gross income and subject to the payment of income taxes, a credit for the payment of which is not otherwise available under the Code as in effect on the date of such report. See 'SUMMARY OF THE LOAN AGREEMENT -- Maintenance of Source of Income; Additional Interest Upon Event of Taxability.' If redeemed, such redemption shall occur not later than 45 days after the occurrence of such an Event of Taxability. No such mandatory redemption shall be required as a result of a change in the tax laws in force on the Date of Issuance. Optional Redemption. The Bonds are subject to redemption, at the option of the Partnership, in whole or in part, on , 2008 or any Payment Date thereafter (which date shall not be less than 45 days from the date that notice of such redemption is received by the Trustee) at the redemption prices set forth below (expressed as percentages of the outstanding principal amount of such Bonds), plus accrued interest to the redemption date: 45
REDEMPTION PERIOD REDEMPTION PRICE - ---------------------------------------------------- ---------------------------------------------------- , 2008 - , 2009......... 102.0% , 2009 - , 2010......... 101.0% , 2010 and thereafter................. 100.0%
To exercise the foregoing optional redemption, the Partnership is required to deposit with the Trustee moneys necessary to effect such redemption on a Business Day (as defined in the Trust Agreement) not less than 31 days before the date on which the corresponding redemption price is due and payable. Selection and Notice of Redemption. At least 30 days before any redemption date, notice thereof will be sent by the Trustee via first-class mail, postage prepaid, to DTC, or if the book-entry only system is discontinued as described above, by first-class mail, postage prepaid, to the Holders of the Bonds to be redeemed. If less than all of the Bonds are called for redemption, the particular Bonds or portions thereof to be redeemed will be selected as provided below, except that so long as the book-entry only system shall remain in effect, in the event of any such partial redemption, DTC shall reduce the credit balances of the applicable DTC Participants in respect of the Bonds, and such Participants shall in turn select those Beneficial Owners whose ownership interests are to be extinguished by such partial redemption, each by such method as DTC or such Participants, as the case may be, in their sole discretion deem fair and appropriate. Each notice of redemption shall set forth (a) the redemption date, (b) the redemption price, (c) if fewer than all of the Bonds then outstanding shall be called for redemption, the distinctive numbers and letters, if any, of such Bonds to be redeemed and, in the case of Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed, (d) that on the date fixed for redemption such redemption price will become due and payable upon each Bond or portion thereof called for redemption, and that interest thereon shall cease to accrue on and after said redemption date, and (e) the place where such Bonds or portions thereof called for redemption are to be surrendered for payment of such redemption price. In case any Bond is to be redeemed in part only, the notice of redemption shall state also that on or after the redemption date, upon surrender of such Bond, a new Bond or Bonds in principal amount equal to the unredeemed portion of such Bond will be issued. Failure to mail such notice to any Bondholder or any defect in any notice so mailed shall not affect the validity of the proceedings for the redemption of the Bonds of any other Bondholders. Except with respect to the mandatory redemption of the Term Bonds in accordance with the amortization requirements described above, if less than all of the outstanding Bonds shall be called for redemption, such Bonds will be redeemed in inverse order of maturity unless otherwise requested by the Partnership. If less than all of the Bonds of any maturity are called for redemption, the particular Bonds or portions thereof to be redeemed shall be selected by the Trustee by such method as the Trustee deems fair and appropriate, in integral multiples of $5,000. If notice of redemption is given and if sufficient funds are on deposit with the Trustee to provide for the payment of the principal of and premium, if any, and interest on the Bonds (or portions thereof) to be redeemed, then the Bonds (or portions thereof) so called for redemption will, on the redemption date, cease to bear interest and shall no longer be deemed outstanding or be entitled to any benefit or security under the Trust Agreement. Any moneys which have been set aside for the purpose of paying any of the Bonds, either at the maturity thereof or upon a redemption or otherwise, and which remain unclaimed by a Holder for a period of two years after the date on which such Bonds shall have become due and payable or deemed tendered for purchase, may, upon the request of the Partnership, be paid to the Partnership or to such office, board or body as may be entitled by law to receive the same. Thereafter, the Holder of such Bonds shall look only to the Partnership or to such office, board or body, as the case may be, for payment and then only to the extent of the amount so received, without interest. AFICA and the Trustee shall have no responsibility with respect to such moneys. 46 SOURCES OF PAYMENT AND SECURITY FOR THE BONDS In General. The Bonds are limited obligations of AFICA payable solely from monies derived pursuant to the Loan Agreement and from such other amounts as may be available to the Trustee under the Trust Agreement and the various security agreements (the 'Security Agreements'). The Bonds will not constitute a charge against the general credit of AFICA and will not constitute an indebtedness of Puerto Rico or any of its political subdivisions other than AFICA. The partners and the affiliates of the Partnership are not liable with respect to the payment of principal of, premium, if any, or interest on the Bonds. The Loan Agreement. Under the Loan Agreement, the Partnership will agree to deposit with the Trustee in the Bond Fund (as defined in the Trust Agreement) amounts sufficient to pay, together with the amounts then on deposit therein, principal of and premium, if any, and interest on the Bonds. Such deposit must be made on the Business Day immediately preceding the day on which the corresponding amounts of principal, premium, if any, and interest are due and payable. Pursuant to the Trust Agreement, AFICA will assign its interest in the Loan Agreement (except certain rights of AFICA to indemnification, exemption from liabilities, notices and the payment of costs and expenses) to the Trustee as security for the Bonds. See 'Summary of the Loan Agreement.' The Reserve Fund. On the Date of Issuance, the Partnership shall cause to be deposited from the proceeds of the Bonds to the credit of the Reserve Fund (as defined in the Trust Agreement) the amount of $ , which equals the Reserve Fund Requirement (as defined in the Trust Agreement). Moneys held for the credit of the Reserve Fund shall be used for the purpose of paying the principal of and interest on the Bonds when due, whenever and to the extent that the moneys held to the credit of the Bond Fund shall be insufficient for such purposes. If the Partnership has failed to deposit amounts sufficient to pay principal of and interest on the Bonds as required under the Loan Agreement, the Trustee will transfer funds from the Reserve Fund to the Bond Fund, and will notify the Partnership of the existence of a Reserve Fund Deficiency (as defined in the Trust Agreement), on the Business Day immediately succeeding a Payment Date. In accordance with the Loan Agreement, the Partnership has the obligation to replenish the Reserve Fund within 20 Business Days after notice from the Trustee of the existence of a Reserve Fund Deficiency. Additionally, commencing , 1999 and on each thereafter if the Trustee determines that there exists a Reserve Fund Deficiency due to a reduction in the market value of securities deposited in the Reserve Fund, as determined by the Trustee pursuant to a valuation effected as provided in the Trust Agreement, the Partnership shall be obligated to replenish the Reserve Fund within 20 Business Days after receipt of notice from the Trustee. The Partnership shall direct the Trustee to cause the moneys held in the Reserve Fund to be invested in Investment Obligations (as defined in the Trust Agreement) of such long-term or short-term maturities as the Partnership elects; provided that such Investment Obligations deposited in the Reserve Fund shall mature or be subject to redemption (at the option of the holder thereof) not later than the respective dates when moneys held to the credit of such fund or account will be required for the purposes intended. Pledge Agreement and Mortgage. The Bonds will be secured by a pledge of real estate and leasehold mortgage notes in the principal amounts of $ and $ , respectively, and bearing interest at the rate of 12% per annum (collectively, the 'Mortgage Notes'). The Mortgage Notes will be secured by a first priority mortgage lien on the Hotel and on the Palominos lease (the 'Mortgages'), subject only to the Permitted Liens (as defined in the Loan Agreement). The Mortgage Notes will be pledged to AFICA pursuant to the pledge agreement (the 'Pledge Agreement') as security for the obligations of the Partnership under the Loan Agreement. AFICA will assign its rights under the Pledge Agreement and the Mortgage Notes to the Trustee for the benefit of the Bondholders. A mortgagee title insurance policy insuring the Mortgages as a first priority lien on the Hotel, subject only to Permitted Liens, will be delivered on the Date of Issuance in an amount equal to the principal amount of the Mortgage Notes. 47 Personal Property Security Agreements. The Bonds are additionally secured by a personal property security agreement which creates a first priority security interest in a substantial portion of the Partnership's tangible and intangible personal property, including accounts receivable and tangible assets, used in connection with the operation of the Resort. If sufficient moneys were otherwise not available in the Bond Fund and the Debt Service Reserve Fund for the payment of the principal of and interest on the Bonds, the Trustee may institute proceedings to cause the enforcement of its security interests under such security agreements. Assignments. As security for its obligations under the Loan Agreement, the Partnership will enter into an Assignment of Rents and an Assignment of Contracts (which will include the Management Agreement). The assignment contracts perfect an assignment of certain contracts, leases, subleases, concessions and other agreements and licenses related to the operation of the Resort. 48 SUMMARY OF THE LOAN AGREEMENT The following summary which describes certain provisions of the Loan Agreement, does not purport to be complete and is subject to, and is qualified by reference to, the Loan Agreement, including the definitions therein of terms not defined in this Official Statement and Prospectus. A copy of the Loan Agreement is filed as an exhibit to the Registration Statement of which this Official Statement and Prospectus is a part. Capitalized terms used in this section and not otherwise defined have the meanings ascribed thereto in the Loan Agreement. AFICA will issue the Bonds and lend the proceeds to the Partnership. The Partnership will agree to make payments directly to the Trustee which, together with amounts then held in the Bond Fund established under the Trust Agreement, will be sufficient to make the payments of principal of and interest on such Bonds as the same become due. The obligations of the Partnership under the Loan Agreement will be absolute and unconditional without right of set-off for any reason. Pursuant to the Loan Agreement, the Partnership will agree to indemnify AFICA and to pay the costs and expenses of indemnifying the Trustee against any losses arising from the operation of the Resort or their participation in the financing (subject to certain exceptions) and will agree to pay the fees and expenses of AFICA and the Trustee. AFICA will assign all its rights under the Loan Agreement (except for certain rights of AFICA to indemnification, exemption from liability and the payment of costs and expenses) to the Trustee pursuant to the Trust Agreement. BOND PROCEEDS The proceeds of the Bonds (exclusive of the Reserve Fund Amount) will be deposited with the Trustee in the Project Fund established pursuant to the Trust Agreement. The Trustee will make disbursements from the Project Fund to pay for the Costs (as defined in the Trust Agreement) immediately after completion of the Offering. MAINTENANCE AND OPERATION OF THE RESORT The Partnership will agree to cause the Resort to be operated as an Industrial Facility (as defined in the Act) and to be maintained, preserved and kept in good repair, working order and condition and from time to time to make all necessary and proper repairs, replacements and renewals; provided, however, that the Partnership will have no obligation to cause to be maintained, preserved, repaired, replaced or renewed any element or unit of the Resort the maintenance, repair, replacement or renewal of which, in the opinion of the Partnership, becomes uneconomical to the Partnership because of damage or destruction or obsolescence, or change in economic or business conditions, or change in government standards and regulations, or the termination by the Partnership of the operation of the facilities to which such element or unit of the Resort is an adjunct. DISPOSITION OF PROJECT; ASSIGNMENT OF LOAN AGREEMENT; MERGER OR CONSOLIDATION OF THE PARTNERSHIP The Resort may be sold, leased or otherwise disposed of with the prior written consent of AFICA and the Trustee. The said consent shall not be required if the following conditions are met: (1) the Partnership (i) notifies AFICA, the Trustee and the Rating Agency of the proposed transaction, and (ii) provides to AFICA and the Trustee proof reasonably satisfactory to them (which may include an opinion of counsel approved by AFICA and the Trustee) that the consummation of the proposed transaction will not result in the interest payable on the Bonds not continuing to constitute income from sources within Puerto Rico under the Code; and (2) the Rating Agency provides confirmation that the rating on the Bonds will not be withdrawn or downgraded as a result of the consummation of the proposed transaction. No such sale, lease or 49 other disposition will relieve the Partnership of its obligations to make payments under the Loan Agreement sufficient to pay principal of and interest on the Bonds as the same become due. The Partnership may assign the Loan Agreement with the prior written consent of AFICA and the Trustee. The said consent shall not be required if (A) the conditions mentioned in (1) and (2) of the prior paragraph are complied with by the Partnership and (B) the assignee (i) expressly assumes in writing the Partnership's obligations under the Loan Agreement and (ii) delivers to AFICA and the Trustee a certificate executed by its chief financial officer or treasurer stating that none of the obligations and covenants under the Loan Agreement and the Related Documents assumed by it, or the performance thereof will conflict with, or constitute on the part of such assignee a breach of, or default under, any indenture, mortgage, agreement or other instrument to which such assignee is a party or by which it is bound, or any existing law, rule, regulation, judgment, order or decree to which such assignee is subject. So long as any Bonds are outstanding, the Partnership will not dispose of all or substantially all of its assets and will not consolidate or merge into another entity; provided, however, that the Partnership may do so if, (1) the successor or transferee entity is organized under the laws of Puerto Rico or any state of the United States and complies with the source of income covenants contained in the Loan Agreement (the 'Source of Income Covenants'); and (2) if the conditions mentioned in (A) and (B) of the prior paragraph are complied with by the Partnership or the successor or transferee, as the case may be. MAINTENANCE OF SOURCE OF INCOME; ADDITIONAL INTEREST UPON EVENT OF TAXABILITY The Partnership will agree under the Loan Agreement that during each taxable year while the Bonds are outstanding it will comply with the Source of Income Covenants so that all interest paid or payable on the Bonds will constitute income from sources within Puerto Rico under the provisions of the Code as in effect on the Date of Issuance. Failure to comply with the Source of Income Covenants shall constitute an Event of Taxability. If an Event of Taxability occurs, the Partnership is required to pay additional interest ('Additional Interest') to each Qualifying Bondholder who receives or accrues interest on the Bonds subject to federal income taxation as a result thereof. Under the Loan Agreement the Partnership will be required to cause its independent accountants to submit, no later than the last day of the third month following the close of each of its taxable years, a report (which shall be made in accordance with generally accepted auditing standards) stating whether in connection with their audit of the books and records of the Partnership, it failed to comply with any of the Source of Income Covenants during the taxable year just ended and if as a consequence thereof, (i) the interest paid to, or accrued by a Beneficial Owner on the Bonds constituted income from sources outside Puerto Rico for purposes of the Code as in effect on the Date of Issuance, and (ii) in his opinion, under the Code as in effect on the date of such report, interest paid or accrued on Bonds held by a Qualifying Bondholder is includable in the gross income and subject to the payment of income taxes, a credit for the payment of which is not otherwise available to the Qualifying Bondholder. Upon receipt of such report, the Trustee shall promptly cause a copy thereof to be mailed to each person who is a Bondholder or who was a Bondholder during the then current calendar year and during the immediately preceding calendar year. Thereafter, any Qualifying Bondholder who has paid or is required to pay income taxes under the Code in respect of the interest paid or accrued on the Bonds may submit a written claim for Additional Interest. Such claim must set forth in reasonable detail the basis therefor and the calculation of the Additional Interest and must be submitted to the Trustee and the Partnership within 180 days from the date of receipt of the Trustee's notice of an independent accountants report showing that an Event of Taxability occurred. The Partnership will pay such claim for Additional Interest to the Qualifying Bondholder within 30 days from the date the Partnership receives the notice of claim from the Qualifying Bondholder. 50 COVENANTS In connection with the Offering, the Partnership agreed to certain limitations on additional indebtedness and liens, and transactions with affiliates. Additionally, the Partnership agreed not to conduct any business other than the operation of the Resort. These covenants may be amended or eliminated without the consent of or notice to any Bondholder, so long as the Rating Agency confirms that such action will not result in a downgrading or withdrawal of its rating of the Bonds below the initial rating of the Bonds. The Loan Agreement contains covenants of the Partnership normally required of borrowers with respect to properties similar to that of the Hotel, including covenants with respect to compliance with environmental laws and regulations and maintenance of insurance. The Loan Agreement permits the Partnership to restore or replace the Resort or portions thereof in the event of any damage due to casualty or loss due to condemnation upon compliance with certain conditions set forth therein. EVENTS OF DEFAULT AND REMEDIES Each of the following is an event of default under the Loan Agreement: (a) failure by the Partnership to pay the amounts required to be paid with respect to principal of or premium, if any, or interest on the Bonds when the same shall become due and payable; (b) failure by the Partnership to make any other payments (excluding payments referred to in (a) above and payments to replenish the Reserve Fund) required by the Loan Agreement and continuation of such failure for 30 days after written notice thereof unless an extension is granted by the Trustee prior to its expiration; (c) failure by the Partnership to observe and perform any other covenant, condition, or agreement under the Loan Agreement (other than (a) or (b) above) and continuation of such failure for 90 days after written notice thereof from the trustee or AFICA unless an extension is granted by the Trustee prior to its expiration; provided, however, that if such failure cannot be corrected within such 90-day period, it shall not constitute an event of default if corrective action is instituted by the Partnership during such period and diligently pursued until such failure is corrected; and (d) certain events of bankruptcy, liquidation or similar proceedings involving the Partnership. If by reason of Force Majeure, as defined in the Loan Agreement, the Partnership is unable to perform any of its obligations under (b) and (c) above, the Partnership shall not be deemed in default during the continuance of such inability, including reasonable time for the removal of the effect thereof. Upon the occurrence of any of the foregoing events of default, the Trustee may declare all unpaid amounts payable under the Loan Agreement in respect of the Bonds to be immediately due and payable and may take any action at law or equity necessary to collect the payments then due and thereafter to become due, or to enforce any obligation of the Partnership under the Loan Agreement. No remedial steps shall be taken, however, the effect of which would be to provide funds for the payment of principal of and interest on the Bonds which have not yet matured or otherwise become due unless such principal and interest shall have been declared due and payable under the Trust Agreement. AFICA has no power to waive any default under the Loan Agreement or extend the time for the correction of any default that could become an Event of Default without the consent of the Trustee. 51 LIMITATION ON PARTNER'S LIABILITY The Loan Agreement provides that no recourse may be had against any partner of the Partnership or any stockholder, officer, director, employee or agent, among others, of such partner for any obligation under the Loan Agreement and the remedies available under the Loan Agreement upon a default in any such obligation shall be only against the Partnership and its assets, including the Resort, and shall include foreclosure upon the Security Agreements. AMENDMENTS The Loan Agreement may not be effectively amended, changed, modified, altered or terminated except in accordance with the Trust Agreement. See 'SUMMARY OF THE TRUST AGREEMENT -- Amendments and Supplements to the Loan Agreement and the Related Documents.' 52 SUMMARY OF THE TRUST AGREEMENT The following summary which describes certain provisions of the Trust Agreement, does not purport to be complete and is subject to, and is qualified by reference to, the Trust Agreement, including the definitions therein of terms not defined in this Official Statement and Prospectus. A copy of the Trust Agreement is filed as an exhibit to the Registration Statement of which this Official Statement and Prospectus is a part. Capitalized terms used in this section and not otherwise defined have the meanings ascribed thereto in the Trust Agreement. The Trust Agreement will constitute an assignment by AFICA to the Trustee of all of AFICA's right, title and interest in the Loan Agreement and the Security Agreements (except for certain rights of AFICA to indemnification, exemption from liability, the payment of costs and expenses and the receipt of notices) in trust as security for the payment of the principal of and interest on the Bonds. PROJECT FUND The proceeds of the sale of the Bonds will be deposited in the Project Fund. Payments will be made from the Project Fund to pay the Costs immediately after completion of the Offering. BOND FUND The Trust Agreement will establish with the Trustee a Bond Fund that shall be used for the payment of the principal of and interest on the Bonds. The following amounts will be deposited in the Bond Fund: (i) all amounts paid pursuant to the Loan Agreement with respect to principal of and interest on the Bonds, including payments with respect to optional and mandatory prepayments of the Bonds; (ii) all amounts derived from the Security Agreements; and (iii) all other moneys received by the Trustee or otherwise which are permitted or required, or are directed by the Partnership or AFICA to be paid into the Bond Fund. RESERVE FUND On the Date of Issuance, an amount equal to the Reserve Fund Amount will be deposited in the Reserve Fund created under the Trust Agreement. Thereafter, the Partnership is required to make additional deposits from time to time so that the amounts held to the credit of the Reserve Fund are not less than the Reserve Fund Amount. The Trustee shall use amounts held to the credit of the Reserve Fund to make transfers to the Bond Fund to the extent necessary to pay interest on and principal of the Bonds (whether at maturity, or upon acceleration or redemption), whenever and to the extent that the monies on deposit in the Bond Fund are insufficient therefor. After the Trustee makes any disbursement from the Reserve Fund, the Partnership is obligated to deposit with the Trustee, on the 20th Business Day succeeding the receipt of notice from the Trustee, sufficient funds to cause the amount then to the credit of the Reserve Fund to equal the Reserve Fund Amount. The Partnership is also required to similarly deposit any amount necessary to cover any loss resulting from a decline in value of Investment Obligations held to the credit of the Reserve Fund if on any date of valuation the value of such Investment Obligations and other amounts on deposit in the Reserve Fund is less than the Reserve Fund Amount. INVESTMENT OF FUNDS Moneys held for the credit of all funds and accounts under the Trust Agreement shall be invested in Investment Obligations in accordance with the instructions of the Partnership. Any such Investment Obligations shall mature not later than the respective dates when the money held for the credit of such funds or accounts will be required for the purposes intended. Investment Obligations are defined as Government Obligations and obligations of any agency or instrumentality whose obligations are backed by the full faith and credit of the United States of America and, to the extent from time to time permitted by law, (A) the obligations of (i) Federal National Mortgage Association, (ii) Federal Home Loan Banks, (iii) Federal Farm Credit System, 53 (iv) Federal Home Loan Mortgage Corporation, and (v) Government National Mortgage Association (to the extent not included in Government Obligations); (B) repurchase agreements with financial institutions which are members of the Federal Reserve System or primary dealers in the United States Treasury market the short-term obligations of which institutions or dealers are rated at least [' '] by Moody's (or any similar rating to which it may be changed by each such rating agency) or whose long-term obligations are rated in one of the three highest rating categories by Moody's (without regard to any gradations within such categories) secured by Government Obligations or by securities described in clause (A); provided, that such repurchase agreement must provide that the value of the underlying obligations shall be maintained at a current market value, calculated at least weekly, of not less than 104% of the repurchase price (or in the case such underlying obligations are obligations of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, of not less than 105% of the repurchase price), a legal opinion shall be furnished to the Trustee to the effect that the repurchase agreement meets guidelines under the laws of Puerto Rico for the legal investment of public funds, the Trustee shall be given a first priority security interest, no independent third party shall have a lien, such obligations repurchased must be transferred to the Trustee or an independent third party agent by physical delivery or by an entry made on the records of the issuer of such obligations, in either case, the entity should receive confirmation from the independent third party that those securities are being held in a safekeeping account in the name of the entity (the trust or safekeeping departments of broker-dealers or financial institutions selling investments or pledging collateral or underlying securities, or their custodial agents, are not considered independent third parties for the foregoing purposes), such repurchase agreement shall constitute a 'repurchase agreement' within the meaning of Section 101 of the United States Bankruptcy Code, as amended, and any investment in a repurchase agreement shall mature within 30 days; (C) debt obligations and commercial paper rated [' '] or better by Moody's; (D) U.S. Treasury Strips, REFCORP Strips and FICO Strips; (E) money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Securities Act, and having a rating of [' '] by Moody's; (F) certificates of deposit secured at all times by Government Obligations or collateral described in (A) which certificates are issued by commercial banks, savings and loan associations or mutual savings banks; provided that the collateral must be held by a third party and the Trustee must have a perfected first priority security interest in the collateral; (G) certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF; (H) bonds or notes issued by any state, territory or municipality which are rated by Moody's in one of the two highest rating categories (without regard to any gradations within such categories) assigned by such agencies; (I) federal funds or bankers' acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of [' '] or better by Moody's; (J) any Puerto Rico administered pool investment fund in which AFICA is statutorily permitted or required to invest; and (K) any other obligation, security or investment for which the Trustee shall have received written confirmation from Moody's to the effect that no reduction in the rating on the Bonds will result from the addition of such other obligation, security or investment. Any investment in Government Obligations or in obligations described in (A) above may be made in the form of an entry made on the records of the issuer of the particular obligation. Government Obligations are defined as (i) direct obligations of, or obligations the timely payment of principal of and interest on which are unconditionally guaranteed by, the United States of America, (ii) bonds, debentures or notes issued by Government National Mortgage Association, and (iii) any certificates or other evidences of an ownership of a proportionate interest in obligations or in specified portions thereof (which may consist of specified portions of the principal thereof or the interest thereon) of the character described in clause (i). 54 EVENTS OF DEFAULT Each of the following events is an event of default under the Trust Agreement: (a) failure to pay the principal of and premium, if any, and interest on the Bonds when the same shall become due and payable by AFICA; (b) certain events of bankruptcy, receivership, insolvency, liquidation or similar proceedings involving the Partnership; or (c) any 'event of default' (other than an event of default of the type described in (a) or (b) above) shall have occurred under the Loan Agreement and such event of default shall not have been remedied or waived. ACCELERATION OF MATURITIES Upon the happening and continuance of an event of default specified above, the Trustee may, and upon the written request of Holders of not less than 25% in aggregate principal amounts of Bonds then outstanding shall, by notice in writing to AFICA, declare the principal of all the Bonds then outstanding (if not then due and payable) to be due and payable immediately, and upon such declaration the same shall become and be immediately due and payable. If at any time after the principal of Bonds shall have been declared to be due and payable, and before the entry of a final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Trust Agreement, moneys shall have accumulated in the Bond Fund sufficient to pay the principal of all Bonds then outstanding (except the principal of any Bonds due and payable solely as a result of such acceleration) and the interest accrued on such Bonds since the last payment date to which interest shall have been paid or duly provided for, interest on overdue installments of interest (to the extent permitted by law) at the rate or rates then borne by the Bonds, and the charges, compensation, expenses, disbursements, advances and liabilities of the Trustee, and all other amounts then payable by AFICA under the Trust Agreement shall have been paid or a sum sufficient to pay the same shall have been deposited with the Trustee, and every other default known to the Trustee in the observance or performance of any covenant, condition, agreement or provision contained in the Bonds or in the Trust Agreement shall have been cured or waived, then and in every such case the Trustee may, and upon the written direction of the Holders of not less than a majority in aggregate principal amount of the Bonds then outstanding shall, by a notice in writing to AFICA and the Partnership, rescind and annul such declaration and its consequences, but no such rescission or annulment shall extend to or affect any subsequent default or impair any right consequent thereon. ENFORCEMENT OF REMEDIES The Holders of a majority of the aggregate principal of Bonds then outstanding will have the right, subject to indemnification of the Trustee, by an instrument or concurrent instruments in writing delivered to the Trustee, to direct the remedial proceedings to be taken by the Trustee under the Trust Agreement provided such directions are in accordance with law and the Trust Agreement and the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such directions. Except as to the indemnity provided in the Loan Agreement with respect to an Event of Taxability, no Bondholder will have any right to institute any suit, action or proceeding in equity or at law on any Bond or for the execution of any trust under the Trust Agreement, or for any other remedy under the Trust Agreement unless: (i) such Holder has previously given to the Trustee written notice of the event of default on account of which such suit, action or proceeding is to be instituted; (ii) the Holders of not less than 25% of the aggregate principal of Bonds then outstanding have requested the Trustee, after the right to execute such powers or right of action, as the case may be, has accrued, and have afforded the Trustee a reasonable opportunity, either to proceed to exercise such powers or to institute such action, suit or proceeding in its or their name; (iii) the Trustee has been offered reasonable security and indemnity against the costs, expenses and liabilities to be incurred (including, without 55 limitation, indemnification for environmental liability); and (iv) the Trustee has refused or neglected to comply with such request within a reasonable time. No one or more Holders will have any right, in any manner, to affect, disturb or prejudice any rights under the Trust Agreement, or to enforce any right thereunder, except in the manner therein provided. All suits, actions and proceedings at law or in equity must be instituted, had and maintained in the manner provided in the Trust Agreement and for the benefit of the Holders. Any individual right of action or other right given to one or more Holder by law is restricted by the Trust Agreement to the rights and remedies therein provided. AMENDMENTS AND SUPPLEMENTS TO THE TRUST AGREEMENT The Trust Agreement may be amended or supplemented without the consent of the Holders: (a) to cure any ambiguity or to make any other provisions with respect to matters or questions arising under the Trust Agreement consistent with the provisions of the Trust Agreement; or (b) to grant or confer upon the Trustee for the benefit of the Holders any additional rights, remedies, powers, benefits, authority or security that may lawfully be so granted or conferred; or (c) to add to the covenants of AFICA for the benefit of the Holders or to surrender any right or power conferred upon AFICA under the Trust Agreement; or (d) to permit the qualification of the Trust Agreement under the Trust Indenture Act of 1939 or any similar federal statute hereafter in effect or to permit the qualification of the Bonds for sale under the securities laws of any of the states of the United States, and to add to the Trust Agreement or any supplement or amendment thereto such other terms, conditions and provisions as may be required by said Trust Indenture Act of 1939 or similar federal statute. The Trust Agreement may be amended or supplemented with the consent of the Holders of a majority of the principal of the Bonds outstanding at the time. However, without the consent of each Holder affected, any amendment to the Trust Agreement may not: (a) extend the time for the payment of the principal of or the interest on any Bond; or (b) reduce the principal of any Bond or the redemption premium, if any, or the rate of interest thereon; or (c) create any lien or security interest with respect to the Loan Agreement or the payments thereunder; or (d) give a preference or priority to any Bond or Bonds over any other Bond or Bonds; or (e) reduce the aggregate principal of the Bonds required for consent to such supplement or amendment or any waiver thereunder. The Trustee is not obligated to execute any proposed supplement or amendment if its rights, obligations and interests would be affected thereby. Nothing herein will affect any preexisting rights to create liens set forth in the Trust Agreement. No amendment or supplement to the Trust Agreement, other than to cure any ambiguity, will become effective without the consent of the Partnership. AMENDMENTS AND SUPPLEMENTS TO THE LOAN AGREEMENT AND THE RELATED DOCUMENTS The Loan Agreement and the Related Documents may be amended or supplemented without the consent of the Holders: (a) to cure any ambiguity or formal defect or omission therein or, in any supplement thereto; (b) to grant to or confer upon AFICA or the Trustee for the benefit of the Holders any additional rights, remedies, powers, benefits, authority or security that may lawfully be granted to or conferred upon AFICA, the Trustee or the Holders; and (c) to add to the covenants of the Partnership for the benefit of the Holders. Other than for the purposes of the above paragraph, the Loan Agreement and the Related documents may be amended or supplemented with the approval of the Holders of not less than a majority of the principal of the Bonds outstanding at the time. No amendment or supplement to the Loan Agreement or the Related Documents will become effective without the consent of the Trustee. 56 DEFEASANCE Any Bond will be deemed paid and no longer entitled to any security under the Trust Agreement upon satisfaction of certain conditions and the deposit with the Trustee of sufficient funds, or direct obligations of the United States of America or obligations unconditionally guaranteed by the United States of America, the principal of and the interest on which, when due (without any reinvestment thereof), will provide moneys which will be sufficient to pay when due the principal of and premium, if any, and interest due and to become due, excluding Additional Interest, on such Bond. The Partnership will be required to indemnify the Beneficial Owners for any Additional Interest. If any Bond is not to be redeemed or does not mature within 60 days after such deposit, the Partnership must give irrevocable instructions to the Trustee to give notice, in the same manner as notice of redemption, that such deposit has been made. The Bonds shall have not been deemed paid unless the Trustee shall have received an opinion of counsel experienced in bankruptcy matters to the effect that payment to the Beneficial Owners would not constitute a transfer which may be voided under the provisions of the United States Bankruptcy Code, and an opinion of counsel experienced in tax matters under the Code to the effect that, assuming the Partnership will continue to comply with the Source of Income Covenant, the deposit of said obligations or moneys would not adversely affect the treatment of interest received by the Beneficial Owners as income from sources within Puerto Rico. AFICA GENERAL AFICA is a body corporate and politic constituting a public corporation and governmental instrumentality of Puerto Rico. The Legislature of Puerto Rico determined that the development and expansion of commerce, industry, and health and educational services within Puerto Rico is essential to the economic growth of Puerto Rico and to attain full employment and preserve the health, welfare, safety and prosperity of all its citizens. The Legislature also determined that new methods of financing capital investments were required to promote industry in Puerto Rico and to provide modern and efficient medical facilities for the citizens of Puerto Rico. Accordingly, AFICA was created under Act No. 121 of the Legislature of Puerto Rico, approved June 27, 1977, as amended (the 'Act'), for the purpose of promoting the economic development, health, welfare and safety of the citizens of Puerto Rico. AFICA is authorized to borrow money through the issuance of revenue bonds and to loan the proceeds thereof to finance and refinance the acquisition, development, construction and equipping of industrial, tourist, educational, medical and environmental pollution control and solid waste disposal facilities. AFICA has no taxing power. AFICA's offices are located at Minillas Government Center, De Diego Avenue, Stop 22, San Juan, Puerto Rico 00940. AFICA's telephone number is (787) 782-4060. GOVERNING BOARD The Act provides that the governing board (the 'Governing Board') of AFICA shall consist of seven members. The President of GDB, the Executive Director of Puerto Rico Industrial Development Company, the Executive Director of Puerto Rico Aqueduct and Sewer Authority, the President of the Puerto Rico Environmental Quality Board and the Executive Director of the Puerto Rico Tourism Company are each ex officio members of the Governing Board. The remaining two members of the Governing Board are appointed by the Governor of Puerto Rico 57 for terms of four years. The following individuals are the current members of the Governing Board:
NAME POSITION TERM OCCUPATION - -------------------------------- ------------ ----------------- ----------------------------- Lourdes M. Rovira............... Chairperson Indefinite President, Government Development Bank for Puerto Rico Jaime Morgan Stubbe............. Member Indefinite Executive Director, Puerto Rico Industrial Development Company Perfecto Ocasio................. Member Indefinite Executive Director, Puerto Rico Aqueduct and Sewer Authority Hector Russe-Martinez........... Member Indefinite President, Puerto Rico Environmental Quality Board Jorge Davila.................... Member Indefinite Executive Director, Puerto Rico Tourism Company James Thordsen.................. Member June 27, 2002 President, James Thordsen, Inc. Jose Salas-Soler................ Member October 22, 2001 Attorney-at-Law
The Act provides that the affirmative vote of four members is sufficient for any action taken by the Governing Board. The following individuals are currently officers of AFICA: LOURDES M. ROVIRA, Executive Director of AFICA, is also President of GDB. Ms. Rovira was the Executive Vice President of GDB from 1996 until her appointment as President. Prior to her appointment at GDB, Ms. Rovira was the chief financial officer of the University of Puerto Rico system. Ms. Rovira received a bachelor's degree in Business Administration from the University of Puerto Rico in 1972. VELMARIE BERLINGERI, Assistant Executive Director of AFICA, is also a Vice President of GDB. Ms. Berlingeri has been associated with GDB since 1993. Prior to her appointment, Ms. Berlingeri worked in the investments area of a major private sector corporation in Puerto Rico. Ms. Berlingeri received a Bachelor of Science in Business Administration degree from the University of Puerto Rico in 1982. DELFINA BETANCOURT-CAPO, Secretary and General Counsel of AFICA, is also Senior Vice President and General Counsel of GDB. Ms. Betancourt has been associated with GDB since 1984. She received a law degree from Cornell University in 1982. OUTSTANDING REVENUE BONDS AND NOTES OF AFICA As of June 30, 1998, AFICA had revenue bonds and notes issued and outstanding in the aggregate principal amount of approximately $2.2 billion. All such bond and note issues have been authorized and issued pursuant to trust agreements or resolutions separate from and unrelated to the Trust Agreement relating to the Bonds and are payable from sources other than the payments under the Loan Agreement. Under the Act, AFICA may issue additional bonds and notes from time to time to finance and refinance industrial, tourist, educational, medical or pollution control facilities. However, any such bonds and notes would be authorized and issued pursuant to other trust agreements or resolutions separate from and unrelated to the Trust Agreement relating to the Bonds and would be payable from sources other than the payments under the Loan Agreement. 58 GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO As required by Act No. 272 of the Legislature of Puerto Rico, approved May 15, 1945, as amended, GDB has acted as a financial advisor to AFICA in connection with the issuance and sale of the Bonds. GDB is a public corporation with varied governmental financial functions. Its principal functions are to act as financial advisor to and fiscal agent for Puerto Rico, its municipalities and its public corporations in connection with the issuance of bonds and notes, to make advances to public corporations and to make loans to private enterprises that will aid in the economic development of Puerto Rico. The Underwriter has been selected by GDB to act from time to time as underwriter of its obligations and the obligations of Puerto Rico, its instrumentalities and public corporations. The Underwriter or its affiliates also participate in other financial transactions with GDB. TAX MATTERS In the opinion of Fiddler Gonzalez & Rodriguez, LLP, Bond Counsel, under the provisions of the Acts of Congress and the laws of Puerto Rico now in force: 1. The Bonds, and the transfer of the Bonds, including any gain derived upon the sale of the Bonds, are exempt from Puerto Rico income tax pursuant to Article 8(b) of the Act. 2. Interest on the Bonds is: (i) excluded from the gross income of the recipient thereof for Puerto Rico income tax purposes pursuant to Section 1022(b)(4)(B) of the Puerto Rico Internal Revenue Code of 1986, as amended (the 'PR-Code'); (ii) exempt from Puerto Rico income tax and alternative minimum tax pursuant to Section 1022(b)(4)(B) of the PR-Code, Article 8(b) of the Act, and Section 3 of Puerto Rican Federal Relations Act (the 'PRFRA'); and (iii) exempt from Puerto Rico municipal license tax pursuant to Section 9(25) of the Puerto Rico Municipal License Tax Act of 1974, as amended, and Section 3 of the PRFRA. 3. The Bonds are exempt from Puerto Rico personal property tax pursuant Section 3.11 of the Puerto Rico Municipal Property Tax Act of 1991, as amended, and Section 3 of the PRFRA. 4. The Bonds are exempt from Puerto Rico (i) gift tax with respect to donors who are residents of Puerto Rico at the time the gift is made and (ii) estate tax with respect to estates of decedents who are residents of Puerto Rico at the time of death, excluding, in each case, United States citizens who acquired their United States citizenship other than by reason of birth or residence in Puerto Rico. In the opinion of Bond Counsel, based upon the provisions of the Code now in force and assuming that the Partnership complies with the Source of Income Covenants, then: 1. interest on the Bonds received by, or accrued to, an individual who is a bona fide resident of Puerto Rico during the entire taxable year in which such interest is received or accrued is excludable from gross income for income tax purposes under the Code; 2. interest on the Bonds received by, or accrued to, a corporation organized under the laws of Puerto Rico or any foreign country is not subject to federal income taxation provided such interest or original issue discount is not effectively connected with the conduct of a trade or business in the United States by such corporation; and 3. interest on the Bonds is not excludable from the gross income of the recipients thereof for federal income tax purposes under Section 103(a) of the Code. United States taxpayers, other than individuals who are bona fide residents of Puerto Rico during the entire taxable year, may be subject to federal income tax on any gain realized upon the sale or exchange of the Bonds. Pursuant to Notice 89-40 issued by the United States Internal Revenue Service on March 27, 1989, gain on the sale of the Bonds (excluding 'original issue discount' accrued under the Code as of the date of such sale or exchange) by an individual who is a bona fide resident of Puerto Rico during the entire taxable year and that is a resident of 59 Puerto Rico for purposes of Section 865(g)(1) of the Code will constitute Puerto Rico source income and, therefore, qualify for the exclusion provided in Section 933(1) of the Code, provided such Bonds do not constitute inventory in the hands of such individual. You should be aware that ownership of the Bonds may result in having a portion of your interest expense allocable to interest on the Bonds disallowed for purposes of computing the regular tax and the alternative minimum tax for Puerto Rico income tax purposes. The opinion of Bond Counsel regarding the tax consequences under the Code and the PR-Code arising from ownership or disposition of the Bonds is limited to the above. RATING The Bonds are expected to be rated 'Baa2' by Moody's. There is no assurance that the rating given to the Bonds will remain in effect for any given period or that it will not be revised downward or withdrawn entirely by Moody's if, in its sole judgment, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market prices of the Bonds. The rating given to the Bonds reflects only the views of Moody's. An explanation of the significance of such rating may be obtained only from Moody's at 99 Church Street, New York, New York 10007. The rating does not constitute a recommendation to buy, sell or hold the Bonds. Moody's was provided with materials relating to the Partnership, the Resort, the Bonds and other relevant information, and no application has been made to any other rating agency for purposes of obtaining a rating on the Bonds. In addition, if requested, the Partnership shall deliver to Moody's, from time to time, such documents and other relevant information required for purposes of its due diligence on the assigned rating to the Bonds. LEGAL INVESTMENT The Bonds will be eligible for deposit by banks in Puerto Rico to secure public funds and will be approved investments for insurance companies to qualify them to do business in Puerto Rico as required by law. UNDERWRITING The Underwriter of the Bonds is: Citicorp Financial Services Corporation, with its principal corporate office in Citibank Center, Lomas Verdes Avenue, Cupey, Puerto Rico. Subject to the terms and conditions of a certain bond purchase agreement to be entered into among AFICA, the Partnership and the Underwriter (the 'Bond Purchase Agreement'), AFICA will agree to sell to the Underwriter, and the Underwriters will agree to purchase from AFICA, all of the Bonds listed on the inside front cover page of this Official Statement and Prospectus. The Underwriter will purchase the Bonds at the public offering price thereof less the underwriting discount set forth below:
AGGREGATE PUBLIC UNDERWRITING OFFERING PRICE UNDERWRITING STRUCTURING/MANAGEMENT PROCEEDS TO THE OF THE BONDS DISCOUNT FEE PARTNERSHIP(1) - ------------------------------------- ------------ ---------------------- --------------- $100,000,000 $ $ $
- ------------ (1) The proceeds to the Partnership set forth above is before deducting expenses of the Offering payable by the Partnership estimated at $ , and $ which will be deposited in the Reserve Fund. ------------------------ The Underwriter proposes initially to offer the Bonds to the public, when, as and if issued by AFICA and accepted by the Underwriter, at the initial public offering prices set forth or derived from information shown on the inside front cover page of this Official Statement and Prospectus. 60 The initial offering prices may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the initial public offering prices stated or derived from information shown on the inside front cover page hereof. The Bond Purchase Agreement will provide that the obligations of the Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The Underwriter is committed to purchase all of the Bonds if any are purchased. Prior to the Offering, there has been no active market for the Bonds. The Underwriter has advised the Partnership that it presently intends to make a market in the Bonds as permitted by applicable laws and regulations. The Underwriter is not obligated, however, to make a market in the Bonds and any such market making may be discontinued at any time at the sole discretion of the Underwriter. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Bonds. The Partnership will agree to indemnify the Underwriter and AFICA against certain civil liabilities, including liabilities under the Securities Act. IN THE OPINION OF THE COMMISSION, INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT IS AGAINST PUBLIC POLICY AND THEREFORE UNENFORCEABLE. The Underwriter has in the past and may from time to time in the future provide underwriting and other investment banking services to the Partnership. In addition, CRE, an affiliate of Underwriter, is the lender under the Interim Financing and, in such capacity received customary fees for such services. LEGAL MATTERS Legal matters incident to the authorization, issuance and sale of the Bonds are subject to the unqualified approving opinion of Fiddler Gonzalez & Rodriguez, LLP, San Juan, Puerto Rico, Bond Counsel. Certain legal matters will be passed upon for the Partnership by Shack & Siegel, P.C., New York, New York and by McConnell Valdes, San Juan, Puerto Rico, and for the Underwriter by Pietrantoni Mendez & Alvarez, San Juan, Puerto Rico. CONTINUING DISCLOSURE COVENANT The Partnership will enter into a Continuing Disclosure Agreement with the Trustee (the 'Continuing Disclosure Agreement') wherein the Partnership will covenant for the benefit of the holders and the Beneficial Owners of the Bonds to file within 120 days after the end of each fiscal year beginning after their fiscal year 1998, with each nationally recognized municipal securities information repository ('NRMSIR') and with any Puerto Rico state information depository ('SID'), core financial information and operating data for such fiscal year, including (i) audited financial statements, prepared in accordance with generally accepted accounting principles in effect from time to time, and (ii) operating data and revenues, expenditures, financial operations and indebtedness generally found in this Official Statement and Prospectus. 61 The Partnership will covenant also to file in a timely manner, with each NRMSIR or with the Municipal Securities Rulemaking Board ('MSRB'), and with any Puerto Rico SID, notice of any of the following events with respect to the Bonds, if material: (i) principal and interest payment delinquencies; (ii) non-payment related defaults; (iii) unscheduled draws on debt service reserves reflecting financial difficulties; (iv) substitution of credit or liquidity providers, or their failure to perform; (v) adverse tax opinions or events affecting the tax-exempt status of the Bonds, including the occurrence of an Event of Taxability; (vi) modifications to rights of Bondholders; (vii) bond calls; (viii) defeasances; (ix) release, substitution, or sale of property securing repayment of the Bonds; and (x) rating changes.
These covenants have been made in order to assist the Underwriter in complying with paragraph (b)(5) of Rule 15c2-12 promulgated under the Exchange Act (the 'Rule'). The Partnership does not undertake to provide the above-described event notice of a scheduled redemption, not otherwise contingent upon the occurrence of an event, if the terms, dates and amounts of redemption are set forth in detail in this Official Statement and Prospectus under 'THE BONDS -- Redemption.' The Partnership expects to provide the core financial information and operating data described above by delivering its audited financial statements prepared in accordance with generally accepted accounting principles for the applicable fiscal year and a supplemental report containing other information to the extent necessary to provide the core financial information and operating data described above by such deadline. As of the date of this Official Statement and Prospectus, there was no Puerto Rico SID, and the nationally recognized municipal securities information repositories are: Bloomberg Municipal Repository, P.O. Box 840, Princeton, New Jersey 08542-0840; Kenny Information Systems, Inc., Attn: Kenny Repository Service, 65 Broadway, New York, New York 10006; Thompson NRMSIR, 395 Hudson Street, New York, New York 10004, Attn: Municipal Disclosure; and DPC Data Inc., One Executive Drive, Fort Lee, New Jersey 07024. The Partnership may from time to time choose to provide notice of the occurrence of certain other events in addition to those listed above if, in the judgment of the Partnership, such other events are material with respect to the Bonds, but the Partnership does not undertake to provide any such notice of the occurrence of any material event except those events listed above. No Bondholder may institute any suit, action or proceeding at law or in equity ('Proceeding') for the enforcement of the foregoing covenants or for any remedy for breach thereof, unless such Bondholder shall have filed with the Partnership written notice of any request to cure such breach, and the Partnership shall have refused to comply within a reasonable time. All Proceedings shall be instituted only as specified in such Continuing Disclosure Agreement in any federal or Puerto Rico court located in the Municipality of San Juan, and for the equal benefit of all Bondholders of the outstanding Bonds benefitted by the same or a substantially similar covenant, and no remedy shall be sought or granted other than specific performance by the Partnership of the covenant at issue. Notwithstanding the foregoing, no challenge to the adequacy of the information provided in accordance with the filings mentioned above may be prosecuted by any Bondholder except in compliance with the remedial and enforcement provisions contained in the Trust Agreement. See 'SUMMARY OF THE TRUST AGREEMENT -- Enforcement of Remedies.' The above covenants may only be amended or waived if: (A) the amendment or waiver is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or 62 status of the Partnership; the covenants, as amended, or the provision as waived, would have complied with the requirements of the Rule at the time of issuance of the Bonds, after taking into account any amendments or change in circumstance as evidenced by the receipt of an opinion of counsel experienced in federal securities laws acceptable to the Trustee and the Partnership; and the amendment or waiver does not materially impair the interests of the Bondholders, as determined by the Trustee or by counsel experienced in federal securities laws acceptable to the Trustee and the Partnership; and (B) the annual financial information containing (if applicable) the amended operating data or financial information will explain, in narrative form, the reasons for the amendment or waiver and the impact of the change in the type of operating data or financial information being provided. REPORTS TO BONDHOLDERS As a result of the Offering, the Partnership will be required to file all reports with the Commission required by Sections 13 and 15(d) of the Exchange Act from the date hereof at least through the end of the reporting period for the fiscal year ending December 31, 1998. After such time, the Partnership does not intend to file annual or quarterly financial information with the Commission. However, the Partnership will file its audited annual financial statements with each NRMSIR and SID as required by the Rule as well as provide certain notices to such entities as well as MSRB pursuant to the Rule. See 'AVAILABLE INFORMATION' and 'CONTINUING DISCLOSURE COVENANT.' Such financial statements will also be available from the Partnership upon request. EXPERTS The (a) Balance Sheet of the Partnership as of December 31, 1997 and March 31, 1997, and the related statements of operations and deficiency in partners' capital, and cash flows for the nine month period ended December 31, 1997 and each of the two years in the period ended March 31, 1997, (b) Balance Sheet of WKA as of December 31, 1997, and (c) Balance Sheet of WHG El Con Corp. as of December 31, 1997 appearing in this Preliminary Official Statement and Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon (which contain an explanatory paragraph describing conditions that raise substantial doubt about each of the Partnership's, WKA's and WHG El Con Corp.'s ability to continue as a going concern as described in: (a) the fourth paragraph of Note 14 to the audited Financial Statements of the Partnership, (b) the third paragraph of Note 7 to the audited Balance Sheet of WKA, and (c) the third paragraph of Note 5 to the audited Balance Sheet of WHG El Con Corp.), appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The Balance Sheet of CHI as of June 30, 1998 appearing in this Preliminary Official Statement and Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about CHI's ability to continue as a going concern as described in Note 5 to the CHI Balance Sheet), appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. MISCELLANEOUS Information relating to DTC and the book-entry system described under the heading 'THE BONDS' has been furnished by DTC and is believed to be reliable, but AFICA, the Partnership and the Underwriters make no representations or warranties whatsoever with respect to such information. Appended as Appendix A and constituting part of this Official Statement and Prospectus is the proposed form of opinion of Fiddler Gonzalez & Rodriguez, LLP, Bond Counsel. 63 The execution and delivery of this Official Statement and Prospectus have been duly authorized by AFICA, and this Official Statement and Prospectus has been approved by the Partnership. This Official Statement and Prospectus will be filed with each NRMSIR and with the MSRB. PUERTO RICO INDUSTRIAL, TOURIST, EDUCATIONAL, MEDICAL AND ENVIRONMENTAL CONTROL FACILITIES FINANCING AUTHORITY By: /s/ ............................ ASSISTANT EXECUTIVE DIRECTOR 64 INDEX TO FINANCIAL STATEMENTS EL CONQUISTADOR PARTNERSHIP L.P. Pro Forma Condensed Financial Statements (Unaudited) Introduction.......................................................................................... F-2 Pro Forma Condensed Balance Sheet as of June 30, 1998................................................. F-3 Pro Forma Condensed Balance Sheet as of December 31, 1997............................................. F-5 Pro Forma Condensed Statement of Operations for Six Months Ended June 30, 1998........................ F-7 Pro Forma Condensed Statements of Operations for Nine Months Ended December 31, 1997.................. F-8 Audited Financial Statements Report of Independent Auditors........................................................................ F-9 Balance Sheet as of June 30, 1998 and 1997 and at December 31, 1997 and 1996 and March 31, 1997....... F-10 Statements of Operations and (Deficiency in) Partners' Capital for Six Months Ended June 30, 1998 and 1997, for the Period of January 1, 1998 to February 28, 1998, for the Period of March 1, 1998 to June 30, 1998, for the Nine Months Ended December 31, 1996 and for Fiscal Years Ended December 31, 1997 (9 Months), March 31, 1997 and 1996............................................................. F-11 Statements of Cash Flows for Six Months Ended June 30, 1998 and 1997, for the Period of January 1, 1998 to February 28, 1998, for the Period of March 1, 1998 to June 30, 1998, for the Nine Months Ended December 31, 1996 and for Fiscal Years Ended December 31, 1997 (9 Months), March 31, 1997 and 1996................................................................................................. F-12 Notes to Financial Statements......................................................................... F-13 WKA EL CON ASSOCIATES Consolidated Balance Sheet (Unaudited) Consolidated Balance Sheet as of June 30, 1998........................................................ F-22 Notes to Consolidated Balance Sheet................................................................... F-23 Audited Balance Sheet Report of Independent Auditors........................................................................ F-30 Balance Sheet as of December 31, 1997................................................................. F-31 Notes to Balance Sheet................................................................................ F-32 CONQUISTADOR HOLDING, INC. Report of Independent Auditors........................................................................ F-36 Balance Sheet as of June 30, 1998..................................................................... F-37 Notes to Balance Sheet................................................................................ F-38 WHG EL CON CORP. Consolidated Balance Sheet (Unaudited) Consolidated Balance Sheet as of June 30, 1998........................................................ F-40 Notes to Consolidated Balance Sheet................................................................... F-41 Audited Balance Sheet Report of Independent Auditors........................................................................ F-48 Balance Sheet as of December 31, 1997................................................................. F-49 Notes to Balance Sheet................................................................................ F-50
F-1 EL CONQUISTADOR PARTNERSHIP L.P. PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma condensed financial statements of El Conquistador Partnership L.P. (the 'Partnership') reflect the following transactions: (i) the Offering and related transactions, including repayment of the Interim Financing; (ii) reduction in base management fees and elimination of additional incentive management fees pursuant to the Management Agreement; and (iii) the assumption by Patriot of the Partnership's indebtedness to GDB in the aggregate principal amount of $25 million. The pro forma condensed balance sheets as of June 30, 1998 and December 31, 1997, show the effects of these transactions as if they had occured at the date of the balance sheets. The unaudited pro forma condensed statements of operations for the six months ended June 30, 1998, and for the year ended December 31, 1997, show the effects of these transactions as if they had occurred at the beginning of the respective period. The pro forma condensed financial statements were prepared by the management of the Partnership. These pro forma condensed financial statements may not be indicative of the results that actually would have occurred if the transactions had been effected on the dates indicated or which may be obtained in the future. The pro forma condensed financial statements should be read in conjunction with the financial statements and notes thereto of the Partnership included elsewhere in this Preliminary Official Statement and Prospectus. F-2 EL CONQUISTADOR PARTNERSHIP L.P. PRO FORMA CONDENSED BALANCE SHEET AS OF JUNE 30, 1998
HISTORICAL ADJUSTMENTS PRO FORMA(1) ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash.................................................... $ 1,606,480 $ 609,255 $ 2,215,735 Restricted cash and investments held by bank............ 1,773,000 3,227,000 5,000,000(2) Trade accounts receivable, net of allowance for doubtful accounts.............................................. 5,632,178 5,632,178 Due from affiliated companies........................... 9,702 9,702 Inventories............................................. 1,603,891 1,603,891 Prepaid expenses and others current assets.............. 2,301,243 2,301,243 ------------ ------------ ------------ Total current assets............................... 12,926,494 3,836,255 16,762,749 Due from affiliated company.................................. 64,286 64,286 Land, building and equipment: Land.................................................... 20,255,500 20,255,500 Building................................................ 191,758,790 191,758,790 Furniture, fixture and equipment........................ 19,940,526 19,940,526 Construction in progress................................ 365,966 365,966 ------------ ------------ ------------ 232,320,782 232,320,782 Less accumulated depreciation........................... 2,594,881 2,594,881 ------------ ------------ ------------ 229,725,901 229,725,901 Operating equipment, net..................................... 1,600,989 1,600,989 Deferred debt issuance costs, net of accumulated............. 1,758,114 3,241,886 5,000,000(3) Deferred pre-opening costs, net of accumulated............... -- -- -- ------------ ------------ ------------ Total assets............................................ $246,075,784 $ 7,078,141 $253,153,925 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL Current liabilities: Trade accounts payable.................................. $ 5,650,392 $ $ 5,650,392 Advance deposits........................................ 2,416,370 2,416,370 Accrued interest........................................ 1,163,745 (1,163,745) 0(4) Other accrued liabilities............................... 7,589,888 7,589,888 Due to affiliated companies............................. 400,015 (2,021,172) (1,621,157)(5) Current portion of long-term debt....................... 120,000,000 (120,000,000) 0(6) Current portion of chattel mortgages and capital lease obligations........................................... 726,200 726,200 ------------ ------------ ------------ Total current liabilities.......................... 137,946,610 (123,184,917) 14,761,693 Long-term debt............................................... 25,000,000 75,000,000 100,000,000(7) Chattel mortgages and capital lease obligations, net of current portion............................................ Due to affiliated companies.................................. 15,788,362 30,904,903 46,693,265(8) Due to partners.............................................. 15,748,651 15,748,651 ------------ ------------ ------------ (Deficiency in) partners' capital: Limited partners........................................ 43,853,337 24,454,432 68,307,769 General partners........................................ 7,738,824 (96,277) 7,642,547 ------------ ------------ ------------ Total (deficiency in) partners' capital............ 51,592,161 24,358,155 75,950,316 ------------ ------------ ------------ Total liabilities and deficiency in partners' capital.......................................... $246,075,784 $ 7,078,141 $253,153,925 ------------ ------------ ------------ ------------ ------------ ------------
(footnotes on next page) F-3 (footnotes from previous page) (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed as of the balance sheet date. (2) Assumes the historical balance in restricted cash of $1,773,000 was refunded as a result of the Interim Financing and the addition of the $5,000,000 deposit into restricted cash as required by the Offering. (3) Reflects the adjustment to write off the historical deferred financing fees of $1,758,114 and the addition of the deferred financing fees of $5,000,000 related to the Offering. (4) Assumes the accrued interest of $1,163,745 was paid with the refund of the historical restricted cash. (5) Reflects the net adjustment due to Patriot as a result of the Interim Financing. (6) Reflects the pay off of the Refunded Bonds with the Interim Financing. (7) Reflects the reduction in long term debt of $25,000,000 related to the GDB debt which will be assumed by Patriot and the addition of the gross proceeds from the Offering. (8) Reflects the increase in due to affiliated companies of $32,021,172 in connection with the Interim Financing and the reduction of incentive management fees due under the Management Agreement. F-4 EL CONQUISTADOR PARTNERSHIP L.P. PRO FORMA CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1997
HISTORICAL ADJUSTMENTS PRO FORMA(1) ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash....................................................... $ 1,128,177 $ 1,883,063 $ 3,011,240 Restricted cash and investments held by bank............... 3,480,539 1,519,461 5,000,000(2) Trade accounts receivable, net of allowance for doubtful accounts................................................. 5,851,394 5,851,394 Due from affiliated companies.............................. 96,365 96,365 Inventories................................................ 1,673,266 1,673,266 Prepaid expenses and others current assets................. 1,723,603 1,723,603 ------------ ------------ ------------ Total current assets.................................. 13,953,344 3,402,524 17,355,868 Due from affiliated company..................................... 71,429 71,429 Land, building and equipment: Land....................................................... 14,372,707 5,882,793 20,255,500(3) Building................................................... 158,039,190 33,719,600 191,758,790(3) Furniture, fixture and equipment........................... 34,658,913 (17,008,970) 17,649,943(3) ------------ ------------ ------------ 207,070,810 22,593,423 229,664,233 Less accumulated depreciation.............................. 25,944,072 25,944,072 0(3) ------------ ------------ ------------ 181,126,738 48,537,495 229,664,233 Operating equipment, net........................................ 1,488,342 1,488,342 Deferred debt issuance costs, net of accumulated................ 2,247,117 2,752,883 5,000,000(4) Deferred pre-opening costs, net of accumulated.................. 1,534,694 (1,534,694) 0(3) ------------ ------------ ------------ Total assets.......................................... $200,421,664 $ 53,158,208 $253,579,872 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND DEFICIENCY IN PARTNERS' CAPITAL Current liabilities: Trade accounts payable..................................... $ 6,035,380 $ $ 6,035,380 Advance deposits........................................... 10,104,458 10,104,458 Accrued interest........................................... 1,597,476 (1,597,476) 0(5) Other accrued liabilities.................................. 5,058,633 5,058,633 Due to affiliated companies................................ 972,686 (2,021,172) (1,048,486)(6) Note payable to bank....................................... 6,000,000 6,000,000 Current portion of long-term debt.......................... 120,000,000 (120,000,000) 0(7) Current portion of chattel mortgages and capital lease obligations.............................................. 1,893,063 1,893,063 ------------ ------------ ------------ Total current liabilities............................. 151,661,696 (123,618,648) 28,043,048 Long-term debt.................................................. 25,000,000 75,000,000 100,000,000(8) Chattel mortgages and capital lease obligations, net of current portion....................................................... 0 0 Due to affiliated companies..................................... 10,386,002 30,904,903 41,290,905(9) Due to partners................................................. 41,344,551 (26,369,509) 14,975,042(3) ------------ ------------ ------------ (Deficiency in) partners' capital: Limited partners........................................... (23,774,997) 86,405,244 62,630,247 General partners........................................... (4,195,588) 10,836,219 6,640,631 ------------ ------------ ------------ Total (deficiency in) partners' capital............... (27,970,585) 97,241,463 69,270,878 ------------ ------------ ------------ Total liabilities and deficiency in partners' capital............................................. $200,421,664 $ 53,158,209 $253,579,873 ------------ ------------ ------------ ------------ ------------ ------------
(footnotes on next page) F-5 (footnotes from previous page) (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed as of the balance sheet date. (2) Assumes the historical balance in restricted cash of $3,480,539 was refunded as a result of the Interim Financing and the addition of the $5,000,000 deposit into restricted cash as required by the Offering. (3) Reflects an adjustment related to the March 31, 1998 acquisition by Patriot of an additional 50% interest in the Partnership and an additional 37.23% interest in WKA. (4) Reflects the adjustment to write off the historical deferred financing fees of $2,247,177 and the addition of the deferred financing fees of $5,000,000 related to the Offering. (5) Assumes the accrued interest of $1,597,476 was paid with the refund of the historical restricted cash. (6) Reflects the net adjustment due to Patriot as a result of the Interim Financing. (7) Reflects the pay off of the Refunded Bonds with the Interim Financing. (8) Reflects the reduction in long term debt of $25,000,000 related to the GDB debt which will be assumed by Patriot and the addition of the gross proceeds from the Offering. (9) Reflects the increase in due to affiliated companies of $32,021,172 in connection with the Interim Financing and the reduction of incentive management fees due under the Management Agreement. F-6 EL CONQUISTADOR PARTNERSHIP L.P. PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1998
HISTORICAL ADJUSTMENTS PRO FORMA(1) ----------- ----------- ------------ (UNAUDITED) Revenues: Rooms........................................................... $27,069,963 $ 27,069,963 Food and beverage............................................... 18,470,780 18,470,780 Casino.......................................................... 2,724,059 2,724,059 Rental and other income......................................... 16,509,261 16,509,261 ----------- ----------- ------------ 64,774,063 64,774,063 Less casino promotional allowances.............................. 388,611 388,611 ----------- ----------- ------------ Net revenues......................................................... 64,385,452 64,385,452 Costs and expenses: Rooms........................................................... 8,612,773 8,612,773 Food and beverage............................................... 10,278,211 10,278,211 Casino.......................................................... 1,736,511 1,736,511 Selling, general and administrative............................. 8,244,093 8,244,093 Management and incentive management fees........................ 4,675,580 (2,920,879) 1,754,701(2) Property operation, maintenance and energy costs................ 5,539,254 5,539,254 Depreciation and amortization................................... 3,865,106 83,333 3,948,439(3) Other expenses.................................................. 5,263,460 5,263,460 ----------- ----------- ------------ 48,214,988 (2,837,546) 45,377,442 ----------- ----------- ------------ Income (loss) from operations........................................ 16,170,464 2,837,546 19,008,010 Interest income...................................................... 84,777 15,223 100,000(4) Interest expense..................................................... (8,669,671) 3,060,758 (5,608,913)(5) ----------- ----------- ------------ Net Income...................................................... $ 7,585,570 $ 5,913,526 $ 13,499,096 ----------- ----------- ------------ ----------- ----------- ------------
- ------------ (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on January 1, 1998. Also assumes that the Management Agreement became effective as of January 1, 1998. (2) Reflects the reduction in base management fees from 3.5% to 2.5% of gross revenues of the Resort, the implementation of a trade name fee of 0.5% of gross room revenues of the Hotel, and the elimination of incentive fees which were accrued at a rate of 10% of the Resort's gross operating profit, and interest thereon. No adjustment has been made with respect to the new marketing fee of 1.5% of gross room revenues of the Hotel and 1.0% of gross room revenues of Las Casitas Village payable pursuant to the Management Agreement. The Partnership believes that the Hotel's historical marketing expenses will not increase and that a portion of such expenses will be reallocated from a Hotel expense to a fee for marketing services. (3) Reflects an adjustment for the amortization of the Offering costs, estimated at $5.0 million, amortized on the straight-line method over the 30-year term of the Bonds at a rate of $83,333 for the 6 months ended June 30, 1998. (4) Reflects additional interest income at an assumed rate of 4.0%, or of $100,000 for the 6 months ended June 30, 1998 on the amount deposited in the Reserve Fund. (5) Reflects an assumed interest rate of 6.35% for the Bonds. F-7 EL CONQUISTADOR PARTNERSHIP L.P. PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR NINE MONTHS ENDED DECEMBER 31, 1997
HISTORICAL ADJUSTMENTS PRO FORMA(1) ------------ ----------- ------------ (UNAUDITED) Revenues: Rooms......................................................... $ 25,129,621 $ 25,129,621 Food and beverage............................................. 17,428,549 17,428,549 Casino........................................................ 3,553,713 3,553,713 Rental and other income....................................... 14,473,191 14,473,191 ------------ ----------- ------------ 60,585,074 60,585,074 Less casino promotional allowances............................ 458,447 458,447 ------------ ----------- ------------ Net revenues....................................................... 60,126,627 60,126,627 Costs and expenses: Rooms......................................................... 9,603,101 9,603,101 Food and beverage............................................. 12,314,635 12,314,635 Casino........................................................ 2,383,568 2,383,568 Selling, general and administrative........................... 11,996,536 11,996,536 Management and incentive management fees...................... 2,984,995 (1,344,720) 1,640,275(2) Property operation, maintenance and energy costs.............. 9,094,645 9,094,645 Depreciation and amortization................................. 6,886,836 125,000 7,011,836(3) Other expenses................................................ 6,875,562 6,875,562 ------------ ----------- ------------ 62,139,878 (1,219,720) 60,920,158 ------------ ----------- ------------ Income (loss) from operations...................................... (2,013,251) 1,219,720 (793,531) Interest income.................................................... 127,840 22,160 150,000(4) Interest expense................................................... (13,156,711) 4,743,342 (8,413,369)(5) ------------ ----------- ------------ Net Income............................................... $(15,042,122) $ 5,985,222 $ (9,056,900) ------------ ----------- ------------ ------------ ----------- ------------
- ------------ (1) Assumes that the Offering and related transactions, including repayment of the Interim Financing, were completed on April 1, 1997. Also assumes that the Management Agreement became effective as of April 1, 1997. (2) Reflects the reduction in base management fees from 3.5% to 2.5% of gross revenues of the Resort, implementation of a trade name fee of 0.5% of gross room revenues of the Hotel, and the elimination of incentive fees which were accrued at a rate of 10% of the Resort's gross operating profit, and interest thereon. No adjustment has been made with respect to the new marketing fee of 1.5% of gross room revenues of the Hotel and 1.0% gross room revenues of Las Casitas Village payable pursuant to the Management Agreement. The Partnership believes that the Hotel's historical marketing expenses will not increase and that a portion of such expenses will be reallocated from a Hotel expense to a fee for marketing services. (3) Reflects an adjustment for the amortization of Offering costs, estimated at $5.0 million, amortized on the straight-line method over the 30-year term of the Bonds at a rate of $125,000 for the 9 months ended December 31, 1997. (4) Reflects additional interest income at an assumed rate of 4.0%, or of $150,000 and $100,000 for the 9 months ended December 31, 1997 and 6 months ended June 30, 1998, respectively on the amount deposited in the Reserve Fund. (5) Reflects an assumed interest rate of 6.35% for the Bonds. F-8 REPORT OF INDEPENDENT AUDITORS The Partners EL CONQUISTADOR PARTNERSHIP L.P. We have audited the accompanying balance sheets of El Conquistador Partnership L.P. as of December 31 and March 31, 1997, and the related statements of operations and deficiency in partners' capital, and cash flows for the nine month period ended December 31, 1997 and for each of the two years in the period ended March 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of El Conquistador Partnership L.P. at December 31 and March 31, 1997, and the results of its operations and its cash flows for the nine month period ended December 31, 1997 and for each of the two years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that El Conquistador Partnership L.P. will continue as a going-concern. As more fully described in Note 14, El Conquistador Partnership L.P. did not renew or replace, prior to June 9, 1998, a letter of credit collateralizing $120,000,000 of indebtedness and the debt was required to be repaid on August 3, 1998. The debt was repaid partially with the proceeds from a short-term loan due on November 3, 1998 and partially with the proceeds of an advance from Posadas de Puerto Rico Associates, Incorporated, an affiliate of the Partnership. This condition raises substantial doubt about the Partnership's ability to continue as a going-concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP San Juan, Puerto Rico June 12, 1998, except for the third, fourth and sixth paragraphs of Note 14 as to which the dates are July 13, August 3, and September 21, 1998, respectively F-9 EL CONQUISTADOR PARTNERSHIP L.P. BALANCE SHEETS
DECEMBER 31, JUNE 30, MARCH 31, ---------------------------- ---------------------------- 1997 1997 1996 1998 1997 ------------ ------------ ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash.................................... $ 2,380,218 $ 1,128,177 $ 1,048,357 $ 1,606,480 $ 937,088 Restricted cash and investments held by bank.................................. 3,360,607 3,480,539 3,332,324 1,773,000 3,438,722 Trade accounts receivable, less allowance for doubtful accounts of $269,115 in March 31, 1997, $346,436 and $215,848 in December 31, 1997 and 1996 and $271,136 and $263,336 in June 30, 1998 and 1997..................... 4,764,607 5,851,394 4,927,730 5,632,178 5,259,173 Due from affiliated companies........... 428,987 96,365 415,351 9,702 496,268 Inventories............................. 1,662,877 1,673,266 1,585,225 1,603,891 1,722,260 Prepaid expenses and others current assets................................ 1,020,716 1,723,603 1,207,886 2,301,243 1,506,524 ------------ ------------ ------------ ------------ ------------ Total current assets................ 13,618,012 13,953,344 12,516,873 12,926,494 13,360,035 Due from affiliated company................. 418,957 71,429 421,024 64,286 258,185 Land, building and equipment: Land.................................... 14,372,707 14,372,707 14,372,707 20,255,500 14,372,707 Building................................ 158,039,190 158,039,190 158,039,190 191,758,790 158,039,190 Furniture, fixture and equipment........ 32,664,796 34,658,913 32,937,874 19,940,526 32,968,909 Construction in progress................ -- -- -- 365,966 -- ------------ ------------ ------------ ------------ ------------ 205,076,693 207,070,810 205,349,771 232,320,782 205,380,806 Less accumulated depreciation........... 21,116,551 25,944,072 19,527,910 2,594,881 22,721,318 ------------ ------------ ------------ ------------ ------------ 183,960,142 181,126,738 185,821,861 229,725,901 182,659,488 Operating equipment, net.................... 1,592,219 1,488,342 1,467,384 1,600,989 1,463,570 Deferred debt issuance costs, net of accumulated amortization of $5,709,747 in March 31, 1997, $6,443,252 and $5,465,254 in December 31, 1997 and 1996, and $489,003 and $5,954,253 in June 30, 1998 and 1997.................................. 2,980,622 2,247,117 3,225,115 1,758,114 2,736,120 Deferred pre-opening costs, net of accumulated amortization of $10,519,175 in March 31, 1997, $11,844,985 and $10,077,235 in December 31, 1997 and 1996, and $10,961,112 in June 30, 1997.......... 2,860,504 1,534,694 3,302,444 -- 2,418,567 ------------ ------------ ------------ ------------ ------------ Total assets........................ $205,430,456 $200,421,664 $206,754,701 $246,075,784 $202,895,965 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND (DEFICIENCY IN) PARTNERS' CAPITAL Current liabilities: Trade accounts payable.................. $ 5,474,496 $ 6,035,380 $ 8,332,877 $ 5,650,392 $ 6,061,114 Advance deposits........................ 5,572,317 10,104,458 6,050,522 2,416,370 2,192,643 Accrued interest........................ 1,785,687 1,597,476 1,598,857 1,163,745 1,701,436 Other accrued liabilities............... 5,271,335 5,058,633 4,615,158 7,589,888 5,070,540 Due to affiliated companies............. 545,824 972,686 1,524,068 400,015 768,358 Note payable to bank.................... 1,500,000 6,000,000 6,273,359 -- 3,500,000 Current portion of long-term debt....... 120,000,000 120,000,000 -- 120,000,000 120,000,000 Current portion of chattel mortgages and capital lease obligations............. 2,679,819 1,893,063 2,444,993 726,200 2,679,819 ------------ ------------ ------------ ------------ ------------ Total current liabilities............... 142,829,478 151,661,696 30,839,934 137,946,610 141,973,910 Long-term debt.............................. 25,000,000 25,000,000 145,000,000 25,000,000 25,000,000 Chattel mortgages and capital lease obligations, net of current portion....... 1,660,040 -- 2,625,918 -- 1,038,142 Due to affiliated companies................. 11,491,977 10,386,002 9,867,677 15,788,362 12,246,673 Due to partners............................. 37,377,424 41,344,551 36,757,360 15,748,651 37,900,913 (Deficiency in) partners' capital: Limited partners........................ (10,989,193) (23,774,997) (15,585,675) 43,853,337 (12,974,122) General partners........................ (1,939,270) (4,195,588) (2,750,413) 7,738,824 (2,289,551) ------------ ------------ ------------ ------------ ------------ Total (deficiency in) partners' capital..... (12,928,463) (27,970,585) (18,336,088) 51,592,161 (15,263,673) ------------ ------------ ------------ ------------ ------------ Total liabilities and deficiency in partners' capital................. $205,430,456 $200,421,664 $206,754,701 $246,075,784 $202,895,965 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. F-10 EL CONQUISTADOR PARTNERSHIP L.P. STATEMENTS OF OPERATIONS AND (DEFICIENCY IN) PARTNERS' CAPITAL
NINE MONTH PERIOD ENDED YEAR ENDED MARCH 31, DECEMBER 31, JANUARY 1 TO MARCH 1 TO --------------------------- --------------------------- FEBRUARY 28, JUNE 30, 1997 1996 1997 1998 1998 ------------ ------------ ------------ 1996 ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenues: Rooms.................. $ 40,023,903 $ 38,817,160 $ 25,129,621 $ 24,419,749 $ 10,755,530 $ 16,314,433 Food and beverage...... 26,235,365 26,188,693 17,428,549 17,633,438 6,475,176 11,995,604 Casino................. 6,005,242 6,179,133 3,553,713 4,011,214 931,502 1,792,557 Rental and other income............... 21,959,328 19,165,969 14,473,191 12,954,106 6,749,398 9,759,863 ------------ ------------ ------------ ------------ ------------ ------------ 94,223,838 90,350,955 60,585,074 59,018,507 24,911,606 39,862,457 Less casino promotional allowances........... 1,265,710 1,136,499 458,447 849,206 158,420 230,191 ------------ ------------ ------------ ------------ ------------ ------------ Net revenues....... 92,958,128 89,214,456 60,126,627 58,169,301 24,753,186 39,632,266 Costs and expenses: Rooms.................. 12,377,694 12,853,157 9,603,101 8,242,928 3,108,760 5,504,013 Food and beverage...... 17,602,484 17,638,186 12,314,635 12,811,291 3,523,059 6,755,152 Casino................. 3,848,981 3,686,904 2,383,568 2,764,980 740,044 996,467 Selling, general and administrative....... 14,657,312 12,992,841 11,996,536 10,449,921 2,633,989 5,610,104 Management and incentive management fees................. 5,680,355 5,394,675 2,984,995 2,969,676 1,944,369 2,731,211 Property operation, maintenance and energy costs......... 12,382,577 12,396,063 9,094,645 9,389,203 2,039,404 3,499,850 Depreciation and amortization......... 9,146,664 10,499,296 6,886,836 6,856,179 1,555,516 2,309,590 Other expenses......... 9,702,212 9,201,228 6,875,562 6,943,646 1,837,481 3,425,979 ------------ ------------ ------------ ------------ ------------ ------------ 85,398,279 84,662,350 62,139,878 60,427,824 17,382,622 30,832,366 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) from operations............... 7,559,849 4,552,106 (2,013,251) (2,258,523) 7,370,564 8,799,900 Interest income............ 199,110 228,625 127,840 139,431 43,300 41,477 Interest expense........... (17,162,132) (17,021,764) (13,156,711) (12,691,706) (3,300,966) (5,368,705) ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss).......... (9,403,173) (12,241,033) (15,042,122) (14,810,798) 4,112,898 3,472,672 (Deficiency in) partners' capital at beginning of period................... (3,525,290) 8,715,743 (12,928,463) (3,525,290) (27,970,585) (23,857,687) Partners' capital contribution............. -- -- -- -- -- 71,977,176 ------------ ------------ ------------ ------------ ------------ ------------ (Deficiency in) partners' capital at end of period................... $(12,928,463) $ (3,525,290) $(27,970,585) $(18,336,088) $(23,857,687) $ 51,592,161 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SIX MONTH PERIOD ENDED JUNE 30, ------------------------------ 1998 1997 ------------ ------------ (UNAUDITED) Revenues: Rooms.................. $ 27,069,963 $ 25,714,358 Food and beverage...... 18,470,780 16,160,989 Casino................. 2,724,059 3,272,405 Rental and other income............... 16,509,261 14,650,784 ------------ ------------ 64,774,063 59,798,536 Less casino promotional allowances........... 388,611 617,076 ------------ ------------ Net revenues....... 64,385,452 59,181,460 Costs and expenses: Rooms.................. 8,612,773 7,741,650 Food and beverage...... 10,278,211 9,597,175 Casino................. 1,736,511 1,987,495 Selling, general and administrative....... 8,244,093 7,997,441 Management and incentive management fees................. 4,675,580 4,160,763 Property operation, maintenance and energy costs......... 5,539,254 6,056,204 Depreciation and amortization......... 3,865,106 4,597,101 Other expenses......... 5,263,460 5,205,247 ------------ ------------ 48,214,988 47,343,076 ------------ ------------ Income (loss) from operations............... 16,170,464 11,838,384 Interest income............ 84,777 105,291 Interest expense........... (8,669,671) (8,871,260) ------------ ----------- Net income (loss).......... 7,585,570 3,072,415 (Deficiency in) partners' capital at beginning of period................... (27,970,585) (18,336,088) Partners' capital contribution............. 71,977,176 -- ------------ ----------- (Deficiency in) partners' capital at end of period................... $ 51,592,161 $(15,263,673) ------------ ------------ ------------ ------------
See accompanying notes. F-11 EL CONQUISTADOR PARTNERSHIP L.P. STATEMENTS OF CASH FLOWS
JANUARY 1 MARCH 1 MARCH 31, DECEMBER 31, TO FEBRUARY TO ----------------------- ------------------------ 28, JUNE 30, 1997 1996 1997 1996 1998 1998 ------------ ------------ ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net income (loss).................. $(9,403,173) $(12,241,033) $(15,042,122) $(14,810,798) $ 4,112,898 $ 3,472,672 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization... 9,146,664 10,499,296 6,886,836 6,856,179 1,555,516 2,309,590 Provision for losses on accounts receivable.................... 205,400 363,245 119,000 115,400 24,567 34,801 Incentive management fees....... 2,375,526 2,224,381 860,043 899,148 1,072,463 1,330,839 Deferred interest expense to partners and affiliates....... 3,100,085 2,995,431 2,417,475 2,678,051 311,571 1,305,415 Changes in operating assets and liabilities: Restricted cash and investments held by bank...................... (481,252) 503,353 (119,932) (452,969) 1,633,434 74,105 Trade accounts receivable... 332,877 1,987,789 (1,205,787) 259,754 440,954 (281,106) Inventories................. (140,414) 529,503 (10,389) (62,762) (119,205) 188,580 Prepaid expenses and other current assets............ (74,811) 26,105 (702,887) (261,981) 211,533 (789,173) Trade accounts payable and advance deposits.......... (179,123) (3,663,803) 5,093,025 675,331 (4,835,976) (3,237,100) Accrued interest and other accrued liabilities....... 873,753 (1,220,058) (400,913) 2,512,878 221,161 1,877,709 Affiliated companies, net... 99,017 (97,985) 690,646 1,604,522 125,779 (595,659) ----------- ------------ ------------ ------------ ----------- ----------- Net cash provided by (used in) operating activities.............. 5,854,549 1,906,224 (1,415,005) 12,753 4,754,695 5,690,673 INVESTING ACTIVITIES Purchases of property and equipment......................... (1,305,594) (826,611) (1,994,117) (1,624,905) (272,876) (2,414,679) (Purchases) usage of operating equipment, net.................... (122,869) (37,454) 103,877 1,966 (49,885) (62,762) ----------- ------------ ------------ ------------ ----------- ----------- Net cash used in investing activities........................ (1,428,463) (864,065) (1,890,240) (1,622,939) (322,761) (2,477,441) FINANCING ACTIVITIES Payments of principal on long-term debt.............................. (2,429,492) (2,198,146) (2,446,796) (1,698,440) (387,929) (778,934) Proceeds from notes payable to bank.............................. 9,500,000 7,684,685 4,500,000 3,500,000 Payments of principal on notes payable to bank................... (10,773,359) (6,549,685) -- -- (2,000,000) (4,000,000) Proceeds from partners', affiliated loans, and capital contributions..................... 800,000 -- -- -- -- -- ----------- ------------ ------------ ------------ ----------- ----------- Net cash (used in) provided by financing activities.............. (2,902,851) (1,063,146) 2,053,204 1,801,560 (2,387,929) (4,778,934) ----------- ------------ ------------ ------------ ----------- ----------- Net increase (decrease) in cash.... 1,523,235 (20,987) (1,252,041) 191,374 2,044,005 (1,565,702) Cash at beginning of period........ 856,983 877,970 2,380,218 856,983 1,128,177 3,172,182 ----------- ------------ ------------ ------------ ----------- ----------- Cash at end of period.............. $ 2,380,218 $ 856,983 $ 1,128,177 $ 1,048,357 $ 3,172,182 $ 1,606,480 ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ------------ ------------ ----------- ----------- Supplemental disclosure of cash flow information: Interest paid................... $13,789,097 $ 14,026,453 $ 10,927,447 $ 9,924,878 -- -- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ------------ ------------ ----------- ----------- Supplemental schedule of noncash investing activities: Equipment transferred from an affiliate $ 439,600 ------------ ------------ SIX MONTH PERIOD ENDED JUNE 30, -------------------------- 1998 1997 ------------ ----------- OPERATING ACTIVITIES Net income (loss).................. $ 7,585,570 $ 3,072,415 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization... 3,865,106 4,597,101 Provision for losses on accounts receivable.................... 59,368 118,000 Incentive management fees....... 2,403,302 2,064,329 Deferred interest expense to partners and affiliates....... 1,616,986 1,143,553 Changes in operating assets and liabilities: Restricted cash and investments held by bank...................... 1,707,539 (106,398) Trade accounts receivable... 159,848 (449,443) Inventories................. 69,375 (137,035) Prepaid expenses and other current assets............ (577,640) (298,638) Trade accounts payable and advance deposits.......... (8,073,076) (6,129,642) Accrued interest and other accrued liabilities....... 2,098,870 557,961 Affiliated companies, net... (469,880) (358,921) ------------ ----------- Net cash provided by (used in) operating activities.............. 10,445,368 4,073,082 INVESTING ACTIVITIES Purchases of property and equipment......................... (2,687,555) (61,856) (Purchases) usage of operating equipment, net.................... (112,647) 3,814 ------------ ----------- Net cash used in investing activities........................ (2,800,202) (58,042) FINANCING ACTIVITIES Payments of principal on long-term debt.............................. (1,166,863) (1,352,950) Proceeds from notes payable to bank.............................. -- -- Payments of principal on notes payable to bank................... (6,000,000) (2,773,359) Proceeds from partners', affiliated loans, and capital contributions..................... -- -- ------------ ----------- Net cash (used in) provided by financing activities.............. (7,166,863) (4,126,309) ------------ ----------- Net increase (decrease) in cash.... 478,303 (111,269) Cash at beginning of period........ 1,128,177 1,048,357 ------------ ----------- Cash at end of period.............. $ 1,606,480 $ 937,088 ------------ ----------- ------------ ----------- Supplemental disclosure of cash flow information: Interest paid................... $ 6,991,710 $ 7,625,128 ------------ ----------- ------------ ----------- Supplemental schedule of noncash investing activities: Equipment transferred from an affiliate
See accompanying notes. F-12 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES ORGANIZATION El Conquistador Partnership L.P. (the Partnership), is a limited partnership organized under the laws of Delaware, pursuant to a Joint Venture Agreement dated January 12, 1990, as amended (the Agreement). The Partnership is 50% owned by WKA El Con Associates (WKA El Con), a partnership owned by several partners affiliated with Williams Hospitality Group Inc. (Williams Hospitality), and 50% owned by Kumagai Caribbean, Inc. (Kumagai), a wholly-owned subsidiary of Kumagai International USA, Inc. The joint venture partners (the Partners) are both General Partners and Limited Partners in the Partnership (see Note 14). The Partnership shall continue to exist until March 31, 2030, unless terminated earlier by mutual agreement of the General Partners. The Agreement provides that net profits or losses of the Partnership after deducting a preferred cumulative annual return of 8.5% on the Partners unrecovered capital accounts, as defined, will be allocated to the Partners on a 50-50 ratio subject to certain exceptions, as defined. The Partnership owns and operates a luxury resort hotel and casino in Fajardo, Puerto Rico (the Resort). CHANGE IN FISCAL YEAR The Partnership changed its fiscal year from March 31 to December 31 beginning with the period ended December 31, 1997. BASIS OF PRESENTATION The financial statements have been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial information contained herein relating to the Partnership's statement of operations and cash flows for the six months ended June 30, 1998 is presented separately for the periods through 'February 28 and from March 1' due to the new basis of accounting which resulted from the acquisition of the Partnership. INTERIM INFORMATION (UNAUDITED) The interim financial statements as of June 30, 1998 and 1997, and as of December 31 1996 and for the six month periods ended June 30, 1998 and 1997, and the nine month period ended December 31, 1996, included herein are unaudited. Such information reflects all adjustments consisting solely of normal recurring adjustments, which are in the opinion of management necessary for a fair presentation of the balance sheets as of June 30, 1998 and 1997, and as of December 31, 1996 and the results of operations, and cash flows for the six month periods ended June 30, 1998 and 1997, and the nine month period ended December 31, 1996. Due to the seasonality of the Partnership's business, the reported results are not necessarily indicative of those expected for the entire year. Certain information and disclosures normally included in annual financial statements in accordance with generally accepted accounting principles have been excluded or omitted in presentation of the interim financial statements. F-13 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 INVENTORIES Inventories, which consist mainly of food, beverages and supplies, are valued at the lower of cost (first-in, first-out method) or market. LAND, BUILDING AND EQUIPMENT Land, building and equipment are stated on the basis of cost. Building and equipment are depreciated by the straight-line method over their estimated useful lives. DEFERRED DEBT ISSUANCE COSTS Debt issuance costs include legal and underwriting fees, other fees incurred in connection with the financing and other costs. These costs are being amortized on a straight-line basis over the term of the debt. DEFERRED PRE-OPENING COSTS Pre-opening costs consist of amounts incurred in connection with the marketing, organization, planning and development of the Resort. Such costs include staffing, marketing, legal and other costs incurred prior to the commencement of operations of the Resort. The costs are being amortized on a straight-line basis over a five year period through November 1998. CASINO REVENUES Casino revenues are the net win from gaming activities, which is the difference between gaming wins and losses. CASINO PROMOTIONAL ALLOWANCES Casino promotional allowances represent the retail value of complimentary rooms, food, beverage and hotel services furnished to patrons. 2. RESTRICTED CASH AND INVESTMENTS HELD BY BANK Pursuant to the terms of the bond agreement (see Note 8), the Partnership had cash and investments on deposit with the trustee for the following:
MARCH 31 DECEMBER 31 1997 1997 ---------- ------------ Interest due February 1, 1998.............................................. $1,773,000 Interest due May 1, 1997 and 1998.......................................... $1,778,961 1,707,539 Interest due August 1, 1997................................................ 1,581,646 -- ---------- ------------ $3,360,607 $3,480,539 ---------- ------------ ---------- ------------
F-14 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 3. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable consisted of the following:
MARCH 31 DECEMBER 31 1997 1997 ---------- ------------ Trade accounts receivable -- hotel......................................... $4,559,108 $5,580,876 Less allowance for doubtful accounts....................................... 144,615 234,614 ---------- ------------ 4,414,493 5,346,262 Trade accounts receivable -- casino........................................ 474,614 616,954 Less allowance for doubtful accounts....................................... 124,500 111,822 ---------- ------------ 350,114 505,132 ---------- ------------ Trade accounts receivable, net............................................. $4,764,607 $5,851,394 ---------- ------------ ---------- ------------
4. TRANSACTIONS WITH RELATED PARTIES The Partnership has an Operating and Management Agreement (the Management Agreement) with Williams Hospitality. The Management Agreement provides that Williams Hospitality will manage the Resort for a period of 20 years for a basic management fee of 3.5% of the Resort's gross revenues, as defined, and an incentive management fee of 10% of the Resort's operating profit, as defined. Incentive management fees accrued each year are not payable until significant cash flow levels are achieved. In addition, the Partnership is required to pay certain administrative expenses incurred by Williams Hospitality in connection with management of the Resort. During each of the two years in the period ended March 31, 1997 and the nine month period ended December 31, 1997, basic management fees amounted to $3,305,000, $3,170,000 and $2,125,000, respectively. Incentive management fees amounted to approximately $2,376,000, $2,224,000 and $860,000 during each of the two years in the period ended March 31, 1997 and the nine month period ended December 31, 1997, respectively. In addition, Williams Hospitality charged the Partnership approximately $3,258,000, $2,728,000 and $83,000 during each of the two years in the period ended March 31, 1997 and the nine month period ended December 31, 1997, respectively, for services provided to the Resort. In addition, the Partnership was charged by Posadas de Puerto Rico Associates, Incorporated (Posadas de Puerto Rico), hotel and casino operations affiliated through common ownership, approximately $410,000, $437,000 and $32,000 during each of the two years in the period ended March 31, 1997 and the nine month period ended December 31, 1997, respectively, for services provided to the Resort. As of December 31, 1997 each partner had advanced $8,765,685 to the Partnership under notes that are due for various periods up to ten years with interest at the Citibank, N.A. in New York base rate. Repayment of interest and principal is subordinate to other long-term debt. In addition, each partner had advanced to the Partnership $4,000,000 under a May 5, 1992 loan agreement. The loan agreement provides for the payment of interest at a variable rate, computed quarterly, equal to LIBOR plus 1.75%. Interest payments will be deferred during the first five years. The principal and deferred interest accrued at December 31, 1997 is payable in quarterly installments of $250,000 commencing in March 2000 and a final lump-sum payment in February 2002. The loan is collateralized by a subordinated pledge of the Partnership's assets. As of December 31, 1997 each partner had provided $3,800,000 to cover cash flow deficiencies in the Partnership's operations as provided by the Agreement. The deficiency loans consist of $3,800,000 in cash by Kumagai, and the conversion of amounts due from the Partnership to F-15 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 Williams Hospitality to loans for WKA El Con. The deficiency loans bear interest at 9.16%. Repayment of interest and principal is subordinated to other long-term debt. During 1993, the Partnership advanced approximately $2,000,000 to Williams Hospitality for the purchase of transportation equipment leased to the Partnership under a five year service agreement. Service agreement payments by the Partnership are equal to the $39,819 monthly amounts receivable under the advance. Repayment of the advances by Williams Hospitality are limited to amounts payable under the service agreement. During the nine month period ended December 31, 1997, Williams Hospitality transferred the transportation equipment to the Partnership. The Partnership then sold the transportation equipment at a loss of approximately $70,000 and the proceeds of this transaction remains to be collected from Williams Hospitality. In addition, a subsidiary of Williams Hospitality financed other transportation equipment from an external borrowing amounting to $441,000 repayable over five years. Monthly payments amount to $9,699. Also, in February 1997, a subsidiary of Williams Hospitality financed a ferryboat from an external borrowing amounting to $456,000, repayable over seven years. Monthly payments amount to $7,561. The Partnership chartered the transportation equipment and ferryboat under terms similar to the transaction described in the preceding paragraph. 5. NOTES PAYABLE TO BANK On October 4, 1996 the Partnership entered into an amendment to a loan agreement whereby the Government Development Bank for Puerto Rico (GDB) extended the Partnership a $6,000,000 credit facility. The notes issued under the credit facility bear interest at 1% over LIBOR. The notes are secured by a mortgage note on the Partnership's real property and a leasehold mortgage note on leased land and a lien on accounts receivable (see Note 8). At December 31, 1997 the Partnership had outstanding borrowings of $6,000,000 with an interest rate at December 31, 1997 of 6.80%. 6. DUE TO AFFILIATED COMPANIES AND PARTNERS Amounts due to affiliated companies consist of fees earned by Williams Hospitality, funds advanced to the Partnership and other payments made by Williams Hospitality, and for services rendered by Posadas de Puerto Rico and Posadas de San Juan Associates. Amounts due to affiliated companies consisted of the following:
MARCH 31, DECEMBER 31, 1997 1997 ----------- ------------ Current: Due to Williams Hospitality: Basic management fees................................ $ 435,309 $ 746,659 Other................................................ 83,891 167,314 Due to Posadas de Puerto Rico........................ 26,624 58,713 ----------- ------------ $ 545,824 $ 972,686 ----------- ------------ ----------- ------------
(table continued on next page) F-16 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 (table continued from previous page)
MARCH 31, DECEMBER 31, 1997 1997 ----------- ------------ Non current: Affiliate: Due to Williams Hospitality: Incentive management fees....................... $ 5,542,528 $ 6,402,571 Interest at 10% on incentive management fees.... 338,405 676,592 Advances........................................ 3,800,000 1,500,000 Interest on advances............................ 856,282 852,076 Other........................................... 375,528 375,529 ----------- ------------ 10,912,743 9,806,768 Due to KG Caribbean....................................... 579,234 579,234 ----------- ------------ $11,491,977 $ 10,386,002 ----------- ------------ ----------- ------------ Partners: Due to WKA El Con: Advances............................................. $12,765,685 $ 15,065,684 Interest on advances................................. 3,594,886 4,430,554 Due to Kumagai: Advances............................................. 16,565,685 16,565,683 Interest on advances................................. 4,451,168 5,282,630 ----------- ------------ $37,377,424 $ 41,344,551 ----------- ------------ ----------- ------------
7. CHATTEL MORTGAGES AND CAPITAL LEASE OBLIGATIONS Chattel mortgages and capital lease obligations on equipment consisted of the following:
MARCH 31, DECEMBER 31, 1997 1997 ---------- ------------ Chattel mortgage notes payable bearing interest at 9%, payable in monthly installments of $215,784, including interest, through October 1998, collateralized with personal property............ $3,868,202 $1,675,855 Capital lease obligations bearing interest at 11.5%, payable in monthly installments of $28,335, including interest, through July 1998, collateralized with personal property............... 471,657 217,208 ---------- ------------ 4,339,859 1,893,063 Less current portion............................................. 2,679,819 1,893,063 ---------- ------------ $1,660,040 $ -- ---------- ------------ ---------- ------------
F-17 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 8. LONG-TERM DEBT Long-term debt consisted of the following:
MARCH 31, DECEMBER 31, 1997 1997 ------------ ------------ Industrial Revenue Bonds Series A............................ $ 90,000,000 $ 90,000,000 Industrial Revenue Bonds Series B............................ 30,000,000 30,000,000 Government Development Bank for Puerto Rico.................. 25,000,000 25,000,000 ------------ ------------ 145,000,000 145,000,000 Less current portion......................................... 120,000,000 120,000,000 ------------ ------------ $ 25,000,000 $ 25,000,000 ------------ ------------ ------------ ------------
On February 7, 1991 the Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority (the Authority) sold industrial revenue bonds (Bonds) for $120,000,000 and loaned the proceeds to the Partnership to be used for the payment of project costs pursuant to a Loan Agreement. The Loan Agreement provides that the Partnership will pay all interest and principal on the Bonds. The Authority issued 1991 Series A, Industrial Revenue Bonds for $90,000,000 and 1991 Series B, Industrial Revenue Bonds for $30,000,000. Commencing on May 1, 1996, the Bonds are subject to redemption at the Partnership's option at par plus accrued interest, if any. The Bonds are due on November 1, 1999 and interest is payable quarterly. The 1991 Series A Bonds and the 1991 Series B Bonds bear interest at a variable rate, computed quarterly, equal to 100% and 94%, respectively, of a LIBOR rate minus 1/8th of 1%. Effective November 1, 1996, the interest rate on the 1991 Series A Bonds increased to 100% of the LIBOR rate. On February 7, 1991 the Partnership entered into an Interest Rate Swap Agreement that expires on March 8, 1998 by which the Partnership agreed to pay, effective May 1, 1991, a fixed rate of 7.55% on the outstanding principal of $120,000,000 in exchange for the counterparty's obligation to pay the variable interest rate equal to 86% and 94% respectively, of the LIBOR rate minus 1/8th of 1%. The Loan Agreement provides that the Partnership will deposit with the trustee all interest which will become due not later than the 124th day preceding the date of payment. The Bonds are collateralized by a letter of credit, that terminates on September 9, 1998, issued by The Bank of Tokyo -- Mitsubishi Ltd., (formerly The Mitsubishi Bank, Limited) (see Note 14). As of December 31, 1997 the Partnership pays an annual letter of credit fee of approximately 1.25% of the Bond principal except under certain circumstances the rate may be reduced to 1.2%. In addition, in connection with the letter of credit the Partnership pays an annual agent's fee of approximately .25% of the Initial Stated Amount, as defined. Under the provisions of a term loan agreement with GDB, the Partnership borrowed $25,000,000 for the payment of project costs. The loan is due on February 7, 2006. The loan agreement provides for a variable interest rate equivalent to a LIBOR rate minus .5% plus an add-on margin as provided in the loan agreement. Interest is payable quarterly in arrears. Commencing on April 1, 1993, the Partnership has been required to deposit annually with an escrow agent 50% of the Available Cash Flow, as defined in the Loan Agreement with GDB, up to a maximum of $1,666,700 plus any prior year requirement in arrears. Through December 31, 1997, there had been no amounts deposited in escrow under this provision. The Bonds and the term loan with GDB are collateralized by a first and second mortgage lien on the Resort, a chattel mortgage on personal property, and an assignment of various contracts and the Management Agreement with Williams Hospitality. The collateral is subject to a F-18 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 subordination agreement in favor of the The Bank of Tokyo -- Mitsubishi Ltd., (formerly The Mitsubishi Bank, Limited). 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Standards Board Statement No. 107 'Disclosures About Fair Value of Financial Instruments', requires the disclosure of the fair value of the Partnership's financial instruments at March 31 and December 31, 1997. The carrying amount of cash and investments, notes payable to bank, chattel mortgage notes and capitalized leases approximates fair value because of the short maturity of the instruments or recent issuance. The fair value of the Partnership's long-term debt has not been determined because similar terms and conditions may no longer be available. 10. INCOME TAXES The Partnership is not taxable for Puerto Rico income tax purposes pursuant to an election submitted to the Puerto Rico Treasury Department. Instead, each Partner reports their distributive share of the Partnership's profits and losses in their respective income tax returns and, therefore, no provision for income taxes has been made in the accompanying financial statements. The Partnership was granted a tax exemption grant under the provisions of the Puerto Rico Tourism Incentives Act of 1993 (the Tourism Act). The Tourism Act provides for a ten-year grant which may be extended for an additional ten-year term. Major benefits of this Act are: a 90% exemption from income taxes on hotel income, and a 90% exemption from municipal real and personal property taxes through the entire term of the grant. The Partnership's casino operations are not covered by the tax exemption grant and are fully taxable. 11. ADVERTISING COSTS The Partnership recognizes the costs of advertising as expense in the year in which they are incurred. Advertising costs amounted to approximately $1,446,000, $847,000 and $1,430,000 for each of the two years in the period ended March 31, 1997 and the nine month period ended December 31, 1997, respectively. 12. COMMITMENTS The Partnership leases land under an operating lease agreement for thirty-two years with renewal options for two five-year periods. Following are the minimum annual rental payments on the operating lease subsequent to December 31, 1997: 1998.................................................................. $ 210,000 1999.................................................................. 210,000 2000.................................................................. 210,000 2001.................................................................. 210,000 2002.................................................................. 240,000 Thereafter............................................................ 5,680,000 ---------- $6,760,000 ---------- ----------
On May 4, 1998, the Partnership entered into a $2,993,000 contract for the construction of the spa facilities at an existing building. Monthly progress payments are due by the fifteenth of each month, with a final payment upon substantial completion of the construction. F-19 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 Total rent expense for each of the two years in the period ended March 31, 1997 and the nine month period ended December 31, 1997 amounted to approximately $1,391,000, $985,000, and $982,000, respectively. 13. EMPLOYEES' SAVINGS PLAN Effective January 1, 1997, the Partnership adopted an employees' savings plan for all hourly employees after one year of service or 1,000 hours. Employees covered by any collective bargaining agreement are not eligible to participate in the plan. Members of the plan can contribute an unlimited percentage of their after tax compensation. The Partnership's contribution is $300 per employee per year and a discretionary additional contribution. The Partnership's contribution to the savings plan amounted to approximately $44,000 for the nine month period ended December 31, 1997. Effective January 1, 1997, the Partnership adopted a salary savings plan for all salaried employees after one year of service or 1,000 hours. Employees covered by any collective bargaining agreement are not eligible to participate in the plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of l974 (ERISA) and Section 1l65(e) of the Puerto Rico Income Tax Act of l994, as amended. For the nine month period ended December 31, 1997, the employee's contribution was limited to $7,500 or 10% of their compensation, whichever was less. Under the provisions of the plan, the Partnership makes a minimum base contribution of $300 per participant plus a discretionary contribution based on sick leave accrued in excess of 240 hours and matches the employee's contribution based on the percentage the gross operating profit, as defined, exceeds the Partnership's annual operating budget as follows:
MATCHING G.O.P. EXCEEDS CONTRIBUTION BUDGET BY PERCENTAGE - ---------------------------------------------------------------------- ------------ Less than 5%.......................................................... 25% 5%.................................................................... 35% 10%................................................................... 45% 15%................................................................... 55% 20%................................................................... 65%
The Partnership's contribution to the salary savings plan amounted to approximately $29,100 for the nine month period ended December 31, 1997. 14. SUBSEQUENT EVENTS On January 16, 1998, Patriot American Hospitality Operating Company Acquisition Subsidiary, a wholly-owned subsidiary of Wyndham International, Inc. (Wyndham) merged with and into WHG Resorts & Casinos Inc. (WHG), a 46.54% indirect owner of WKA El Con. As part of the transaction WHG stockholders received for each issued and outstanding share of common stock .784 shares of Wyndham and Patriot American Hospitality, Inc. (Patriot), a self-administered REIT, which trade as 'Paired Shares' on the New York Stock Exchange. On March 31, 1998, Patriot acquired an additional 50% interest in the Partnership for approximately $22,728,000, which interest was owned by Kumagai, and an additional 37.23% interest in WKA El Con for approximately $16,072,000. On July 13, 1998, Patriot acquired the remaining additional interest in WKA El Con for approximately $3,890,000. The purchase transactions were accounted for under the purchase F-20 EL CONQUISTADOR PARTNERSHIP L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 method and the cumulative purchase price paid by Wyndham and Patriot was the basis used to record net assets on the records of WHG and its subsidiaries. The Bonds amounting to $120,000,000 at December 31, 1997 are collaterized by a letter of credit which expires on September 9, 1998. Under the terms of the loan agreement, such debt was required to be repaid on August 3, 1998 since the letter of credit was not renewed or replaced prior to June 9, 1998 (see Note 8). On August 3, 1998, the letter of credit was honored and the $120,000,000 was paid in full. In accordance with the Letter of Credit and Reimbursement Agreement, the Partnership was obligated to immediately reimburse the letter of credit issuer the full amount drawn under the letter of credit. On August 3, 1998, the Partnership made a partial payment of $30,000,000 and entered into an Assignment and Modification Agreement of the Letter of Credit and Reimbursement Agreement with Citicorp Real Estate, Inc. (CRE). CRE reimbursed the letter of credit issuer with respect to the $90,000,000 balance due under the Letter of Credit and Reimbursement Agreement. As part of the Assignment and Modification Agreement, the $90,000,000 advanced by CRE matures on November 3, 1998, with an additional extension option to March 15, 1999, if certain conditions are met. Interest on the $90,000,000 is payable at a rate equal to 7.91% per annum up to September 1, 1998 and at a rate equal to LIBOR plus 225 basis point up to maturity. The $30,000,000 used for the partial payment of the letter of credit was obtained from a cash advance received from Posadas de Puerto Rico, an affiliate company through common ownership. In connection with the repayment of the long-term debt the Partnership recorded an extraordinary loss of approximately $1,700,000 related to the write-off of the unamortized deferred debt issuance costs. The Partnership is engaged in the process of refinancing the balance due to CRE through a new bond issue by the Authority. Based on operating history of the Resort, the Partnership's management believes such refinancing will be achieved, but there can be no assurance thereof. If such refinancing is not obtained, it raises substantial doubt about the Partnership's ability to continue as a going-concern. On September 21 and 22, 1998, Hurricane Georges affected Puerto Rico and caused certain damage to the Resort. While the financial effects of the hurricane are not yet determinable, the Partnership believes that the nature of the damage and its insurance coverage is such that there will not be a significant impact on the Partnership's financial condition. 15. IMPACT OF YEAR 2000 -- UNAUDITED The Partnership has developed a plan to modify its information technology to be ready for the year 2000 and has begun converting critical data processing systems. The Partnership expects the project to be substantially completed by 1999. The Partnership does not expect this project to have significant effect on its operations. F-21 WKA EL CON ASSOCIATES UNAUDITED CONSOLIDATED BALANCE SHEET JUNE 30, 1998
ASSETS Current assets: Cash............................................................................... $ 1,610,100 Restricted cash and investments held by bank....................................... 1,773,000 Trade accounts receivable, less allowance for doubtful accounts of $271,000........ 5,632,200 Due from affiliated companies...................................................... 9,700 Inventories........................................................................ 1,603,900 Prepaid expenses and others current assets......................................... 2,301,200 ------------ Total current assets.......................................................... 12,930,100 Due from affiliated company............................................................. 64,300 Land, building and equipment: Land............................................................................... 20,255,500 Building........................................................................... 191,758,800 Furniture, fixture and equipment................................................... 19,940,500 Construction in progress........................................................... 366,000 ------------ 232,320,800 Less accumulated depreciation...................................................... 2,594,900 ------------ 229,725,900 Operating equipment, net................................................................ 1,601,000 Deferred debt issuance costs and other assets, net of accumulated amortization of $495,000.............................................................................. 1,858,600 Capitalized interest net of accumulated amortization of $27,000......................... 1,269,500 ------------ Total assets.................................................................. $247,449,400 ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Trade accounts payable............................................................. $ 5,650,400 Advance deposits................................................................... 2,416,400 Accrued interest................................................................... 1,163,700 Other accrued liabilities.......................................................... 7,647,400 Due to affiliated companies........................................................ 400,000 Current portion of long-term debt.................................................. 120,000,000 Current portion of chattel mortgages and capital lease obligations................. 726,200 ------------ Total current liabilities..................................................... 138,004,100 Long-term note payable.................................................................. 896,300 Long-term debt.......................................................................... 25,000,000 Due to affiliated companies............................................................. 16,625,400 Due to partners......................................................................... 5,547,400 Minority interest....................................................................... 21,360,400 Partners' capital: Contributed........................................................................ 36,237,700 Accumulated Earnings............................................................... 3,778,100 Total partners' capital................................................................. 40,015,800 ------------ Total liabilities and deficiency in partners' capital......................... $247,449,400 ------------ ------------
See accompanying notes. F-22 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET JUNE 30, 1998 1. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES ORGANIZATION WKA El Con Associates (the Partnership) is a joint venture organized under the General Partnership Law of the State of New York, pursuant to a Joint Venture Agreement (the Agreement) dated January 9, 1990, as amended, for the purpose of becoming a general and limited partner of El Conquistador Partnership L.P. (El Con). The Partnership is owned 46.54% by WHG El Con Corp., a wholly owned subsidiary of Wyndham International, Inc. (Wyndham), 37.23% by Conquistador Holding Inc., a wholly owned subsidiary of, Patriot American Hospitality, Inc. (Patriot) and 16.23% by Hospitality Investor Group, S.E. The Partnership shall continue to exist until January 9, 2040, unless terminated earlier pursuant to the Agreement (see Note 14). The consolidated balance sheet includes the accounts of El Conquistador Partnership L.P. (El Con), a limited partnership organized under the laws of Delaware, pursuant to a Joint Venture Agreement dated January 12, 1990, as amended (the Agreement). El Con is 50% owned by the Partnership and 50% owned by Conquistador Holding, Inc. The joint venture partners (Partners) are both General Partners and Limited Partners in the Partnership (see Note 14). The Partnership shall continue to exist until March 31, 2030, unless terminated earlier by mutual agreement of the General Partners. El Con owns a luxury resort hotel and casino in Fajardo, Puerto Rico (the Resort). The Partnership is a 50% limited partner in Las Casitas Development Company I, S en C (S.E.) (Las Casitas), a joint venture that constructed and sold condominiums on property adjacent to El Con. BASIS OF PRESENTATION The consolidated balance sheet has been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. The consolidated balance sheet information at June 30, 1998 includes all adjustments (consisting of normal recurring adjustments) management considers necessary for fair presentation of the consolidated balance sheet at June 30, 1998. As part of the acquisition by Wyndham and Patriot, accounted for under the purchase method, the Partnership's investment in El Con was increased by approximately $46,422,000 and pre-opening costs were decreased by approximately $636,000. INVENTORIES Inventories, which consist mainly of food, beverages and supplies, are valued at the lower of cost (first-in, first-out method) or market. LAND, BUILDING AND EQUIPMENT Land, building and equipment are stated on the basis of cost. Building and equipment are depreciated by the straight-line method over their estimated useful lives. F-23 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 DEFERRED DEBT ISSUANCE COSTS AND OTHER ASSETS Debt issuance costs include legal and underwriting fees, other fees incurred in connection with the financing and other costs. These costs are being amortized on a straight-line basis over the term of the debt. Certain other capital costs related to El Con were incurred by the Partnership and are being amortized over 50 years. 2. RESTRICTED CASH AND INVESTMENTS HELD BY BANK Pursuant to the terms of the bond agreement (see Note 8), El Con had cash and investments on deposit amounting to approximately $1,773,000 for the interest due on August 3, 1998. 3. TRADE ACCOUNTS RECEIVABLE At June 30, 1998, trade accounts receivable consisted of the following: Trade accounts receivable -- hotel.............................................. $5,537,100 Less allowance for doubtful accounts............................................ 180,600 ---------- 5,356,500 Trade accounts receivable -- casino............................................. 366,200 Less allowance for doubtful accounts............................................ 90,500 ---------- 275,700 ---------- Trade accounts receivable, net.................................................. $5,632,200 ---------- ----------
4. TRANSACTIONS WITH RELATED PARTIES El Con has an Operating and Management Agreement (the Management with Agreement) with Williams Hospitality Group Inc. (Williams Hospitality). The Management Agreement provides that Williams Hospitality will manage the Resort for a period of 20 years for a basic management fee of 3.5% of the Resort's gross revenues, as defined, and an incentive management fee of 10% of the Resort's operating profit, as defined. Incentive management fees accrued each year are not payable until significant cash flow levels are achieved. In addition, El Con is required to pay certain administrative expenses incurred by Williams Hospitality in connection with management of the Resort. A subsidiary of Williams Hospitality, a related entity through common ownership, financed certain transportation equipment from an external borrowing amounting to $441,000 repayable over five years. Monthly payments amount to $9,699. Also, in February 1997, a subsidiary of Williams Hospitality financed a ferryboat from an external borrowing amounting to $456,000, repayable over seven years. Monthly payments amount to $7,561. 5. DUE TO AFFILIATED COMPANIES AND PARTNERS Amounts due to affiliated companies consist of fees earned by Williams Hospitality, funds advanced to El Con and other payments made by Williams Hospitality, and for services rendered F-24 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 by Posadas de Puerto Rico Associates, Incorporated (Posadas de Puerto Rico) and Posadas de San Juan Associates. At June 30, 1998 amounts due to affiliated companies consisted of the following: Current: Due to Williams Hospitality: Basic management fees.......................................................... $ 240,600 Other.......................................................................... 148,900 Due to Posadas de Puerto Rico....................................................... 10,500 $ 400,000 ----------- Non current: Affiliate: Due to Williams Hospitality: Incentive management fees................................................. $ 8,805,900 Interest at 10% on incentive management fees.............................. 813,300 Advances.................................................................. 1,500,000 Interest on advances...................................................... 1,064,100 Other..................................................................... 412,500 ----------- 12,595,800 Due to Patriot............................................................ 4,029,600 ----------- $16,625,400 ----------- -----------
At various times, the partners loaned the Partnership $8,229,700 under the terms of loan agreements. The notes are payable in 2003 to 2005 and bear interest at the prime rate commencing on various dates. The Partnership has advanced the same amount under a subordinated note to El Con under the same terms as the borrowing from the partners. The interest rate as of December 31, 1997 was 8.50%. The Partnership guaranteed a revolving credit facility from GDB to El Con in the aggregate amount of up to $6,000,000. The revolving credit facility was terminated in May 1998. 6. CHATTEL MORTGAGES AND CAPITAL LEASE OBLIGATIONS At June 30, 1998, chattel mortgages and capital lease obligations on equipment consisted of the following: Chattel mortgage notes payable bearing interest at 9%, payable in monthly installments of $215,784, including interest, through October 1998, collateralized with personal property.................................................................................. $670,300 Capital lease obligations bearing interest at 11.5%, payable in monthly installments of $28,335, including interest, through July 1998, collateralized with personal property..... 55,900 -------- $726,200 -------- --------
7. LONG-TERM NOTE PAYABLE The note is payable in quarterly installments of $250,000 commencing in May 2000. Any unpaid principal and interest is payable in May 2002. The note bears interest at a variable rate, computed quarterly, equal to LIBOR, plus 1.75%, interest rate at June 30, 1998 was 7.5%. Under the terms of the Credit Facility Agreement dated May 5, 1992, interest payments are deferred during the first five years. The $4,000,000 borrowing was loaned to El Con under similar terms (see Note 2). F-25 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 The note is collateralized by second mortgages on parcels of land owned by Williams Hospitality and Posadas de Puerto Rico, affiliated companies through common ownership, with a cost of approximately $3,761,000, and a guarantee of $1,000,000 by Wyndham, the ultimate owner of WHG El Con Corp. 8. LONG-TERM DEBT At June 30, 1998 long-term debt consisted of the following: Industrial Revenue Bonds Series A............................................. $ 90,000,000 Industrial Revenue Bonds Series B............................................. 30,000,000 Government Development Bank for Puerto Rico................................... 25,000,000 ------------ 145,000,000 Less current portion.......................................................... 120,000,000 ------------ $ 25,000,000 ------------ ------------
On February 7, 1991 the Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority (the Authority) sold industrial revenue bonds (Bonds) for $120,000,000 and loaned the proceeds to El Con to be used for the payment of project costs pursuant to a Loan Agreement. The Loan Agreement provides that El Con will pay all interest and principal on the Bonds. The Authority issued 1991 Series A, Industrial Revenue Bonds for $90,000,000 and 1991 Series B, Industrial Revenue Bonds for $30,000,000. Commencing on May 1, 1996, the Bonds were subject to redemption at El Con's option at par plus accrued interest, if any. The Bonds are due on November 1, 1999 and interest is payable quarterly. The 1991 Series A Bonds and the 1991 Series B Bonds bear interest at a variable rate, computed quarterly, equal to 100% and 94%, respectively, of a LIBOR rate minus 1/8th of 1%. Effective November 1, 1996, the interest rate on the 1991 Series A Bonds increased to 100% of the LIBOR rate. On February 7, 1991 El Con entered into an Interest Rate Swap Agreement that expired on March 8, 1998 by which El Con agreed to pay, effective May 1, 1991, a fixed rate of 7.55% on the outstanding principal of $120,000,000 in exchange for the counterparty's obligation to pay the variable interest rate equal to 86% and 94% respectively, of the LIBOR rate minus 1/8th of 1%. The Loan Agreement provides that El Con will deposit with the trustee all interest which will become due not later than the 124th day preceding the date of payment. The Bonds are collaterilized by a letter of credit, that terminates on September 9, 1998, issued by The Bank of Tokyo-Mitsubishi Ltd (formerly The Mitsubishi Bank, Limited). The Loan Agreement required the letter of credit to be renewed or replaced prior to June 9, 1998 or the debt amounting to $120,000,000 would become due on August 3, 1998. On August 3, 1998, the letter of credit was honored and the $120,000,000 was paid in full. In accordance with the Letter of Credit and Reimbursement Agreement, El Con was obligated to immediately reimburse the letter of credit issuer the full amount drawn under the letter of credit. On August 3, 1998, El Con made a partial payment of $30,000,000 and entered into an Assignment and Modification Agreement of the Letter of Credit Agreement with Citicorp Real Estate, Inc. (CRE). CRE reimbursed the letter of credit issuer with respect to the $90,000,000 balance due under the Letter of Credit and Reimbursement Agreement. As part of the Assignment and Modification Agreement, the remaining $90,000,000 advance by CRE matures on November 3, 1998, with an additional extention option to March 15, 1999, if certain conditions are met. Interest on the $90,000,000 is payable at a rate equal to 7.91% per annum up to September 1, 1998 and at a rate equal to LIBOR plus 225 basis points up to maturity. The $30,000,000 used for the partial payment of the letter of credit was obtained from a F-26 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 cash advance received from Posadas de Puerto Rico, an affiliate company through common ownership. El Con is engaged in the process of refinancing the balance due to CRE through a new bond issue by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. Based on operating history of the Resort, the Partnership's management believes such refinancing will be achieved, but there can be no assurance thereof. El Con pays an annual letter of credit fee of approximately 1.25% of the Bond principal except under certain circumstances the rate may be reduced to 1.2%. In addition, in connection with the letter of credit El Con pays an annual agent's fee of approximately .25% of the Initial Stated Amount, as defined. Under the provisions of a term loan agreement with GDB, El Con borrowed $25,000,000 for the payment of project costs. The loan is due on February 7, 2006. The loan agreement provides for a variable interest rate equivalent to a LIBOR rate minus .5% plus an add-on margin as provided in the loan agreement. Interest is payable quarterly in arrears. Commencing on April 1, 1993, El Con is required to deposit annually with an escrow agent 50% of the Available Cash Flow, as defined in the Loan Agreement with GDB, up to a maximum of $1,666,700 plus any prior year requirement in arrears. Through June 30, 1998, there had been no amounts deposited in escrow under this provision. The Bonds and the term loan with GDB are collateralized by a first and second mortgage lien on the Resort, a chattel mortgage on personal property, and an assignment of various contracts and the Management Agreement with Williams Hospitality. The collateral is subject to a subordination agreement in favor of The Bank of Tokyo-Mitsubishi Ltd (formerly the Mitsubishi Bank, Limited). 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Standards Board Statement No. 107 'Disclosures About Fair Value of Financial Instruments', requires the disclosure of the fair value of El Con's financial instruments at June 30, 1998. The carrying amount of investments, notes payable to bank, chattel mortgage notes and capitalized leases approximates fair value because of the short maturity of the instruments or recent issuance. The fair value of El Con's long-term debt has not been determined because similar terms and conditions may no longer be available. 10. INCOME TAXES The Partnership is not taxable for Puerto Rico income tax purposes pursuant to an election submitted to the Puerto Rico Treasury Department. Instead, each Partner reports their distributive share of the Partnership's profit and losses in their respective income tax returns. El Con was granted a tax exemption grant under the provisions of the Puerto Rico Tourism Incentives Act of 1993 (the Tourism Act). The Tourism Act provides for a ten-year grant which may be extended for an additional ten-year term. Major benefits of this Act are: a 90% exemption from income taxes on hotel income, and a 90% exemption from municipal real and personal property taxes through the entire term of the grant. The Partnership's casino operations are not covered by the tax exemption grant and are fully taxable. F-27 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 11. COMMITMENTS El Con leases land under an operating lease agreement for thirty-two years with renewal options for two five-year periods. Following are the minimum annual rental payments on the operating lease subsequent to June 30, 1998: 1998............................................................................ $ 210,000 1999............................................................................ 210,000 2000............................................................................ 210,000 2001............................................................................ 210,000 2002............................................................................ 240,000 Thereafter...................................................................... 5,575,000 ---------- $6,655,000 ---------- ----------
On May 4, 1998, El Con entered into a $2,993,000 contract for the construction of spa facilities at an existing building. Monthly progress payments are due by the fifteenth of each month, with a final payment upon substantial completion of the construction. 12. EMPLOYEES' SAVINGS PLAN Effective January 1, 1997, El Con adopted an employees' savings plan for all hourly employees after one year of service or 1,000 hours. Employees covered by any collective bargaining agreement are not eligible to participate in the plan. Members of the plan can contribute an unlimited percentage of their after tax compensation. El Con's contribution is $300 per employee per year and a discretionary additional contribution. Effective January 1, 1997, El Con adopted a salary savings plan for all salaried employees after one year of service or 1,000 hours. Employees covered by any collective bargaining agreement are not eligible to participate in the plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of l974 (ERISA) and Section 1l65(e) of the Puerto Rico Income Tax Act of l994, as amended. Under the provisions of the plan, El Con makes a minimum base contribution of $300 per participant plus a discretionary contribution based on sick leave accrued in excess of 240 hours and matches the employee's contribution based on the percentage the gross operating profit, as defined, exceeds El Con's annual operating budget as follows:
MATCHING CONTRIBUTION G.O.P. EXCEEDS BUDGET BY PERCENTAGE - -------------------------------------------------------------------------------- ------------ Less than 5%.................................................................... 25% 5%.............................................................................. 35% 10%............................................................................. 45% 15%............................................................................. 55% 20%............................................................................. 65%
13. SUBSEQUENT EVENTS On July 13, 1998, Patriot acquired the remaining additional interest in the Partnership for approximately $3,890,000. The purchase transactions, were accounted for under the purchase method and the cumulative purchase price paid by Wyndham and Patriot was the basis used to record net assets on the records of its subsidiaries. On September 21 and 22, 1998, Hurricane Georges caused certain damage to the Resort. While the financial effects of the hurricane are not yet determinable, management of the Partnership believes that F-28 WKA EL CON ASSOCIATES NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 the nature of the damage and its insurance coverage is such that there will not be a significant impact on El Con's financial condition. 14. IMPACT OF YEAR 2000 El Con has developed a plan to modify its information technology to be ready for the year 2000 and has begun converting critical data processing systems. El Con expects the project to be substantially completed by 1999. El Con does not expect this project to have significant effect on its financial position. F-29 REPORT OF INDEPENDENT AUDITORS The Partners WKA EL CON ASSOCIATES We have audited the accompanying balance sheet of WKA El Con Associates (a joint venture partnership) as of December 31, 1997. This balance sheet is the responsibility of the Partnership's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of WKA El Con Associates as of December 31, 1997 in conformity with generally accepted accounting principles. The accompanying balance sheet has been prepared assuming that WKA El Con Associates will continue as a going-concern. As more fully described in Note 7, El Conquistador Partnership L.P., a 50% owned partnership, did not renew or replace prior to June 9, 1998 a letter of credit collateralizing $120,000,000 of indebtedness and the debt was required to be repaid on August 3, 1998. The debt was partially repaid with proceeds from a short-term loan due on November 3, 1998 and the proceeds of an advance from Posadas de Puerto Rico Associates, Incorporated, an affiliate of the Partnership. This condition raises substantial doubt about the Partnership's ability to continue as a going-concern. The balance sheet does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP San Juan, Puerto Rico June 11, 1998, except for the second, third and fifth paragraphs of Note 7 as to which the dates are July 13, August 3, and September 21, 1998, respectively F-30 WKA EL CON ASSOCIATES BALANCE SHEET DECEMBER 31, 1997 ASSETS Cash.............................................................................................. $ 3,600 Notes receivable from affiliated company.......................................................... 19,096,300 Capitalized interest, less accumulated amortization of $115,000................................... 1,353,500 Deferred debt issuance costs and other assets, less accumulated amortization of $451,300.......... 718,500 ------------ Total assets....................................................................... $ 21,171,900 ------------ ------------ LIABILITIES AND DEFICIENCY IN ASSETS Liabilities: Long-term note payable....................................................................... $ 5,526,200 Due to affiliated company.................................................................... 95,700 Due to partners.............................................................................. 10,832,600 Losses in excess of equity investment in: El Conquistador Partnership L.P......................................................... 19,985,300 Las Casitas Development Company......................................................... 57,400 ------------ 20,042,700 ------------ Total liabilities.................................................................. 36,497,200 Deficiency in assets: Contributed.................................................................................. 20,286,200 Deficit...................................................................................... (35,611,500) ------------ Total deficiency in assets......................................................... (15,325,300) ------------ Total liabilities and deficiency in assets......................................... $ 21,171,900 ------------ ------------
See accompanying notes. F-31 WKA EL CON ASSOCIATES NOTES TO THE BALANCE SHEET DECEMBER 31, 1997 1. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES ORGANIZATION WKA El Con Associates (the Partnership) is a joint venture organized under the General Partnership Law of the State of New York, pursuant to a Joint Venture Agreement (the Agreement) dated January 9, 1990, as amended, for the purpose of becoming a general and limited partner of El Conquistador Partnership L.P. (El Con), the owner of El Conquistador Resort & Country Club (the Resort). The Partnership is owned 46.54% by WHG El Con Corp., which is wholly-owned by WHG Resorts & Casinos Inc. (WHG), 37.23% by AMK Conquistador, S.E. and 16.23% by Hospitality Investor Group, S.E. The Partnership shall continue to exist until January 9, 2040, unless terminated earlier pursuant to the Agreement (see Note 7). Net profits or losses of the Partnership will be allocated to the partners in accordance with the terms of the Agreement. The Partnership is a 50% limited partner in Las Casitas Development Company I, S en C (S.E.) (Las Casitas), a joint venture that constructed and sold condominiums on property adjacent to the Resort. CHANGE IN FISCAL YEAR The Partnership changed its fiscal year from June 30 to December 31 beginning with the period ended December 31, 1997. BASIS OF PRESENTATION The balance sheet has been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. INVESTMENTS IN AFFILIATED COMPANIES The investments in affiliated companies are accounted for under the equity method. Capitalized interest is being amortized by the straight-line method over the estimated useful life of the Resort property. DEFERRED DEBT ISSUANCE COSTS AND OTHER ASSETS Deferred debt issuance costs include legal and bank fees incurred in connection with the issuance of the debt, and are being amortized over the maturity of the related debt. Certain other capital and pre-opening costs related to the Resort were incurred by the Partnership and are being amortized over 5 to 50 years. F-32 WKA EL CON ASSOCIATES NOTES TO THE BALANCE SHEET -- (CONTINUED) DECEMBER 31, 1997 2. NOTES RECEIVABLE FROM AFFILIATED COMPANY At December 31, 1997 notes receivable from El Con consisted of the following: Note receivable due on demand.................................................. $ 136,000 Note receivable due through May, 2002 (see Note 5)............................. 4,000,000 Subordinated notes receivable due in 2003 to 2005 (see Note 4)................. 8,229,700 Accrued interest receivable.................................................... 4,430,600 Deficiency loan participation.................................................. 2,300,000 ----------- $19,096,300 ----------- -----------
Repayment of the notes, including accrued interest, is subordinated to other long-term debt of El Con. During the six month period ended December 31, 1997, the Partnership acquired from Williams Hospitality Group Inc. (Williams Hospitality) an additional $300,000 of participation in a deficiency loan to El Con. The loan and interest at 9.16% are payable from specified future cash flow of El Con. 3. INVESTMENT IN AFFILIATED COMPANIES In 1991, the Partnership borrowed $9,000,000 from Williams Hospitality, a hotel/casino management company that is an affiliated company and the manager of the Resort, and invested the proceeds in the partnership capital of El Con, a joint venture organized to acquire and develop the Resort property. The Partnership owns a 50% interest, as both a general and limited partner, of El Con (see Note 4). Summarized financial information for El Con as of December 31, 1997 is as follows: Total assets.................................................................. $200,422,000 Total liabilities............................................................. 228,393,000 Deficiency in partners' capital............................................... 27,971,000
The Partnership's investment in Las Casitas amounts to $5,000. 4. DUE TO AFFILIATED COMPANY AND PARTNERS At various times, the partners loaned the Partnership $8,229,700 under the terms of various loan agreements. The notes with respect to such loans are payable in 2003 to 2005 and bear interest at the prime rate commencing on various dates. The Partnership has advanced the same amount under a subordinated note to El Con under the same terms as the borrowing from the partners. The interest rate as of December 31, 1997 was 8.50% (see Note 2). The Partnership guarantees a revolving credit facility with a bank in the aggregate amount of up to $6,000,000 of El Con. 5. LONG-TERM NOTE PAYABLE The long-term note payable to a bank includes accrued interest of $1,526,200 at December 31, 1997. The note is payable in quarterly installments of $250,000 commencing in May 2000. Any unpaid principal and interest is payable in May 2002. The note bears interest at a variable rate, computed quarterly, equal to LIBOR, plus 1.75%. The interest rate at December 31, 1997 was 7.5%. Under the terms of the Credit Facility Agreement dated May 5, 1992, among the Partnership, Kumagai Caribbean, Inc. and the Government Development Bank for Puerto Rico interest payments are deferred during the first five years. The $4,000,000 borrowing was loaned to El Con under similar terms (see Note 2). F-33 WKA EL CON ASSOCIATES NOTES TO THE BALANCE SHEET -- (CONTINUED) DECEMBER 31, 1997 The note is collateralized by second mortgages on parcels of land owned by Williams Hospitality and Posadas de Puerto Rico Associates, Incorporated, affiliated companies through common ownership, with a cost of approximately $3,761,000, and a guarantee of $1,000,000 by WHG, the ultimate owner of WHG El Con Corp. 6. INCOME TAXES The Partnership is not taxable for Puerto Rico income tax purposes pursuant to an election submitted to the Puerto Rico Treasury Department. Instead, each partner reports their distributive share of the Partnership's profits or losses in their respective income tax returns. Profits or losses the Partnership for Federal income tax purposes is reported by the partners. 7. SUBSEQUENT EVENTS BUSINESS ACQUISITION On January 16, 1998, Patriot American Hospitality Operating Company Acquisition Subsidiary, a wholly-owned subsidiary of Wyndham International, Inc. (Wyndham), merged with and into WHG. As part of the transaction, WHG stockholders received for each issued and outstanding share of common stock .784 shares of Wyndham and Patriot American Hospitality, Inc. (Patriot), a self-administered REIT, which trade as 'Paired Shares' on the New York Stock Exchange. On March 31 and July 13, 1998, Patriot acquired a 37.23% and 16.23%, respectively, additional interest in the Partnership for approximately $16,072,000 and $3,890,000, respectively. Patriot subsequently transferred such interest to Conquistador Holding, Inc., all of the voting stock and 1% of the equity interest of which is owned by Wyndham and 99% of the equity interest of which is owned by Patriot. As a result of the acquisition transactions, Patriot beneficially owns 53.46% of the Partnership and Wyndham beneficially owns 46.54% of the Partnership. Also, the long-term note payable and due to the partners of the Partnership was paid in full. In connection with the repayment of the long-term debt, the Partnership recorded an extraordinary loss of approximately $99,000 related to the write-off of the unamortized deferred debt issuance costs. The purchase transactions were accounted for under the purchase method and the cumulative purchase price paid by Wyndham and Patriot was the basis used to record net assets in the records of WHG and its subsidiaries. EL CON REFINANCING The debt of El Con is collateralized by a letter of credit which expires on September 9, 1998. The loan agreement requires the letter of credit to be renewed or replaced prior to June 9, 1998, or the debt amounting to $120,000,000 will become due on August 3, 1998. On August 3, 1998, the letter of credit was honored and the $120,000,000 was paid in full. In accordance with the Letter of Credit and Reimbursement Agreement, El Con was obligated to immediately reimburse the letter of credit issuer the full amount drawn under the letter of credit. On August 3, 1998, El Con made a partial payment of $30,000,000 and entered into an Assignment and Modification Agreement of the Letter of Credit Agreement with Citicorp Real Estate, Inc. (CRE). CRE reimbursed the letter of credit issuer with respect to the $90,000,000 balance due under the Letter of Credit and Reimbursement Agreement. As part of the Assignment and Modification Agreement, the remaining $90,000,000 advance by CRE matures on November 3, 1998, with an additional extension option to March 15, 1999, if certain conditions are met. Interest on the $90,000,000 is payable at a rate equal to 7.91% per annum up to September 1, 1998 and at a rate equal to LIBOR plus 225 basis points up to maturity. The $30,000,000 used for the partial payment of the F-34 WKA EL CON ASSOCIATES NOTES TO THE BALANCE SHEET -- (CONTINUED) DECEMBER 31, 1997 letter of credit was obtained from a cash advance received from Posadas de Puerto Rico Associates, Incorporated, an affiliate company through common ownership. El Con is engaged in the process of refinancing the balance due to CRE through a new bond issue by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. Based on operating history of the Resort, the Partnership's management believes such refinancing will be achieved, but there can be no assurance thereof. If such refinancing is not obtained, it raises substantial doubt about the Partnership's ability to continue as a going-concern. HURRICANE GEORGES On September 21 and 22, 1998, Hurricane Georges caused certain damage to the Resort. While the financial effects of the hurricane are not yet determinable, management of the Partnership believes that the nature of the damage and its insurance coverage is such that there will not be a significant impact on El Con's and the Partnership's financial condition. 8. IMPACT OF YEAR 2000 -- UNAUDITED The Partnership has developed a plan to modify its information technology to be ready for the year 2000 and has begun converting critical data processing systems. The Partnership expects the project to be substantially completed by 1999. The Partnership does not expect this project to have significant effect on its financial position. F-35 REPORT OF INDEPENDENT AUDITORS To the Board of Directors CONQUISTADOR HOLDING, INC. We have audited the accompanying balance sheet of Conquistador Holding, Inc., a Delaware corporation, as of June 30, 1998. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Conquistador Holding, Inc. as of June 30, 1998, in conformity with generally accepted accounting principles. The accompanying balance sheet has been prepared assuming that Conquistador Holding, Inc. will continue as a going-concern. As more fully described in Note 5, El Conquistador Partnership L.P., did not renew or replace prior to June 9, 1998 a letter of credit collateralizing $120,000,000 of indebtedness and such debt was repaid on August 3, 1998 with proceeds from the letter of credit. The letter of credit issuer was partially repaid with the proceeds of an advance from Posadas de Puerto Rico Associates, Incorporated, an affiliate of El Conquistador Partnership L.P. with the remaining amount due on November 3, 1998. This condition raises substantial doubt about the Company's ability to continue as a going-concern. The balance sheet does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. /S/ ERNST & YOUNG LLP Dallas, Texas October 16, 1998 F-36 CONQUISTADOR HOLDING, INC. BALANCE SHEET JUNE 30, 1998 ASSETS Cash............................................................................................... $ 101 Investments in unconsolidated subsidiaries......................................................... 35,219,299 ----------- Total assets........................................................................ $35,219,400 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Current income tax liability.................................................................. $ 703,207 Deferred tax liabilities...................................................................... 130,582 ----------- Total liabilities................................................................... 833,789 Shareholders' equity Class A voting common stock, $0.01 par value; 50,000 shares authorized; 100 shares issued and outstanding........................................................... 1 Class B non-voting common stock, $0.01 par value; 50,000 shares authorized; 9,900 shares issued and outstanding....................................................................... 99 Additional paid-in capital.................................................................... 34,174,946 Retained earnings............................................................................. 1,548,464 ----------- 35,723,510 Less: subscription note receivable............................................................ (1,337,899) ----------- Total shareholders' equity.......................................................... 34,385,611 ----------- Total liabilities and shareholders' equity.......................................... $35,219,400 ----------- -----------
See accompanying notes. F-37 CONQUISTADOR HOLDING, INC. NOTES TO BALANCE SHEET JUNE 30, 1998 1. ORGANIZATION Conquistador Holding, Inc. (the 'Company') is owned by Patriot American Hospitality, Inc. ('PAH') and a subsidiary of Wyndham International, Inc. The Company was incorporated for the purpose of acquiring partnership interests in El Conquistador Partnership L.P. ('El Con') and WKA El Con Associates ('WKA'). WKA owns the remaining partnership interests in El Con while El Con owns the El Conquistador Resort & Country Club located in Fajardo, Puerto Rico. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Effective March 1, 1998, the Company acquired a 50% interest in El Con and a 37.23% interest in WKA from PAH. The remaining controlling partnership interests of El Con and WKA are owned by a subsidiary of Wyndham International, Inc. ('Wyndham'). Accordingly, the Company accounts for its investments in El Con and WKA under the equity method. INCOME TAXES The Company records its provision for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ('SFAS 109'). Under the liability method of SFAS 109, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect in the years the differences are expected to reverse. Deferred tax liabilities are primarily a result of tax over book depreciation. 3. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Summarized unaudited financial information for El Con as of June 30, 1998 is as follows: Total assets.................................................................. $246,075,784 Total liabilities............................................................. 194,483,623 Partners' capital............................................................. 51,592,161
Summarized unaudited financial information for WKA as of June 30, 1998 is as follows: Total assets.................................................................. $247,449,400 Total liabilities............................................................. 203,641,100 Partners' capital............................................................. 43,808,300
4. SUBSCRIPTION NOTE RECEIVABLE Upon incorporation, Wyndham International, Inc., through one of its subsidiaries, contributed cash of $101 and a note payable to the Company in the amount of $1,337,899 in exchange for 100 shares of the Company's Class A common stock. F-38 CONQUISTADOR HOLDING, INC. NOTES TO BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 5. SUBSEQUENT EVENTS On July 13, 1998, the Company acquired an additional 16.23% interest in WKA for approximately $3,890,000. The debt of El Con was collateralized by a letter of credit which expired on September 9, 1998. On August 3, 1998, the letter of credit was honored and drawn on. In accordance with the Letter of Credit and Reimbursement Agreement, El Con is obligated to immediately reimburse the letter of credit issuer the full $120,000,000 drawn under the letter of credit. On August 3, 1998, El Con made a partial payment of $30,000,000 and entered into an Assignment and Modification Agreement of the Letter of Credit Agreement. As part of the such agreement, the maturity of the remaining $90,000,000 was extended to November 3, 1998, with an additional extension option to March 15, 1999 available if certain conditions are met. Interest on the $90,000,000 is payable at a rate equal to 7.91% per annum up to September 1, 1998 and at a rate equal to LIBOR plus 225 basis points thereafter. The $30,000,000 used for the partial payment of the letter of credit was obtained in a cash advance from Posadas de Puerto Rico Associates, Incorporated, a company affiliated through common ownership. El Con is engaged in the process of refinancing the remaining $90,000,000 through a new bond issue. The Company believes such refinancing will be achieved, but there can be no assurance thereof. This raises substantial doubt about the Company's ability to continue as a going-concern. On September 21 and 22, 1998, Hurricane Georges caused certain damage to the hotel owned by El Con. While the financial effects of the hurricane are not yet determinable, the Company believes that the nature of the damage and insurance coverage is such that there will not be a significant impact on the Company's financial condition. 6. IMPACT OF YEAR 2000-UNAUDITED The Company's accounting records are processed by Wyndham who is assessing the modifications or replacements of its software that may be necessary for its computer systems to function properly with respect to the dates in the year 2000 and thereafter. Wyndham is presently negotiating with a vendor that is expected to perform this remediation of Wyndham's systems. The scope and cost of this work is not yet known at this time. Wyndham believes that the remediation will be implemented by June 30, 1999. F-39 WHG EL CON CORP. UNAUDITED CONSOLIDATED BALANCE SHEET JUNE 30, 1998 ASSETS Current assets: Cash......................................................................................... $ 1,610,100 Restricted cash and investments held by bank................................................. 1,773,000 Trade accounts receivable, less allowance for doubtful accounts of $271,000.................. 5,632,200 Due from affiliated companies................................................................ 9,700 Inventories.................................................................................. 1,603,900 Prepaid expenses and others current assets................................................... 2,301,200 ------------ Total current assets.................................................................... 12,930,100 Due from affiliated company....................................................................... 3,190,100 Land, building and equipment: Land......................................................................................... 20,255,500 Building..................................................................................... 191,758,800 Furniture, fixture and equipment............................................................. 19,940,500 Construction in progress..................................................................... 366,000 ------------ 232,320,800 Less accumulated depreciation................................................................ 2,594,900 ------------ 229,725,900 Operating equipment, net.......................................................................... 1,601,000 Deferred debt issuance costs and other assets, net of accumulated amortization of $495,000........ 1,858,600 Capitalized interest, net of accumulated amortization of $27,000.................................. 1,269,500 ------------ Total assets....................................................................... $250,575,200 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable....................................................................... $ 5,650,400 Advance deposits............................................................................. 2,416,400 Accrued interest............................................................................. 1,163,700 Other accrued liabilities.................................................................... 7,647,400 Due to affiliated companies.................................................................. 400,000 Current portion of long-term debt............................................................ 120,000,000 Current portion of chattel mortgages and capital lease obligations........................... 726,200 ------------ Total current liabilities............................................................... 138,004,100 Long-term note payable............................................................................ 896,300 Long-term debt.................................................................................... 25,000,000 Deferred income tax liability..................................................................... 2,030,000 Due to affiliated companies....................................................................... 16,625,400 Due to partners................................................................................... 137,000 Minority interest................................................................................. 43,137,800 Shareholder's equity: Common stock, non par value: Authorized shares - 3,000 issued and outstanding shares - 1,000............................... 12,056,100 Additional paid-in capital........................................................................ 10,800,000 Retained earnings................................................................................. 1,888,500 ------------ Total shareholder's equity.............................................................. 24,744,600 ------------ Total liabilities and shareholder's equity......................................... $250,575,200 ------------ ------------
See accompanying notes. F-40 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET JUNE 30, 1998 1. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES ORGANIZATION WHG El Con Corp. (the Company), organized under the laws of the State of Delaware, is a wholly owned subsidiary of Patriot American Hospitality Operating Company Acquisition Subsidiary, a wholly owned subsidiary of Wyndham International, Inc. (Wyndham). The Company owns 46.54% of WKA El Con Associates (the Partnership), a joint venture organized under the General Partnership Law of the State of New York, pursuant to a Joint Venture Agreement (the Agreement) dated January 9, 1990, as amended, for the purpose of becoming a general and limited partner of El Conquistador Partnership L.P. (El Con). El Con is a limited partnership organized under the laws of Delaware pursuant to a Joint Venture Agreement dated January 12, 1990, as amended (the Agreement). El Con is 50% owned by WKA El Con Associates and 50% owned by Conquistador Holding, Inc., a wholly-owned subsidiary of Patriot American Hospitality (Patriot). El Con owns and operates a luxury resort hotel and casino in Fajardo, Puerto Rico (the Resort). The consolidated balance sheet includes the accounts of the Company, the Partnership and El Con. (see Note 13). The Partnership is a 50% limited partner in Las Casitas Development Company I, S en C (S.E.) (Las Casitas), a joint venture that constructed and sold condominiums on property adjacent to El Con. BASIS OF PRESENTATION The consolidated balance sheet has been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. The consolidated balance sheet information at June 30, 1998 includes all adjustments (consisting of normal accounting adjustments) that management considers necessary for a fair presentation of the consolidated balance sheet at June 30, 1998. As part of the acquisition by Wyndham and Patriot, accounted for under the purchase method, the Partnership's investment in El Con was increased by approximately $23,570,000 and capitalized interest costs were decreased by approximately $774,000. INVENTORIES Inventories, which consist mainly of food, beverages and supplies, are valued at the lower of cost (first-in, first-out method) or market. LAND, BUILDING AND EQUIPMENT Land, building and equipment are stated on the basis of cost. Building and equipment are depreciated by the straight-line method over their estimated useful lives. DEFERRED DEBT ISSUANCE COSTS AND OTHER ASSETS Debt issuance costs include legal and underwriting fees, other fees incurred in connection with the financing and other costs. These costs are being amortized on a straight-line basis over the term of the debt. Certain other capital and costs related to El Con were incurred by the Partnership and are being amortized over 50 years. F-41 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 2. RESTRICTED CASH AND INVESTMENTS HELD BY BANK Pursuant to the terms of the bond agreement (see Note 8), El Con had cash and investments on deposit amounting to approximately $1,773,000 for the interest due on August 3, 1998. 3. TRADE ACCOUNTS RECEIVABLE At June 30, 1998, trade accounts receivable consisted of the following: Trade accounts receivable -- hotel........................................................ $5,537,100 Less allowance for doubtful accounts...................................................... 180,600 ---------- 5,356,500 Trade accounts receivable -- casino....................................................... 366,200 Less allowance for doubtful accounts...................................................... 90,500 ---------- 275,700 ---------- Trade accounts receivable, net....................................................... $5,632,200 ---------- ----------
4. TRANSACTIONS WITH RELATED PARTIES El Con has an Operating and Management Agreement (the Management Agreement) with Williams Hospitality Group Inc. (Williams Hospitality). The Management Agreement provides that Williams Hospitality will manage the Resort for a period of 20 years for a basic management fee of 3.5% of the Resort's gross revenues, as defined, and an incentive management fee of 10% of the Resort's operating profit, as defined. Incentive management fees accrued each year are not payable until significant cash flow levels are achieved. In addition, El Con is required to pay certain administrative expenses incurred by Williams Hospitality in connection with management of the Resort. A subsidiary of Williams Hospitality, a related entity through common ownership, financed certain transportation equipment from an external borrowing amounting to $441,000 repayable over five years. Monthly payments amount to $9,699. Also, in February 1997, a subsidiary of Williams Hospitality financed a ferryboat from an external borrowing amounting to $456,000, repayable over seven years. Monthly payments amount to $7,561. 5. DUE TO AFFILIATED COMPANIES AND PARTNERS Amounts due to affiliated companies consist of fees earned by Williams Hospitality, funds advanced to El Con and other payments made by Williams Hospitality, and for services rendered F-42 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 by Posadas de Puerto Rico Associates, Incorporated (Posadas de Puerto Rico) and Posadas de San Juan Associates. At June 30, 1998 amounts due to affiliated companies consisted of the following: Current: Due to Williams Hospitality: Basic management fees.................................................................... $ 240,600 Other.................................................................................... 148,900 Due to Posadas de Puerto Rico................................................................. 10,500 ----------- $ 400,000 ----------- ----------- Non current: Affiliate: Due to Williams Hospitality: Incentive management fees........................................................... $ 8,805,900 Interest at 10% on incentive management fees........................................ 813,300 Advances............................................................................ 1,500,000 Interest on advances................................................................ 1,064,100 Other............................................................................... 412,500 ----------- 12,595,800 Due to Patriot........................................................................... 4,029,600 ----------- $16,625,400 ----------- -----------
At various times, the partners loaned the Partnership $8,229,700 under the terms of loan agreements. The notes are payable in 2003 to 2005 and bear interest at the prime rate commencing on various dates. The Partnership has advanced the same amount under a subordinated note to El Con under the same terms as the borrowing from the partners. Interest rate as of December 31, 1997 was 8.50% (see Note 2). The Partnership guaranteed a revolving credit facility from GDB to El Con in the aggregate amount of up to $6,000,000. The revolving credit facility was terminated in May 1998. 6. CHATTEL MORTGAGES AND CAPITAL LEASE OBLIGATIONS At June 30, 1998, chattel mortgages and capital lease obligations on equipment consisted of the following: Chattel mortgage notes payable bearing interest at 9%, payable in monthly installments of $215,784, including interest, through October 1998, collateralized with personal property........................................... $670,300 Capital lease obligations bearing interest at 11.5%, payable in monthly installments of $28,335, including interest, through July 1998, collateralized with personal property.......................................................... 55,900 -------- $726,200 -------- --------
7. LONG-TERM NOTE PAYABLE The note is payable in quarterly installments of $250,000 commencing in May 2000. Any unpaid principal and interest is payable in May 2002. The note bears interest at a variable rate, computed quarterly, equal to LIBOR, plus 1.75%, interest rate at June 30, 1998 was 7.5%. Under the terms of the Credit Facility Agreement dated May 5, 1992, interest payments are deferred during the first five years. F-43 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 The note is collateralized by second mortgages on parcels of land owned by Williams Hospitality and Posadas de Puerto Rico, affiliated companies through common ownership, with a cost of approximately $3,761,000, and a guarantee of $1,000,000 by Wyndham, the ultimate owner of WHG El Con Corp. 8. LONG-TERM DEBT At June 30, 1998 long-term debt consisted of the following: Industrial Revenue Bonds Series A.................................................. $ 90,000,000 Industrial Revenue Bonds Series B.................................................. 30,000,000 Government Development Bank for Puerto Rico........................................ 25,000,000 ------------ 145,000,000 Less current portion.................................................................... 120,000,000 ------------ $ 25,000,000 ------------ ------------
On February 7, 1991 the Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority (the Authority) sold industrial revenue bonds (Bonds) for $120,000,000 and loaned the proceeds to El Con to be used for the payment of project costs pursuant to a Loan Agreement. The Loan Agreement provides that El Con will pay all interest and principal on the Bonds. The Authority issued 1991 Series A, Industrial Revenue Bonds for $90,000,000 and 1991 Series B, Industrial Revenue Bonds for $30,000,000. Commencing on May 1, 1996, the Bonds were subject to redemption at El Con's option at par plus accrued interest, if any. The Bonds are due on November 1, 1999 and interest is payable quarterly. The 1991 Series A Bonds and the 1991 Series B Bonds bear interest at a variable rate, computed quarterly, equal to 100% and 94%, respectively, of a LIBOR rate minus 1/8th of 1%. Effective November 1, 1996, the interest rate on the 1991 Series A Bonds increased to 100% of the LIBOR rate. On February 7, 1991, El Con entered into an Interest Rate Swap Agreement that expired on March 8, 1998 by which El Con agreed to pay, effective May 1, 1991, a fixed rate of 7.55% on the outstanding principal of $120,000,000 in exchange for the counterparty's obligation to pay the variable interest rate equal to 86% and 94% respectively, of the LIBOR rate minus 1/8th of 1%. The Loan Agreement provides that El Con will deposit with the trustee all interest which will become due not later than the 124th day preceding the date of payment. The Bonds are collaterilized by a letter of credit, that terminates on September 9, 1998, issued by The Bank of Tokyo-Mitsubishi Ltd (formerly The Mitsubishi Bank, Limited). The Loan Agreement required the letter of credit to be renewed or replaced prior to June 9, 1998 or the debt amounting to $120,000,000 would become due on August 3, 1998. On August 3, 1998, the letter of credit was honored and the $120,000,000 was paid in full. In accordance with the Letter of Credit and Reimbursement Agreement, El Con was obligated to immediately reimburse the letter of credit issuer the full amount drawn under the letter of credit. On August 3, 1998, El Con made a partial payment of $30,000,000 and entered into an Assignment and Modification Agreement of the Letter of Credit Agreement with Citicorp Real Estate, Inc. (CRE). CRE reimbursed the letter of credit issuer with respect to the $90,000,000 balance due under the Letter of Credit and Reimbursement Agreement. As part of the Assignment and Modification Agreement, the remaining $90,000,000 advance by CRE matures on November 3, 1998, with an additional extention option to March 15, 1999, if certain conditions are met. Interest on the $90,000,000 is payable at a rate equal to 7.91% per annum up to September 1, 1998 and at a rate equal to LIBOR plus 225 basis points up to maturity. The $30,000,000 used for the partial payment of the letter of credit was obtained from a F-44 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 cash advance received from Posadas de Puerto Rico, an affiliate company through common ownership. El Con is engaged in the process of refinancing the balance due to CRE through a new bond issue by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. Based on operating history of the Resort, the Partnership's management believes such refinancing will be achieved, but there can be no assurance thereof. El Con pays an annual letter of credit fee of approximately 1.25% of the Bond principal except under certain circumstances the rate may be reduced to 1.2%. In addition, in connection with the letter of credit El Con pays an annual agent's fee of approximately .25% of the Initial Stated Amount, as defined. Under the provisions of a term loan agreement with GDB, El Con borrowed $25,000,000 for the payment of project costs. The loan is due on February 7, 2006. The loan agreement provides for a variable interest rate equivalent to a LIBOR rate minus .5% plus an add-on margin as provided in the loan agreement. Interest is payable quarterly in arrears. Commencing on April 1, 1993, El Con was required to deposit annually with an escrow agent 50% of the Available Cash Flow, as defined in the Loan Agreement with GDB, up to a maximum of $1,666,700 plus any prior year requirement in arrears. Through June 30, 1998 there had been no amounts deposited in escrow under this provision. The Bonds and the term loan with GDB are collateralized by a first and second mortgage lien on the Resort, a chattel mortgage on personal property, and an assignment of various contracts and the Management Agreement with Williams Hospitality. The collateral is subject to a subordination agreement in favor of The Bank of Tokyo-Mitsubishi Ltd (formerly The Mitsubishi Bank, Limited). 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial Accounting Standards Board Statement No. 107 'Disclosures About Fair Value of Financial Instruments' requires the disclosure of the fair value of El Con's financial instruments at June 30, 1998. The carrying amount of investments, notes payable to bank, chattel mortgage notes and capitalized leases approximates fair value because of the short maturity of the instruments or recent issuance. The fair value of El Con's long-term debt has not been determined because similar terms and conditions may no longer be available. 10. INCOME TAXES The Company's operations are included with Wyndham's Federal income tax return. Statement of Financial Accounting Standards No. 109 'Accounting for Income Taxes', (SFAS No. 109) requires that a portion of income tax expense be allocated to the Company. The 'Separate Return Method' was utilized to calculate the Federal income tax provision allocated to the Company. The Partnership is not taxable for Puerto Rico income tax purposes pursuant to an election submitted to the Puerto Rico Treasury Department. Instead, each Partner reports their distributive share of the Partnership's profit and losses in their respective income tax returns. El Con was granted a tax exemption grant under the provisions of the Puerto Rico Tourism Incentives Act of 1993 (the Tourism Act). The Tourism Act provides for a ten-year grant which may be extended for an additional ten-year term. Major benefits of this Act are: a 90% exemption from income taxes on hotel income, and a 90% exemption from municipal real and personal property taxes through the entire term of the grant. El Con's casino operations are not covered by the tax exemption grant and are fully taxable. F-45 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income taxes in the income tax return of the Company. The deferred tax liability as of June 30, 1998 relates to the depreciation method used for book and tax purposes. 11. COMMITMENTS El Con leases land under an operating lease agreement for thirty-two years with renewal options for two five-year periods. Following are the minimum annual rental payments on the operating lease subsequent to June 30, 1998: 1998............................................................................ $ 210,000 1999............................................................................ 210,000 2000............................................................................ 210,000 2001............................................................................ 210,000 2002............................................................................ 240,000 Thereafter...................................................................... 5,575,000 ---------- $6,655,000 ---------- ----------
On May 4, 1998, El Con entered into a $2,993,000 contract for the construction of spa facilities at an existing building. Monthly progress payments are due by the fifteenth of each month, with a final payment upon substantial completion of the construction. 12. EMPLOYEES' SAVINGS PLAN Effective January 1, 1997, El Con adopted an employees' savings plan for all hourly employees after one year of service or 1,000 hours. Employees covered by any collective bargaining agreement are not eligible to participate in the plan. Members of the plan can contribute an unlimited percentage of their after tax compensation. El Con's contribution is $300 per employee per year and a discretionary additional contribution. Effective January 1, 1997, El Con adopted a salary savings plan for all salaried employees after one year of service or 1,000 hours. Employees covered by any collective bargaining agreement are not eligible to participate in the plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of l974 (ERISA) and Section 1l65(e) of the Puerto Rico Income Tax Act of l994, as amended. Under the provisions of the plan, El Con makes a minimum base contribution of $300 per participant plus a discretionary contribution based on sick leave accrued in excess of 240 hours and matches the employee's contribution based on the percentage the gross operating profit, as defined, exceeds El Con's annual operating budget as follows:
MATCHING CONTRIBUTION G.O.P. EXCEEDS BUDGET BY PERCENTAGE - -------------------------------------------------------------------------------- ------------ Less than 5%.................................................................... 25% 5%.............................................................................. 35% 10%............................................................................. 45% 15%............................................................................. 55% 20%............................................................................. 65%
13. SUBSEQUENT EVENTS On July 13, 1998, Patriot acquired the remaining additional interest in the Partnership for approximately $3,890,000. The purchase transactions, were accounted for under the purchase F-46 WHG EL CON CORP. NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET -- (CONTINUED) JUNE 30, 1998 method and the cumulative purchase price paid by Wyndham and Patriot was the basis used to record net assets on the records of its subsidiaries. On September 21 and 22, 1998, Hurricane Georges caused certain damage to the Resort. While the financial effects of the hurricane are not yet determinable, management of the Partnership believes that the nature of the damage and its insurance coverage is such that there will not be a significant impact on El Con's financial condition. 14. IMPACT OF YEAR 2000 El Con has developed a plan to modify its information technology systems to be ready for the year 2000 and has begun converting critical data processing systems. El Con expects the project to be substantially completed by 1999. El Con does not expect this project to have a significant effect on its financial position. F-47 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders WHG EL CON CORP. We have audited the accompanying balance sheet of WHG El Con Corp. as of December 31, 1997. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also 0includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of WHG El Con Corp. as of December 31, 1997 in conformity with generally accepted accounting principles. The accompanying balance sheet has been prepared assuming that WHG El Con Corp. will continue as a going-concern. As more fully described in Note 6, El Conquistador Partnership L.P., a 23.27% indirectly owned partnership, did not renew or replace prior to June 9, 1998 a letter of credit collaterizing $120,000,000 of indebtedness and the debt was required to be repaid on August 3, 1998. The debt was partially repaid with proceeds from a short-term loan due on November 3, 1998 and the proceeds of an advance from Posadas de Puerto Rico Associates, Incorporated, an affiliate of the Company. This condition raises substantial doubt about the Company's ability to continue as a going-concern. The balance sheet does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP San Juan, Puerto Rico October 2, 1998 F-48 WHG EL CON CORP. BALANCE SHEET DECEMBER 31, 1997 ASSETS Cash.............................................................................................. $ 3,106,400 Interest receivable............................................................................... 15,200 Notes receivable from affiliated companies........................................................ 5,228,300 ------------ Total assets....................................................................... $ 8,349,900 ------------ ------------ LIABILITIES AND DEFICIENCY IN ASSETS Liabilities: Deferred income taxes........................................................................ $ 1,978,000 Losses in excess of equity investment in WKA El Con Associates............................... 7,090,200 ------------ Total liabilities.................................................................. $ 9,068,200 Deficiency in Assets: Common stock, non par value: Authorized shares -- 3,000, issued and outstanding shares -- 1,000...................... $ 12,056,100 Accumulated deficit..................................................................... (12,774,400) ------------ Total Deficiency in Assets......................................................... (718,300) ------------ Total liabilities and Deficiency in Assets......................................... $ 8,349,900 ------------ ------------
See accompanying notes. F-49 WHG EL CON CORP. NOTES TO THE BALANCE SHEET DECEMBER 31, 1997 1. ORGANIZATION AND PRINCIPAL ACCOUNTING POLICIES ORGANIZATION WHG El Con Corp. (the Company), organized under the laws of Delaware, is a wholly-owned subsidiary of WHG Resorts & Casinos, Inc. (WHG). The Company owns 46.54% of WKA El Con Associates (WKA), a joint venture organized under the General Partnership Law of the State of New York for the purpose of becoming a general and a limited partner of El Conquistador Partnership L.P. (El Con). El Con owns the El Conquistador Resort & Country Club (the Resort), a luxury resort hotel and casino in Fajardo, Puerto Rico. CHANGE IN FISCAL YEAR The Company changed its fiscal year from June 30 to December 31 beginning with the period ended December 31, 1997. BASIS OF PRESENTATION The balance sheet has been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. INVESTMENT IN WKA The investment in WKA is accounted for under the equity method. Capitalized interest is being amortized by the straight-line method over the estimated useful life of the Resort property. 2. NOTES RECEIVABLE FROM AFFILIATED COMPANIES Notes receivable from WKA and El Con at December 31, 1997 consisted of the following: Note receivable due through May, 2002 from El Con............................... $ 186,160 Subordinated notes receivable due in 2003 to 2005 from WKA...................... 3,830,094 Accrued interest receivable..................................................... 1,212,046 ---------- $5,228,300 ---------- ----------
Repayment of the notes, including accrued interest, is subordinated to other long-term debt of El Con. 3. INVESTMENT IN WKA The Company owns a 46.54% general partnership interest in WKA. Summarized financial information for WKA as of December 31, 1997 is as follows: Total assets................................................................... $21,171,900 Total liabilities.............................................................. 36,497,200 Deficiency in partners' capital................................................ 15,325,300
4. INCOME TAXES The Company's operations are included with WHG's Federal income tax return. Statement of Financial Accounting Standards No. 109 'Accounting for Income Taxes', (SFAS No. 109) requires that a portion of income tax expense be allocated to the Company. The 'Separate Return Method' was utilized to calculate the Federal income tax provision allocated to the Company. Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income taxes in the income tax return. The defered tax liability as of December 31, 1997 relates to the depreciation method used for book and tax purposes. F-50 WHG EL CON CORP. NOTES TO THE BALANCE SHEET -- (CONTINUED) DECEMBER 31, 1997 5. SUBSEQUENT EVENTS BUSINESS ACQUISITION On January 16, 1998, Patriot American Hospitality Operating Company Acquisition Subsidiary, a wholly-owned subsidiary of Wyndham International, Inc. (Wyndham), merged with and into WHG. As part of the transaction, WHG stockholders received for each issued and outstanding share of common stock .784 shares of Wyndham and Patriot American Hospitality, Inc. (Patriot), a self-administered REIT, which trade as 'Paired Shares' on the New York Stock Exchange. The purchase transactions were accounted for under the purchase method and the cumulative purchase price paid by Wyndham and Patriot was the basis used to record net assets in the records of WHG and its subsidiaries. EL CON REFINANCING The debt of El Con is collateralized by a letter of credit which expires on September 9, 1998. The loan agreement requires the letter of credit to be renewed or replaced prior to June 9, 1998, or the debt amounting to $120,000,000 will become due on August 3, 1998. On August 3, 1998, the letter of credit was honored and the $120,000,000 was paid in full. In accordance with the Letter of Credit and Reimbursement Agreement, El Con was obligated to immediately reimburse the letter of credit issuer the full amount drawn under the letter of credit. On August 3, 1998, El Con made a partial payment of $30,000,000 and entered into an Assignment and Modification Agreement of the Letter of Credit Agreement with Citicorp Real Estate, Inc. (CRE). CRE reimbursed the letter of credit issuer with respect to the $90,000,000 balance due under the Letter of Credit and Reimbursement Agreement. As part of the Assignment and Modification Agreement, the remaining $90,000,000 advance by CRE matures on November 3, 1998, with an additional extension option to March 15, 1999, if certain conditions are met. Interest on the $90,000,000 is payable at a rate equal to 7.91% per annum up to September 1, 1998 and at a rate equal to LIBOR plus 225 basis points up to maturity. The $30,000,000 used for the partial payment of the letter of credit was obtained from a cash advance received from Posadas de Puerto Rico Associates, Incorporated, an affiliate company through common ownership. El Con is engaged in the process of refinancing the balance due to CRE through a new bond issue by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. Based on operating history of El Con Resort, the Company's management believes such refinancing will be achieved, but there can be no assurance thereof. If such refinancing is not obtained, it raises substantial doubt about the El Con, WKA and the Company's ability to continue as a going-concern. HURRICANE GEORGES On September 21 and 22, 1998, Hurricane Georges caused certain damage to the Resort. While the financial effects of the hurricane are not yet determinable, management of the Company believes that the nature of the damage and its insurance coverage is such that there will not be a significant impact on El Con's or the Company's financial condition. 6. IMPACT OF YEAR 2000 -- UNAUDITED The Company has developed a plan to modify its information technology to be ready for the year 2000 and has begun converting critical data processing systems. The Company expects the project to be substantially completed by 1999. The Company does not expect this project to have significant effect on its financial position. F-51 _____________________________ _____________________________ NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS OFFICIAL STATEMENT AND PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY AFICA, THE PARTNERSHIP OR THE UNDERWRITERS. THIS OFFICIAL STATEMENT AND PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE BONDS OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS OFFICIAL STATEMENT AND PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF AFICA OR THE PARTNERSHIP SINCE THE DATE HEREOF OR THAT THE OTHER INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information...................................................................................... 1 Disclosure Regarding Forward-Looking Statements............................................................ 1 Summary.................................................................................................... 2 Risk Factors............................................................................................... 9 Use of Proceeds............................................................................................ 17 The Resort................................................................................................. 18 The Partnership............................................................................................ 24 Security Ownership of Management and Certain Beneficial Owners............................................. 25 Management of the Partnership.............................................................................. 28 Selected Financial Data.................................................................................... 31 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................................ 33 Legal Proceedings.......................................................................................... 39 Policy with Respect to Certain Activities.................................................................. 39 Investment Objectives and Policies......................................................................... 40 Policies with Respect to Certain Transactions.............................................................. 40 Certain Relationships and Related Transactions............................................................. 40 The Bonds.................................................................................................. 42 Summary of the Loan Agreement.............................................................................. 49 Summary of the Trust Agreement............................................................................. 53 AFICA...................................................................................................... 57 Government Development Bank for Puerto Rico.............................................................................................. 59 Tax Matters................................................................................................ 59 Rating..................................................................................................... 60 Legal Investment........................................................................................... 60 Underwriting............................................................................................... 60 Legal Matters.............................................................................................. 61 Continuing Disclosure Covenant............................................................................. 61 Reports to Bondholders..................................................................................... 63 Experts.................................................................................................... 63 Miscellaneous.............................................................................................. 63 Index to Financial Statements.............................................................................. F-1 Form of Opinion of Bond Counsel............................................................................ A-1
------------------------ UNTIL ALL DEALERS EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. _____________________________ _____________________________ _____________________________ _____________________________ $100,000,000 AFICA TOURISM REVENUE BONDS, 1998 SERIES A (EL CONQUISTADOR RESORT PROJECT) -------------------------------------- OFFICIAL STATEMENT AND PROSPECTUS -------------------------------------- CITICORP FINANCIAL SERVICES CORPORATION _____________________________ _____________________________ APPENDIX A FORM OF OPINION OF BOND COUNSEL [ ,] 1998 Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority San Juan, Puerto Rico Gentlemen: We have examined Act No. 121 of the Legislature of Puerto Rico, approved June 27, 1977, as amended (the 'Act'), creating Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority (the 'Authority'), a body corporate and politic constituting a public corporation and governmental instrumentality of Puerto Rico ('Puerto Rico'). We have also examined certified copies of the proceedings of the Board of Directors of the Authority in authorizing the execution and delivery of the Trust Agreement and the Loan Agreement hereinafter referred to, and certified copies of the proceedings and other proofs submitted relative to the authorization, issuance, and sale of the following bonds (the 'Bonds'): $100,000,000 PUERTO RICO INDUSTRIAL, TOURIST, EDUCATIONAL, MEDICAL AND ENVIRONMENTAL CONTROL FACILITIES FINANCING AUTHORITY TOURISM REVENUE BONDS, 1998 SERIES A (EL CONQUISTADOR RESORT PROJECT) Said Bonds are issued under and pursuant to a Deed of Trust Agreement (the 'Trust Agreement'), dated the date hereof, by and between the Authority and Banco Santander Puerto Rico, Trustee (the 'Trustee'). The proceeds of the sale of the Bonds are to be used for the purpose of repaying the principal of and interest on an interim loan provided by Citicorp Real Estate, Inc. to El Conquistador Partnership L.P. (the 'Borrower'), funding certain reserves and paying certain costs and expenses of issuing the Bonds. The proceeds of said interim financing were used to pay Borrower's obligations under a certain reimbursement agreement resulting from the redemption of bonds issued by the Authority for the financing, in part, of the purchase, renovation, development, construction, equipping and operation of a hotel in Fajardo, Puerto Rico, known as El Conquistador Resort & Country Club. The Authority has entered into a Loan Agreement, dated the date hereof (the 'Loan Agreement'), with the Borrower providing for the loan of the proceeds of the sale of the Bonds to the Borrower and for repayment by the Borrower of the loan in amounts sufficient to pay the principal of and interest on the Bonds as the same will become due and payable. The Loan Agreement provides that the loan repayments will be paid directly to the Trustee and will be deposited to the credit of a special fund created by the Trust Agreement and designated 'Tourism Revenue Bonds 1998 Series A (El Conquistador Resort Project) Bonds Fund' (the 'Bond Fund'), which special fund is charged with the payment of the principal of and interest on the Bonds. In addition, the Loan Agreement, except for certain rights of the Authority, and the repayments thereunder, has been assigned to the Trustee. The Bonds are subject to redemption as provided in the Trust Agreement. As to any questions of fact material to our opinion, we have relied upon representations of the Authority and the Borrower contained in the Trust Agreement and the Loan Agreement, the A-1 certified proceedings and other certifications by officials of the Authority and the Borrower, without undertaking to verify the same by independent investigation. We have also examined one of the Bonds as executed and authenticated. All capitalized terms used in this opinion letter and not otherwise defined herein will have the meanings ascribed to them in the Trust Agreement. From such examination, we are of the opinion that: 1. The Act is valid. 2. The proceedings of the Board of Directors of the Authority required in connection with the authorization, issuance and sale of the Bonds and the authorization, execution, and delivery of the Loan Agreement and the Related Documents to which the Authority is a party and the Trust Agreement have been validly and legally taken. 3. The Trust Agreement and the Related Documents to which the Authority is a party have been duly authorized, executed and delivered by the Authority and assuming due authorization, execution and delivery by the other parties thereto, constitute the legal, valid, binding and enforceable obligations of the Authority in accordance with their terms, except to the extent such enforceability may be limited by bankruptcy, insolvency or other laws affecting creditors' rights generally, and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4. The Bonds have been duly authorized by the Authority and constitute legal, valid, and binding obligations of the Authority, payable solely from the Bond Fund and entitled to the benefit of the Trust Agreement. 5. All right, title and interest of the Authority in and to the Related Documents (except certain rights of the Authority including its rights to payment of expenses indemnity) have been validly assigned to the Trustee. 6. The Bonds do not constitute an indebtedness of either Puerto Rico or any of its principal subdivisions, other than the Authority, and neither Puerto Rico nor any of such political subdivisions, other than the Authority, will be liable thereon. 7. The Bonds and the transfer of the Bonds, including gain derived upon the sale of the Bonds, are exempt from Puerto Rico income tax pursuant to Article 8(b) of the Act. 8. Interest on the Bonds is (i) excluded from the gross income of the recipient thereof for Puerto Rico income tax purposes pursuant to Section 1022(b)(4)(B) of the Puerto Rico Internal Revenue Code of 1994, as amended (the 'PR-Code'); (ii) exempt from Puerto Rico income tax and alternative minimum tax pursuant to Section 1022(b)(4)(B) of the PR-Code, Article 8(b) of the Act and Section 3 of the Puerto Rico Federal Relations Act ('PRFRA') and; (iii) exempt from Puerto Rico municipal license tax pursuant to Section 9(25) of the Puerto Rico Municipal License Tax Act of 1974, as amended, and Section 3 of the PRFRA. 9. The Bonds are exempt from Puerto Rico personal property tax pursuant to Section 3.11 of the Puerto Rico Municipal Property Tax Act of 1991, as amended, and Section 3 of the PRFRA. 10. The Bonds are exempt from Puerto Rico (i) gift tax with respect to donors who are residents of Puerto Rico at the time the gift is made and (ii) estate tax with respect to estates of decedents who are residents of Puerto Rico at the time of death, excluding, in each case, United States citizens who acquired their United States citizenship other than by reason of birth or residence in Puerto Rico. 11. Assuming that the Partnership complies with the source of income representations, warranties and covenants contained in the Loan Agreement, then: a. Interest received or accrued on the Bonds is excludable from gross income pursuant to Section 933(1) of the Code if the holder of the Bonds is an individual who is a bona fide resident of Puerto Rico during the entire taxable year in which the interest is received or accrued. A-2 b. Interest received or accrued on the Bonds is not subject to United States federal income tax if the holder of the Bonds is a corporation organized under the laws of Puerto Rico or any foreign country and such interest is not effectively connected with the conduct of a trade or business in the United States by such corporation. 12. Interest on the Bonds is not excluded from the gross income of the recipient thereof for United States federal income tax purposes under Section 103(a) of the Code. United States taxpayers, other than individuals who are bona fide residents of Puerto Rico during the entire taxable year, may be subject to United States federal income tax on gain realized upon the sale or exchange of the Bonds. Pursuant to Notice 89-40, 1989-1 CB 681, gain on the sale of the Bonds (not including original issue discount accruing under the Code as of the date of such sale or exchange) by an individual who is bona fide resident of Puerto Rico for purposes of Section 865(g)(1) of the Code will constitute income from sources within Puerto Rico and will qualify for the exclusion provided in Section 933(1) of the Code, provided that the Bonds do not constitute inventory property in such individual's hands. Ownership of the Bonds may result in having a portion of the interest expense allocable to interest on the Bonds disallowed for purposes of computing the regular tax and the alternative minimum tax for Puerto Rico income tax purposes. This opinion is limited to the above, and we express no other opinion regarding Puerto Rico or United States tax consequences arising from ownership or disposition of the Bonds. This letter is furnished by us solely for the benefit of the Authority and the holders from time to time of the Bonds and may not be relied upon by any other person. Respectfully submitted, A-3 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting commissions. All of the amounts shown are estimates except for the Securities and Exchange Commission (the 'Commission') registration fee.
ITEM AMOUNT - ---------------------------------------------------------------------------------- -------- Commission registration fee....................................................... $ 29,500 Printing expenses................................................................. Accounting fees and expenses...................................................... Legal fees and expenses........................................................... Trustee fees...................................................................... AFICA fees........................................................................ 500,000 Miscellaneous expenses............................................................ -------- TOTAL........................................................................ $ -------- --------
ITEM 32. SALES TO SPECIAL PARTIES. Not applicable. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES. Not applicable. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Partnership Agreement of the El Conquistador Partnership L.P. (the 'Partnership') provides that no general partner and none of its officers, directors, partners, employees or agents, whether acting as a general partner, a member of the Development Committee (as defined in the Partnership Agreement) or otherwise, has any liability to the Registrant or any other partner for any acts performed by such general partner, officer, director, partner, employee or agent, by or on behalf of the Registrant in its capacity as such except for gross negligence or willful misconduct. The Partnership Agreement of the Registrant also provides that the liability of each limited partner is limited to its capital contribution and that no limited partner as such has any other liability to contribute money to, or in respect of the liabilities or obligations of, the Registrant, nor is any limited partner as such personally liable for any obligations of the Registrant except as otherwise provided by law. Each of the general and limited partners (the 'Partners') of the Partnership will be a Delaware corporation at the time of the Offering. Each Partner's authority to indemnify its respective officers and directors will be governed by the provisions of Section 145 of the General Corporation Law of the State of Delaware (the 'DGCL') and by the Certificate of Incorporation of such Partner. The Certificate of Incorporation of each Partner will provide that it shall, to the fullest extent permitted by Section 145 of the DGCL, (i) indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and (ii) advance expenses to any and all said persons, and that such indemnification and advances shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such offices, and shall continue as to persons who have ceased to be II-1 directors, officers, employees or agents and shall inure to the benefit of the heirs, executors and administrators of such person. In addition, the Certificate of Incorporation of each Partner will provides for the elimination of personal liability of directors of such Partner to such Partner or its stockholders for monetary damages for breach of fiduciary duty as a director, to the fullest extent permitted by the DGCL, as amended and supplemented. ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED. Not applicable. ITEM 36. FINANCIAL STATEMENT AND EXHIBITS. (a) Financial Statements. EL CONQUISTADOR PARTNERSHIP L.P. Pro Forma Condensed Financial Statements (Unaudited) Introduction.......................................................................................... F-2 Pro Forma Condensed Balance Sheet as of June 30, 1998................................................. F-3 Pro Forma Condensed Balance Sheet as of December 31, 1997............................................. F-5 Pro Forma Condensed Statement of Operations for Six Months Ended June 30, 1998........................ F-7 Pro Forma Condensed Statements of Operations for Nine Months Ended December 31, 1997.................. F-8 Audited Financial Statements Report of Independent Auditors........................................................................ F-9 Balance Sheet as of June 30, 1998 and 1997 and at December 31, 1997 and 1996 and March 31, 1997....... F-10 Statements of Operations and (Deficiency in) Partners' Capital for Six Months Ended June 30, 1998 and 1997, for the Period of January 1, 1998 to February 28, 1998, for the Period of March 1, 1998 to June 30, 1998, for the Nine Months Ended December 31, 1996 and for Fiscal Years Ended December 31, 1997 (9 Months), March 31, 1997 and 1996............................................................. F-11 Statements of Cash Flows for Six Months Ended June 30, 1998 and 1997, for the Period of January 1, 1998 to February 28, 1998, for the Period of March 1, 1998 to June 30, 1998, for the Nine Months Ended December 31, 1996 and for Fiscal Years Ended December 31, 1997 (9 Months), March 31, 1997 and 1996................................................................................................. F-12 Notes to Financial Statements......................................................................... F-13 WKA EL CON ASSOCIATES Consolidated Balance Sheet (Unaudited) Consolidated Balance Sheet as of June 30, 1998........................................................ F-22 Notes to Consolidated Balance Sheet................................................................... F-23 Audited Balance Sheet Report of Independent Auditors........................................................................ F-30 Balance Sheet as of December 31, 1997................................................................. F-31 Notes to Balance Sheet................................................................................ F-32 CONQUISTADOR HOLDING, INC. Report of Independent Auditors........................................................................ F-36 Balance Sheet as of June 30, 1998..................................................................... F-37 Notes to Balance Sheet................................................................................ F-38
II-2 WHG EL CON CORP. Consolidated Balance Sheet (Unaudited) Consolidated Balance Sheet as of June 30, 1998........................................................ F-40 Notes to Consolidated Balance Sheet................................................................... F-41 Audited Balance Sheet Report of Independent Auditors........................................................................ F-48 Balance Sheet as of December 31, 1997................................................................. F-49 Notes to Balance Sheet................................................................................ F-50
(b) Exhibits. *1 -- Bond Purchase Agreement between the Partnership and Citicorp Financial Services Corporation. 3.1 -- El Conquistador Partnership L.P. Venture Agreement dated January 12, 1990 between WKA El Con Associates ('WKA') and Kumagai Caribbean, Inc. ('Kumagai'), as amended May 4, 1992, March 31, 1998 and April 29, 1998. 3.2 -- Certificate of Limited Partnership, as amended, of the Partnership. *4.1 -- Form of Loan Agreement between Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Authority ('AFICA') and the Partnership. *4.2 -- Form of Trust Agreement between AFICA and Banco Santander Puerto Rico, as Trustee (the 'Trustee'). *4.3 -- Form of Serial Bond (included in Exhibit 4.2 hereof). *4.4 -- Form of Term Bond (included in Exhibit 4.2 hereof). *4.5 -- Continuing Disclosure Agreement between the Partnership and the Trustee. *5 -- Opinion of Shack & Siegel, P.C. with respect to the legality of the securities being registered. *8 -- Opinion of Fiddler Gonzalez & Rodriguez with respect to certain tax matters. 10.1 -- El Conquistador Partnership L.P. Development Services and Management Agreement dated January 12, 1990 between the Partnership and Williams Hospitality Management Corporation (now known as Williams Hospitality Group Inc. ('WHGI')), as amended as of September 30, 1990 and January 31, 1991. 10.2 -- Deed of Lease dated December 15, 1990 by Alberto Bachman Umpierre and Lilliam Bachman Umpierre to the Partnership. 10.3 -- Letter of Credit and Reimbursement Agreement dated as of February 7, 1991 between the Partnership and The Mitsubishi Bank, Limited acting through its New York Branch (now known as The Bank of Tokyo-Mitsubishi, Ltd.) (the 'Bank') and the Irrevocable Transferable Standby Letter of Credit dated February 7, 1991 issued pursuant thereto. 10.4 -- First Amendment to the Letter of Credit and Reimbursement Agreement dated as of May 5, 1992 between the Partnership, WKA, Kumagai and the Bank. 10.5 -- Assignment and Modification Agreement dated as of August 3, 1998 among the Partnership, Citicorp Real Estate, Inc. ('CRE'), Banco Popular de Puerto Rico, as trustee, AFICA and the Bank. 10.6 -- Replacement Reserve Agreement dated as of August 3, 1998 between the Partnership and CRE. 10.7 -- Debt Service Reserve Agreement (CRE) dated as of August 3, 1998 between the Partnership and CRE. 10.8 -- Debt Service Reserve Agreement (GDB) dated as of August 3, 1998 between the Partnership and CRE. 10.9 -- Environmental Indemnity Agreement dated as of August 3, 1998 by the Partnership and Patriot American Hospitality, Inc. in favor of CRE. 10.10 -- Security Agreement dated as of August 3, 1998 between the Partnership and CRE.
II-3 10.11 -- Assignment of Leases and Rents dated as of August 3, 1998 by the Partnership to CRE. 10.12 -- Assignment of Licenses, Permits and Contracts dated as of August 3, 1998 by the Partnership to CRE. 10.13 -- Assignment of Management Agreement and Subordination of Management Fees dated as of August 3, 1998 by the Partnership to CRE and acknowledged and consented to by WHGI. 10.14 -- Promissory Note dated August 3, 1998 in the aggregate principal amount of $32,021,172 made by Posadas de Puerto Rico Associates, Incorporated in favor of the Partnership. 10.15 -- Loan Agreement dated February 7, 1991 between The Government Development Bank for Puerto Rico ('GDB') and the Partnership. 10.16 -- First Amendment to GDB Loan Agreement dated May 5, 1992 between GDB and the Partnership. 10.17 -- Second Amendment to GDB Loan Agreement dated as of October 4, 1996 between GDB and the Partnership. 10.18 -- Management Agreement Subordination and Attornment Agreement dated as of February 7, 1991 between Williams Hospitality Management Corporation (now knows as WHGI) and the Bank. 10.19 -- Collateral Pledge Agreement dated as of February 7, 1991 among the Partnership, AFICA and the Bank. 10.20 -- Mortgage dated February 7, 1991 by the Partnership in favor of AFICA. 10.21 -- Deed of Mortgage dated February 7, 1991 by the Partnership in favor of GDB. 10.22 -- Leasehold Mortgage dated February 7, 1991 by the Partnership in favor of AFICA. 10.23 -- Deed of Leasehold Mortgage dated February 7, 1991 by the Partnership in favor of GDB. 12 -- Statement with respect to computation of ratios. 23.1 -- Consent of Ernst & Young LLP with respect to the Partnership, WKA and WHG El Con Corp. 23.2 -- Consent of Ernst & Young LLP with respect to Conquistador Holding, Inc. *23.3 -- Consent of Shack & Siegel, P.C. (contained in their opinion filed as Exhibit 5 hereto). *23.4 -- Consent of Fiddler Gonzalez & Rodriguez (contained in their opinion filed as Exhibit 8 hereto). 24 -- Powers of Attorney (included on the signature page hereto). *25 -- Statement of Eligibility of Trustee (separately bound). 27 -- Financial Data Schedule (filed with EDGAR version only).
----------------- * To be filed by amendment. ITEM 37. UNDERTAKINGS. (h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (i) The undersigned registrant hereby undertakes that: II-4 1. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(l) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, Texas on the 19th day of October, 1998. EL CONQUISTADOR PARTNERSHIP L.P. (Registrant) By: CONQUISTADOR HOLDING, INC. By: /s/ JAMES D. CARREKER ................................... NAME: JAMES D. CARREKER TITLE: CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each person whose signature to this Registration Statement appears below hereby appoints Larry Vitale and Noel Vera-Ramirez and each of them, each with full power to act without the other, his true and lawful attorney-in-fact, each with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, which amendment or amendments may make such changes and additions to this Registration Statement as such attorney-in-fact may deem necessary and appropriate. Pursuant to the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
SIGNATURE CAPACITIES IN WHICH SIGNED DATE - ------------------------------------------ -------------------------------------------- ------------------- /s/ JAMES D. CARREKER Chief Executive Officer (Principal Executive October 19, 1998 ......................................... Officer) of the Registrant and Director of JAMES D. CARREKER Conquistador Holding, Inc. /s/ LAWRENCE S. JONES Executive Vice President and Treasurer October 19, 1998 ......................................... (Principal Financial Officer and Principal LAWRENCE S. JONES Accounting Officer) of the Registrant and Director of Conquistador Holding, Inc.
II-6 STATEMENT OF DIFFERENCES ------------------------ The registered trademark symbol shall be expressed as ................ 'r' The section symbol shall be expressed as.............................. 'SS' EX-3 2 EXHIBIT 3.1 EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Dated January 12, 1990 EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Table of Contents ARTICLE PAGE - ------- ---- 1. DEFINED TERMS.......................................................... 1 1.01. Act........................................................... 2 1.02. Additional Loans.............................................. 2 1.03. Additional Projects........................................... 2 1.04. Adjusted Capital Account...................................... 2 1.05. Annual Budgets................................................ 2 1.06. Appendix...................................................... 2 1.07. Approved Budgets.............................................. 2 1.08. Bankruptcy.................................................... 2 1.09. Basic Management Fee.......................................... 3 1.10. Call Notice................................................... 3 1.11. Capital Accounts.............................................. 3 1.12. Capital Contribution.......................................... 3 1.13. Capital Transaction........................................... 3 1.14. Class A Limited Partner....................................... 3 1.15. Class B Limited Partner....................................... 3 1.16. Code.......................................................... 3 1.17. Commencement Date............................................. 4 1.18. Construction Management Agreement............................. 4 1.19. Construction Manager.......................................... 4 1.20. Construction Phase............................................ 4 1.21. Contribution Ratio............................................ 4 1.22. Deferred Preferred Return..................................... 4 1.23. Deficiency.................................................... 4 1.24. Deficiency Loan............................................... 4 1.25. Depreciation.................................................. 4 1.26. Development Budget............................................ 5 1.27. Development Committee......................................... 5 1.28. Distributable Cash............................................ 5 1.29. Distributable Cash from a Capital Transaction................. 5 1.30. Economic Risk of Loss......................................... 5 1.31. Extraordinary Cashflow........................................ 5 1.32. Final Completion Date......................................... 6 1.33. First Mortgage Loans.......................................... 6 1.34. First Mortgage Loan Documents................................. 6 EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Table of Contents (Continued) ARTICLE PAGE - ------- ---- 1.35. Fiscal Year.................................................... 6 1.36. Gain from a Capital Transaction................................ 6 1.37. General Partners............................................... 6 1.38. Hard Costs..................................................... 7 1.39. Incentive Management Fee....................................... 7 1.40. Interest ...................................................... 7 1.41. KG Loan........................................................ 7 1.42. KG General Partner............................................. 7 1.43. Limited Partner................................................ 7 1.44. Major Decision................................................. 7 1.45. Management Agreement........................................... 7 1.46. Minimum Gain Attributable to Partner Nonrecourse Debt.......... 7 1.47. Mitsubishi Credit Facility..................................... 8 1.48. Net Income..................................................... 8 1.49. Net Loss....................................................... 8 1.50. Net Loss from a Capital Transaction............................ 8 1.51. Nonrecourse Deductions......................................... 8 1.52. Nonrecourse Liability.......................................... 8 1.53. Offer.......................................................... 8 1.54. Offering Price................................................. 8 1.55. Operating Cashflow............................................. 8 1.56. Partner........................................................ 9 1.57. Partner Nonrecourse Debt....................................... 9 1.58. Partner Nonrecourse Deductions................................. 9 1.59. Partnership.................................................... 9 1.60. Partnership Minimum Gain....................................... 9 1.61. Partner's Share of Partnership Minimum Gain.................... 9 1.62. Partner's Share of Minimum Gain Attributable to Partner Nonrecourse Debt............................................... 9 1.63. Plans and Specifications....................................... 9 1.64. Preferred Return............................................... 9 1.65. Pre-Opening Budgets............................................ 10 1.66. Pre-Opening Period............................................. 10 1.67. Project........................................................ 10 1.68. Recapture...................................................... 10 ii EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Table of Contents (Continued) ARTICLE PAGE - ------- ---- 1.69. Regulations.................................................... 10 1.70. Residual Partnership Interest.................................. 10 1.71. Resort......................................................... 10 1.72. Resort Gross Revenues.......................................... 10 1.73. Resort Manager................................................. 11 1.74. Resort Operating Profits....................................... 11 1.75. Security Agreement............................................. 12 1.76. Selling Partner................................................ 12 1.77. Soft Costs..................................................... 12 1.78. Subordinated Mortgage Loan..................................... 12 1.79. Subordinated Mortgage Loan Documents........................... 12 1.80. Target Capital Account......................................... 12 1.81. Tax Matters Partner............................................ 12 1.82. Total Project Costs............................................ 13 1.83. Treas. Reg.'SS'................................................ 13 1.84. Unrecovered Capital............................................ 13 1.85. Venture Agreement.............................................. 13 1.86. WKA............................................................ 13 1.87. WKA General Partner............................................ 13 2. FORMATION AND ORGANIZATION.............................................. 13 2.01. Formation...................................................... 13 2.02. Name, Place of Business and Office............................. 13 2.03. Purpose........................................................ 14 2.04. Term........................................................... 15 3. PARTNERS AND CAPITAL.................................................... 15 3.01. General Partners............................................... 15 3.02. Limited Partners............................................... 16 3.03. Capital Contributions of the Partners.......................... 17 3.04. Contributions of Right to Acquire El Conquistador Land and Buildings...................................................... 18 3.05. No Right to Return of Capital.................................. 18 3.06. No Obligation to Restore Deficits.............................. 18 iii EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Table of Contents (Continued) ARTICLE PAGE - ------- ---- 4. MANAGEMENT OF THE PARTNERSHIP........................................... 19 4.01. Authority of General Partners.................................. 19 4.02. Operation of the Partnership................................... 22 4.03. Liability of Partners.......................................... 22 4.04. Major Decisions Requiring Consent.............................. 22 4.05. Consent of General Partners.................................... 25 4.06. Financial Information.......................................... 26 4.07. Accountants.................................................... 27 4.08. Tax Returns.................................................... 27 4.09. Fiscal Year.................................................... 27 4.10. Tax Matters Partner............................................ 27 4.11. Delegation of Authority........................................ 29 4.12. General Partners or Affiliates Dealing with the Partnership.... 29 4.13. Other Business Activities...................................... 30 4.14. Additional Projects............................................ 31 4.15. Initial Condominium Units...................................... 32 4.16. Additional Financial Information............................... 36 5. THE PRE-OPENING PERIOD.................................................. 37 5.01. The Development Committee...................................... 37 5.02. Reimbursement of Expenses...................................... 38 5.03. Conduct of Negotiations........................................ 38 5.04. Conditions to Acquiring the Project............................ 39 5.05. Contractors.................................................... 41 5.06. Cooperation.................................................... 41 6. LOANS TO THE PARTNERSHIP................................................ 42 6.01. Deficiency Loans............................................... 42 6.02. Additional Loans............................................... 43 6.03. KG Loans....................................................... 44 6.04. Repayment of Loans............................................. 46 6.05. Assumption of Letter of Credit Obligations..................... 47 7. CAPITAL ACCOUNTS; ALLOCATION OF PROFITS AND LOSSES...................... 47 7.01. Definitions.................................................... 47 iv EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Table of Contents (Continued) ARTICLE PAGE - ------- ---- 7.02. Definition of Capital Accounts................................. 48 7.03. Allocations of Income and Loss................................. 49 7.04. Special Partnership Election................................... 50 8. PARTNERSHIP DISTRIBUTION................................................ 51 8.01. Distributable Cash from Operations............................. 51 8.02. Distributable Cash from a Capital Transaction.................. 52 9. TRANSFERABILITY OF PARTNERS' INTERESTS.................................. 54 9.01 No Transfer.................................................... 54 9.02. No Withdrawal.................................................. 56 9.03. Permitted Sales of Limited Partners' Interests................. 56 9.04. Permitted Security Interest.................................... 58 9.05. Withdrawal or Transfer by General Partner...................... 58 9.06. Effect of Bankruptcy, Death or Incompetence of a Limited Partner........................................................ 60 9.07. Bankruptcy of a General Partner................................ 60 9.08. Effect of Transfer............................................. 61 10. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.............................. 62 10.01. Management of the Partnership.................................. 62 10.02. Limitation on Liability of Limited Partners.................... 62 10.04. Power of Attorney.............................................. 63 11. APPROVALS............................................................... 64 11.01. Puerto Rico Gaming Authority Approval.......................... 64 11.02. Approval of Japanese Ministry of Finance....................... 64 12. PARTNERSHIP OBLIGATIONS................................................. 65 12.01. Nature of Obligations.......................................... 65 12.02. Indemnities.................................................... 66 13. TERMINATION AND LIQUIDATION............................................. 68 13.01. Termination.................................................... 68 13.02. Winding Up..................................................... 68 v EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT Table of Contents (Continued) ARTICLE PAGE - ------- ---- 14. REPRESENTATIONS, WARRANTIES AND ADDITIONAL COVENANTS.................... 70 14.01. Due Organization............................................... 70 14.02. Due Execution and Delivery..................................... 70 14.03. Binding Obligations............................................ 70 14.04. Investment..................................................... 70 14.05. Ownership of KG General Partner................................ 71 14.06. Ownership of WKA General Partner............................... 71 15. MISCELLANEOUS........................................................... 71 15.01. Further Assurances............................................. 71 15.02. Expenses....................................................... 71 15.03. Notices........................................................ 72 15.04. Equitable Remedies............................................. 72 15.05. Remedies Cumulative............................................ 72 15.06. Captions; Partial Invalidity................................... 73 15.07. Entire Agreement............................................... 73 15.08. Applicable Law................................................. 73 15.09. Counterparts................................................... 74 15.10. Successors..................................................... 74 15.11. Confidentiality................................................ 74 APPENDIX................................................................... A-1 I. Allocations of Net Income, Net Loss, Gain or Net Loss from a Capital Transaction and Depreciation.......................... A-2 1. Net Income............................................... A-2 2. Net Loss................................................. A-2 3. Gain from a Capital Transaction.......................... A-4 4. Net Loss from a Capital Transaction...................... A-5 5. Allocation of Depreciation............................... A-6 II. Allocations to Conform to Target Capital Accounts............. A-8 III. Exceptions.................................................... A-8 1. General Limitation....................................... A-8 2. Partner Nonrecourse Deductions........................... A-9 3. Partnership Minimum Gain................................. A-9 4. Minimum Gain Attributable to Partner Nonrecourse Debt... A-10 5. Qualified Income Offset................................. A-11 IV. Special Allocation Rules and Partnership Elections:.......... A-12 vi EXHIBITS -------- Exhibit A Hard Costs Exhibit B Project Description Exhibit C Soft Costs Exhibit D Signatures for Major Decisions Exhibit E Costs Incurred and Commitments Made Exhibit F Security Agreement Exhibit G Assumption of Letter of Credit by Kumagai Exhibit H Addresses for Notices Exhibit I Kumagai Guaranty (Re: Capital Contributions and Deficiency Loans) Exhibit J Kumagai Guaranty (Re: Letter of Credit) Exhibit K Assumption of Letter of Credit by WKA VENTURE AGREEMENT OF EL CONQUISTADOR PARTNERSHIP L.P. THIS LIMITED PARTNERSHIP AGREEMENT (the "Venture Agreement") is made the 12th day of January 1990, between KUMAGAI CARIBBEAN, INC., a Texas corporation, having an office at 1585 Kapiolani Boulevard, Suite 1404, Honolulu, Hawaii 96814 and WKA EL CON ASSOCIATES, a New York general partnership, having an office at 767 Fifth Avenue, 23rd Floor, New York, New York 10153. W I T N E S S E T H: WHEREAS, the parties hereto desire to form a limited partnership for the purpose of acquiring certain real property and improvements thereon located in Fajardo, Puerto Rico, formerly known as "El Conquistador Hotel," (sometimes referred to herein as the El Conquistador land and buildings) and to undertake the renovation, improvement, construction and development thereof and to operate the same as a first class, luxury destination mega-resort; and WHEREAS, the parties desire to set forth the terms and understandings of their association and their rights and obligations with respect to the Partnership. NOW THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants and conditions contained herein, the parties hereto agree as follows: ARTICLE ONE DEFINED TERMS The capitalized terms used in this Venture Agreement and the Appendix shall, unless the context otherwise requires, have the meanings specified in this Article One. The singular shall include the plural and the masculine gender shall include the feminine, the neuter and vice versa, as the context requires. SECTION 1.01. "ACT" means the Delaware Revised Uniform Limited Partnership Act, 6 Del. C, Section 17-101 et seq., as amended from time to time. SECTION 1.02. "ADDITIONAL LOANS" means a loan or loans made to the Partnership pursuant to Section 6.02 hereof. SECTION 1.03. "ADDITIONAL PROJECTS" is defined in Section hereof. SECTION 1.04. "ADJUSTED CAPITAL ACCOUNT" means the Capital Account of a Partner reduced by any adjustments, allocations or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations. SECTION 1.05. "ANNUAL BUDGETS" means the proposed operating and capital budgets of the Resort which shall have been prepared and submitted by the Resort Manager to the Partnership for its approval in respect of each fiscal year of the Partnership pursuant to the terms of the Management Agreement. SECTION 1.06. "APPENDIX" means the Appendix attached to this Venture Agreement. SECTION 1.07. "APPROVED BUDGETS" means the Annual Budgets as the same shall have been approved by the Partnership as provided in the Management Agreement. SECTION 1.08. "BANKRUPTCY" means the initiation of any proceeding, whether voluntary or involuntary, under the federal bankruptcy laws or any state, local or foreign bankruptcy act, including without limitation, an assignment for the benefit of creditors, if not 2 discharged, in the case of any involuntary proceeding, within sixty (60) days. SECTION 1.09. "BASIC MANAGEMENT FEE" means the 3.5% of Resort Gross Revenues payable to the Resort Manager as its basic compensation for management services under the Management Agreement. SECTION 1.10. "CALL NOTICE" is defined in Section 6.01 hereof. SECTION 1.11. "CAPITAL ACCOUNTS" is defined in Section 7.02 hereof. SECTION 1.12. "CAPITAL CONTRIBUTION" means the amount to be contributed to the Partnership by any Partner pursuant to Article Three hereof. SECTION 1.13. "CAPITAL TRANSACTION" means any sale, condemnation or insured casualty loss of all or any substantial part of the Resort and, after the Final Completion Date, refinancings of the Resort. Loans to be made by any Partner under the terms hereof and the initial permanent financing arrangements under the Mitsubishi Credit Facility to replace the construction financing under such facility shall not be deemed a refinancing of the Resort. SECTION 1.14. "CLASS A LIMITED PARTNER" means initially Kumagai Caribbean, Inc. in its capacity as a limited partner of the Partnership and any transferee of all or any portion of such limited partnership Interest who is admitted to the Partnership as a Class A Limited Partner pursuant to the terms of this Venture Agreement. SECTION 1.15. "CLASS B LIMITED PARTNER" means initially WKA in its capacity as a limited partner of the Partnership and any transferee of all or any portion of such limited partnership Interest who is admitted to the Partnership as a Class B Limited Partner pursuant to the terms of this Venture Agreement. SECTION 1.16. "CODE" means the Internal Revenue Code of 1986, as amended. 3 SECTION 1.17. "COMMENCEMENT DATE" means the first day the Resort opens to the general public and commences business. SECTION 1.18. "CONSTRUCTION MANAGEMENT AGREEMENT" means the construction management agreement of even date herewith entered into between the Construction Manager and the Partnership pursuant to which the Construction Manager will render services to the Partnership during the Construction Phase in connection with the Project. SECTION 1.19. "CONSTRUCTION MANAGER" means KG (Caribbean) Corporation, a Texas corporation. SECTION 1.20. "CONSTRUCTION PHASE" means the period from the date hereof through the Final Completion Date. SECTION 1.21. "CONTRIBUTION RATIO" means with respect to each Partner, the ratio that such Partner's Capital Contribution as set forth in Sections 3.01 and 3.02 hereof bears to the Capital Contributions of a specified group of Partners. SECTION 1.22. "DEFERRED PREFERRED RETURN" means the amount of any Preferred Return unpaid from all prior fiscal year(s) of the Partnership, together with interest thereon at the rate of 10% per annum from the end of the Fiscal Year to which such Preferred Return relates to the date of payment. SECTION 1.23. "DEFICIENCY" is defined in Section 6.01 hereof. SECTION 1.24. "DEFICIENCY LOAN" means a loan or loans made to the Partnership pursuant to Section 6.01 hereof. SECTION 1.25. "DEPRECIATION" means, for each fiscal year of the Partnership, the deductions for depreciation under Sections 167 and 168 of the Code (or any similar provision 4 hereafter enacted), with respect to the Project and amortization deductions under Sections 195 and 709(b) of the Code. SECTION 1.26. "DEVELOPMENT BUDGET" means the budgets for all phases of the Project as the same shall be approved by the Partnership from time to time. Initially the Development Budget consists of the Hard Costs and Soft Costs set forth in Exhibits A and C annexed hereto, and shall hereafter mean such Development Budget as the same shall be amended, changed, modified and refined from time to time by the mutual agreement of the General Partners as provided in Section 4.04 hereof. SECTION 1.27. "DEVELOPMENT COMMITTEE" means the committee established pursuant to Section 5.01 hereof to administer the Partnership from the date hereof through the Final Completion Date in connection with the development of the Project. SECTION 1.28. "DISTRIBUTABLE CASH" means Operating Cashflow less all payments made in respect of Deficiency Loans and Additional Loans. SECTION 1.29. "DISTRIBUTABLE CASH FROM A CAPITAL TRANSACTION" means Extraordinary Cashflow less all payments made in respect of Deficiency Loans and Additional Loans. SECTION 1.30. "ECONOMIC RISK OF LOSS" shall have the meaning set forth in Section 1.704-1T(b)((4)(iv)(k)(1) of the Regulations. SECTION 1.31. "EXTRAORDINARY CASHFLOW" means the gross cash proceeds received by the Partnership resulting from a Capital Transaction, reduced by all costs, expenditures, fees, amounts needed for any required debt repayments, funds reserved for repair, replacement or reconstruction of the Project and any other reserves established by mutual agreement of the 5 General Partners to meet obligations of the Partnership, but before providing for the payment of (i) the Preferred Return and Deferred Preferred Return, (ii) the Incentive Management Fee, and (iii) the Deficiency Loans and Additional Loans. SECTION 1.32. "FINAL COMPLETION DATE" means the date of final completion of the last portion of the physical construction and renovation aspects of the Project. SECTION 1.33. "FIRST MORTGAGE LOANS" means the construction and initial permanent loan for the Project, obtained by the Partnership with the consent of both General Partners as provided in Section 4.04 hereof, repayment of which is secured by a first mortgage lien on the Project, and any refinancings or replacements thereof. It is contemplated that the First Mortgage Loan shall initially be the Mitsubishi Credit Facility. SECTION 1.34. "FIRST MORTGAGE LOAN DOCUMENTS" means all documents and all instruments evidencing the Partnership's obligations under the First Mortgage Loan including the notes, loan agreements, mortgages, and deeds of trust relating to the construction or permanent financing thereof and all other documents and instruments executed and delivered in connection therewith. SECTION 1.35. "FISCAL YEAR" is defined in Section 4.09 hereof. SECTION 1.36. "GAIN FROM A CAPITAL TRANSACTION" is defined in paragraph (B) of Section 7.01 hereof. SECTION 1.37. "GENERAL PARTNERS" means initially the KG General Partner and the WKA General Partner in their capacities as general partners of the Partnership, and their successors or transferees who are admitted as general partners of the Partnership under the terms of this Venture Agreement. 6 SECTION 1.38. "HARD COSTS" means the cost for the items listed on Exhibit A annexed hereto and such other items as may hereafter be included as Hard Costs with the consent of both General Partners as provided in Section 4.09 hereof. SECTION 1.39. "INCENTIVE MANAGEMENT FEE" means the 10% of Resort Operating Profits payable to the Resort Manager under the Management Agreement. SECTION 1.40. "INTEREST" means the entire ownership interest of a Limited Partner or General Partner of the Partnership at any particular time, including the right of any such Partner to any and all benefits to which such Partner may be entitled under this Venture Agreement, together with the obligations of such Partner to comply with all the terms and provisions of this Venture Agreement and the Act. SECTION 1.41. "KG LOAN" means a loan made by the KG General Partner to the WKA General Partner pursuant to Section . SECTION 1.42. "KG GENERAL PARTNER" means Kumagai Caribbean, Inc. SECTION 1.43. "LIMITED PARTNER" means any Class A Limited Partner and any Class B Limited Partner. SECTION 1.44. "MAJOR DECISION" is defined in Section 4.04 hereof. SECTION 1.45. "MANAGEMENT AGREEMENT" means the development services and management agreement of even date herewith entered into between the Partnership and the Resort Manager pursuant to which the Resort Manager will render services to the Partnership during the Construction Phase and become manager of the Resort on the Commencement Date. SECTION 1.46. "MINIMUM GAIN ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT" shall have the meaning set forth in Section 1.704-1T(b)(4)(iv)(h) of the Regulations. 7 SECTION 1.47. "MITSUBISHI CREDIT FACILITY" means the credit facility to be provided by Mitsubishi Bank, Ltd. in the principal amount of not less than $113,400,000 to be available as construction financing and thereafter "permanent" financing for the Project, the proceeds of which will constitute the First Mortgage Loan. SECTION 1.48. "NET INCOME" is defined in paragraph (A) of Section 7.01 hereof. SECTION 1.49. "NET LOSS" is defined in paragraph (A) of Section 7.01 hereof. SECTION 1.50. "NET LOSS FROM A CAPITAL TRANSACTION" is defined in paragraph (B) of Section 7.01 hereof. SECTION 1.51. "NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Section 1.704-1T-(b)(4)(iv)(b) of the Regulations. SECTION 1.52. "NONRECOURSE LIABILITY" shall have the meaning set forth in Section 1.704-1T-(b)(4)(iv)(k)(3) of the Regulations. SECTION 1.53. "OFFER" is defined in paragraph (B) of Section 9.03 hereof. SECTION 1.54. "OFFERING PRICE" is defined in paragraph (B) of Section 9.03 hereof. SECTION 1.55. "OPERATING CASHFLOW" means all cash received by the Partnership from all sources (including investment income from all reserves and other liquid investments of the Partnership but excluding proceeds from a Capital Transaction) less all cash expended or reserved for all due and maturing liabilities, including debt service (principal and interest) on the First Mortgage Loan and the Subordinated Mortgage Loan, capital and operating expenditures, and other obligations of the Partnership whether or not secured by the assets of the Partnership but no deductions shall be made for (i) expenditures and reserves actually 8 deducted in determining Extraordinary Cashflow, (ii) the Preferred Return and Deferred Preferred Return, (iii) the Incentive Management Fee and (iv) the Deficiency Loans and Additional Loans. SECTION 1.56. "PARTNER" shall mean a General Partner, a Limited Partner or both as the context shall refer. SECTION 1.57. "PARTNER NONRECOURSE DEBT" shall have the meaning set forth in Section 1.704-1T(b)(4)(iv)(k)(4) of the Regulations. SECTION 1.58. "PARTNER NONRECOURSE DEDUCTIONS" is defined in paragraph III 2. of the Appendix. SECTION 1.59. "PARTNERSHIP" means the limited partnership formed by this Venture Agreement. SECTION 1.60. "PARTNERSHIP MINIMUM GAIN" shall have the meaning set forth in Section 1.704-1T(b)(4)(iv)(c) of the Regulations. SECTION 1.61. "PARTNER'S SHARE OF PARTNERSHIP MINIMUM GAIN" shall be calculated as set forth in Section 1.704-1T(b)(4)(iv)(f) of the Regulations. SECTION 1.62. "PARTNER'S SHARE OF MINIMUM GAIN ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT" shall be calculated as set forth in Section 1.704-1T(b)(4)(h)(5) of the Regulations. SECTION 1.63. "PLANS AND SPECIFICATIONS" means the plans and specifications relating to the renovation and construction of the Project as the same shall be initially approved by both General Partners and thereafter changed, amended, modified or refined from time to time as provided in Section 4.04 hereof. 9 SECTION 1.64. "PREFERRED RETURN" means for any Fiscal Year or part thereof an 8.5% annual rate of return on the amount of each Partner's Unrecovered Capital calculated based upon the amount of each Partner's Unrecovered Capital from day to day. SECTION 1.65. "PRE-OPENING BUDGETS" means budgets and requests for payment approvals submitted by the Resort Manager in connection with the development of the Project and as provided in the Management Agreement. Once approved by the Partnership, Pre-Opening Budgets shall be included within the term Approved Budgets. SECTION 1.66. "PRE-OPENING PERIOD" means from the date hereof through and including the Commencement Date. SECTION 1.67. "PROJECT" means all matters relating to the acquisition of the El Conquistador land and buildings, all things associated with the construction, renovation and completion of the Resort including equipping the Resort and making it operational as a first class, luxury destination mega-resort. SECTION 1.68. "RECAPTURE" means that portion of the gain on any sale, exchange or other disposition of Partnership property which is characterized as ordinary income by virtue of the recapture rules of Section 1250 or Section 1245 of the Code. SECTION 1.69. "REGULATIONS" means United States Treasury Regulations. SECTION 1.70. "RESIDUAL PARTNERSHIP INTEREST" means for each Partner the percentage set forth as such in Sections 3.01 and 3.02 hereof, as the same may be amended from time to time. SECTION 1.71. "RESORT" means the land and all buildings, property and facilities resulting from completion of the Project as the same may exist from time to time. 10 SECTION 1.72. "RESORT GROSS REVENUES" shall mean all gross revenues from all operations of the Resort, including, without limitation, all revenues from rooms, golf course (including dues and the first $5,000 of each initiation or membership fee but not amounts in excess thereof), marina, food and beverage, telephone, telex, interest, casino net wins, condominium net rentals, rentals or other payments from lessees, licensees, or concessionaires (but not including the licensees' or concessionaires' receipts), proceeds of business interruption insurance, and all other receipts (exclusive of tips, service charges added to a customer's bill or statement in lieu of gratuities, which are payable to Resort employees, taxes collected and remitted to others, and the value of complimentary rooms, food and beverages, except those purchased by the casino), minus actual credits and refunds made to customers, guests or patrons. SECTION 1.73. "RESORT MANAGER" means Williams Hospitality Management Corporation as the manager of the Resort including the hotel, casino, golf course, marina, condominiums and related operations constituting the Resort pursuant to the Management Agreement, and any permitted assignee thereof. SECTION 1.74. "RESORT OPERATING PROFITS" shall mean Resort Gross Revenues less all operating expenses of the Resort whether designated herein as an obligation of Manager, the Partnership or the Resort, including, without limitation, (a) the Basic Management Fee; (b) marketing expenses; (c) repair and maintenance; (d) utility charges; (e) reserve for replacement of furniture, fixtures and equipment; (f) administrative and general expenses (including bad debt reserve); and (g) premiums for life, accident, workers compensation, health and other insurance furnished to or for the benefit of employees of the Resort and premiums for other insurance of a similar nature; but prior to deducting (i) premiums for liability, property and casualty 11 insurance; (ii) depreciation of building, plant, furniture, fixtures and equipment; (iii) amortization of pre-opening expenses; (iv) financing costs including interest charges, principal payment and debt service; (v) capital expenditures and payments on leases other than amounts included in the reserve for replacement of furniture, fixtures and equipment; (vi) property taxes and taxes on income; (vii) the Incentive Management Fee; (viii) real property rentals. SECTION 1.75. "SECURITY AGREEMENT" is defined in Section 6.03(C). SECTION 1.76. "SELLING PARTNER" is defined in Section 9.03 hereof. SECTION 1.77. "SOFT COSTS" means the cost for the items listed on Exhibit C annexed hereto and such other items as may hereafter be included as Soft Costs by the consent of both General Partners as provided in Section 4.04 hereof. SECTION 1.78. "SUBORDINATED MORTGAGE LOAN" means the construction and permanent loan in an amount not less than $21,000,000 or such other amount as the General Partners shall approval as provided in Section 4.04 hereof, made by the Government Development Bank of Puerto Rico, secured by a second mortgage lien on the Project and any refinancings or replacements thereof. SECTION 1.79. "SUBORDINATED MORTGAGE LOAN DOCUMENTS" means all documents and instruments evidencing the Partnership's obligations under the Subordinated Mortgage Loan including the notes, loan agreements, mortgages, and deeds of trust relating to the construction and permanent financing thereof and all other documents and instruments executed and delivered in connection therewith. SECTION 1.80. "TARGET CAPITAL ACCOUNT" is defined in paragraph (B) of Section 7.02 hereof. 12 SECTION 1.81. "TAX MATTERS PARTNER" is defined in paragraph (A) of Section 4.10 hereof. SECTION 1.82. "TOTAL PROJECT COSTS" means the sum of the Hard Costs and Soft Costs as the same are approved by both General Partners from time to time as provided in Section 4.04 hereof. SECTION 1.83. "TREAS. REG. 'SS' means Regulation Section. SECTION 1.84. "UNRECOVERED CAPITAL" means with respect to each Partner the amount at any time of such Partner's Capital Contribution actually made to the Partnership, reduced by distributions made to such Partner pursuant to paragraph (G) of Section 8.02 hereof. SECTION 1.85. "VENTURE AGREEMENT" means this agreement of limited partnership as the same may be amended or restated in writing from time to time. SECTION 1.86. "WKA" means WKA El Con Associates. SECTION 1.87. "WKA GENERAL PARTNER" means WKA El Con Associates, a New York general Partnership. ARTICLE TWO FORMATION AND ORGANIZATION SECTION 2.01. FORMATION. The parties hereto hereby form a limited partnership under and pursuant to the laws of the State of Delaware and the Act for the purposes set forth in Section 2.03 hereof. The rights, duties and liabilities of the Partners shall be as provided by the laws of the State of Delaware, except as otherwise expressly provided in this Venture Agreement. 13 SECTION 2.02. NAME, PLACE OF BUSINESS AND OFFICE. The name of the Partnership shall be EL CONQUISTADOR PARTNERSHIP L.P. The business of the Partnership shall be conducted under that name or such other name as may be mutually agreed to by the General Partners. The office and principal place of business of the Partnership shall be such place or places as the General Partners may from time to time mutually determine. The WKA General partner shall promptly notify the Limited Partners of the location of and any change in the location of the principal office of the Partnership. If required by applicable law, the WKA General Partner shall file or record an assumed or fictitious name certificate in the appropriate records in each place in which the nature of the operations of the Partnership makes such filings or recordings necessary. The General Partners shall promptly execute and cause to be filed with the Secretary of State of the State of Delaware an appropriate certificate of limited partnership as required by the Act. The WKA General Partner shall do all other acts and things (including publication or periodic filings of any certificate) that may now or hereafter be required for the perfection and continuing maintenance of the Partnership as a limited partnership under the laws of the State of Delaware. SECTION 2.03. PURPOSE. the business and purpose of the Partnership shall be to acquire, own, renovate, develop, improve, finance, refinance, operate, lease and sell the Project and Resort as a first class, luxury destination mega-resort and perform any and all acts and services necessary or desirable in connection with the foregoing. The relationship between and among the Partners shall be limited to the performance of the specific purposes of the Partnership as set forth in this Venture Agreement. Nothing herein shall be construed to create a general purpose partnership between or among the Partners or any of them; to authorize any partner to 14 act as general agent for any other; or to confer or grant to any Partner any proprietary interest in, or to subject any Partner to any liability for or in respect of, the business, assets, profits or obligations of any other Partner, except only to the extent contemplated by this Venture Agreement. SECTION 2.04. TERM. The Partnership shall commence on the date that the certificate of limited partnership of the Partnership as required by the Act is filed with the Secretary of State of the State of Delaware and shall continue for a term ending March 31, 2030 unless sooner terminated as provided in Article Thirteen hereof. ARTICLE THREE PARTNERS AND CAPITAL SECTION 3.01. GENERAL PARTNERS. The names and addresses of each General Partner, its Capital Contribution and its "Residual Partnership Interest" in the Partnership are as follows: 15
========================================================================================================= Residual Capital Partnership Contribution Interest - --------------------------------------------------------------------------------------------------------- Kumugai Caribbean, Inc. $3,150,000 15% Ala Moana Pacific Center 1585 Kapiolani Boulevard Suite 1404 Honolulu, Hawaii 96814 - --------------------------------------------------------------------------------------------------------- WKA El Con Associates $1,350,000 15% c/o WMS Industries Inc. 767 Fifth Avenue 23rd Floor New York, New York 10153 =========================================================================================================
SECTION 3.02. LIMITED PARTNERS. The names and addresses of the Limited Partners, their Capital Contributions and their Residual Partnership Interest in the Partnership are as follows: 16
========================================================================================================= Residual Capital Partnership Class A Limited Partner Contribution Interest - --------------------------------------------------------------------------------------------------------- Kumugai Caribbean, Inc. $17,850,000 35% Ala Moana Pacific Center 1585 Kapiolani Boulevard Suite 1404 Honolulu, Hawaii 96814 =========================================================================================================
========================================================================================================= Residual Capital Partnership Class B Limited Partner Contribution Interest - --------------------------------------------------------------------------------------------------------- WKA El Con Associates $ 7,650,000 35% c/o WMS Industries Inc. 767 Fifth Avenue 23rd Floor New York, New York 10153 =========================================================================================================
SECTION 3.03. CAPITAL CONTRIBUTIONS OF THE PARTNERS. The Partners shall make up to THIRTY MILLION ($30,000,000) Dollars in aggregate Capital Contributions to the Partnership in cash, as set forth in this Article 3. Capital Contributions shall be made in such amounts and at such time or times as shall be determined jointly by the General Partners. It is expected that Capital Contributions will be made from time to time in sufficient amounts to reimburse the General Partners or their affiliates, as the case may be, and the Resort Manager for expenses incurred by them prior to the date hereof in connection with the Project and the formation of the Partnership and to provide for timely payment of expenses incurred in connection with the Project, including the purchase of the El Conquistador land and buildings. Annexed hereto as Exhibit E are the expenses incurred and commitments made as of the date set forth therein in connection with the Project. Such expenses or commitments are hereby 17 approved by the Partnership and the General Partners and shall be reimbursed or paid, as applicable, by the Partnership. Whenever Capital Contributions are to be made, each Partner shall make such Capital Contribution within seven (7) business days after its receipt of written request therefor signed by the WKA General Partner, in the same proportion as such Partner's total Capital Contribution bears to $30,000,000. No partner shall be required to make a Capital Contribution in excess of its proportionate share and the amount set forth above as its total Capital Contribution. SECTION 3.04. CONTRIBUTIONS OF RIGHT TO ACQUIRE EL CONQUISTADOR LAND AND BUILDINGS. Each of the Partners hereby assigns and contributes to the Partnership all of its respective rights to negotiate for and acquire the El Conquistador land and buildings, including, without limitation, all of the Partners' rights under that certain agreement dated August 18, 1989 between the Resort Manager and the Government Development Bank for Puerto Rico referred to in Exhibit G annexed hereto and each of the Partners shall cause their affiliates to provide the Partnership with any and all rights they may have to acquire the El Conquistador land and buildings. SECTION 3.05. NO RIGHT TO RETURN OF CAPITAL. No Partner shall have the right to withdraw any part of its Capital Contribution or to demand or receive the return of its Capital Contribution except as expressly set forth herein. SECTION 3.06. NO OBLIGATION TO RESTORE DEFICITS. No Partner shall be obligated to restore any deficit balance in its Capital Account upon the dissolution and liquidation of the Partnership. 18 ARTICLE FOUR MANAGEMENT OF THE PARTNERSHIP SECTION 4.01. AUTHORITY OF GENERAL PARTNERS. The General Partners, as such, and not the Limited Partners, as such, shall have full and complete discretion in the management of the Partnership for the purposes set forth in Section 2.03 and to do all things necessary, desirable or convenient to carry on the business of the Partnership without notice to or obtaining the consent of the Limited Partners. Subject to the foregoing, the General Partners shall perform or cause to be performed, at the Partnership's expense and in its name, the development and completion of the Project, the negotiation and coordination of contracts for the acquisition of the Project, the arrangement for long-term loans and the coordination of all management, leasing and operational functions relating to the Resort upon its completion. Without limiting the generality of the foregoing, the General Partners (subject to the provisions of this Venture Agreement) are expressly authorized on behalf of the Partnership to: (A) operate any business normal or customary for the owner of a hotel/casino/resort property similar to the Project; (B) perform any and all acts necessary or appropriate to the acquisition, development, leasing, and operation of the Project, including, but not limited to, making applications for rezoning or objections to rezoning of other property, and commencing, defending and/or settling litigation regarding the Partnership, the Project or any aspect thereof; (C) procure and maintain with responsible companies such insurance as may be available in such amounts and covering such risks as are deemed appropriate by the General Partners, but in no event shall the amount of, or risks covered by, such insurance be 19 less than that which is required pursuant to the First Mortgage Loan and the Subordinated Mortgage Loan (during the term of the First Mortgage Loan and the Subordinated Mortgage Loan), provided that such insurance is available; (D) take and hold all property of the Partnership, real, personal and mixed, in the Partnership name, or in the name of a nominee of the Partnership for the purpose of placing a mortgage on the Project or closing a loan relating to the Project; (E) mortgage, lease, sell or otherwise dispose of all or any portion of the assets of the Partnership and execute and deliver on behalf of and in the name of the Partnership, or in the name of a nominee of the Partnership, deeds, deeds of trust, notes, leases, subleases, mortgages, bills of sale, financing statements, security agreements, easements and any and all other instruments necessary or incidental to the conduct of the Partnership's business and the financing thereof; (F) coordinate all accounting and clerical functions of the Partnership and employ such accountants, lawyers, managers, agents and other management, professional or service personnel, including affiliates as may from time to time be required to carry on the business of the Partnership; (G) collect all rents and other income accruing to the Partnership and pay all costs, expenses, debts and other obligations of the Partnership; (H) negotiate and execute for and on behalf of the Partnership leases for space or units in the Project on such terms and conditions as the General Partners may determine in their sole discretion; (I) pay the fees, commissions and expense reimbursements provided 20 for elsewhere in this Venture Agreement; (J) invest Partnership funds in United States Treasury obligations, bankers acceptances, money market accounts, certificates of deposit, investment grade commercial paper and similar money market and short term instruments; (K) enter into the Management Agreement and the Construction Management Agreement; (L) perform any and all obligations provided elsewhere in this Venture Agreement to be performed by the General Partners; (M) otherwise provide for the management of the Project on such terms as the General Partners shall determine, in the exercise of their sole discretion; (N) elect to terminate or dissolve the Partnership; (O) enter into any contracts, agreements or arrangements with or make loans to or pay compensation or fees to any Partner or an affiliate of any Partner or any officer, director, employee or agent of any Partner or any affiliate of any Partner; (P) amend this Venture Agreement including any amendment to create a class or group of partnership interests not previously outstanding, including any class or group senior in any respect to the Limited Partners; (Q) admit any Partners to the Partnership; (R) purchase or otherwise acquire any new or additional projects which may expand the purposes of the Partnership whether or not located on the Partnership's property and whether or not providing any ownership or other economic interest therein to the Limited Partners. 21 SECTION 4.02. OPERATION OF THE PARTNERSHIP. Except as otherwise set forth in this Article FOUR and in Article FIVE, from and after the Commencement Date with respect to the operations of the Resort and from and after the Final Completion Date with respect to all other matters, the WKA General Partner shall have the full and exclusive right to manage and control the business and affairs of the Partnership and to make all decisions regarding the business of the Partnership and shall otherwise have all of the rights, powers and obligations of a general partner of a limited partnership under the Act. In performing its duties under this Venture Agreement, the WKA General Partner shall have all power and authority to act in the name and on behalf of the Partnership and the Partners in connection with the affairs of the Partnership necessary to perform such duties. No Limited Partner in its capacity as such, shall participate in the management of or have any control of the Partnership's business nor shall any Limited Partner, as such, have the power to represent, act for, sign for or bind any General Partner or the Partnership. SECTION 4.03. LIABILITY OF PARTNERS. No General Partner and none of its officers, directors, partners, employees or agents, whether acting as a General Partner, a member of the Development Committee or otherwise, shall have any liability to the Partnership or to any other Partner for any acts performed by such General Partner, officer, director, partner, employee or agent, by or on behalf of the Partnership in its capacity as such except for gross negligence or willful misconduct. SECTION 4.04. MAJOR DECISIONS REQUIRING CONSENT. Anything else in this Venture Agreement notwithstanding, no General Partner shall take any of the following actions (each a "Major Decision") on behalf of the Partnership without first obtaining the written 22 consent of the other General Partner: (A) Approve the initial plans and specifications for all or any portion of the Project which, when so approved, shall be deemed the Plans and Specifications or authorize any amendment, change, modification or refinement in the Plans and Specifications as previously approved which shall have the effect of diminishing the scope or quality of the Project or increasing the Total Project Costs or allocations in the Development Budget. (B) Authorize budgets to implement the Project including amendments, changes, modifications and refinements of the Development Budget, Pre-Opening Budgets or Annual Budgets, authorize any increase in the Total Project Costs, the Hard Costs, the Soft Costs or any item thereof or authorize any reallocation of amounts designated for categories of items included in the Development Budget. (C) Grant any consent or approval of the Partnership under the Management Agreement. (D) Grant any consent or approval of the Partnership under the Construction Management Agreement or accept the Project or any portion thereof under any agreement with a general contractor. (E) Accept bids from contractors, award contracts relating to the Project, or approval change orders under any construction agreement. (F) Apply for, execute, amend or modify the First Mortgage Loan Documents or the Subordinated Mortgage Loan Documents, approve the amounts thereof, or apply for, execute, amend or modify in any material respect any other material mortgage, deed of trust, pledge, encumbrance or other hypothecation or security agreement affecting the Project 23 or any interest therein, or execute any financing statement in connection therewith except, if necessary, a third mortgage on the Project to be granted to the KG General Partner to secure the KG Loans. (G) Execute, enter into, amend or terminate any material agreement of the Partnership including, without limitation, the Management Agreement, the Construction Management Agreement and the agreement between the Partnership and the Land Administration of Puerto Rico pursuant to which the Partnership intends to acquire the El Conquistador land and buildings except that the KG General Partner, acting alone on behalf of the Partnership, shall have the right to exercise the Partnership's right under Section 8.1.2. of the Management Agreement to terminate the Management Agreement as provided therein. (H) Execute or enter into any contract or agreement (including any financing or refinancing arrangement or undertaking) relating to borrowed money on behalf of the Partnership or amend in any material respect any contract, agreement or undertaking relating to borrowed money. (I) Abandon the Project or terminate the Partnership. (J) Purchase, acquire or undertake any Additional Projects beyond the scope of the initial Resort whether or not located on the Partnership's property. (K) Sell, assign, transfer, exchange, grant or otherwise dispose of the Project or any substantial portion thereof. (L) Make, execute or deliver on behalf of the Partnership any assignment for the benefit of creditors or any guarantee, indemnity bond or surety bond, or file any Bankruptcy proceeding on behalf of the Partnership. 24 (M) Obligate the Partnership or any Partner as a surety, guarantor or accommodation party except as specifically provided in this Venture Agreement. (N) Have any property of the Partnership partitioned or file a complaint or institute any proceeding at law or in equity to have any such property partitioned. (O) Amend this Venture Agreement or admit any Partners to the Project except as specifically provided in this Venture Agreement. (P) Terminate, change or appoint the firm of independent certified public accountants designated for the Partnership or authorize or approve the terms of the Partnership's business relationship with such accountants. (Q) Enter into or amend or terminate any agreement with any Partner or any affiliate of any Partner except as otherwise provided in this Venture Agreement. (R) Authorize disbursement of Partnership funds other than in accordance with the Development Budget or approved Budgets. (S) Require Capital Contributions to be made. (T) Change the Partnership's Fiscal Year. (U) Amend, change, modify, extend or otherwise alter that certain agreement dated August 18, 1989 between the Resort Manager and the Government Development Bank for Puerto Rico referred to in Exhibit G annexed hereto, or the letter of credit deposited pursuant thereto. SECTION 4.05. CONSENT OF GENERAL PARTNERS. The written consent of a General Partner to a Major Decision shall be evidenced by the signatures of such General Partner as set forth in Exhibit D hereto. Any General Partner can change the signatures necessary for a Major 25 Decision by written notice to the other General Partner signed by a person authorized to sign on behalf of such General Partner immediately prior to such notice. Each General Partner shall use its best efforts to respond promptly to all requests for consent and shall cooperate with the other General Partner in a prompt and timely manner to resolve or compromise any differences between the General Partners in respect of any Major Decision so as to avoid and prevent any adverse affect on the Partnership's business. SECTION 4.06. FINANCIAL INFORMATION. The WKA General Partner shall, at the expense of the Partnership, maintain or cause to be maintained the books and records of the Partnership (including all items of income and loss) in accordance with generally accepted accounting principles consistently applied. The WKA General Partner shall prepare or cause to be prepared and delivered to each of the Partners the following financial statements: (A) not later than 120 days after the end of each Fiscal Year of the Partnership, a balance sheet, an income statement and a statement of cash flows of the Partnership for such fiscal year, certified by the independent certified public accountants then servicing the Partnership as having been prepared in accordance with generally accepted accounting principles consistently applied; and (B) not later than 45 days after the end of each of the first three quarters of the Partnership's Fiscal Year, an unaudited balance sheet, income statement and statement of cash flows for such quarter. In addition, the WKA General Partner shall cause to be furnished to each General Partner the monthly financial reports provided to the Partnership by the Resort Manager under the terms of the Management Agreement. 26 SECTION 4.07. ACCOUNTANTS. Initially the firm of Ernst & Young shall serve as the independent certified public accountants for the Partnership. SECTION 4.08. TAX RETURNS. The WKA General Partner shall engage and instruct the independent certified public accountants or other professionals then servicing the Partnership to prepare income tax returns for the Partnership as soon as practical after the end of each of the Partnership's fiscal years and shall instruct such accountants to deliver such tax returns to each of the General Partners for their review and reasonable approval prior to their delivery to each Partner and the filing thereof with the appropriate governmental agencies. SECTION 4.09. FISCAL YEAR. The Fiscal Year of the Partnership shall end on each March 31 or on such other date as shall be agreed to by both General Partners as provided in Section 4.04 hereof. SECTION 4.10. TAX MATTERS PARTNER. (A) Designation of Tax Matters Partner. The WKA General Partner shall be the tax matters partner as defined in Section 6231(a)(7) of the Code (the "Tax Matters Partner"). (B) Duties of Tax Matters Partner. To the extent and in the manner provided by applicable law and regulations, the Tax Matters Partner shall: (1) furnish the name, address, partnership interest and taxpayer identification number of each Partner, including any successor to a Partner, to the Secretary of the Treasury or his delegate (the "Secretary"); and (2) keep each Partner informed of the administrative and judicial proceedings for the adjustment at the Partnership level of any item required to be taken into 27 account by a Partner for income tax purposes (such administrative proceeding referred to hereinafter as a "tax audit" and such judicial proceeding referred to hereinafter as "judicial review"). (C) Authority of Tax Matters Partner. Without the consent of the other General Partner, the Tax Matters Partner shall not: (1) enter into any settlement with the Internal Revenue Service, the Secretary or other taxing authority; (2) seek judicial review of any administrative adjustment; (3) file a request for an administrative adjustment or a petition for judicial review with respect thereto; (4) enter into any agreement with the Internal Revenue Service or other taxing authority to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; or (5) take any other action or behalf of the Partners or the Partnership in connection with any tax audit or judicial review regardless of whether or not permitted by applicable law or regulations. (D) Participation by other General Partner. The Tax Matters Partner shall give reasonable advance notice to the other General Partner of all meetings and discussions between the Partnership and the Internal Revenue Service, the Secretary and all other governmental authorities and courts asserting jurisdiction with respect to tax matters and all agents and representatives of the foregoing and the KG General Partner shall have the right, 28 together with the Tax Matters Partner, to meet, discuss and negotiate with such persons and entities. SECTION 4.11. DELEGATION OF AUTHORITY. Except as otherwise set forth in this Venture Agreement, the General Partners jointly or any one of them with the consent of the other, may appoint, employ, contract or otherwise deal with any person for the transaction of the business of the Partnership, which person may, under supervision of the General Partners, perform any acts or services for the Partnership as the General Partners may approve. SECTION 4.12. GENERAL PARTNERS OR AFFILIATES DEALING WITH THE PARTNERSHIP. (A) Nothing in this Venture Agreement shall be construed to prevent any Partner or any affiliate thereof from acting as resort manager for the Resort and/or construction manager or general contractor for the Project. The Partners acknowledge that it is presently contemplated that an affiliate of WKA shall be engaged by the Partnership to render development services to the Partnership during the Construction Phase and to act as the Resort Manager and that an affiliate of the KG General Partner shall be engaged to render services to the Partnership during the Construction Phase. The Partners acknowledge that no General Partner shall be entitled to payment of any fee for its services as a General Partner but the Partners acknowledge that various fees will be paid to Partners for services rendered by them in their capacities other than as Partners. (B) In addition to services elsewhere set forth in this Venture Agreement, the General Partners or any affiliate thereof shall have the right to contract or otherwise deal with the Partnership for the purchase or sale of property or services or for other purposes upon such terms as the General Partners in their sole discretion shall determine and 29 the General Partners shall have no duty to disclose such arrangements or such relationships to the Limited Partners. SECTION 4.13. OTHER BUSINESS ACTIVITIES. No General Partner shall be obligated to devote its full time to the Partnership, or to devote its financial, personnel or other services or resources exclusively for the benefit or on behalf of the Partnership or to the activities in which the Partnership is participating, but shall only be obligated to devote such time, attention and resources to the conduct of the business of the Partnership as it shall deem reasonably necessary for the conduct of such business and the performance of such parties obligations hereunder, and the General Partners are expressly authorized to exercise their powers and discharge their duties hereunder through their affiliates and employees of such affiliates. Any General Partner and any shareholder, partner or affiliate of a General Partner, direct or indirect, may engage in or possess an interest in other business ventures of every nature and description and in any vicinity whatsoever, including the ownership, operation, management and development of real property or resorts, and, except as otherwise provided in this Article, neither the Partnership, nor any other Partner, shall have any rights in or to such independent ventures or to any profits therefrom. Any of such activities may be undertaken with or without notice to or participation therein by the other Partners. Each Partner and the Partnership hereby waive any right or claim that they may have against any Partner (or any shareholder or partner of a partner) now or hereafter conducting such activity with respect to the income or profits therefrom. The Partners acknowledge that affiliates of WKA are engaged and affiliates of the KG General Partner expect to become engaged in Puerto Rico in the business of owning, operating, managing and developing hotel and casino resorts and that nothing in the Venture 30 Agreement or otherwise shall be construed to limit, prevent or otherwise impair such activities. Except as otherwise provided in this Article, no General Partner or any of its affiliates shall have any obligation to offer any opportunity to the Partnership or any Partner or allow the Partnership to invest in any property or business of any General Partner or of any of their affiliates. Neither the Partnership nor any Partner shall by virtue of this Venture Agreement have any right, title or interest in or to such permitted independent activities or ventures. Notwithstanding the foregoing, if a General Partner of an affiliate thereof undertakes or has an opportunity to undertake or participate in any project any portion of which is located within a one mile radius from the Resort's property line, then it shall offer the other General Partner individually, not the Partnership, an opportunity to participate therein. If such other General Partner desires to participate, either directly or through an affiliate, then the General Partners shall negotiate in good faith equitable terms upon which they both may participate in such project, and, in the event of any failure to reach agreement, each of the General Partners shall have the right to participate in such project on an equal basis. SECTION 4.14. ADDITIONAL PROJECTS. The General Partners acknowledge that this Partnership has been formed for the purpose of developing the Project in accordance with the description of the Project set forth in Exhibit B attached hereto and thereafter operating the Resort as first class, luxury destination mega-resort. It is the present intention of the General Partners, however, to consider the pursuit of further development of the real estate on which the Project is located and the acquisition and development of related real estate opportunities in connection with the Resort such as condominiums, time-sharing units and an additional gift course (herein referred to as "Additional Projects"). The undertaking of such Additional 31 Projects may be undertaken by the Partnership, by the General Partners for their own benefit or a new partnership or other entity formed for such purpose. Except as otherwise provided in Sections 4.13 and 4.15 of this Venture Agreement, the General Partner shall have no obligation to the Partnership or the Limited Partners with respect to such Additional Projects. In the event a new or different partnership or other entity is formed for any Additional Project, it is the present intention of the General Partners that such new partnership or other entity be jointly owned in equal shares by WKA and the KG general partner, for their own benefit, and that all funds required to be contributed by such General Partners to such entity and participation in the profits and losses of such entity shall be on an equal basis. The foregoing is merely an expression of the General Partners' present intentions and shall not be construed as a binding agreement of the General Partners to undertake such Additional Projects or to participate in such Additional Projects. Nothing contained herein shall obligate any General Partner to engage in any Additional Project unless such General Partner shall specifically agree to do so in writing. The General Partners shall be free to form such new entities and to enter into any arrangements on behalf of the Partnership with such new entities as they in their sole discretion shall determine. SECTION 4.15. INITIAL CONDOMINIUM UNITS. (A) The parties contemplate that at least 100 condominium units (each unit being capable of rental as three separate hotel rooms thereby resulting in the potential availability of at least 300 hotel rooms upon completion of all such units and each unit being referred to as a "Condominium" and all units being collectively referred to as the "Condominiums") will be constructed between 1992 and 1995. These Condominiums are 32 anticipated to be constructed in sections consisting of at least 25 Condominiums per section on that portion of the present El Conquistador land situated south of the "clifftop" building, on the bluff, overlooking the golf course, having Fajardo Bay to the East and the golf course and spa to the West. Each section is contemplated to include a swimming pool. It is also contemplated that prior to the commencement of construction, each Condominium shall be sold to private investors purchasing such Condominium pursuant to contracts executed prior to the commencement of construction of each Condominium. The Condominiums will be offered and sold on substantially the same terms as similar units are then being offered at Palmas del Mar and the Hyatt Dorado Beach Hotel and the Partnership will offer to manage such units on the same terms contained in management agreements covering similar units at Palmas del Mar and the Hyatt Dorado Beach. In the event the KG General Partner elects, in writing delivered to WKA by not later than one year after the Commencement Date, not to participate in the construction and sale of the Condominiums, WKA shall thereafter, in its discretion, be entitled to do so directly or through its affiliates. In such event, WKA's construction of the Condominiums shall occur without participation in the profit, loss, construction or financing of such Condominiums by the Partnership or the KG General Partner and all profits and losses with regard to the construction or sale of such Condominiums shall inure to the benefit of WKA. (B) Unless the KG General Partner has elected not to participate in the construction and development of the Condominiums, then development and construction thereof shall be accomplished by a new entity (the "Condo Entity"), separate and different, from the Partnership which Condo Entity shall have been formed for that purpose by WKA and the KG General Partner. The Condo Entity shall be jointly owned in equal shares by WKA and the KG 33 General Partner, for their own benefit and not for the benefit of the Partnership or any other Partners thereof, and all funds required to be contributed by such General Partners to the Condo Entity and participation in the profits and losses of the Condo Entity shall be on an equal basis, unless agreed otherwise by the General Partners. Provided that KG General Partner has not elected to exercise its right not to participate in the construction and development of the Condominiums, all decisions regarding the Condominiums shall require the approval of WKA and the KG General Partner. (C) If requested to do so by WKA (after the KG General Partner has elected not to participate in the construction and sale of the Condominiums) or by the Condo Entity, the land to be used for such purpose shall be conveyed to (i) WKA or its affiliate if the KG General Partner has elected not to participate in the construction and sale of the Condominiums or (ii) to the Condo Entity, by the Partnership together with all other legal rights sufficient to permit WKA or the Condo Entity, as applicable, to construct the Condominiums in the manner currently envisioned by the General Partners. Such conveyance shall occur prior to the commencement of construction of any such Condominium, or section thereof, and concurrently with or after financing for the construction thereof has been obtained. (D) The Partnership shall be paid a purchase price for any land so conveyed in an amount equal to the Partnership's cost per acre of land conveyed, as determined below. For purposes of this Paragraph D, the Partnership's cost per acre of the land initially acquired by the Partnership from the Land Administration of Puerto Rico shall be the result of multiplying (a) the sum of (i) $10,000,000 and (ii) interest on the sum specified in (i) above from the date the Partnership acquires title to the Resort to the date of such conveyance, 34 calculated at a rate equal to the average blended rate of the cost of funds incurred by the Partnership on the First Mortgage Loan (including all fees payable under the Mitsubishi Credit Facility) and the Subordinated Mortgage Loan, times (b) a fraction, the numerator of which is the number of acres so conveyed and the denominator of which shall be the total number of acres contained in the Resort at the time of acquisition thereof by the Partnership from the Land Administration of Puerto Rico. The Partnership's cost per acre of other land acquired by the Partnership which may be transferred to WKA or the Condo Entity as provided herein shall be the sum of the Partnership's actual cost for such land and interest on such amount at the average blended rate of the Partnership's cost of funds incurred to finance such purchase price. The amount of the purchase price shall be paid simultaneously with such conveyance provided that the construction financing lender has agreed to loan such amount to WKA or the Condo Entity, as applicable (each of WKA and the Condo Entity, as applicable, agree to use its best efforts to cause such construction financing lender to do so) or, if such construction financing lender has not agreed to do so, the purchase price shall be paid simultaneously with the closing of the sale of such Condominiums to third party investors and the Partnership shall be entitled to retain a lien against such property to receive the payment thereof. (E) Because it is anticipated that the Condominiums will be constructed in sections, the provisions above relating to the transfer of and payment for the land on which the Condominiums will be built shall be applicable to each section. (F) In the event WKA or the Condo Entity, as applicable, undertakes construction of the Condominiums (or any of them), WKA or the Condo Entity, as applicable, and not the Partnership, shall indemnify, defend, and hold harmless the Partnership, the Partners 35 and their respective agents, officers, directors, shareholders, successors and assigns from and against any and all liability, damage, cost and expense (including legal fees and court costs) associated with the development, financing, construction and sale of the Condominiums upon the procedures set forth in Section 12.02(D) hereof. (G) The Partnership shall offer to place such Condominiums into a rental pool program operated by the Partnership under the Management Agreement pursuant to which a percentage of gross revenues derived from the occupancy of such Condominiums shall be paid to the Partnership in consideration for its conducting the program. The terms of such rental pool arrangements shall be substantially similar to the arrangements for similar units at the Hyatt Dorado Beach Hotel and Palmas del Mar. Neither WKA nor any of its affiliates will offer or otherwise make available to any owner of a Condominium any rental pool arrangement or similar arrangement with respect to such Condominiums except through the Partnership. Each guest occupying a Condominium (and owner, when occupying such Condominium) shall be entitled to use the facilities of the Project on the same terms as are generally made available to guests of the Resort. SECTION 4.16. ADDITIONAL FINANCIAL INFORMATION. The Partner acknowledge that because the fiscal years of the Partnership, the Resort and each of the General Partners are different, certain additional financial information and accounting reviews may be necessary in order to provide each General Partner with sufficient information to meet its own financial reporting needs and obligations. The Partnership, at its sole cost and expense shall furnish or cause to be furnished to each General partner such additional information as each General Partner shall reasonably request. Such additional information may be furnished or provided by 36 the accountants for the Partnership or the accountants for the General Partner requesting such information at the Partnership's expense, or a combination of both. The General Partners shall cause the Partnership to furnish such information so that each of the General Partner's needed are met in the manner most economical to the Partnership. ARTICLE FIVE THE PRE-OPENING PERIOD SECTION 5.01. THE DEVELOPMENT COMMITTEE. The Partnership hereby establishes a committee (the "Development Committee") to consist of two persons; one person designated by the WKA General Partner and one person designated by the KG General Partner. The person initially designated by the WKA General Partner shall be Hugh A. Andrews and the person initially designated by the KG General Partner shall be Shunsuke Nakane. Either General Partner shall have the right to change such designee upon written notice given to the other General Partner and such other General Partner's designee. The designation set forth in such notice shall not be effective until actually received by the other General Partner and its designee. Subject to the direction and control of the General Partners, the Development Committee shall be responsible for administering the Partnership's activities in connection with the Project, the disbursement of amounts relating to the Construction Phase as the same shall been approved by the Partnership, the solicitation of bids for construction contracts relating to the Project and the negotiation of the terms thereof, the making of recommendations as to the Development Budget, the setting of the Commencement Date and the administration of the overall design and development of the Project in accordance with the Development Budget and the Plans and 37 Specifications. The Development Committee shall respond to questions, initiate correspondence, submit appropriate information to the General Partners in connection with Major Decisions and otherwise administer the day to day affairs of the Partnership to effect completion of the Project. The Development Committee may only act by joint consent of its members. The Committee shall not, however, have the authority to authorize a Major Decision, it being the intention of the Partners that any action involving a Major Decision be made exclusively as provided in Section 4.05. Unless otherwise determined by mutual consent of the General Partners, the power and authority of the Development Committee shall cease upon the Final Completion Date. SECTION 5.02. REIMBURSEMENT OF EXPENSES. Annexed hereto as Exhibit E are to the expenses incurred and commitments made to date by the General Partners or their affiliates and by the Resort Manager in connection with the Project. The General Partners shall promptly submit to the Partnership an estimate of expenses to be incurred by the Partnership prior to its purchase of the Project, in such detail and with such supporting data as the Partnership shall reasonably request. The Partners shall make their respective Capital Contributions to provide for prompt reimbursement of all such expenses and commitment incurred to date and all such expenses and commitments reasonably incurred or made by such General Partners, as determined by the Partnership, and to provide for payment in a timely manner of all expenses to be incurred by or on behalf of the Partnership or the General Partners in connection with the Project. The Partners anticipate that initial Capital Contributions will be required shortly after the execution of this Venture Agreement and that additional amounts will be required prior to the acquisition of the El Conquistador land and buildings by the Partnership. SECTION 5.03. CONDUCT OF NEGOTIATIONS. The WKA General Partner shall be 38 primarily responsible for conducting negotiations on behalf of the Partnership with the Land Administration of Puerto Rico and other government agencies in connection with the acquisition of the El Conquistador land and buildings and related parcels of real property for the Project. The other General Partner shall have the right to participate in such negotiations but shall have no right to independently conduct such negotiations on behalf of the Partnership. All material decisions with respect to such negotiations shall be made by the General Partners. SECTION 5.04. CONDITIONS TO ACQUIRING THE PROJECT. The Partnership shall not close the acquisition of the El Conquistador land and buildings from the Land Administration of Puerto Rico until the following conditions shall have been satisfied or waived by the written consent of the General Partners: (A) The KG General Partner shall have received a copy of the written arrangements among the partners of WKA concerning their ownership of and investment in WKA and such arrangements shall be reasonably satisfactory to the KG General Partner. (B) The General Partners shall have received all environmental, engineering, toxic waste and other professional studies which they shall require and the results of such studies shall be reasonably satisfactory to each of the General Partners. (C) All governmental approvals, including zoning and building permits necessary for the commencement of the construction and renovation of the Project shall have been obtained, including the following: (i) Endorsements of an Engineering and Planning Approvals of the Puerto Rico Aqueduct and Sewer Authority and Puerto Rico Electric Power Authority; (ii) Approval of Puerto Rico Environmental Quality Board; 39 (iii) Approval of an environmental impact statement for the Project by the Puerto Rico Planning Board, Municipality of Fajardo, Puerto Rico Highway Authority, Puerto Rico Tourism Company, Puerto Rico Telephone Company, Puerto Rico Electric Power Authority, United States Fish and Wildlife Service, Department of Natural Resources, and the Puerto Rico Environmental Quality Board; (iv) Siting Permit from the Puerto Rico Planning Board; (v) Approval of preliminary development plans for the first construction stage of the Project by the Administration of Regulations and Permits; and (vi) Construction Permit. (D) The KG General Partner shall have received any necessary approvals of the Japanese Ministry of Finance with respect to the KG General Partner's investment in the Partnership. (E) Each of the General Partners shall have approved the Total Project Costs including the respective amounts of the Hard Costs and the Soft Costs and the items thereof. (F) Each of the General Partners shall be satisfied as to the terms and commitments of the First Mortgage Loan and the Subordinated Mortgage Loan. (G) Each of the General Partners shall have received title and survey reports with respect to the Project and such reports shall be reasonably satisfactory to each General Partner. (H) Each of the General Partners shall have approved the terms and conditions of the contract to acquire the existing El Conquistador and buildings from the Land 40 Administration of Puerto Rico. (I) Each of the General Partners shall be satisfied that the Partnership will be acquiring all the real property or the sufficient rights thereto, including Palominos Island, which is contemplated to constitute the Project. SECTION 5.05. CONTRACTORS. Without the consent of the General Partners as provided in Section 4.05 hereof as required for a Major Decision, the Partnership shall not enter into any agreement with a general contractor or any subcontractor for the provision of any labor or materials in connection with the construction, renovation or development of the Project unless such contract or subcontract provides for a guaranteed maximum price for the furnishing of such labor or materials in accordance with Plans and Specifications and further provides for delivery to the Partnership of a full and complete performance (and payment, if applicable) bond in respect of such contract, issued by a financially responsible surety acceptable to the General Partners. SECTION 5.06. COOPERATION. Each General Partner shall cause its designee on the Development Committee to act reasonably and to cooperate with the other member of the Development Committee to make decisions and take action necessary and advisable to complete the Project in a prompt and efficient manner within the Development Budget and within the current expectations of the General Partners that the Resort will be a first class, luxury destination mega-resort. Each of the General Partners will use their best efforts to ascertain and confirm as soon as practical and with a high degree of certainty that the Construction Phase of the Project can be completed within the budgeted Hard Costs, such certainty to include the obtaining of guaranteed maximum construction contracts with respect to the construction aspects 41 and renovations of the Project, and to ascertain and confirm that the entire Project can be completed within the budgeted Total Project Costs, such certainty to include bids for and to the extent practical actual pricing of items included in the Soft Costs. 6.01. ARTICLE SIX LOANS TO THE PARTNERSHIP SECTION 6.01. DEFICIENCY LOANS. If at any time after all Capital Contributions of the Partners have been made but prior to the expiration of five years from the Commencement Date, the Partnership has insufficient funds available to pay any portion of the Total Project Costs, operating costs or any other fees or expenses related to the Project or operation of the Resort, the Partnership's business or the liquidation or winding up of the Partnership, including payment of liabilities or reserves for liabilities, the WKA General Partner shall notify (the "Call Notice") each of the General Partners in writing of the amount needed (the "Deficiency") pay such costs, fees or expenses. With thirty (30) days after the receipt of the Call Notice each of the KG General Partner and the WKA General Partner shall advance to the Partnership one-half of the amount of the Deficiency. All such advances shall constitute loans ("Deficiency Loans") to the Partnership, shall be non-recourse to the Partnership and the General Partners of the Partnership and shall be subordinate to the First Mortgage Loan and the Subordinated Mortgage Loan. Deficiency Loans shall be repaid on or before the expiration of nine years from the Commencement Date (subject to prepayment as provided in Section 6.03 hereof) and shall bear interest at the same rate of interest as the First Mortgage Loan (computed with respect to all costs of such financing, including fees payable to credit enhancers, trustees and others). 42 Notwithstanding the foregoing, at no time shall either the KG General Partner or the WKA General Partner be required to make Deficiency Loans to the Partnership in excess of $10,000,000 in principal amount each outstanding at any time. SECTION 6.02. ADDITIONAL LOANS. If at any time after all Capital Contributions have been made and either (i) there is outstanding Deficiency Loans in the aggregate principal amount of $20,000,000 or (ii) the obligation of the General Partners to make Deficiency Loans has terminated, the Partnership has insufficient funds to meet any of its obligations other than obligations to any of its Partners, then the General Partners shall have the right, but not the obligation, to fund such deficiencies by making additional loans ("Additional Loans") to the Partnership in the amounts necessary to meet such obligations but only if the reasonable needs of the Partnership's business so require. If both General Partners desire to make such Additional Loans to the Partnership, each shall have the right to do so up to 50% of the amount needed or in such other proportion as they shall agree. If only one General Partner desires to make an Additional Loan, such General Partners shall have the right to make such Additional Loan for the full amount needed. Additional Loans shall be repaid on or before the expiration of ten years from the date each is made (subject to prepayment as provided in Section 6.05 hereof) and shall bear simple interest at the rate per annum equal to the lesser of the prime rate announced in New York City by The Chase Manhattan Bank, N.A. from time to time as its "Prime Rate" or the maximum lawful rate under applicable law. All Additional Loans shall be non-recourse to the Partners of the Partnership and shall be subordinate to the First Mortgage Loan and Subordinated Mortgage Loan but senior to Deficiency Loans and all other distributions to the Partners hereunder and shall be paid only in accordance with Section 6.04 hereof. 43 SECTION 6.03. KG LOANS. (A) At the time of delivery of the Call Notice with respect to any Deficiency Loan, the WKA General Partner may include in the Call Notice a request that the KG General Partner make a loan (the "KG Loan") to the WKA General Partner in principal amount up to one-half of the amount of the Deficiency. In such event, within thirty (30) days after the receipt of the Call Notice, the KG General Partner shall advance to the WKA General Partner such amount. (B) Upon receipt of such amount, the WKA General Partner shall use such funds to immediately make its share of the Deficiency Loan to the Partnership as provided in Section 6.01. Anything in Section 6.01 to the contrary notwithstanding, and provided the WKA General Partner has requested that the KG General Partner make a KG Loan, the WKA General Partner shall have no obligation to make any Deficiency Loan to the Partnership unless it concurrently receives the proceeds of a KG Loan in like amount. (C) All KG Loans shall be for a term ending nine years after the Commencement Date, shall bear interest at the same rate as the First Mortgage Loan (computed with respect to all costs of such financing, including fees payable to credit enhancers, trustees and others), and shall be secured by all of WKA's Interests in the Partnership, both as a General and a Limited Partner, pursuant to the terms of a security agreement (the "Security Agreement") in the form of Exhibit F annexed hereto which shall be executed and delivered concurrently herewith. The KG General Partner shall only be obligated to make a KG Loan if, at the time such loan is made, the security interest granted under the Security Agreement constitutes a valid first priority lien on such Interests. The Partnership shall grant the KG General Partner a third 44 mortgage on the Resort (and in the form and of substance reasonably satisfactory to the KG General Partner), subordinate to the First Mortgage Loan and the Subordinated Mortgage Loan, as security for Deficiency Loans made by the WKA General Partner which Deficiency Loans have been assigned to the KG General Partner as additional security for the KG Loans. This mortgage shall be released upon payment in full of the KG Loans. The costs and expenses associates with the preparation and recording of such mortgage and assignment thereof shall be paid by the Partnership. (D) The obligation to pay principal and interest to the KG General Partner in respect of any KG Loan shall be non-recourse to WKA or any successor thereto or transferee thereof, or any partner, employee or agent of WKA or such successor or transferee. (E) WKA shall be obligated to pay principal and interest on the KG Loans solely from (i) the proceeds of loans received by WKA from the Resort Manager out of the Basic Management Fee as provided in that certain agreement of even date herewith among WKA, the KG General Partner and the Resort Manager, a copy of which is annexed as Exhibit F to the Management Agreement, (ii) amounts paid by the Partnership to WKA in respect of Deficiency Loans and (iii) the proceeds of any collateral securing such KG Loans, except that WKA shall have the right, but not the obligation, to pay the KG Loans from any other sources. WKA hereby assigns to the KG General Partner its right to receive payments from the Partnership in respect of Deficiency Loans. WKA hereby authorizes and directs the Partnership, for so long as the KG Loans are outstanding, to pay to the KG General Partner at the address provided herein all sums which WKA is entitled to receive from the Partnership in repayment of Deficiency Loans. Notwithstanding the payment of such sums to the KG General Partner, 45 such sums shall be deemed to be in payment of the obligations of the Partnership to WKA under the terms hereof with respect to Deficiency Loans owed to WKA. (F) Upon the foreclosure of the security interest granted the KG General Partner pursuant to the terms of the Security Agreement and the substitution of the party acquiring the Interest of WKA under the Venture Agreement in accordance with the Act, as both a Limited Partner and a General Partner for WKA, the obligations of WKA under this Venture Agreement shall terminate. (G) The Partnership and WKA will, at all times, maintain accurate books and records duly marked with an entry showing the assignment of the Interest of WKA, as both a Limited Partner and a General Partner, to Secured Party under the Security Agreement as contemplated herein. SECTION 6.04. REPAYMENT OF LOANS. Subject to appropriate subordination agreements which may be required by the holders of the First Mortgage Loan, the Partnership shall be required to pay interest and principal on Deficiency Loans and Additional Loans solely from Operating Cashflow and Extraordinary Cashflow in the following manner and shall not be required to pay such Deficiency Loans from any other sources: FIRST: In payment of interest and then principal of all outstanding Additional Loans. If Additional Loans have been made by more than one General Partner, then such funds shall be applied to such loans in the same proportion as each General Partner's Additional Loan bears to the total outstanding Additional Loans, first in payment of interest and then principal; SECOND: one-half to interest and then principal of Deficiency Loans 46 made by the KG General Partner and one-half to interest and then principal of Deficiency Loans made by the WKA General Partner. Operating Cashflow shall be paid in reduction of such loans at least once per year on or before the 120th day following the end of the Partnership's fiscal year. Extraordinary Cashflow shall be paid in reduction of such loans as soon as practical after the receipt of such proceeds. SECTION 6.05. ASSUMPTION OF LETTER OF CREDIT OBLIGATIONS. Concurrently herewith, the KG General Partner is executing an assumption agreement in the form of Exhibit G annexed hereto pursuant to which it is assuming 70% of the liability under the irrevocable letter of credit in the principal amount of $1,650,000 which was furnished by Williams Hospitality Management Corporation to secure the performance of the Partnership in negotiating the acquisition from the Land Administration for Puerto Rico of the existing El Conquistador land and buildings and Kumuagai Properties, Inc. is executing a guaranty of such assumption in the form of Exhibit I annexed hereto. Concurrently herewith, the WKA General Partner is executing an assumption agreement in the form of Exhibit K annexed hereto pursuant to which it is assuming 30% of the liability under the aforesaid irrevocable letter of credit. The Partnership hereby assumes and agrees to defend, indemnify and hold the Resort Manager harmless from and against any liability it may have whatsoever arising under such irrevocable letter of credit. ARTICLE SEVEN CAPITAL ACCOUNTS; ALLOCATION OF PROFITS AND LOSSES SECTION 7.01. DEFINITIONS. As used in this Venture Agreement, the following 47 terms shall have the meanings hereinafter set forth: (A) "Net Income" and "Net Loss" shall mean, for each fiscal year of the Partnership, the Partnership's taxable income or loss for such fiscal year as determined under Code Section 703(a) and Treas. Reg. 'SS' 1.703-1, but with the following adjustments: (1) Net Income and Net Loss shall be adjusted to treat items of tax-exempt income described in Code Section 705(a)(1)(b) as items of gross income, and to treat as deductible items all nondeductible, noncapital expenditures (other than expenses in respect of which an election is made under Code Section 709) describe in Code Section 705(a)(2)(B), including any items treated under Treas. Reg. 'SS' 1.704-1(b)(2)(iv)(i) as items described in Code Section 705(a)(2)(B). (2) Items of Depreciation, and Gain from a Capital Transaction and Net Loss from a Capital Transaction shall be excluded from the computation of Net Income or Net Loss. (B) "Gain from a Capital Transaction" and "Net Loss from a Capital Transaction" shall mean, for each fiscal year of the Partnership, the gain and loss, respectively, realized by the Partnership from a Capital Transaction. SECTION 7.02. DEFINITION OF CAPITAL ACCOUNTS. (A) Capital Accounts. The Partnership shall establish and maintain "Capital Accounts" for each Partner throughout the full term of the Partnership in accordance with Treas. Reg. 'SS' 1.704-1(b)(2)(iv), as such regulation may be amended from time to time. To the extent not inconsistent with such rules, the following provisions shall apply: The Capital Account of each Partner shall be credited with (i) each 48 Partner's Capital Contribution and (ii) such Partner's share of Net Income and Gain from a Capital Transaction (or items thereof). The Capital Account of each Partner shall be debited by (i) the amount of distributions made to such Partner (other than distributions in repayment of debt, as payment of interest or as fees (including the Incentive Management Fee) or reimbursement of expenses) and (ii) such Partner's share of Net Loss, Net Loss from a Capital Transaction and Depreciation (or items thereof) including expenditures which can neither be capitalized nor deducted for tax purposes. (B) "Target Capital Account" shall mean for any Partner the Capital Account of such Partner as of the most recently completed fiscal year which would equal the hypothetical distribution that any such Partner would receive if the Partnership sold all of its assets (including cash) for cash equal to the tax basis of such assets as of the end of such fiscal year (or book value if an adjustment has been made pursuant to Regulation 'SS'1.704-1(b)(2)(iv)(g) and all liabilities allocable to those assets were due and satisfied according to their terms (limited with respect to each nonrecourse liability to the book basis of the assets securing that liability (or book value if an adjustment has been made pursuant to Regulation 'SS'1.704-1(b)(2)(iv)(g)) and all net assets of the Partnership (including the proceeds from the disposition) were distributed pursuant to Section 8.02 hereof as of the last day of such fiscal year reduced by each Partner's share of Partnership Minimum Gain and Partner Minimum Gain immediately prior to the hypothetical sale and such Partner's share of Distributable Cash which if taken into account hereunder shall not be taken into account when distributed. SECTION 7.03. ALLOCATIONS OF INCOME AND LOSS. Income and losses of the Partnership shall be allocated and charged to the Capital Accounts of the Partners in accordance 49 with the provisions of the Appendix attached hereto, all the terms of which are incorporated herein by reference. SECTION 7.04. SPECIAL PARTNERSHIP ELECTION. The Partnership and each of its Partners shall prepare, execute and file appropriate documents and returns with the taxing authorities or otherwise in a manner so as to reduce, minimize or eliminate Puerto Rican income taxes payable including, without limitation, the election by the Partnership to be treated for Puerto Rican income tax purposes as a special purpose partnership. 50 ARTICLE EIGHT PARTNERSHIP DISTRIBUTION SECTION 8.01. DISTRIBUTABLE CASH FROM OPERATIONS. Distributable Cash shall be distributed at least once per year on or before the 120th day following the end of the Resort's fiscal year and shall be distributed and applied in the following order of priority: (A) Payment of the Preferred Return to the KG General Partner and the Class A Limited Partners for such fiscal year to the extent not previously paid from Distributable Cash from a Capital Transaction. If the Distributable Cash is insufficient to pay such Preferred Return in full, then the Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners and the amount of any Preferred Return unpaid shall become Deferred Preferred Return. (B) Payment of any Deferred Preferred Return to the KG General Partner and the Class A Limited Partners. If such Distributable Cash is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash shall be paid to each Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and then to the oldest Preferred Return portions. (C) Payment of the Preferred Return to the WKA General Partner and Class B Limited Partners or such fiscal year to the extent not previously paid from Distributable Cash from a Capital Transaction. If such Distributable Cash is insufficient to pay such Preferred Return in full, then such Distributable Cash shall be paid to each such Partner in the same ratio 51 as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and Class B Limited Partners and the amount of any Preferred Return unpaid shall become Deferred Preferred Return. (D) Payment of any Deferred Preferred Return to the WKA General Partner and Class B Limited Partners. If such Distributable Cash is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and the Class B Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and then to the oldest Preferred Return portions. (E) Payment of the Incentive Management Fee. (F) Any Balance remaining shall be paid to the Partners in accordance with their Residual Partnership Interests. SECTION 8.02. DISTRIBUTABLE CASH FROM A CAPITAL TRANSACTION. As soon as practical after the receipt of the proceeds from a Capital Transaction, the Partnership shall distribute and apply the distributable Cash from a Capital Transaction in the following order of priority: (A) Payment of the Preferred Return to the KG General Partner and the Class A Limited Partners for the current Fiscal Year. If the Distributable Cash from a Capital Transaction is insufficient to pay such Preferred Return in full, then the Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and 52 Class A Limited Partners. (B) Payment of any Deferred Preferred Return to the KG General Partner and the Class A Limited Partners. If such Distributable Cash from a Capital Transaction is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and them to the oldest Preferred Return portions. (C) Payment of the Preferred Return to the WKA General Partner and Class B Limited Partners for the current Fiscal Year. If such Distributable Cash from a Capital Transaction is insufficient to pay such Preferred Return in full, then such Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and Class B Limited Partners. (D) Payment of any Deferred Preferred Return to the WKA General Partner and Class B Limited Partners. If such Distributable Cash from a Capital Transaction is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and the Class B Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and then to the oldest Preferred Return Portions. (E) Payment of any Incentive Management Fee in respect of the fiscal 53 year in which the funds constituting Distributable Cash from a Capital Transaction were received by the Partnership. (F) Payment of any Incentive Management Fee in respect of any preceding fiscal year of the Resort which was earned and not previously paid. (G) To the Partners as return of their respective Capital Contributions in an amount equal to their respective Unrecovered Capital. If the remaining Distributable Cash from a Capital Transaction is less than the Partners' Unrecovered Capital, then the remaining Distributable Cash from a Capital Transaction shall be paid to each Partner in the same proportion as each Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of all Partners. (H) Any balance remaining shall be paid to the Partners in accordance with their respective Residual Partnership Interests. ARTICLE NINE TRANSFERABILITY OF PARTNERS' INTERESTS SECTION 9.01 NO TRANSFER. (A) Except as otherwise set forth in this Article Nine, no Partner may assign, transfer, sell, pledge, hypothecate, exchange or otherwise transfer or dispose of all or any part of its Interest, without the written consent of the General Partners. Any such attempted sale, assignment, transfer, pledge, encumbrance, hypothecation, mortgage or other disposition by a Partner without such consent shall be null and void. No sale, assignment, transfer or other alienation permitted by this Venture Agreement shall constitute or result in a termination of the 54 Partnership unless otherwise expressly provided for herein. For purposes of this Section 9.01, a sale or transfer of all or any portion of the beneficial ownership of any General Partner shall be deemed a transfer of such General Partner's Interest. (B) Notwithstanding anything contained in this Article Nine, no Partner shall sell or offer for sale or solicit offers to purchase or effect any transfer of any Interest in the Partnership whether or not otherwise permitted under this Article Nine to any person (i) in such a manner as to require the registration or qualification of such interest under the Securities Act of 1933, as amended, or under any applicable state, local or foreign securities laws; (ii) if such sale or transfer would result in or create a prohibited transaction under, or cause the Partnership to become a "party in interest" as defined in Section 3(14) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or otherwise result in the holder of an Interest in the Partnership or the assets of the Partnership being subject to the provisions of ERISA; (iii) if any part of the funds to be used in such purchase or transfer to acquire an interest in the Partnership constitutes assets of an employee benefit plan within the meaning of Section 3(3) of ERISA or any trust created under any such plan, or assets of a plan as defined in Section 4975(e)(i) of the Code, or any trust created under any such plan; (iv) if such sale or transfer would constitute or result in a termination of the Partnership under Section 708 (or any successor provision) of the Code; (v) if such sale or transfer would cause the Partnership to cease to be classified as a partnership for federal income tax purposes or the Interest of each Partner 55 to cease to be treated as a partnership interest for federal income tax purposes; (vi) if such sale or transfer would constitute a default under or cause the acceleration of the First Mortgage Loan or Subordinated Mortgage Loan; (vii) if the Puerto Rico Gaming Authorities require such person to be qualified or approved and such person has not been so qualified or approved prior to becoming a Partner; or (viii) if such sale or transfer would adversely affect any tax exemptions granted to the Partnership by the Commonwealth of Puerto Rico. In connection with any sale or transfer, the General Partners or either of them may request counsel to the partnership to render its opinion to the Partnership as to whether such sale or transfer would cause a termination of the Partnership for federal income tax purposes. No offer, sale, transfer, hypothecation or pledge of any Interest may be made unless the Partnership shall have received an opinion of counsel satisfactory to the General Partners that such proposed sale or transfer is exempt from registration under the federal securities laws and any applicable state or local securities laws. SECTION 9.02. NO WITHDRAWAL. Prior to the Commencement Date, no Partner shall withdraw, retire or resign from the Partnership or sell, assign, transfer, pledge or hypothecate its Interest. After the Commencement Date, except as provided in Section 9.06 or 9.07 hereof, no General Partner shall withdraw, retire or resign from the Partnership without the prior written consent of the other General Partner. SECTION 9.03. PERMITTED SALES OF LIMITED PARTNERS' INTERESTS. (A) After the Commencement Date, any Limited Partner may sell, 56 assign or transfer all or any portion of its limited partnership Interest to any of its affiliates, provided that such affiliate is admitted to the Partnership as a Class A or B Limited Partner, as the case may be, as hereinafter provided. (B) Any Limited Partner (the "Selling Partner") desiring to sell or otherwise dispose of all or any part of its Interest as a Limited Partner to an unaffiliated third party after the Commencement Date shall first offer (the "Offer") in writing to sell such Interest or part thereof to the General Partners in equal shares. If the Selling Partner is also a General Partner, such Offer shall only be made to the other General Partner. Such Offer shall set forth the price (the "Offering Price") and the terms at which the Selling Partner desires to sell such Interest including copies of any third party offer received by such Selling Partner. The General Partner(s) receiving such Offer shall have the right, but not the obligation, to accept such Offer by written notice of acceptance within 30 days from their receipt of the Offer. If the Offer is not accepted in full by such General Partners, the Selling Partner shall offer the Interest not so accepted to the General Partner who shall have accepted the Offer and such General Partner shall have the right, but not the obligation, to accept such additional Offer by written notice of acceptance within 30 days from its receipt of such additional Offer. If the Selling Partner is also a General Partner, such additional offer need not be made to such General Partner. The General Partners shall have the right to accept the Offer in such other proportion as they shall agree. If the Offers are not accepted by the General Partners with respect to the entire Interest being offered by such Selling Partner, then the Selling Partner shall be free for a period of 180 days thereafter to enter into a binding contract with an unaffiliated third party for the sale of such Interest for a price not less than 95% of the Offering Price and otherwise on such material terms 57 and conditions as are not more favorable to the purchaser than those contained in the Offer; provided, however, that if the sale of such Interest is not consummated within 60 days after the entry into such contract, the Selling Partner's Interest in the Partnership shall again be subject to the restrictions of this Section 9.03. (C) Upon the consummation of sale or transfer permitted under this Section 9.03, the purchaser or transferee of such Interest shall be admitted as a Class A or Class B Limited Partner, as the case may be. SECTION 9.04. PERMITTED SECURITY INTEREST. WKA shall have the right to grant a security interest in all or any part of its Interests in the Partnership, both as a General Partner and a Limited Partner, to secure payment of the KG Loans as provided in Section 6.03 hereof. SECTION 9.05. WITHDRAWAL OR TRANSFER BY GENERAL PARTNER. (A) A General Partner shall be entitled to withdraw from the Partnership only in connection with a transfer of its General Partner Interest otherwise permitted under this Venture Agreement. (B) Any General Partner (the "Selling General Partner") desiring to sell or otherwise dispose of all of its Interest as a General Partner to an unaffiliated third party at any time after the expiration of nine years after the Commencement Date, shall first Offer in writing to sell such Interest to the other General Partner. Such Offer shall set forth the Offering Price and the terms at which the Selling General Partner desires to sell such Interest including copies of any third party offer received by such Selling General Partner. The other General Partner shall have the right, but not the obligation, to accept such offer, in whole but not in part, by written notice of acceptance within 30 days from their receipt of the Offer. If the Offer is 58 not accepted in full by such General Partner or the Selling General Partner is the sole remaining General Partner, then the Selling General Partner shall offer the Interest to the Limited Partners, other than Limited Partners who are also General Partners, and such Limited Partners shall have the right to accept such additional Offer in proportion to their respective Residual Partnership Interests, by written notice of acceptance within 30 days from their receipt of such additional Offer. If the Offer is not accepted in full by such Limited Partners, the Selling General Partner shall Offer the Interest not so accepted to the Limited Partners who shall have accepted the Offer and such Limited Partners shall have the right, but not the obligation, to accept such additional Offer in proportion to their respective Residual Partnership Interests, by written notice of acceptance given within 15 days of their receipt of such additional offer. The Limited Partners entitled to receive an Offer from the General Partner shall have the right to accept the Offers in such other proportion as they shall agree. If the Offers are not accepted by the General and/or Limited Partners with respect to the entire General Partner Interest of such Selling General Partner, then the Selling General Partner shall be free for a period of 180 days thereafter to enter into a binding contract with an unaffiliated third party for the sale of such Interest for a price not less than 95% of the Offering Price for such Interest and otherwise on such material terms and conditions as are not more favorable to the purchaser than those contained in the Offer; provided, however, that if the sale of such Interest is not consummated within 60 days after entry into such contract, the Selling General Partner's Interest in the Partnership shall again be subject to the restrictions of this Section 9.05; (C) Upon the consummation of any sale or transfer permitted under this Section 9.05, the purchasers or transferees of such Interest shall be admitted as a General 59 Partner except that if the Selling Partner is not the sole remaining General Partner, the remaining General Partner(s) may require that such purchaser or transferee be admitted only as a Limited Partner: a Class A Limited Partner if the Selling General Partner was the KG General Partner and a Class B Limited Partner if the Selling General Partner was the WKA General Partner. SECTION 9.06. EFFECT OF BANKRUPTCY, DEATH OR INCOMPETENCE OF A LIMITED PARTNER. The Bankruptcy, death or dissolution of a Limited Partner or an adjudication that a Limited Partner is incompetent (which term shall include, but not be limited to, insanity), shall not cause the termination or dissolution of the Partnership, and the business of the Partnership shall continue. In the event of the Bankruptcy, death or dissolution of a Limited Partner, the trustee, receiver, executor, administrator or trustee of its estate, or if he is adjudicated incompetent, his committee, guardian or conservator, shall have the rights of such Limited Partner for the purpose of settling or managing his estate or property and such power as the Bankrupt, deceased, dissolved or incompetent Limited Partner possessed to assign all or any part of its Interest and to join with the assignee in satisfying conditions precedent to the admission of the assignee as a Limited Partner. The estate of a deceased, dissolved or incompetent Limited Partner shall not be relieved of any liabilities and obligations of the deceased, dissolved or incompetent Limited Partner to the Partnership under this Agreement. SECTION 9.07. BANKRUPTCY OF A GENERAL PARTNER. In the event of the Bankruptcy or dissolution of a General Partner, the Partnership shall not be dissolved unless such General Partner is the sole remaining General Partner. Upon the Bankruptcy or dissolution of a General Partner, provided the Partnership is not thereby dissolved, such Genal Partner shall immediately cease to be a General Partner and its Interest as a General Partner shall become the Interest of 60 a Limited Partner (Class A Limited Partner if such Bankrupt General Partner is the KG General Partner and a Class B General Partner if such Bankrupt General Partner is the WKA General Partner). Such event shall not affect any rights, including rights to fees hereunder, or liabilities of the former General Partner which matured or were earned prior to the Bankruptcy or dissolution or the value at the time of such Bankruptcy or dissolution of its Interest. If at the time of the Bankruptcy or dissolution of a General Partner such General Partner was not the sole General Partner of the Partnership, the remaining General Partner shall immediately make such amendments of this Venture Agreement and execute and file such amendments, certificates or other instruments as are necessary to reflect the withdrawal. SECTION 9.08. EFFECT OF TRANSFER. A Partner selling, transferring or assigning all or any portion of its Interest hereunder shall pay all taxes and fees incurred by the Partnership or any other Partner as a result of any transfer of all or any portion of such Partner's Interest in the Partnership. Any purchaser, transferee or assignee of a Partner's Interest shall be bound by all of the terms and conditions of this Venture Agreement, including this Article Nine, with the same force and effect as if such transferee had been a signatory and an original party to this Venture Agreement in the place and stead of its transferor. No sale, transfer or assignment shall be effective and no purchaser, transferee or assignee of any Interest shall be admitted to the Partnership unless and until such purchaser, transferee or assignee shall have accepted and agreed to be bound by the terms and conditions of this Venture Agreement and expressly assumed all obligations of the transferor with respect to such Interest, except those obligations which are enforceable against the transferor only by foreclosure of a lien or encumbrance on the Project or the other property or assets of the Partnership by executing a 61 counterpart hereof and other appropriate instruments and shall have delivered such executed counterparts and instruments to each of the General Partners. ARTICLE TEN RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS SECTION 10.01. MANAGEMENT OF THE PARTNERSHIP. No Limited Partner as such shall take part in the management or control of the business of the Partnership or transact any business in the name of the Partnership. No Limited Partner as such shall have the power or authority to bind the Partnership or to sign any agreement or document in the name of the Partnership. No Limited Partner shall have any power or authority with respect to the Partnership. SECTION 10.02. LIMITATION ON LIABILITY OF LIMITED PARTNERS. The liability of each Limited Partner shall be limited to its Capital Contribution as and when it is payable under the provisions of this Venture Agreement. No Limited Partner as such shall have any other liability to contribute money to, or in respect of the liabilities or obligations of, the Partnership, nor shall any Limited Partner as such be personally liable for any obligations of the Partnership except as otherwise provided by law. No Limited Partner as such shall be obligated to make loans to the Partnership. SECTION 10.03. LIABILITY TO LIMITED PARTNERS. The General Partners shall have no fiduciary obligations to the Limited Partners as provided by the Act or the law of the State of Delaware or any other jurisdiction absent gross negligence or willful misconduct on the part of the General Partner sought to be held liable. The Limited Partners shall look solely to the 62 assets of the Partnership for any liability owed to them including any return of their Capital Contributions and shall not look to the General Partners to satisfy any such liabilities. SECTION 10.04. POWER OF ATTORNEY. Each Class A Limited Partner hereby makes, constitutes and appoints the KG General Partner and each Class B Limited Partner hereby makes, constitutes and appoints WKA, its true and lawful attorney for itself and in its name, place and stead to make, execute, sign, acknowledge, file for recording at the appropriate public offices, and public such documents as may be necessary to carry out the provisions of this Venture Agreement, including (i) this Venture Agreement and amendments to this Venture Agreement, (ii) any certificate and such other certificates or instruments as may be required by law or are necessary to the conduct of the Partnership business. Each Class A Limited Partner shall execute and deliver to the KG General Partner and each Class B Limited Partner shall execute and deliver to WKA, within five (5) days after receipt of the respective General Partner's written request therefor, such other and further powers of attorney and instruments as the KG General Partner or WKA deems necessary to carry out the purpose of this Section. The foregoing grant of authority is hereby declared to be irrevocable and a power coupled with an interest and shall not be affected by the Bankruptcy, death or disability of any Limited Partner and the assignment by any Limited Partner of its Interest; provided that in the event of an assignment of its entire Interest, the foregoing power of attorney of an assignor Limited Partner shall survive such assignment only until such time as the assignee is admitted to the Partnership as a Limited Partner and all required documents and instruments have been duly executed, filed and recorded to effect such substitution. In the event of any conflict or inconsistency between the provisions of this Venture Agreement and any document executed, signed or acknowledged 63 by the KG General Partner and/or WKA or filed for recording or published pursuant to the power of attorney granted in this Section, this Venture Agreement shall govern. ARTICLE ELEVEN APPROVALS SECTION 11.01. PUERTO RICO GAMING AUTHORITY APPROVAL. Each General Partner shall use its best efforts to obtain and thereafter maintain all consents, approvals and authorizations which must be obtained and maintained by such party in order to consummate the transactions contemplated thereby and operate the Project as a first class luxury resort as presently contemplated, including, without limitation, all consents, approvals and authorizations from the Treasury of the Commonwealth of Puerto Rico and any other governmental body or agency having authority over licensing of gambling in the Commonwealth of Puerto Rico and any tax exemption granted to the Partnership by the Commonwealth of Puerto Rico; provided. however, that nothing contained in this Article Eleven shall require any General Partner to consent to modify any provisions of this Venture Agreement or any other document referred to herein in any manner materially adverse to its best interests. SECTION 11.02. APPROVAL OF JAPANESE MINISTRY OF FINANCE. The KG General Partner shall use its best efforts to obtain as promptly as practical all approvals of the Japanese Ministry of Finance or other governmental authorities as may be necessary to permit the KG General Partner to invest in the Partnership and perform its obligations hereunder. 64 ARTICLE TWELVE PARTNERSHIP OBLIGATIONS SECTION 12.01. NATURE OF OBLIGATIONS. The General Partners are acting as joint developers of the Project and are sharing responsibility for completing the Project on time and within a budget mutually agreed to by the General Partners, all in accordance with the terms of this Venture Agreement. Except as provided in Article Three with respect to Capital Contributions and Article Six with respect to Deficiency Loans and KG Loans, all obligations of and expenses and losses incurred by the Partnership or any General Partner on behalf of the Partnership, and all payments made by the General Partners in connection with the Partnership and the Project, including any liability for damages arising out of claims or actions against any of the General Partners on account of the ownership or operation of the Project, shall be obligations of the Partnership and shall be satisfied out of the assets of the Partnership. Any indebtedness of this Partnership, including any loans contemplated by this Venture Agreement, which is secured by a mortgage, security interest or other lien or encumbrance on the Project or the interests of the Partners in the Partnership, its assets, profits and distributions and any mortgages, security interests or other liens or encumbrances executed or granted in connection therewith, shall expressly provide (unless the General Partners shall otherwise agree in writing) that the obligee shall look solely to its security interest in the Project or the interests of the Partners in the Partnership, its assets, profits and distributions for the payment of any and all amounts due under the term of such instruments and that the Partners shall have absolutely no personal liability for the payment of such indebtedness or for any deficiency judgment resulting from the foreclosure of such mortgage, security interest or liens. 65 SECTION 12.02. INDEMNITIES. (A) The Partnership shall defend, indemnify and hold harmless each General Partner from and against all claims, demands, actions, suits, proceedings, losses, liabilities, damages, deficiencies, costs or expenses (including interest, penalties and reasonably, attorneys fees and disbursements (collectively, "Losses") arising from (i) any act taken on behalf of or reasonably believed by such General Partner to be taken on behalf of the Partnership other than willful misconduct or gross negligence of the indemnified General Partner. (B) Each General Partner shall defend, indemnify and hold the Partnership and the other General Partner harmless against and from all Losses which shall or may arise by reason of anything done or omitted to be done by the indemnifying General Partner (through or by its agents, employees or other representatives) constituting gross negligence or willful misconduct. (C) Each General Partner shall defend, indemnify and hold the Partnership and the other General Partner harmless against and from any Loss asserted by a transferee of all or any portion of such General Partner's Interest as a Limited Partner. (D) For purposes of this Section, the party entitled to indemnification shall be known as the "Injured Party" and the party required to indemnify shall be known as the "Other Party." In the event that the Other Party shall be obligated to the Injured Party pursuant to this Section or in the event that a suit, action, investigation, claim or proceeding is begun, made or instituted as a result of which the Other Party may become obligated to the Injured Party hereunder, the Injured Party shall give prompt written notice to the Other Party of the occurrence of such event. The Other Party shall have the right to defend, contest or otherwise 66 protect against any such suit, action, investigation, claim or proceeding at the Other Party's own cost and expense by counsel of its own choice reasonably satisfactory to the Injured Party. The Injured Party shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of its own choice. In the event that the Other Party fails timely to defend, contest or otherwise protect against any such suit, action, investigation, claim or proceeding, the Injured Party shall have the right to defend, contest or otherwise protect against the same and may make any compromise or settlement thereof and recover the entire cost thereof from the Other Party, including, without limitation, reasonable attorneys fees, disbursements and all amounts paid as a result of such suit, action, investigation, claim or proceeding or compromise or settlement thereof. In the event the Injured Party elects at any time not to seek or continue to rely upon indemnification from the Other Party with respect to any Loss, it shall have the right to pay, defend, contest or otherwise protect against the same at its sole cost and expense and the Other Party shall have no liability to the Injured Party in respect of such Loss and no right to defend or participate in the defense of such Loss. Anything to the contrary herein notwithstanding, prior to finally settling any such claim, suit, action or proceeding, the Other Party shall give the Injured Party notice of its intention to settle same and the terms of such proposed settlement. If the Injured Party shall object to such proposed settlement within ten days after its receipt of such notice, then the Injured Party shall thereafter, at its sole expense, assume the control and defense of such claim, suit, action or proceeding. In such event, the Other Party shall not be relieved from its obligations hereunder but such obligation shall be limited with respect to the amount of such claim, suit, action or proceeding in the sense that its liability may not be greater than the amount for which the same could have been settled 67 as proposed by the Other Party and will not be greater than the amount for which such suit, action, claim, investigation or proceeding is ultimately resolved. If the Injured Party does not object to the terms of the proposed settlement within the aforesaid ten day period, then the Other Party shall have the right to consummate such proposed settlement upon the terms set forth in the aforesaid notice. Failure to give the Other Party timely notice of any claim, suit, action or proceeding shall in no way relieve such party from its obligation to indemnify the Injured Party except to the extent of losses actually caused to the Other Party by reason of such failure. ARTICLE THIRTEEN TERMINATION AND LIQUIDATION SECTION 13.01. TERMINATION. The Partnership shall terminate upon the occurrence of any one of the following events: (A) The end of its term as provided in Section 2.04 hereof. (B) Mutual agreement of the General Partners. (C) The sale or abandonment of all or substantially all of the Resort. (D) Bankruptcy of the sole remaining Genal Partner unless within 90 days after such Bankruptcy, all Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal of the Bankrupt General Partner, of one or more additional General Partners. SECTION 13.02. WINDING UP. Upon termination of the Partnership for any reason, the Partnership shall continue its business solely for the purpose of winding up its affairs and shall be liquidated as rapidly as business judgment permits. All decisions with respect to 68 disposition of Partnership assets, collection or compromise of any amounts receivable and payment or compromise of any amounts payable by the Partnership shall be made only with the consent of all General Partners except any General Partner who is in Bankruptcy. The assets of the Partnership or proceeds thereof shall be applied for the following purposes in the following order: (A) Payment or provision for payment of all just debts and obligations of the Partnership to creditors (other than Deficiency Loans, Additional Loans, Preferred Returns, Deferred Preferred Returns and Incentive Management Fees) and for the expenses of winding up the affairs of the Partnership. (B) Payment of interest and then principal on the Deficiency Loans and Additional Loans in the order of priority and in such proportions as set forth in Section 6.04 hereof. (C) Payment of Distributable Cash in accordance with Section 8.01 with respect to any Fiscal Year for which such distributions had not been made. (D) In accordance with the order of priority of the distribution of Distributable Cash from a Capital Transaction as provided in Section 8.02 hereof. 69 ARTICLE FOURTEEN REPRESENTATIONS, WARRANTIES AND ADDITIONAL COVENANTS SECTION 14.01. DUE ORGANIZATION. (A) Kumugai Caribbean, Inc. represents and warrants to each Partner that it is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has all necessary power and authority, corporate or otherwise, to enter into this Venture Agreement, own its Interests and perform its obligations hereunder. (B) WKA represents and warrants to each Partner that it is a genal partnership duly organized under the laws of the State of New York and has all necessary power and authority under its partnership agreement to enter into this Venture Agreement, own its Interests and perform its obligations hereunder. SECTION 14.02. DUE EXECUTION AND DELIVERY. Each Partner represents and warrants to each other Partner that the execution, delivery and performance by such Partner of this Venture Agreement have been duly authorized by all necessary corporate or partnership action, as the case may be, on the part of such Partner, and no further action or approval is required in order to constitute this Venture Agreement as the valid and binding obligation of such Partner, enforceable in accordance with its terms. SECTION 14.03. BINDING OBLIGATION. Each Partner represents and warrants to each other Partner that this Venture Agreement constitutes the legal, valid and binding obligation of such Partner, enforceable in accordance with its terms. SECTION 14.04. INVESTMENT. Each Partner represents and warrants to each other 70 Partner that such Partner is acquiring its interest in the Partnership for its own account and without a view to sale or distribution. SECTION 14.05. OWNERSHIP OF KG GENERAL PARTNER. The KG General Partner represents and warrants to WKA that all of its outstanding capital stock is issued to and beneficially owned by Kumugai Properties, Inc., that Kumugai Properties, Inc. has the sole right to own and control the KG General Partner and that no other person, firm or entity has any rights in or right to acquire any interest in the KG General Partner. SECTION 14.06. OWNERSHIP OF WKA GENERAL PARTNER. WKA represents and warrants to the KG General Partner that it is directly or indirectly controlled by WMS Industries, Inc., Burton and Richard Koffman and Hugh A. Andrews and that no unaffiliated person, firm or entity has any rights to acquire any interest in WKA. ARTICLE FIFTEEN MISCELLANEOUS SECTION 15.01. FURTHER ASSURANCES. Each Partner hereby agrees to execute and deliver all such other and additional instruments and documents and do all such other acts and things as may be necessary to more fully effectuate this Venture Agreement and carry on the business contemplated herein. SECTION 15.02. EXPENSES. All costs, expenses and fees incurred by any General Partner in connection with the formation and/or operation of the business of this Partnership, the preparation, negotiation and execution of this Venture Agreement and the acquisition of the Project shall be paid for and borne by the Partnership and each General Partner shall be entitled to be reimbursed for any of such amounts paid directly by it. All of the foregoing amounts, 71 other than those incurred in connection with the operation of the business of the Partnership, shall be included in the Total Project Costs. SECTION 15.03. NOTICES. All notices, requests, statements, offers, acceptances or other writings required or permitted to be given or furnished hereunder to any Partner shall be deemed sufficiently given or furnished if in writing and delivered personally to such Partner, transmitted by confirmed fax, deposited in the United States mail, in a sealed envelope, certified, with postage prepaid, or sent by responsible overnight delivery service addressed to such Partner, at its address set forth on Exhibit H hereof or at such other address as such Partner shall have previously designated by written notice to the other Partners and shall be effective when personally delivered or transmitted, five business days after mailing or the next business day after delivery to a responsible overnight delivery service. SECTION 15.04. EQUITABLE REMEDIES. In the event of a breach or threatened breach of this Venture Agreement by any Partner, the remedy at law in favor of the other Partners will be inadequate and such other Partners, in addition to all other rights which may be available, shall accordingly have the right of specific performance in the event of any breach, or injunction in the event of any threatened breach, of this Venture Agreement by any Partner. SECTION 15.05. REMEDIES CUMULATIVE. Except as otherwise provided herein, each right, power and remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for herein, or now or hereafter existing at law, in equity, by statute or otherwise, and the exercise or beginning of the existence or the forbearance of exercise by any party of any one or more of such rights, powers or remedies shall not preclude the 72 simultaneous or later exercise by such party of any or all of such other rights, power or remedies. SECTION 15.06. CAPTIONS; PARTIAL INVALIDITY. The captions, Section numbers and Article numbers appearing in this Venture Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such Sections or Articles of this Venture Agreement nor in any way affect this Venture Agreement. If any term, covenant or condition of this Venture Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Venture Agreement, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Venture Agreement shall be valid and be enforced to the fullest extent permitted by law. SECTION 15.07. ENTIRE AGREEMENT. This Venture Agreement and the other documents and instruments being delivered concurrently herewith shall constitute the entire agreement among the Partners with respect to the Partnership, all prior agreements among the partners, whether written or oral, begin merged herein and of no further force and effect. This Venture Agreement cannot be changed, modified or discharged orally but only by an agreement in writing executed by all General Partners. The Venture Agreement shall be amended as may be necessary to reflect the subsequent addition, substitution or deletion of any Partner. SECTION 15.08. APPLICABLE LAW. This Venture Agreement shall be interpreted and construed under and governed by the Act and the laws of the State of Delaware applicable to agreements executed and performed entirely within that State. 73 SECTION 15.09. COUNTERPARTS. This Venture Agreement may be executed in several original counterparts, each of which shall for all purposes be deemed an original, and all of such counterparts shall together constitute but one and the same agreement. SECTION 15.10. SUCCESSORS. All of the provisions of this Venture Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Partners hereto. Any Partner who makes a transfer or assignment of all of its Interest permitted by the terms of this Venture Agreement shall have no further liability or obligation hereunder, except with (i) respect to claims arising prior to such transfer or assignment and the obligation to make Capital Contributions, (ii) that no assignment shall relieve the KG General Partner from its obligation to make Deficiency Loans or KG Loans, (iii) no transfer by WKA shall impair or impede the obligation of the WKA General Partner to repay the KG Loans in accordance with their terms or impair or impede the validity or integrity of the security interest granted to the KG General Partner in the Interests of WKA in the Partnership and any such transfer shall be expressly subject thereto. References in this Venture Agreement to one or more of the parties hereto, or to a "Partner" or the "Partners" shall, in the case of a transfer or assignment of any such Partner's Interest which is permitted by this Venture Agreement, be deemed to be, or to include, as the case may be, a reference to such permitted assignee or transferee and shall not be deemed to include a reference to the Partner who has transferred or assigned such Interest. SECTION 15.11. CONFIDENTIALITY. Each Partner agrees not to issue any press release or make any public announcement no public statement regarding this Venture Agreement without the consent of the other Partner, except as may be required by law. 74 IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first written. WKA EL CON ASSOCIATES By: WMS El Con Corp., Partner By:/s/ ............................ Norman J. Menell, President By: International Textile Products of Puerto Rico, Inc., Partner By:/s/ ............................ Richard E. Koffman, Vice President By: KMA Associates of Puerto Rico, Inc., Partner By:/s/ ............................ Richard E. Koffman, Vice President By: Hospitality Investor Group, S.E., Partner By:/s/ ............................ Hugh A. Andrews, President KUMAGAI CARIBBEAN, INC. By:/s/ ............................ Takayuki Furuta, Chairman 75 State of Hawaii ) : ss.: City and County of Honolulu ) On January 12, 1990 before me personally came Norman J. Menell, to me known and known to me to be President of WMS El Con Corp., the corporation described in and who executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors. /s/ .............................. Notary Public 76 State of Hawaii ) : ss.: City and County of Honolulu ) On January 12, 1990 before me personally came Richard E. Koffman, to me known and known to me to be Vice President of International Textile Products of Puerto Rico, Inc., the corporation described in and who executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors. /s/ ............................... Notary Public 77 State of Hawaii ) : ss.: City and County of Honolulu ) On January 12, 1990 before me personally came Richard E. Koffman, to me known and known to me to be Vice President of KMA Associates of Puerto Rico, Inc., the corporation described in and who executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors. /s/ ............................... Notary Public 78 State of Hawaii ) : ss.: City and County of Honolulu ) On January 12, 1990 before me personally came Hugh A. Andrews, to me known and known to me to be President of HASN, Inc., the corporation described in and who executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors. /s/ ............................... Notary Public 79 State of Hawaii ) : ss.: City and County of Honolulu ) On January 12, 1990 before me personally came Takayuki Furuta, to me known and known to me to be Chairman of Kumagai Caribbean, Inc., the corporation described in and who executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors. /s/ ............................... Notary Public 80 APPENDIX The following constitutes an Appendix to the EL CONQUISTADOR PARTNERSHIP L.P. VENTURE AGREEMENT, dated January 12, 1990 and shall be deemed a part thereof as if fully set forth therein. All capitalized terms used herein shall have the same meaning ascribed to such terms in the Venture Agreement except as otherwise defined herein. The allocations to the Capital Account of each Partner for Federal income tax purposes of Net Income, Gain from a Capital Transaction, Net Loss, Net Loss from a Capital Transaction and Depreciation or, where required, the allocation of items or elements of any of the foregoing, and the allocation of gross income, if required, shall be made in accordance with this Appendix. The Partners wish to have the allocations made in accordance with Article I of this Appendix but recognize that under certain circumstances such allocations may diverge from allocations that may be required to be made for tax purposes. Article II of this Appendix sets forth certain targets which must be met by the Allocations in Article I. To the extent that there is divergence between the results of allocations under Article I and Article II, Article I is subject to Article II. Article II prescribes the order in which the allocations in Article I are to be adjusted if such adjustments are required to bring the Article I allocations into conformity with the results mandated by Article II. Article III sets forth certain provisions required by the Regulations and both Article I and Article II are subject to Article III. I. ALLOCATIONS OF NET INCOME, NET LOSS, GAIN OR NET LOSS FROM A CAPITAL TRANSACTION AND DEPRECIATION 1. NET INCOME: For each fiscal year of the Partnership with respect to which the operations of the Partnership have produced Net Income, 50% of such Net Income shall be allocated and credited to the Capital Accounts of the Class A Limited Partners and the KG General Partner in proportion to their respective Residual Partnership Interests and 50% of such Net Income shall be allocated and credited to the Capital Accounts of the WKA General Partner and the Class B Limited Partners in proportion to their respective Residual Partnership Interests (the foregoing allocation being referred to as the "50-50 ratio") provided that an amount of Net Income up to the amount of the Preferred Return for such fiscal year shall first be allocated and credited 70% to the Capital Accounts of the Class A Limited Partners and the KG General Partner in proportion to their Contribution Ratios and 30% to the Capital Account of the WKA General Partner and the Class B Limited Partners in proportion to their respective Contribution Ratios, and further provided that allocations in the 50-50 ratio shall only exceed the amount of Distributable Cash to be distributed in such ratio to the extent the Capital Account of each of the Partners after giving effect to distributions of such Net Income for the Fiscal Year in the 50- 50 ratio would exceed its Unrecovered Capital plus such Partner's Deferred Preferred Return. 2. NET LOSS: For each year of the Partnership with respect to which the operations of the Partnership have produced a Net Loss such Net Loss shall be allocated and charged to the Capital Accounts of the Partners in the following manner: FIRST: 50% to the KG General Partner and the Class A Limited Partners in proportion to their respective Residual Partnership Interests and 50% to the WKA General Partner and the Class B Limited Partners in proportion to their respective Residual A-2 Partnership Interests to the extent of the respective allocations to them of the excess of (X) prior allocations of Net Income made in the 50-50 ratio plus current and prior allocations of Gain from a Capital Transaction made in the 50-50 ratio over the sum of (Y) distributions of Operating Cashflow and Extraordinary Cashflow made in the 50-50 ratio and prior allocations made in the 50-50 ratio of (i) Net Loss, (ii) Net Loss from a Capital Transaction, and (iii) Depreciation; SECOND: 70% to the KG General Partner and the Class A Limited Partners in proportion to their respective Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their respective Contribution Ratios until the Capital Account of any Partner has been reduced to zero; THIRD: to any Partner or Partners with a positive balance in its Capital Account until each Partner's Capital Account has been reduced to zero; and if more than one Partner has a Positive Capital Account as near as possible to the ratio set forth in paragraph SECOND, until no Partner has a Positive Capital Account. FOURTH: 100% to the KG General Partner and the Class A General Partners in the ratio of their respective Contribution Ratios up to the lesser of an additional $20 million or the Partner Nonrecourse Debt in respect of Deficiency Loans in accordance with and subject to the principles of Section 2 of Article III of this Appendix. FIFTH: to the General Partners in proportion to their Residual Partnership Interests. Notwithstanding the foregoing, Nonrecourse Deductions shall be allocated 70% to the KG General Partner and the Class A Limited Partners in proportion to their respective A-3 Contribution Ratios, and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their respective Contribution Ratios. 3. GAIN FROM A CAPITAL TRANSACTION. Gain from a Capital Transaction realized by the Partnership after giving effect to Sections 3 and 4 of Article III of this Appendix shall be allocated as follows after giving effect for purposes of paragraph FOURTH of this Section to the distribution of the Preferred Return and the Deferred Preferred Return but otherwise prior to giving effect to any other distribution of Extraordinary Cash Flow in respect of such transaction: FIRST: up to the deficit balance in each Partner's Capital Account (i) in the ratio of 50% to the KG General Partner and the Class A Limited Partners in proportion to their Contribution Ratios and 50% to the WKA General Partner and the Class B Limited Partners in proportion to their Contribution Ratios or such other ratio as will cause the deficits in their Capital Accounts to be in the Prescribed Ratio and (ii) thereafter in the ratio of 70% to the KG General Partner and the Class A Limited Partners in proportion to their Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partner in proportion to their Contribution Ratios until the Partners' Capital Accounts shall no longer be negative; SECOND: to the KG General Partner and the Class A Limited Partners in proportion to their Contribution Ratios to the extent their Capital Accounts are less than the amounts distributable to them under paragraphs A and B of Section 8.02 of the Venture Agreement in respect of such transaction; THIRD: to the WKA General Partner and the Class B Limited Partners in proportion to their Contribution Ratios to the extent their Capital Accounts are less A-4 than the amounts distributable to them under paragraphs C and D of Section 8.02 of the Venture Agreement in respect of such transaction; FOURTH: to either the KG General Partner and the Class A Limited Partners on the one hand, or the WKA General Partner and the Class B Limited Partners, on the other, the amount or amounts if any necessary to cause the Capital Account of such Partners to be in the same ratio to their Unrecovered Capital as the ratio of the other Partners' Capital Accounts is to their Unrecovered Capital; and thereafter 70% to the KG General Partner and the Class A Limited Partners in proportion to their Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their Contribution Ratios until each Partner's Capital Account is equal to its Unrecovered Capital; FIFTH: to the Partners in accordance with their respective Residual Partnership Interests. 4. NET LOSS FROM A CAPITAL TRANSACTION. Net Loss from a Capital Transaction shall be charged to the Capital Accounts of the Partners and allocated as follows: FIRST: 50% to the KG General Partners and the Class A Limited Partners in proportion to their Residual Partnership Interests and 50% to the WKA General Partners and the Class B Limited Partners in proportion to their Residual Partnership Interests to the extent in the case of each Partner of the excess of (X) current and prior allocations of Net Income plus prior allocations of Gain from a Capital Transaction made in the 50-50 ratio over the sum of (Y) distributions made in the 50-50 ratio, current and prior allocations of Net Loss made in the 50-50 ratio, prior allocations of Net Loss from a Capital Transaction made in the 50-50 ratio and prior allocations of Depreciation made in the 50-50 ratio. A-5 SECOND: 70% to the KG General Partner and the Class A Limited Partners in proportion to their Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their Contribution Ratios until the Capital Account of any Partner shall be reduced to zero; THIRD: to any Partner or Partners with a positive balance in its Capital Account until each Partner's Capital account has been reduced to zero and if more than one Partner has a Positive Capital Account in proportion to their respective Contribution Ratios or as near as possible to such ratios until no Partner has a Positive Capital Account; and FOURTH: to the General Partners in proportion to their Residual Partnership Interests, subject to Section 2 of Article III of this Appendix. 5. ALLOCATION OF DEPRECIATION. (A) For each fiscal year of the Partnership there shall be charged to the Capital Account of each Partner, and allocated to each Partner for income tax purposes, an amount of the Depreciation as follows: FIRST: 50% to the KG General Partner and the Class A Limited Partners in proportion to their Residual Partnership Interests and 50% to the WKA General Partner and the Class B Limited Partners in proportion to their Residual Partnership Interests to the extent of the excess in the case of each Partner of (X) current and prior allocations of Net Income and Gain from a Capital Transaction made in the 50-50 ratio over the sum of (Y) distributions of Operating Cashflow and Extraordinary Cashflow made in the 50-50 ratio, current and prior allocations of Net Loss and Net Loss from a Capital Transaction made in the 50-50 ratio, and prior allocations under this paragraph FIRST; A-6 SECOND: depreciation shall be allocated to the Partners in the ratio of 70% to the KG General Partner and the Class A Limited Partners in proportion to their respective Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their respective Contribution Ratios until the Capital Account of any Partner shall be reduced to zero; THIRD: to any Partner or Partners with a positive balance in its Capital Account until each Partner's Capital Account has been reduced to zero and if more than one Partner has a Positive Capital Account in proportion to their Contribution Ratios or as near as possible to such ratios until no Partner has a Positive Capital Account; and FOURTH: subject to Section 2 of Article III of this Appendix, any remaining Depreciation shall be allocated 70% to the KG General Partner and the Class A Limited Partners in proportion to their Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their Contribution Ratios. Notwithstanding the foregoing paragraphs FIRST through FOURTH, Depreciation which is a Nonrecourse Deduction shall be allocated 70% to the KG General Partner and the Class A Limited Partners in proportion to their respective Contribution Ratios and 30% to the WKA General Partner and the Class B Limited Partners in proportion to their respective Contribution Ratios. (B) Recapture shall be allocated to the Partners as follows (i.e., the portion of the gain allocated to a Partner which constitutes Recapture shall be determined as follows): to the extent possible, there shall be allocated to each Partner that portion of such Recapture which is equal to the fraction, the numerator of which is the Depreciation deductions A-7 that generated such Recapture (or other items of deduction that generated such Recapture) allowable with respect to the Partnership property being sold theretofore allocated to such Partner (or a predecessor in interest to such Partner), and the denominator of which is the total Depreciation deductions that generated such Recapture (or other items of deduction that generated such Recapture) allowable with respect to the Partnership property being sold theretofore allocated to all Partners provided, however, that under no circumstances shall there be allocated to any Partner Recapture in excess of the Gain from a Capital Transaction allocated to such Partner (and such excess shall be allocated instead to the other Partners). II. ALLOCATIONS TO CONFORM TO TARGET CAPITAL ACCOUNTS. If the Capital Account of a Partner at the end of any fiscal year as determined by the application of Articles I and III differs from that Partner's Target Capital Account, the allocations provided for in Article I of this Appendix shall be modified so that each Partner's Capital Account shall equal its Target Capital Account. Modification pursuant to the preceding sentence shall be subject to the requirements that (i) the ceiling rule as set forth in Code Section 1.704-1(c)(2) as it may be applied by the Internal Revenue Service will not be violated and (ii) the provisions of Article III of this Appendix may not be violated. Subject to the foregoing, the modifications required hereunder shall be made by first reallocating Net Income or Net Loss, as the case may be, and then reallocating Gain or Net Loss from a Capital Transaction, as the case may be, and then by reallocating Depreciation. III. EXCEPTIONS. Notwithstanding anything to the contrary contained in this Appendix, the following shall apply: 1. GENERAL LIMITATION: No allocation shall be made to a Partner which A-8 would cause such Partner to have a deficit balance in its Adjusted Capital Account which exceeds the sum of such Partner's share of Partnership Minimum Gain and such Partner's Share of Minimum Gain Attributable to Partner Nonrecourse Debt. If the limitation contained in the preceding sentence would apply to cause an item of Net Loss or deduction to be unavailable for allocation to all Partners then such item of Net Loss or deduction shall be allocated among the Partners in accordance with the WKA General Partner's best judgment as to the manner in which the loss or deduction will be borne. 2. PARTNER NONRECOURSE DEDUCTIONS: Any and all items of Net Loss and deduction and any and all expenditures described in Section 705(a)(2)(B) of the Code (or treated as expenditures so described pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations) (collectively, "Partner Nonrecourse Deductions") that are (in accordance with the principles set forth in Section 1.704-IT(b)(4)(iv)(h)(3) of the Regulations) attributable to Partner Nonrecourse Debt shall be allocated to the Partner that bears the Economic Risk of Loss for such Partner Nonrecourse Debt. If more than one Partner bears such Economic Risk of Loss, such Partner Nonrecourse Deductions shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss. 3. PARTNERSHIP MINIMUM GAIN: If there is a net decrease in Partnership Minimum Gain for any fiscal year of the Partnership, there shall be allocated to each Partner for such fiscal year, before any other allocation is made of Partnership items under Article I or Article II of this Appendix, items of income and gain for such year (and, if necessary, for subsequent years) in proportion to, and to the extent of, an amount equal to the greater of: (1) the portion of such Partner's share of the net decrease in Partnership Minimum Gain during such A-9 fiscal year that is allocable (in accordance with the principles set forth in Section 1.704-IT(b)(4)(iv)(e)(2) of the Regulations) to the sale or other disposition of Partnership property subject to one or more Nonrecourse Liabilities of the Partnership; or (2) the deficit balance in such Partner's Adjusted Capital Account at the end of such fiscal year. The amount of such deficit balance which needs to be eliminated shall be reduced by the amount of such Partner's Share of Partnership Minimum Gain and such Partner's Share of Minimum Gain Attributable to Partner Nonrecourse Debt (computed, in each case, by reference to the amount of Partnership Minimum Gain and Minimum Gain Attributable to Partner Nonrecourse Debt after taking into account any changes thereto during such fiscal year). Items of income and gain to be allocated pursuant to the foregoing provisions of this paragraph shall consist first of gains recognized from the disposition of items of Partnership property subject to one or more Nonrecourse Liabilities of the Partnership to the extent of the decrease in Partnership Minimum Gain attributable to the disposition of such items of Partnership property (or a proportionate share of each such gain if such gains exceed the amount of income and gain required to be allocated pursuant to the foregoing provisions of this paragraph for such fiscal year), and then of a pro rata portion of the other items of Partnership income and gain for that year. 4. MINIMUM GAIN ATTRIBUTABLE TO PARTNER NONRECOURSE DEBT: If there is, for any fiscal year of the Partnership, a net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt, there shall be allocated to each Partner that has a share of Minimum Gain Attributable to Partner Nonrecourse Debt at the beginning of such fiscal year before any other allocation under Section 704(b) of the Code is made pursuant to this Appendix (other than an allocation required pursuant to the provisions of Section 3 of this Article III of this Appendix) A-10 items of income and gain for such fiscal year (and, if necessary, for subsequent years) in proportion to, and to the extent of, an amount equal to the greater of: (1) the portion of such Partner's share of the net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt that is allocable (in accordance with the principles set forth in Section 1.704-1T(b)(4)(iv)(h)(4) of the Regulations) to the sale or other disposition of Partnership property subject to such Partner Nonrecourse Debt; or (2) the deficit balance in such Partner's Adjusted Capital Account at the end of such fiscal year. The amount of such deficit balance which needs to be eliminated shall be reduced by the amount of such Partner's Share of Partnership Minimum Gain and such Partner's Share of Minimum Gain Attributable to Partner Nonrecourse Debt (computed, in each case, by reference to the amount of Partnership Minimum Gain and Minimum Gain Attributable to Partner Nonrecourse Debt after taking into account any changes thereto during such fiscal year). The determination of which items of income and gain to be allocated pursuant to the foregoing provisions of this paragraph of this Section shall be made in a manner that is consistent with the principles contained in Section 1.704-IT(b)(4)(iv)(e)(2) of the Regulations. 5. QUALIFIED INCOME OFFSET: In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Regulations (modified, as appropriate, by Sections 1.704-IT(b)(4)(iv)(e)(3) and (h)(4) of the Regulations), there shall be specially allocated to such Partner such items of Partnership income and gain, at such times and in such amounts as will eliminate as quickly as possible the deficit balance (if any) in its Capital Account (in excess of the sum of such Partner's share of Partnership Minimum Gain, such Partner's share of Minimum Gain Attributable to Partner A-11 Nonrecourse Debt) created by such adjustments, allocations or distributions. To the extent permitted by the Code and the Regulations, any special allocations of items of income or gain pursuant to this paragraph 5 shall be taken into account in computing subsequent allocations of Net Income or Net Loss pursuant to this Appendix, so that the net amount of any items so allocated and the subsequent Net Income or Net Loss allocated to the Partners pursuant to Article I and Article II of this Appendix shall, to the extent possible, be equal to the net amounts that would have been allocated to each such Partner pursuant to the provisions of Article I and Article II of this Appendix if such unexpected adjustments, allocations or distributions had not occurred. IV. SPECIAL ALLOCATION RULES AND PARTNERSHIP ELECTIONS: 1. Income, gain, loss and deduction with respect to property contributed to the Partnership by a Partner (and with respect to other circumstances for which Treas. Reg. 'SS'1.704-1(b) requires Code Section 704(c) principles to be applied) shall be allocated among the Partners for tax purposes so as to take account of the variation between the basis (within the meaning of Section 704(c) of the Code) of the property to the Partnership and its fair market value at the time of contribution (or the variation between the basis and value or applicable Capital Account at the time the principles of Section 704(c) of the Code are to be applied. 2. In the event a Partner transfers all or part of its interest in the Partnership, or in the event an interest in the Partnership, or in the event an interest in a Partner that itself is a partnership is transferred, the Partnership shall, upon request of the transferee, elect, pursuant to Section 754 of the Code, to adjust the basis of the property owned by the Partnership in accordance with Section 743 of the Code. A-12 3. The Partnership shall elect the straight line method of depreciation and the shortest permissible recovery periods (within the meaning of Section 168 of the Code) with respect to the Resort. 4. Except as otherwise provided in this Partnership Agreement, all other elections required or permitted to be made by the Partnership under the Code shall be made by mutual agreement of all the General Partners. A-13 FIRST AMENDMENT AGREEMENT This Amendment Agreement (the "Amendment Agreement") is made the 4th day of May, 1992, between KUMAGAI CARIBBEAN, INC., a Texas corporation, having an office at Suite 300, Parkside Building, Metro Office Park, San Juan, Puerto Rico 00920-1706 and WKA EL CON ASSOCIATES, a New York General Partnership, having an office c/o WMS Industries Inc., 405 Lexington Avenue, New York, New York 10174. W I T N E S S E T H : WHEREAS, the parties executed on January 12, 1990, a Venture Agreement (the "Venture Agreement") for the purpose of acquiring certain real property and improvements thereon located in Fajardo, Puerto Rico, formerly known as "El Conquistador Hotel", and to undertake the renovation, improvement, construction and development thereof and to operate the same as a first-class, luxury destination mega-resort; and WHEREAS, the parties desire to amend the Venture Agreement. NOW, THEREFORE, in consideration of the premises and other respective representations, warranties, covenants and conditions contained herein, the parties hereto agree as follows: 1. The Preamble is made to form part hereof. 2. The capitalized terms used herein shall have the same meaning used in the Venture agreement and the Appendix thereto, unless the context requires otherwise. 3. It is the intent of the parties that the terms of this First Amendment Agreement (the "Amendment Agreement") shall supersede and override any conflicting provision in the Venture Agreement or other document executed by the parties hereto and any conflict or ambiguity between this Amendment Agreement and any other Agreement shall be resolved in favor of this Amendment Agreement. 4. The revised Development Budget for the Project is hereby approved as delivered by the parties hereto. 5. The Venture Agreement is hereby amended by deleting Sections 1.212 and 1.28 in their entireties and substituting in their places the following: "Section 1.12 "Capital Contribution" means the amount to be contributed to the Partnership by any Partner, other than Supplemental Contributions, pursuant to Article Three hereof." "Section 1.28 "Distributable Cash" means Operating Cashflow plus an amount equal to mandatory prepayments under the Special Loans less all payments made in respect of Deficiency Loans and Additional Loans." 6. The Venture Agreement is hereby amended by adding new Sections 1.88 through 1.95 to read as follows: "Section 1.88 "Supplemental Contribution" means the amounts contributed to the Partnership by any Partner designated as a "Supplemental Contribution" in Article Three. Section 1.89 "Unrecovered Supplemental Contribution" means with respect to each Partner the amount at any time of such Partner's Supplemental Contribution actually made to the Partnership, reduced by distributions made to such Partner pursuant to Paragraph J of Section 8.02 hereof. Section 1.90 "Supplemental Preferred Return" means for any Fiscal Year or part thereof an 8.5% annual rate of return on the amount of each Partner's Unrecovered Supplemental Contribution calculated based upon the amount of each Partner's Unrecovered Supplemental Contribution from day to day. 2 Section 1.91 "Supplemental Deferred Preferred Return" means the amount of any Supplemental Preferred Return unpaid from all prior fiscal year(s) of the Partnership, together with interest thereon at the rate of 10% per annum from the end of the Fiscal Year to which such Supplemental Preferred Return relates to the date of payment. Section 1.92 "GDB" means the Government Development Bank For Puerto Rico. Section 1.92 "GDB Loans" shall have the meaning set forth in Section 6.06 hereof. Section 1.94 "GDB Loan Agreements" means the Loan Agreement dated February 7, 1991 between the GDB and the Partnership and the Credit Facility Agreement dated May 5, 1992 between the GDB, the KG General Partner and the WKA General Partner, as the same may be amended from time to time. Section 1.95 "Special Loans" shall have the meaning set forth in Section 6.06 hereof. 7. The Venture Agreement is hereby amended by changing the addresses in the table in Section 3.01 to read as follows: Kumagai Caribbean, Inc. Suite 310, Parkside Bldg. Metro Office Park San Juan, Puerto Rico 00920-1706 WKA El Con Associates c/o WMS Industries Inc. 3401 N. California Avenue Chicago, Illinois 60618 8. The Venture Agreement is hereby further amended by changing the addresses in the table in Section 3.02 to read as follows: Class A Limited Partner - ----------------------- 3 Kumagai Caribbean, Inc. Suite 310, Parkside Bldg. Metro Office Park San Juan, Puerto Rico 00920-1706 Class B Limited Partner - ----------------------- WKA El Con Associates c/o WMS Industries Inc. 3401 N. California Avenue Chicago, Illinois 60618 9. Section 3.03 of the Venture Agreement is hereby amended by adding the following at the end thereof: "Additionally, the Partners may make Supplemental Contributions to the Partnership, such Supplemental Contributions to be made pursuant to the written consent of the Partners as they may agree upon from time to time." 10. The parties hereby agree that a Call Notice for Deficiency Loans cannot be made to fund costs, fees or expenses attributable to Total Project Costs, it being the intention of the parties that the revised Development Budget not to be exceeded. The first sentence of Section 6.01 of the Venture Agreement is hereby amended to read as follows: "If at any time after the Commencement Date but prior to the expiration of five (5) years from the Commencement Date, the Partnership has insufficient funds available to pay any portion of operating costs or any other fees or expenses related to the operation of the Project or the Resort, the Partnership's business or the liquidation or winding up of the Partnership, including payment of liabilities or reserves for liabilities, the WKA General Partner shall notify (the "Call Notice") each of the General Partners in writing of the amount needed (the "Deficiency") to pay such costs, fees or expenses; no Call Notice should be made to cover any portion of any costs, fees or expenses attributable to Total Project Costs, including the renovation, improvement, construction or development of the Project or the Resort." 4 11. Section 6.01 of the Venture Agreement is hereby further amended by deleting the last sentence thereof and substituting in its place the following: "Notwithstanding the foregoing, at no time shall either the KG General Partner or the WKA General Partner be required to make Deficiency Loans to the Partnership in excess of $7,000,000 in principal amount each outstanding at any time." 12. Section 6.02 of the Venture Agreement is hereby amended by deleting the first sentence thereof and substituting in its place the following: "If at any time after all Capital Contributions have been made and either (i) there is outstanding Deficiency Loans in the aggregate principal amount of $14,000,000 or (ii) the obligation of the General Partners to make Deficiency Loans has terminated, the Partnership has insufficient funds to meet any of its obligations other than obligations to any of its Partners, then the General Partners shall have the right, but not the obligation, to fund such deficiencies by making additional loans ("Additional Loans") to the Partnership in the amounts necessary to meet such obligations but only if the reasonable needs of the Partnership's business so require." 13. Contemporaneously herewith the Partners are entering into an agreement with The Mitsubishi Bank, Limited pursuant to which the Partners, severally and not jointly, have agreed with The Mitsubishi Bank, Limited to provide up to $3,000,000 each to the Partnership under certain circumstances to fund operating deficiencies. Such funds, if provided, will be deemed Additional Loans under Section 6.02 of the Venture Agreement. Any additional Loans made by the Partners voluntarily and not at the request of The Mitsubishi Bank, Limited will not be deemed to satisfy such Partner's obligations to The Mitsubishi Bank, Limited to make the Additional Loans to fund operating deficiencies as aforesaid. 14. Section 7.02(A) of the Venture Agreement is hereby amended by adding the following after the words "Capital Contribution": 5 "and Supplemental Capital Contribution". 15. There is hereby added a new Section 6.06 to the Venture Agreement entitled "Special Loans", which reads as follows: "6.06 Special Loans. The General Partners each expect to borrow $4,000,000.00 from the GDB (the "GDB Loans") for a total of $8,000,000.00 The General Partners agree to utilize the proceeds from the GDB Loans to make a loan to the Partnership of $4,000,000.00 each (the "Special Loans"). The terms and conditions of the Special Loans shall be the same as the terms and conditions of the GDB Loans in all material respects and shall be in accordance with the form of Partnership loan agreement annexed hereto as Exhibit A. Special Loans shall not be deemed to be Deficiency Loans or Additional Loans for purposes of this Agreement, including Section 6.04 hereof." 16. Section 6.04 of the Venture Agreement dealing with repayment of loans is hereby amended by the addition at the end of the section of a new paragraph which reads as follows: "The payment of interest and principal on the Special Loans shall not be subject to the limitations provided above and the Partnership shall make payments of interest and principal on the Special Loans in accordance with the terms and conditions thereof (which reflect the terms and conditions of the GDB Loans)." 17. The Venture Agreement is hereby amended by deleting ARTICLE EIGHT in its entirety and substituting in its place the following: "ARTICLE EIGHT PARTNERSHIP DISTRIBUTIONS "Section 8.01 Distributable Cash from Operations. Distributable cash shall be distributed at least once per year on or before the 120th day following the end of the Resort's fiscal year and shall be distributed and applied in the following order of priority: 6 (A) Special Loan prepayments required to be deposited in escrow in respect of such fiscal year for the benefit of the GDB pursuant to the GDB Loans. (B) Payment of the Preferred Return to the KG General Partner and the Class A Limited Partners for such fiscal year to the extent not previously paid from Distributable Cash from a Capital Transaction. If the Distributable Cash is insufficient to pay such Preferred Return in full, then the Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners and the amount of any Preferred Return unpaid shall become Deferred Preferred Return. (C) Payment of any Deferred Preferred Return to the KG General Partner and the Class A Limited Partners. If such Distributable Cash is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and then to the oldest Preferred Return portions. (D) Payment of the Preferred Return to the WKA General Partner and Class B Limited Partners for such fiscal year to the extent not previously paid from Distributable Cash from a Capital Transaction. If such Distributable Cash is insufficient to pay such Preferred Return in full, then such Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and Class B Limited Partners and the amount of any Preferred Return unpaid shall become Deferred Preferred Return. (E) Payment of any Deferred Preferred Return to the WKA General Partner and Class B Limited Partners. If such Distributable Cash is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and the Class B Limited Partners and shall be applied first to the interest portion of such Deferred Preferred 7 Return and then to the oldest Preferred Return portions. (F) Payments of Supplemental Preferred Returns to the Partners in accordance with their Unrecovered Supplemental Contributions. If the Distributable Cash is insufficient to pay such Supplemental Preferred Returns in full, then the Distributable Cash shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Supplemental Contribution bear to the aggregate Unrecovered Supplemental Contributions of all Partners. (G) Payment of the Supplemental Deferred Preferred Return to all Partners. If such Distributable Cash is insufficient to pay such Supplemental Deferred Preferred Return in full, then such Distributable Cash shall be paid to each Partner in the same ratio as such Partner's Unrecovered Supplemental Contributions bear to the aggregate Unrecovered Supplemental Contributions of all Partners and shall be applied first to the interest portion of such Supplemental Deferred Preferred Return and then to the oldest Supplemental Preferred Return portions. (H) Payment of the Incentive Management Fee. (I) Any balance remaining shall be paid to the Partners in accordance with their Residual Partnership Interests. Section 8.02 Distributable Cash from a Capital Transaction. As soon as practical after the receipt of the proceeds from a Capital Transaction, the Partnership shall distribute and apply the Distributable Cash from a Capital Transaction in the following order of priority: (A) Special Loan prepayments required to be deposited in escrow in respect of such fiscal year for the benefit of the GDB pursuant to the GDB Loans. (B) Payment of the Preferred Return to the KG General Partner and the Class A Limited Partners for the current Fiscal Year. If the Distributable Cash from a Capital Transaction is insufficient to pay such Preferred Return in full, then the Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners. 8 (C) Payment of any Deferred Preferred Return to the KG General Partner and the Class A Limited Partners. If such Distributable Cash from a Capital Transaction is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the KG General Partner and Class A Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and then to the oldest Preferred Return portions. (D) Payment of the Preferred Return to the WKA General Partner and Class B Limited Partners for the current Fiscal Year. If such Distributable Cash from a Capital Transaction is insufficient to pay such Preferred Return in full, then such Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and Class B Limited Partners. (E) Payment of any Deferred Preferred Return to the WKA General Partner and Class B Limited Partners. If such Distributable Cash from a Capital Transaction is insufficient to pay such Deferred Preferred Return in full, then such Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of the WKA General Partner and the Class B Limited Partners and shall be applied first to the interest portion of such Deferred Preferred Return and then to the oldest Preferred Return portions. (F) Payments of Supplemental Preferred Returns to the Partners for the current fiscal year in accordance with their Unrecovered Supplemental Contributions. If the Distributable Cash form a Capital Transaction is insufficient to pay such Supplemental Preferred Returns in full then the Distributable Cash from a Capital Transaction shall be paid to each such Partner in the same ratio as such Partner's Unrecovered Supplemental Contributions bear to the aggregate Unrecovered Supplemental Contributions of all Partners. (G) Payment of the Supplemental Deferred Preferred Return to all Partners. If such Distributable Cash from a Capital Transaction is insufficient to pay such Supplemental Deferred 9 Preferred Return in full, then such Distributable Cash from Capital Transaction shall be paid to each Partner in the same ratio as such Partners Unrecovered Supplemental Contributions bear to the aggregate Unrecovered Supplemental contributions of all Partners and shall be applied first to the interest portion of such Supplemental Deferred Preferred Return and then to the oldest Supplemental Preferred Return portions. (H) Payment of any Incentive Management Fee in respect of the fiscal year in which the funds constituting Distributable Cash from a Capital Transaction were received by the Partnership. (I) Payment of any Incentive Management Fee in respect of any preceding fiscal year of the Resort which was earned and not previously paid. (J) To the Partners as return of their respective Supplemental Contributions in an amount equal to their respective Unrecovered Supplemental Contributions. If the remaining Distributable Cash from a Capital Transaction is less than the Partners' Unrecovered Supplemental Contributions, then the remaining Distributable Cash from a Capital Transaction shall be paid to each Partner in the same proportion as each Partner's Unrecovered Supplemental Contribution bears to the aggregate Unrecovered Supplemental Contributions of all Partners. (K) To the Partners as return of their respective Capital Contributions in an amount equal to their respective Unrecovered Capital. If the remaining Distributable Cash from a Capital Transaction is less than the Partners' Unrecovered Capital, then the remaining Distributable Cash from a Capital Transaction shall be paid to each Partner in the same proportion as each Partner's Unrecovered Capital bears to the aggregate Unrecovered Capital of all Partners. (L) Any balance remaining shall be paid to the Partners in accordance with their respective Residual Partnership Interests." 18. All Partners agree that they will request no further design changes to the Project and will exercise their best efforts not to incur in any cost overruns and to keep Total Project Costs within the revised Development Budget. 10 19. The WKA General Partner acknowledges for itself and for the Partnership that the Guaranty executed on the 12th day of January, 1990 by Kumagai Properties, Inc. which formed Exhibit I to the Venture Agreement, is hereby modified so that the reference to the KG Partner being required to loan to the Partnership up to $10,000,000.00 as Deficiency Loans and for the KG Partner to loan to the WKA General Partner up to $10,000,000.00 as the KG Loan Obligation is hereby amended so that the Guaranty properly refers to the Deficiency Loan Obligation as $7,000,000.00 and to the KG Loan Obligation as $7,000,000. 20. The parties hereto acknowledge that certain assets of the Partnership and the Partners (but excluding the Partners' ownership Interests in the Partnership) may be encumbered by the GDB Loan Agreements, and each party agrees to subordinate, assign and pledge its rights and interests under the Venture Agreement to the extent necessary to comply with the GDB Loan Agreements, and no such subordination, assignment or pledge shall be deemed a breach of the Venture Agreement. 21. The parties hereto acknowledge that appropriate technical changes must be made in the provisions of the appendix to the Venture Agreement relating to tax matters to reflect the partners' understandings set forth above. The parties agree to negotiate such changes in good faith and to use their best efforts to have such changes in effect by May 31, 1992. 11 WKA EL CON ASSOCIATES BY: WMS EL CON CORP., PARTNER By: ................................. Louis J. Nicastro Chairman BY: AMK CONQUISTADOR, S.E, PARTNER By: ................................. Ruthanne Koffman By: ................................. Sara Koffman BY: HOSPITALITY INVESTMENT GROUP, S.E., PARTNER By: HASN, INC., GENERAL PARTNER By: ............................. Hugh A. Andrews, President KUMAGAI CARIBBEAN, INC. By: ....................................... Shunsuke Nakane, President 12 SECOND AMENDMENT TO VENTURE AGREEMENT OF EL CONQUISTADOR PARTNERSHIP L.P. THIS SECOND AMENDMENT (the "Second Amendment"), is made this 31st day of March, 1998, between PATRIOT AMERICAN HOSPITALITY, INC. ("Patriot"), a Delaware corporation, and WKA EL CON ASSOCIATES ("WKA"), a New York general partnership. W I T N E S S E T H: WHEREAS, Kumagai Caribbean, Inc., a Texas corporation ("Kumagai"), and WKA are parties to a Venture Agreement of El Conquistador Partnership L.P. dated January 12, 1990, as amended by the First Amendment Agreement dated May 4, 1992 (collectively, the "Venture Agreement"); and WHEREAS, Kumagai has sold and assigned all of its Interest in the Partnership to Patriot, together with all Deficiency Loans and Additional Loans made by Kumagai to the Partnership; and WHEREAS, the parties hereto desire to provide for the admission of Patriot as both a General Partner and a Class A Limited Partner of the Partnership in the place and stead of Kumagai and to amend the Venture Agreement in certain respects. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. All capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to such terms in the Venture Agreement. 2. WKA hereby consents pursuant to Article NINE of the Venture Agreement to the sale and assignment by Kumagai of its Interest, Deficiency Loans and Additional Loans to Patriot, the withdrawal of Kumagai as a General Partner and a Class A Limited Partner of the Partnership, the admittance of Patriot as a General Partner and a Class A Limited Partner of the Partnership in the place and stead of Kumagai and the assumption by Patriot of the obligations of Kumagai under the Venture Agreement. Patriot hereby confirms its assumption of all of Kumagai's obligations under the Venture Agreement including, without limitation, its obligation to make Deficiency Loans under Section 6.01 thereof. 3. All references to Kumagai and the KG General Partner in the Venture Agreement shall henceforth be deemed references to Patriot and Patriot shall be bound by and entitled to the benefits of and shall perform the obligations of Kumagai and the KG General Partner under the Venture Agreement. 4. Section 3.01 of the Venture Agreement shall be amended and restate to read as follows: "Section 3.01. General Partner. The names and addresses of each General Partner and its Residual Partnership Interest in the Partnership are as follows:
Entity Residual Partnership Interest ------ ----------------------------- Patriot American Hospitality, Inc. 15% 1950 Stemmons Freeway Suite 6001 Dallas, Texas 75207 WKA El Con Associates 15% 6063 East Isla Verde Avenue Carolina, Puerto Rico 00979
5. Section 3.02 of the Venture Agreement is hereby amended and restated to read as follows: "Section 3.02. Limited Partners. The names and addresses of the Limited Partners and their Residuary Partnership Interest in the Partnership are as follows:
Class A Limited Partner Residual Partnership Interest ----------------------- ----------------------------- Patriot American Hospitality, Inc. 35% 1950 Stemmons Freeway Suite 6001 Dallas, Texas 75207
2
Class B Limited Partner ----------------------- WKA El Con Associates 35% 6063 East Isla Verde Avenue Carolina, Puerto Rico 00979"
6. Section 4.04 of the Venture Agreement is hereby amended to delete the title and introductory paragraph and replace it with the following: "Major Decisions. Anything else in this Venture Agreement notwithstanding, Patriot, in its capacity as a General Partner, shall have the authority, acting alone, to take any of the following actions (each a "Major Decision") on behalf of the Partnership:" Paragraphs (a) through (u) of such Section 4.04 shall remain unchanged except that such paragraphs shall be deemed amended to the extent necessary to be consistent with the other provisions of this Second Amendment. 7. Section 4.05 of the Venture Agreement is hereby deleted in its entirety but the balance of the subsections of Section 4 shall not be renumbered. 8. Section 4.09 of the Venture Agreement shall be amended to delete the words "as provided in Section 4.04 hereof" from the end of such section. 9. Article FIVE of the Venture Agreement is hereby deleted in its entirety but the balance of the Articles of the Venture Agreement shall not be renumbered 10. Section 6.03 of the Venture Agreement is hereby deleted in its entirety but the balance of the subsections of Section 6 shall not be renumbered. 11. Section 6.05 of the Venture Agreement is hereby deleted in its entirety. 12. Article FOURTEEN of the Venture Agreement is hereby deleted in its entirety but the balance of Articles of the Venture Agreement shall not be renumbered. 3 13. WKA and Patriot reconfirm the partnership and agree that the Partnership shall continue its existence in accordance with the Venture Agreement, as amended hereby, and reconfirm all of the rights and obligations of the Partnership, all of which shall remain in full force and effect. WKA and Patriot hereby release Kumagai from any direct or indirect obligations under the Venture Agreement. 14. This Second Amendment may be executed in one or more counterparts which, when taken together, shall constitute one agreement. 15. The amendment set forth herein is limited precisely as written and shall not be deemed to be a consent to any modification or waiver of any other term or condition of the Venture Agreement or any documents referred to therein. 16. This Second Amendment, including the validity hereof and the rights and obligations of the parties hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to the choice of law provisions thereof. IN WITNESS WHEREOF, the parties hereto have cause this Second Amendment to be executed by their respective duly authorized officers or representatives as of the date first above written. WKA EL CON ASSOCIATES WHG EL CON CORP. By: /s/ James D. Carreker ----------------------- Name: James D. Carreker Title: Chief Executive Officer PATRIOT AMERICAN HOSPITALITY, INC. By: /s/ Paul Nussbaum ----------------------- Name: Paul Nussbaum Title: Chief Executive Officer 4 STATE OF TEXAS ) : ss.: COUNTY OF DALLAS ) On March 31, 1998, before me personally came JAMES D. CARREKER, to me known and known to me to be the Chief Executive Officer of WHG EL CON CORP., the corporation described in and which executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors and consent of the Venturers Committee of the Partnership. /s/ Charlette Bevers -------------------------------- Notary Public STATE OF TEXAS ) : ss.: COUNTY OF DALLAS ) On March 31, 1998, before me personally came PAUL NUSSBAUM, to me known and known to me to be the Chief Executive Officer of PATRIOT AMERICAN HOSPITALITY, INC., the corporation described in and which executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors of such corporation. /s/ Mary Ellen Kyle -------------------------------- Notary Public 5 THIRD AMENDMENT TO VENTURE AGREEMENT OF EL CONQUISTADOR PARTNERSHIP L.P. THIS THIRD AMENDMENT (the "Third Amendment"), is made this 29th day of April, 1998 between CONQUISTADOR HOLDING, INC., ("Holding"), a Delaware corporation, and WKA EL CON ASSOCIATES ("WKA"), a New York general partnership. W I T N E S S E T H: WHEREAS, Patriot American Hospitality, Inc., a Delaware corporation ("Patriot"), and WKA are parties to a Venture Agreement of El Conquistador Partnership L.P. dated January 12, 1990, as amended by the First Amendment Agreement dated May 4, 1992 and as further amended by the Second Amendment Agreement dated March 31, 1998 (collectively, the "Venture Agreement"); and WHEREAS, on March 31, 1998 Kumagai Caribbean, Inc., a Texas corporation ("Kumagai"), sold and assigned all of its Interest in the Partnership to Patriot, together with all Deficiency Loans and Additional Loans made by Kumagai to the Partnership; and WHEREAS, Patriot desires to assign all of its Interest in the Partnership to Holding, together with all Deficiency Loans and Additional Loans made by Patriot (as assignee of Kumagai) to the Partnership; and WHEREAS, the parties hereto desire to provide for the admission of Holding as both a General Partner and a Class A Limited Partner of the Partnership in the place and stead of Patriot and to amend the Venture Agreement in certain respects. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. All capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to such terms in the Venture Agreement. 2. WKA hereby consents pursuant to Article NINE of the Venture Agreement to the assignment by Patriot of its Interest, Deficiency Loans and Additional Loans to Holding, the withdrawal of Patriot as a General Partner and a Class A Limited Partner of the Partnership, the admittance of Holding as a General Partner and a Class A Limited Partner of the Partnership in the place and stead of Patriot and the assumption by Holding of the obligations of Patriot under the Venture Agreement. Holding hereby confirms its assumption of all of Patriot's obligations under the Venture Agreement including, without limitation, its obligation to make Deficiency Loans under Section 6.01 thereof. 3. All references to Patriot in the Venture Agreement shall henceforth be deemed references to Holding and Holding shall be bound by and entitled to the benefits of and shall perform the obligations of Patriot under the Venture Agreement. 4. Section 3.01 of the Venture Agreement shall be amended and restate to read as follows: "Section 3.01. General Partner. The names and addresses of each General Partner and its Residual Partnership Interest in the Partnership are as follows:
Entity Residual Partnership Interest ------ ----------------------------- Conquistador Holding, Inc. c/o Patriot American Hospitality, Inc. 15% 1950 Stemmons Freeway Suite 6001 Dallas, Texas 75207 WKA El Con Associates 15% 6063 East Isla Verde Avenue Carolina, Puerto Rico 00979"
5. Section 3.02 of the Venture Agreement is hereby amended and restated to read as follows: 2 "Section 3.02. Limited Partners. The names and addresses of the Limited Partners and their Residuary Partnership Interest in the Partnership are as follows:
Class A Limited Partner Residual Partnership Interest ----------------------- ----------------------------- Conquistador Holding, Inc. c/o Patriot American Hospitality, Inc. 35% 1950 Stemmons Freeway Suite 6001 Dallas, Texas 75207 Class B Limited Partner ----------------------- WKA El Con Associates 35% 6063 East Isla Verde Avenue Carolina, Puerto Rico 00979"
6. Section 4.04 of the Venture Agreement is hereby amended to delete the title and introductory paragraph and replace it with the following: "Major Decisions. Anything else in this Venture Agreement notwithstanding, Holding, in its capacity as a General Partner, shall have the authority, acting alone, to take any of the following actions (each a "Major Decision") on behalf of the Partnership:" Paragraphs (a) through (u) of such Section 4.04 shall remain unchanged except that such paragraphs shall be deemed amended to the extent necessary to be consistent with the other provisions of this Third Amendment. 7. WKA and Holding reconfirm the partnership and agree that the Partnership shall continue its existence in accordance with the Venture Agreement, as amended hereby, and reconfirm all of the rights and obligations of the Partnership, all of which shall remain in full force and effect. WKA and Holding hereby release Patriot from any direct or indirect obligations under the Venture Agreement. 3 8. This Third Amendment may be executed in one or more counterparts which, when taken together, shall constitute one agreement. 9. The amendment set forth herein is limited precisely as written and shall not be deemed to be a consent to any modification or waiver of any other term or condition of the Venture Agreement or any documents referred to therein. 10. This Third Amendment, including the validity hereof and the rights and obligations of the parties hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to the choice of law provisions thereof. IN WITNESS WHEREOF, the parties hereto have cause this Third Amendment to be executed by their respective duly authorized officers or representatives as of the date first above written. WKA EL CON ASSOCIATES WHG EL CON CORP. By: /s/ James D. Carreker ---------------------------------------- Name: James D. Carreker Title: Chief Executive Officer CONQUISTADOR HOLDING, INC. By: /s/ James D. Carreker ---------------------------------------- Name: James D. Carreker Title: Chief Executive Officer 4 STATE OF TEXAS ) : ss.: COUNTY OF DALLAS ) On April 28, 1998, before me personally came JAMES D. CARREKER, to me known and known to me to be the Chief Executive Officer of WHG EL CON CORP., the corporation described in and which executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors and consent of the Venturers Committee of the Partnership. /s/ Beverly Ann Houston -------------------------------- Notary Public STATE OF TEXAS ) : ss.: COUNTY OF DALLAS ) On April 28, 1998, before me personally came JAMES D. CARREKER, to me known and known to me to be the Chief Executive Officer of CONQUISTADOR HOLDING, INC., the corporation described in and which executed the foregoing instrument, and he acknowledged to me that he executed the same by order of the Board of Directors of such corporation. /s/ Beverly Ann Houston ---------------------------------- Notary Public 5 EX-3 3 EXHIBIT 3.2 CERTIFICATE OF LIMITED PARTNERSHIP OF EL CONQUISTADOR PARTNERSHIP L.P. This Certificate of Limited Partnership of El Conquistador Partnership L.P. (the "Partnership"), is being duly executed and filed by Kumagai Caribbean, Inc., a Texas corporation, to form a limited partnership. 1. The name of the limited partnership formed hereby is El Conquistador Partnership L.P. 2. The address of the registered office and the name and address of the registered agent for the service of process on the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 3. The name and mailing address of each of the general partners of the Partnership are: Kumagai Caribbean, Inc. 1585 Kapiolani Boulevard, Suite 1404 Honolulu, Hawaii 96814 WKA El Con Associates 767 Fifth Avenue - 23rd Floor New York, NY 10153 KUMAGAI CARIBBEAN, INC. By: /s/ Shunsuke Nakane ---------------------------- Shunsuke Nakane, President WKA EL CON ASSOCIATES By: WMS El Con Corp., Partner By: /s/ Norman J. Menell ---------------------------- By: Norman J. Menell, President Dated: January 12, 1990 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF LIMITED PARTNERSHIP OF EL CONQUISTADOR PARTNERSHIP L.P. (A DELAWARE LIMITED PARTNERSHIP) The undersigned, being the general partners (the "General Partners") of EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership (the "Partnership"), do hereby certify as follows: 1. The name of the Partnership is EL CONQUISTADOR L.P. 2. The Certificate of Limited Partnership of the Partnership (the "Certificate") was filed in the Office of the Secretary of State of the State of Delaware on January 16, 1990. 3. Item 3 of the Certificate is hereby amended to read as follows: "3. The name and mailing address of each of the general partners of the Partnership are: Kumagai Caribbean, Inc. El San Juan Hotel & Casino 187 East Isla Verde Road Isla Verde, Puerto Rico 00913 WKA El Con Associates c/o WMS Industries Inc. 3401 North California Avenue Chicago, Illinois 60618" IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment of the Certificate of Limited Partnership this 20th day of March, 1991. KUMAGAI CARIBBEAN, INC. By: /s/ Shunsuke Nakane --------------------------------- Shunsuke Nakane, President WKA EL CON ASSOCIATES By: WMS El Con Corp., a general partner By: /s/ Norman J. Menell --------------------------------- By: Norman J. Menell, President 2 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF LIMITED PARTNERSHIP OF EL CONQUISTADOR L.P. (A Delaware Limited Partnership) The undersigned, being a general partner (the "General Partner") of EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership (the "Partnership"), does hereby certify as follows: 1. The name of the Partnership is EL CONQUISTADOR L.P. 2. The Certificate of Limited Partnership of the Partnership (the "Certificate") was filed in the Office of the Secretary of State of the State of Delaware on January 16, 1990, as amended by Certificate of Amendment filed on March 21, 1991, which Certificate erroneously recited in Paragraph 1 that the name of the Partnership was "EL CONQUISTADOR L.P." and in Paragraph 3 set forth the amendment to be reflected with respect to the address of the Partnership. 3. This Certificate of Amendment is filed (a) to correct the name of the Partnership on the records of the Secretary of State of Delaware and (b) pursuant to the rules promulgated under the Limited Partnership Act the Certificate is hereby amended to read as follows: "1. The name of the Partnership is EL CONQUISTADOR PARTNERSHIP L.P." IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment of the Certificate of Limited Partnership this 2nd day of March, 1992. WKA EL CON ASSOCIATES By: WMS El Con Corp., a general partner By: /s/ Neil D. Nicastro --------------------------------- Neil D. Nicastro, Executive Vice President 2 AMENDMENT TO CERTIFICATE OF LIMITED PARTNERSHIP OF EL CONQUISTADOR PARTNERSHIP L.P. (A Delaware Limited Partnership) The undersigned, being the general partners (the "General Partners") of EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership (the "Partnership"), do hereby certify as follows: 1. The name of the Partnership is EL CONQUISTADOR PARTNERSHIP L.P. 2. The Certificate of Limited Partnership (the "Certificate") was filed in the Office of the Secretary of State of the State of Delaware on January 16, 1990, and was amended by Certificates of Amendment filed on March 21, 1991 and on March 5, 1992, respectively. 3. This Certificate of Amendment is filed to (a) reflect the withdrawal of Kumagai Caribbean, Inc. as a general partner of the Partnership, (b) reflect the admission of Conquistador Holding, Inc. as a general partner of the Partnership, and (c) change the address of WKA El Con Associates, the other general partner of the Partnership. 4. Item 3 of the Certificate is hereby amended to read as follows: "3. The name and mailing address of each of the general partners of the Partnership are: Conquistador Holding, Inc. c/o Patriot American Hospitality, Inc. 1950 Stemmons Highway Suite 6001 Dallas, Texas 75207 WKA El Con Associates 6063 East Isla Verde Avenue Carolina, Puerto Rico 00979" IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment of the Certificate of Limited Partnership this 29th day of April, 1998. CONQUISTADOR HOLDING, INC. By: /s/ James D. Carreker ------------------------------ Name: James D. Carreker Title: Chief Executive Officer WKA EL CON ASSOCIATES By WHG El CON CORP., a general partner By: /s/ James D. Carreker ------------------------------ Name: James D. Carreker Title: Chief Executive Officer 2 EX-10 4 EXHIBIT 10.1 EL CONQUISTADOR PARTNERSHIP L.P. DEVELOPMENT SERVICES AND MANAGEMENT AGREEMENT DATED JANUARY 12, 1990 EL CONQUISTADOR PARTNERSHIP L.P DEVELOPMENT SERVICES AND MANAGEMENT AGREEMENT TABLE OF CONTENTS -----------------
ARTICLE PAGE ------- ---- 1. DEVELOPMENT OF THE RESORT..................................................................... 2 1.1. The Renovation....................................................................... 2 1.2. Certain Definitions.................................................................. 3 1.2.1. "Commencement Date"........................................................... 3 1.2.2. "Construction Management Agreement"........................................... 3 1.2.3. "Construction Manager"........................................................ 4 1.2.4. "Consultants"................................................................. 4 1.2.5. "Contractors"................................................................. 4 1.2.6. "Project"..................................................................... 4 1.3. Technical and Development Services................................................... 4 1.4. Pre-Opening Program.................................................................. 5 1.5. Working Capital and Supplies......................................................... 6 1.6. Reimbursable Costs and Expenses...................................................... 6 1.7. Partnership's Pre-Approval........................................................... 8 1.8. Pre-Opening Budgets.................................................................. 10 1.9. Compensation for Technical and Development Services.................................. 11 1.10. Obligations Separate................................................................. 13 2. APPOINTMENT AS MANAGER OF THE RESORT.......................................................... 14 2.1. Appointment and Term................................................................. 14 2.2. Relation of the Parties.............................................................. 15 3. BUDGETS....................................................................................... 16 3.1. General Policy....................................................................... 16 3.2. Fiscal Year.......................................................................... 16 3.3. Annual Budgets....................................................................... 16 3.4. No Guarantee......................................................................... 21 4. OPERATION..................................................................................... 21 4.1. Operational Standards, Etc........................................................... 21 4.1.1. First Class Resort............................................................ 21 4.1.2. Non-Disturbance............................................................... 22 4.2. Permits.............................................................................. 23 4.3. Personnel............................................................................ 24 4.3.1. Employees of Partnership...................................................... 24 4.3.2. Employees of Manager.......................................................... 24 4.3.3. Key Managers.................................................................. 25 ii
4.3.4. Reimbursement for Third Party Costs........................................... 25 4.4. Sales and Promotion.................................................................. 26 4.4.1. Sales......................................................................... 26 4.4.2. Promotion..................................................................... 26 4.5. Maintenance and Capital Replacement.................................................. 26 4.6. Operating, Supply and Maintenance Contracts.......................................... 27 4.7. Accounting Services.................................................................. 28 4.7.1. Books and Records............................................................. 28 4.7.2. Annual Financial Information.................................................. 28 4.7.3. Monthly Reports............................................................... 29 4.7.4. Quarterly Financial Information............................................... 29 4.7.5. Meetings...................................................................... 30 4.8. Bank Accounts........................................................................ 30 4.9. Concessions.......................................................................... 30 4.10. Working Capital...................................................................... 31 4.11. Legal Actions........................................................................ 32 4.12. Expenses............................................................................. 32 4.12.1. Partnership's Financial Obligations.......................................... 32 4.12.2. No Obligation to Fund........................................................ 33 4.12.3. Taxes........................................................................ 33 4.12.4. Funding Deficits............................................................. 33 4.13. Consent and Approvals................................................................ 34 5. COMPENSATION OF MANAGER....................................................................... 34 5.1. Basic Compensation for Management Services........................................... 34 5.2. Incentive Management Fees............................................................ 35 5.3. Fee Adjustment....................................................................... 35 5.4. Subordination of Incentive Management Fees........................................... 35 5.4.1. Subordination................................................................. 35 5.4.2. Payment of Loans.............................................................. 38 5.5. Losses............................................................................... 38 5.6. Manager Loans........................................................................ 38 5.7. Certain Definitions.................................................................. 39 5.7.1. Resort Gross Revenues......................................................... 39 5.7.2. Resort Operating Profits...................................................... 40 5.7.3. Venture Agreement............................................................. 41 6. INSURANCE..................................................................................... 41 6.1. Insurance............................................................................ 41 6.2. Insurance Standards and Requirements................................................. 41 6.3. Indemnification...................................................................... 42 6.3.1. Indemnification of Manager.................................................... 42 6.3.2. Indemnification of the Partnership............................................ 43 6.3.3. Procedure for Indemnification................................................. 44
iii 7. DAMAGE TO RESORT AND CONDEMNATION............................................................. 46 7.1. Casualty Damage...................................................................... 46 7.1.1. The Partnership to Restore.................................................... 46 7.1.2. Limitation on Restoration..................................................... 47 7.2. Condemnation......................................................................... 47 7.2.1. Total Condemnation............................................................ 47 7.2.2. Partial Condemnation.......................................................... 48 8. TERMINATION................................................................................... 48 8.1. Right of Termination................................................................. 48 8.2. Payments............................................................................. 50 8.3. Manager's Liquidation Share.......................................................... 51 8.4. Null and Void........................................................................ 52 9. MISCELLANEOUS................................................................................. 52 9.1. Entire Agreement..................................................................... 52 9.2. Counterparts......................................................................... 53 9.3. Notices.............................................................................. 53 9.4. Waivers.............................................................................. 55 9.5. Severability......................................................................... 55 9.6. Choice of Law........................................................................ 55 9.7. Non-Assignability.................................................................... 55 9.8. Captions............................................................................. 56 9.9. Non-Recourse to Partners............................................................. 56 9.10. Limitation of Remedies............................................................... 56
iv DEVELOPMENT SERVICES AND MANAGEMENT AGREEMENT THIS AGREEMENT, made as of the 12th day of January 1, 1990, by and between EL CONQUISTADOR PARTNERSHIP L.P., a limited partnership formed pursuant to the limited partnership law of the State of Delaware (the "Partnership"), and WILLIAMS HOSPITALITY MANAGEMENT CORPORATION, a Delaware Corporation ("Manager"). W I T N E S S E T H: WHEREAS, the Partnership is acquiring and renovating a hotel and casino resort in Fajardo, Puerto Rico, formerly known as the "El Conquistador Hotel" to develop the property as a first class, luxury destination mega-resort (the "Resort"); and WHEREAS, the Resort is currently closed and will undergo extensive remodeling, renovation, refurbishing and construction (the "Renovation") as generally outlined in Exhibit A annexed hereto, prior and subsequent to its scheduled re-opening in December, 1991; and WHEREAS, the parties mutually desire Manager to provide technical assistance and development services during the Renovation and to control, supervise and direct the operation and management of the Resort on behalf of the Partnership after the opening of the Resort; NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained, the parties hereby agree as follows: 1. DEVELOPMENT OF THE RESORT. 1.1. THE RENOVATION. The Partnership shall proceed diligently to acquire the land and buildings contemplated for the Resort and to use its best efforts to effect the Renovation in accordance with plans and specifications approved by the Partnership so that the Resort may be ready for operation as a first class, luxury destination mega-resort as quickly as practical. Manager shall use its best efforts to assist the Partnership by performing the Technical and Development Services (as hereafter defined) provided in this Section 1 as and when requested by the Partnership and will work closely and coordinate its services with the Partnership and the Construction Manager (as hereafter defined) so that the Resort may be ready for operation as a first class, luxury destination mega-resort as quickly as practical. The parties acknowledge that the Partnership has prepared an estimated budget (the "Development Budget"), a copy of which is annexed hereto as Exhibit B, for all "hard costs" and "soft costs" to be incurred in connection with the Renovation and equipping of the Resort. The parties believe that the Project (as hereafter defined) can be completed within the parameters of the Development Budget. To the extent practical, the Partnership and Manager shall make decisions and recommendations, perform their obligations hereunder and otherwise use their best efforts to complete the 2 Renovation and perform the Technical and Development Services within the parameters of the Development Budget. Notwithstanding the foregoing, it shall be the Partnership's obligation, subject to the provisions of Section 9.10 hereof, to complete the Renovation, approve Pre-Opening Budgets (as hereafter defined) and deliver to the Manager for management as hereafter provided, a fully equipped, first class, luxury destination mega-resort having substantially all the facilities described in Exhibit A annexed hereto, even if the costs and expenses thereof exceed the Development Budget. From time to time the Partnership may revise the Development Budget without the approval or consent of Manager but such revision shall not affect any previously approved Pre-Opening Budget without the consent of the Manager. The Partnership shall notify Manager promptly of all changes, modifications and refinements to the Development Budget. All references herein to the Development Budget shall refer to such budgets as amended by the Partnership from time to time. 1.2. CERTAIN DEFINITIONS. 1.2.1. "COMMENCEMENT DATE" means the first day the Resort opens to the general public and commences business. 1.2.2. "CONSTRUCTION MANAGEMENT AGREEMENT" shall refer to the contract to be entered into between the Partnership and the "Construction Manager" for construction management services in connection with the Renovation. 3 1.2.3. "CONSTRUCTION MANAGER" shall refer to KG (Caribbean) Corporation. 1.2.4. "CONSULTANTS" shall refer to any an all various architectural, landscape, design, engineering or other professional consultants retained by or on behalf of the Partnership for the overall or separate aspects of the Project. 1.2.5. "CONTRACTORS" shall refer to any and all of the various general and specialty contractors, suppliers, trade contractors or other construction related firms or entities retained by or on behalf of the Partnership for the overall or separate aspects of the Renovation. 1.2.6. "PROJECT" means all matters relating to the acquisition of the land and buildings for the Resort, all things associated with completion of the Renovation and to fully equip the Resort and make it fully operational as a first-class, luxury destination mega-resort having substantially all the facilities described in Exhibit A annexed hereto. 1.3. TECHNICAL AND DEVELOPMENT SERVICES. In connection with the Project, and subject to the terms of this Section 1, Manager shall make available and provide to the Partnership the technical and development services ("Technical and Development Services") as are described on Exhibit C annexed hereto. Manager will use its best efforts in rendering such services as and when requested by the Partnership and will work closely with and coordinate its activities with the Construction Manager except that Manager 4 makes no representation or warranty as to its ability to perform the Technical and Development Services. Manager will make available all of its sources of supply to the Partnership and shall make reasonably available all of its expertise in connection with the Project. To the extent it is able and subject to any other provisions of this Section 1, Manager will provide personnel as needed for the rendering of its Technical and Development Services and for the coordination of its obligations with other parties involved in the Renovation including the Construction Manager. Manager understands that the Partnership may request Manager to render assistance to the Partnership in all phases and aspects of the Renovation and that Manager will be working closely on a day to day basis with the Construction Manager. In some cases, the responsibilities of Manager and the Construction Manager overlap and it is the parties intention that the Manager and the Construction Manager will coordinate their activities in a manner so as to provide the best results to the Partnership. Any conflicts between the Manager and the Construction Manager shall be resolved by the Partnership. Manager shall use its best efforts, subject to the limitations and constraints of this agreement, in rendering the Technical and Development Services consistent with completion of the Project as contemplated and to the extent practical, consistent with the Development Budget. 1.4. PRE-OPENING PROGRAM. Prior to the Commencement Date, Manager shall develop and implement a pre-opening program for the 5 Resort in accordance with Pre-Opening Budgets to be developed and approved pursuant to Section 1.8 hereof and as part of such program shall on behalf of the Partnership (a) recruit, hire and train the initial staff of the Resort using such training techniques as Manager shall reasonably deem advisable, (b) organize the Resort's operations and services, including licensees and concessionaires, and (c) provide a marketing program for the Resort, which shall include advertising, promotions, literature, travel, business entertainment and opening celebration ceremonies (all of the foregoing begin referred to herein as the "Pre-Opening Program"). 1.5. WORKING CAPITAL AND SUPPLIES. Prior to the Commencement Date and consistent with the Development Budget and the Pre-Opening Budgets approved by the Partnership as provided in Section 1.8, the Partnership shall provide all necessary working capital and all necessary inventories of chinaware, silverware, utensils, glasses, linens, towels, uniforms, food, beverage, paper products, soap, cleaning supplies, cards, chips, dice and other casino supplies, golf and marina supplies and other operating supplies and consumables as Manager deems reasonably necessary to operate the Resort as a first class, luxury destination mega-resort. 1.6. REIMBURSABLE COSTS AND EXPENSES. Subject to pre-approval by the Partnership as provided in Section 1.8, all costs, fees and expenses incurred by Manager in performance of its duties under this Section 1, including the Pre-Opening Program and Technical and Development 6 Services, shall be borne by the Partnership and shall not be the responsibility of Manager. Manager shall receive monthly reimbursement payments from the Partnership in respect thereof, or, at Manager's request, the Partnership shall pay such costs, fees or expenses directly upon submission of third party invoices therefor. Such costs shall include, but not be limited to, the following: (A) travel, meals, lodging and other living expenses in connection with travel outside of Puerto Rico; (B) salaries personnel of Manager other than Hugh Andrews, to the extent directly involved in the performance of services hereunder; (C) reproductions, postage and handling of drawings, plans, specifications and other documents; (D) Manager's computer and duplicating services at its usual and customary hourly rate or the actual cost of use of outside data processing, computer or duplicating services; (E) photography and video procedures, whether by Manager or third parties; (F) renderings, models and work-ups; (G) cost of establishing and maintaining an on-site office for Manager and/or the Partnership's use including furnishings, equipment and utilities in connection therewith; 7 (H) local and long distance phone charges and telecommunication costs; (I) entertainment and promotional expenses, particularly in connection with the Pre-Opening Program; (J) advertising expenses; (K) salaries and fees of third parties such as accounting, law, architectural, design, engineering and decorating firms; (L) overtime work requiring higher than regular rates; (M) insurance, if any, carried by Manager in connection with its services; (N) transportation to and from or otherwise in connection with the Project and the performance of Manager's obligations under this Section 1; and (O) any other expense incurred by Manager in connection with performance of its obligations under this Section 1. 1.7. PARTNERSHIP'S PRE-APPROVAL. Manager acknowledges that the Partnership intends to perform the Renovation and otherwise complete the Project within strict budgetary guidelines evidenced by the Development Budget. Accordingly, Manager will assist the Partnership and the Partnership's agents to set up budgets to the extent reasonably practical for all expenses for which Manager expects to be reimbursed in connection with 8 performance of its obligations under this Section 1, and to be incurred by the Partnership in connection with the Project, including staffing, allocation of resources and contingencies. Manager shall only incur such expenses and perform such services under this Section 1 as shall be provided for in a Pre- Opening Budget approved by the Partnership. All of Manager's staffing, allocation and assignment of personnel to the performance of services under this Section 1 shall be subject to the Partnership's prior approval through the Pre-Opening Budget process, which approval shall not be unreasonably withheld. Except as set forth herein, Manager shall not incur or be entitled to reimbursement for any costs or expenses or enter into any contracts, or engage the services of any professionals, consultants or other third parties without the Partnership's prior approval thereof through the Pre-Opening Budget approval process. Manager's obligation to render Technical and Development Services and establish and carry out the Pre-Opening Program is expressly limited by and conditioned upon the Partnership's approval of the costs and expenses associated therewith evidenced by its approval of a Pre-Opening Budget containing such costs and expenses. The Partnership's obligation to pay or reimburse Manager therefor is expressly subject to the Partnership's prior approval thereof as aforesaid and to its obligations as provided in Section 1.1 but the Pre-Opening Budget approval process and Manager's compliance therewith shall not impair, impede or otherwise affect the payments to Manager of the Development Fee as provided in Section 1.9 hereof. 9 1.8. PRE-OPENING BUDGETS. 1.8.1. From time to time Manager shall prepare and deliver to the Partnership cost estimates and budgets ("Pre-Opening Budgets") detailing costs and expenses which Manager intends to incur in connection with its rendering of Technical and Development Services and establishment of the Pre-Opening Program and may provide for unanticipated contingencies. These Pre-Opening Budgets may be in various forms and formats depending upon the nature of the expenditure for which approval is sought. For example, a Pre- Opening Budget may consist of a request to engage a specific professional such as an architect or designer at a specific price or rate of compensation, may be a request to hire a specific individual or unidentified individuals at specific rates of compensation, or may be in the nature of line items of a general nature such as travel, secretarial services, equipment, landscape, architects, etc. Manager shall identify the expenditures for which approval is sought and provide the Partnership with such detail and explanations to support such requests as may reasonably be requested by the Partnership. 1.8.2. The initial Pre-Opening Budget shall be submitted to the Partnership promptly following the execution of this agreement but prior to Manager's performance of any additional Technical and Development Services other than the continuation of services already in progress. The Partnership acknowledges that Manager has heretofore performed Technical and Development Services in connection with the Project and made 10 expenditures and commitments in connection therewith. The Partnership hereby approves such services, expenses and commitments and shall reimburse Manager for the expenses incurred in connection therewith promptly following the execution of this agreement and hereby assumes the commitments, all as set forth in Exhibit D annexed hereto. All subsequent Pre-Opening Budgets shall be submitted to the Partnership for its approval sufficiently in advance of the date by which the expenses are expected to be incurred so as to permit the Partnership an adequate opportunity to fully evaluate and take action with respect to such Pre-Opening Budget. The Partnership shall respond promptly to Manager's requests for approval of Pre-Opening Budgets by approving, disapproving or proposing changes for or modifications to all requests for approval of Pre-Opening Budgets so that there is no unreasonable delay in Manager's performance of its obligations hereunder. 1.8.3. Pre-Opening Budgets shall be prepared by the Manager so as to effect the Renovation and completion of the Project as a first class, luxury destination mega-resort and to be ready for the Commencement Date as quickly as practical. 1.9. Compensation for Technical and Development Services. 1.9.1. In consideration for all services rendered by Manager under this Section 1, the Partnership shall pay to Manager a fee (the "Development Fee") equal to Three Million Two Hundred Thirty Eight Thousand ($3,238,000) Dollars. In addition to the Development Fee, Manager 11 shall receive monthly payments on account of reimbursable expenses as set forth in Section 1.6 hereof. The Development Fee shall be deemed earned by and shall be paid to Manager in twenty-four (24) equal monthly installments of One Hundred Thirty Four Thousand Nine Hundred Sixteen Dollars and Sixty Seven Cents ($134,916.67) each on the first day of each calendar month commencing December, 1989 and ending November, 1991; provided, however, that the Partnership shall not pay and is not required to pay any portion of the Development Fee unless and until the Partnership acquires the land and buildings on which the Resort shall be located and upon the closing with respect to such acquisition, the Partnership shall pay to the Manager that portion of the Development Fee deemed earned by Manager from December 1, 1989 through the date of such closing. 1.9.2. Subject to Section 1.9.1 and any provisions to the contrary which may be required by the lender of the First Mortgage Loan, as defined in the Venture Agreement (as hereafter defined), the Partnership shall pay the Development Fee to Manager as and when earned. The parties acknowledge that the Development Fee shall be paid from funds available to the Partnership including capital contributions to the Partnership and proceeds of loans received by the Partnership from lenders for the Project and that notwithstanding any provision in this Section 1.9 to the contrary, payment of the Development Fee to the Manager as provided herein shall be made only to the extent and in the manner permitted by such lenders; provided, however, 12 that the Partnership shall make every effort to include the Development Fee within such loans and to permit payment of the Development Fee as provided herein under the terms of such loans. The Partnership shall promptly advise Manager of any limitation or objection by its lenders with respect thereto. 1.9.3. Subject to Section 1.9.2, payments to Manager under this Section 1, both of the Development Fee and for reimbursement of expenses, shall be made on the basis set forth herein in full without retainage of other withholding. 1.10. OBLIGATIONS SEPARATE. The obligations of Manager under this Section 1 are separate and severable from the obligations of Manager during the Management Term (as hereafter defined). No default or claimed default by Manager in the performance of its obligations under Section 1 hereof shall in any way affect or operate to terminate Manager's rights and obligations with respect to the Management Term, affect Manager's right to commence management of the Resort on the Commencement Date, nor be asserted against Manager or entitle the Partnership to deduct from, offset or withhold any amounts required to be paid to Manager in respect of the Management Term. Provided this agreement has not bee terminated prior to the Commencement Date as provided in Section 8.1.1, 8.1.4 or 8.1.5 hereof, Manager's right to commence management of the Resort on the Commencement Date as hereafter provided is absolute and unconditional and neither the Partnership nor any partner of the Partnership shall assert any claim 13 to the contrary. No deductions shall be made from the Development Fee or other compensation or from any expenses due Manager on account of penalty, liquidated damage or other sums withheld from payments to Consultants or Contractors, or on account of the cost of changes in work comprising the Project. 1.11. If the Partnership observes or otherwise becomes aware of any fault or defect in the Project, or nonconformance with the applicable contract documents, the Partnership shall give prompt written notice thereof to Manager. 1.12. Manager shall be entitled to rely upon the expertise of all third party Contractors and Consultants in connection with the Project. Under no circumstances shall the Partnership seek to hold Manager responsible for any acts or omissions of any Contractor or Consultant or for the quality of their performance or lack thereof. 2. APPOINTMENT AS MANAGER OF THE RESORT. 2.1. APPOINTMENT AND TERM. The Partnership hereby appoints and employs Manager to act as its agent for the supervision, direction and control of the operation and management of the Resort on the Partnership's behalf, upon the terms and conditions hereinafter set forth, for a term of 20 years beginning on the Commencement Date (the "Management Term"). Manager hereby accepts such appointment and shall supervise, direct and control the operation and management of the Resort during the Management 14 Term upon the terms and conditions hereinafter set forth. As used herein, the Resort shall include substantially all the facilities currently contemplated by the Partnership as set forth in Exhibit A annexed hereto to the extent constructed. The Partnership shall also include in the Resort for purposes of Manager's services hereunder as and when built the up to 100 condominium units (each unit to be capable of rental as three separate hotel rooms) currently contemplated by the Partnership to be built in four sections of 25 units each during the years 1992 through 1995, the net rental income from which is contemplated to be included within the Resort's Gross Revenues (as hereafter defined), and such other additional facilities as may be added to the Resort at the election of the Partnership from time to time. Manager shall have no right by virtue of this agreement to manage such other additional facilities unless the Partnership shall have elected to include such facilities in the Resort. 2.2. RELATION OF THE PARTIES. In performing its duties during the Management Term, Manager shall be deemed to act only as the appointed agent or representative of the Partnership, and nothing in this agreement shall be construed as creating a tenancy, partnership, joint venture or any other relationship between the parties hereto except that of principal and agent. All debts and liabilities incurred by Manager within the scope and in accordance with the performance of its obligations hereunder as manager of the Resort shall be the debts and obligations of the Partnership only and shall be borne by the Partnership and shall not be the responsibility of Manager. 15 3. BUDGETS. 3.1. GENERAL POLICY. It is the intention of the parties to operate the Resort at all times in accordance with pre-established budgets approved by the Partnership and Manager shall not incur on behalf of the Partnership any debts, liabilities, costs, expenses or commitments except within such budgetary restraints or which are otherwise specifically approved by the Partnership except as otherwise contemplated by this agreement. All budgeting, planning and accounting records and reports prepared by Manager will be based upon generally accepted accounting principles consistently applied and the Uniform System of Accounts for Hotels, copyrighted by the Hotel Association for New York City, 8th edition of 1986, as amended from time to time (the "Uniform System of Account for Hotels") and shall, to the extent practical, be coordinated with the Partnership's books and records. 3.2. FISCAL YEAR. For all purposes under this agreement, the Resort's fiscal year ("Fiscal Year") shall be the twelve-month period ending on March 31 or such other period as the Partnership shall designate, which period shall be reasonably acceptable to Manager. 3.3. ANNUAL BUDGETS. 3.3.1. For each Fiscal Year or part thereof during the Management Term, Manager shall submit to the Partnership 60 days before the beginning of each such Fiscal Year, or, with respect to the Fiscal Year in which the Commencement Date occurs, 45 days before the Commencement 16 Date, reasonably detailed operating budgets (the "Operating Budgets") and capital expenditures budgets (the "Capital Budgets") (the Operating Budgets and Capital Budgets are referred to herein collectively as the "Annual Budgets"), each in comparable detail to the Operating Budgets and Capital Budgets now prepared by Manager in respect of the El San Juan Hotel and Casino and the Condado Plaza Hotel and Casino. Capital Budgets shall contain all items of a capital nature as determined under generally accepted accounting principles and Operation Budgets shall contain all other items. Within 30 days after its receipt of any Annual Budget, the Partnership shall notify Manager in writing of its approval of the Operating Budget and Capital Budget comprising the Annual Budget or items therein or of any objections, changes, revisions or other comments it may have with respect thereto. The Partnership may approve or object to all or any portion of an Annual Budget. To the extent that any budget is approved, in whole or in part, in writing by the Partnership, such budget or portion thereof so approved shall constitute an approved budget ("Approved Budget") for purposes of this agreement and Manager shall be entitled to incur expenses and made commitments consistent with such Approved Budget. To the extent that the Partnership has failed to approve any Annual Budget or portion thereof, Manager and the Partnership shall meet with each other to agree upon a mutually satisfactory Operating Budget or Capital Budget, as the case may be, or portion thereof in accordance with the principle set forth in Section 3.3.5 and, once so agreed, the budget 17 or portion thereof so agreed to shall become an Approved Budget for purposes of this agreement. Subject to Section 9.10, the Partnership shall not, however, be entitled to unilaterally require the reduction of the amount of the total Operating Budget, excluding Variable Charges, (as hereafter defined), below the amount of the total Operating Budget, excluding Variable Charges, contained in the most recent Approved Budget and shall not be entitled to unilaterally require the reduction of the total amount of the Variable Charges so as to reduce the Variable Charges as a percent of projected revenues in the proposed Annual Budget below the amount of the Variable Charges as a percentage of revenues in the most recent Approved Budget. The Partnership shall have absolute discretion to approve or disapprove items in a Capital Budget except the Partnership shall approve portions of the Capital Budgets consistent with the principle set forth in Section 4.5 hereof. No proposed Capital Budget or Operating Budget or portion thereof shall constitute an Approved Budget unless and until it shall be approved by the Partnership as herein provided. 3.3.2. After approval of a Capital Budget, Manager may not exceed the expenditures therein without the prior written approval of the Partnership. 3.3.3. The parties acknowledge that the Operating Budgets shall consist of certain charges which are not expected to fluctuate based upon occupancy or use of the Resort's facilities ("Stable Charges") and 18 certain charges which will fluctuate based upon occupancy or use of the Resort's facilities ("Variable Charges"). Variable Charges include, but are not limited to, utilities, water, laundry, personnel and food and beverage. Stable Charges include, but are not limited to, marketing and advertising expenses, property taxes and insurance. Within each Operating Budget, Manager shall be entitled to establish a reserve amount which it deems sufficient to cover any cost overruns in connection with the Stable Charges. Accordingly, Manager shall not exceed the total amount of Stable Charges, including such reserve, reflected in an Approved Budget without the prior written consent of the Partnership. Variable Charges shall be reflected in Operating Budgets both as a dollar amount and as a percentage of projected revenues. Manager shall be entitled to incur Variable Charges in an aggregate amount above or below the aggregate dollar amounts reflected in an Approved Budget provided, however, that the aggregate amount of actual Variable Charges as a percentage of projected revenues reflected in the Approved Budget by more than five (5) percentage points. 3.3.4. If the Partnership fails to approve Annual Budgets or any portion thereof for any Fiscal Year, Manager may continue to operate the Resort and made expenditures for such Fiscal Year within the parameters of (i) the Operating Budget, including Variable Charges as a percentage of revenues, and (ii) the amount set forth for replacement of furniture, fixtures and equipment in the Capital Budget, each contained in the Approved Budgets 19 for the most recently completed Fiscal Year until full Approved Budgets shall have been established except that Manager shall be entitled to incur increased expenses in the ordinary course of business for matters set forth in the operating Budget if such increases are due to factors beyond the control of Manager such as utility rate increases, increased insurance premiums, tax increases, interest rate increases, supplier price increases and the like. 3.3.5. Manager shall prepare Annual Budgets and the Partnership shall act to approve budgets for the purpose of establishing Approved Budgets so as to enable the Resort to operate as a first class, luxury destination mega-resort. 3.3.6. In some cases Annual Budgets and therefore Approved Budgets may be broken down by month or quarter. All tests for whether Manager has complied with the Approved Budgets shall be made on an annual basis and not a monthly or quarterly basis. Such more detailed breakdown shall be solely for information purposes. 3.3.7. During the course of any Fiscal Year during the Management Term it may be appropriate to modify portions of an Approved Budget based upon actual operations and experience, unforeseen events or otherwise. In such event, Manager shall be entitled to request changes or modifications to Approved Budgets using the same procedures for requests for approval of Annual Budgets as provided above. 20 3.4. NO GUARANTEE. Manager makes no guarantee, warranty or representation whatsoever with respect to any Annual or Approved Budgets, including whether there will be profits or losses from the operation of the Resort or the amount of revenues to be derived. Manager shall use due care in preparing Annual Budgets so that such budgets shall reflect Manager's best estimate of costs and expenses to be incurred and revenues to be generated. The amounts, however, shall be only estimates and Manager shall have no liability to the Partnership with respect to such amounts absent gross negligence, wilful misconduct or fraud in connection with the preparation of such Annual Budgets or in connection with the performance of Manager's obligations during the Management Term. 4. OPERATION. 4.1. OPERATIONAL STANDARDS, ETC. 4.1.1. FIRST CLASS RESORT. Manager shall, at the expense of the Partnership and subject to Approved Budgets and the provisions of Section 9.10 hereof, use its best efforts to operate the Resort as a first class, luxury destination mega-resort in accordance with the provisions of this agreement and consistent with such standards, other comparable properties in the area and customary practices in the resort industry. Subject to the provisions of Section 9.10 hereof, the Partnership shall conduct its affairs, provide funds and all other matters necessary for the operation of the Resort as a first class, luxury destination mega-resort. 21 4.1.2. NON-DISTURBANCE. Subject to Section 9.10, the Partnership hereby warrants to Manager uninterrupted control and operation of the Resort during the Management Term except as otherwise set forth herein, unless this agreement is earlier terminated as herein provided. The Partnership shall comply with all obligations to lenders to the Partnership so as to preserve ownership of the Resort and to permit the Partnership to fund its obligations hereunder. Except as otherwise set forth herein, Manager shall have complete control and discretion in the management of the Resort and the Partnership shall not interfere or involve itself with the day-to-day operation and affairs of the Resort. Manager shall operate the Resort free of molestation, eviction, disturbance by the Partnership or any third party claiming by, through or under the Partnership. Manager shall have absolute discretion in the determination of room rates, food and beverage menu prices, and charges to guests for other services performed by the Resort for guests and may alter room rates or other charges without prior consultation with the Partnership. Manager shall have control and discretion with regard to the use of the Resort for all customary purposes, including, the terms of admittance to the Resort for rooms, for commercial purposes, for privileges of entertainment, employee rules and practices and all phases of publicity and promotion. No influence shall be brought on Manager by the Partnership relating to the granting or extension of credit. Credit facilities shall be given by Manager in its discretion and in accordance with Manager's standard 22 practice. All of the foregoing shall be consistent with Manager's obligation to operate a first class, luxury destination mega-resort for the benefit of the Partnership as provided hereunder and within Approved Budgets. 4.2. PERMITS. Manager shall, on behalf of and with the cooperation of the Partnership and at the Partnership's sole expense, obtain all necessary licenses, findings of suitability, approvals and permits from the applicable governmental authorities (the "Government Authorities"), including the Secretary of the Treasury of the Commonwealth of Puerto Rico and any other governmental body or agency having authority over gaming, as may be required for the operation of the Resort throughout the Management Term, including without limitation, such liquor, bar, restaurant, gaming, marina, sign and hotel licenses as may be required for the operation of the Resort as a first class, luxury destination mega-resort. All such licenses, approvals and permits shall, to the extent possible, be obtained in the name of the Partnership. Manager shall notify the Partnership prior to obtaining any license, approval or permit in the name of anyone other than the Partnership. Manager undertakes to comply in all material respects with the rules, regulations and orders of the Government Authorities and with any conditions set out in any such licenses and permits and at all times to operate and manage the Resort in accordance with such conditions and any other requirements of law. Upon receipt by Manager of notice from the Partnership or any Government Authority that either the Manager or the Resort is not in compliance with the 23 rules, regulations and orders of any Government Authority or any condition in any license or permit, Manager, subject to the Approved Budgets, shall take such action as may be necessary to fully comply therewith. 4.3. PERSONNEL. 4.3.1. EMPLOYEES OF PARTNERSHIP. Subject to the Approved Budgets, Manager, as agent for the Partnership, shall hire, supervise, direct the work of, discharge, and determine the compensation and other benefits of all personnel working in the Resort during the term hereof, all of whom shall be in the sole employ of the Partnership and not in the employ of Manager. Manager shall be the sole judge of the fitness and qualifications of such personnel and shall have absolute discretion in the hiring, supervision, direction, discharging and determination of the compensation and other benefits of such personnel during the course of their employment. Manager shall in no way be liable to such personnel for their wages, compensation or other benefits (including, without limitation, severance, vacation and termination pay), nor to the Partnership, and the Partnership shall not interfere with or give orders or instructions to personnel employed at the Resort. Manager shall not, however, without the written consent of the Partnership, enter into any negotiations with any collective bargaining units or enter into any collective bargaining agreements. 4.3.2. EMPLOYEES OF MANAGER. Manager shall employ such of its personnel as deemed necessary by Manager for the performance of 24 its duties hereunder. During the term hereof, Manager shall be reimbursed by the Partnership for the salary, expenses and other compensation or benefits of such personnel, consistent with Approved Budgets. If such personnel perform services for other hotels or resorts managed by Manager, such personnel's salary, expenses and other compensation and benefits shall be fairly allocated by Manager, consistent with allocation methods used with other facilities managed by Manager. Manager shall keep the Partnership advised as to the personnel and services which it performs and shall fully advise the Partnership of allocation procedures used. Manager shall have the right to grant complimentary rooms and food and beverages to key personnel and their families, or to others wherein such is customary in the hotel industry or in Manager's standard practice or policy. 4.3.3. KEY MANAGERS. Notwithstanding the foregoing, the Partnership shall have the right to disapprove of Manager's choice for hiring or designation of key managers of the Resort, whether such managers shall be employees of the Partnership or Manager. Such key managers shall include the Resort's general manager, food and beverage manager, casino manager, controller, executive assistant manager and other managers whose annual compensation exceeds $100,000 per year. 4.3.4. REIMBURSEMENT FOR THIRD PARTY COSTS. The costs, fees, compensation or other expenses of any persons engaged by the Partnership or Manager in connection with the operations of the Resort and the 25 continuing obligations of the Manager, to perform duties of a specialist in nature related to the operation, maintenance or protection of the Resort, such as engineers, designers, attorneys, independent accountants and the like, shall be borne by the Partnership in accordance with Approved Budgets and shall not be the responsibility of Manager. Such costs, fees, compensation and other expenses shall be included in the Approved Budgets. 4.4. SALES AND PROMOTION. 4.4.1. SALES. Manager, on behalf of the Partnership and at the sole expense of the Partnership, shall institute and supervise a sales and marketing program which shall be reflected in the Operating Budgets included in the Approved Budgets. 4.4.2. PROMOTION. Manager may cause the Resort, on behalf of the Partnership and at the sole expense of the Partnership in accordance with Approved Budgets, to participate in sales and promotional campaigns and activities involving complimentary rooms, food, beverages and the use of other facilities of the Resort to travel agents, tourist officials and airline representatives. 4.5. MAINTENANCE AND CAPITAL REPLACEMENT. The Partnership and Manager recognize the necessity of establishing a continuing program of replacement of furnishings and equipment and the need to cause the Resort to be furnished, equipped and landscaped as a first class, luxury destination mega-resort. The parties acknowledge that the Partnership has 26 estimated that such program during the early years of the Management Term will be approximately 1% of revenues per year and thereafter increase up to approximately 3% of revenues per year. The actual amount shall be fixed each year under the procedures for Approved Budgets. However, the foregoing is intended to establish the Partnership's obligation to approve a budget implementing such program and to set forth the parties' expectation of the scope of such program as of the date hereof. The program shall be reflected in the Capital Budgets prepared by Manager and shall be included in the Approved Budgets consistent with the principles set forth in this Section 4.5 and Section 3.3.5 hereof. 4.6. OPERATING, SUPPLY AND MAINTENANCE CONTRACTS. Manager is authorized to make and enter into in the name of, for the account of, and at the expense of the Partnership all such contracts and agreements as are in Manager's opinion necessary for the operation, supply and maintenance of the Resort, except that prior written approval of the Partnership shall be required if such contract or agreement is for a term greater than one year and cannot be terminated without payment or penalty upon not more than 90 days notice. Manager is authorized to pay amounts due under such contracts and agreements when due from the Resort's accounts, consistent with the Approved Budgets. Manager shall be required to obtain the consent of the Partnership before entering into any contract, agreement or purchase involving any structural repair, alteration or rehabilitation of the Resort or the repair or 27 replacement of any furnishings, fixtures or equipment contained therein if not provided for in the Approved Budgets. 4.7. ACCOUNTING SERVICES. 4.7.1. BOOKS AND RECORDS. As an expense of the Partnership, Manager shall maintain an accurate accounting system in connection with its management of the Resort which shall be reasonably coordinated with the accounting system used by the Partnership. The books and records regarding the operation of the Resort shall be kept in accordance with Section 3.1 of this agreement, shall be maintained at the Resort, and shall be the property of the Partnership. As an expense of the Partnership and as reflected in the Approved Budgets, Manager shall comply with all requirements in respect of internal controls and accounting and shall prepare all required reports under the rules and regulations of the Government Authorities or any other applicable law or regulation. In connection with the foregoing and consistent with the Approved Budgets, Manager shall, in connection with its obligations under this Section 4.7.1, exercise due care and diligence, consistent with the level of operations of the Resort contemplated by this agreement. 4.7.2. ANNUAL FINANCIAL INFORMATION. As an expense of the Partnership, Manager shall direct that a certified audit of the accounts of the Resort shall be performed annually by Ernst and Young or another independent accounting firm mutually acceptable to the Partnership and Manager and shall instruct such accounting firm to deliver at least one copy 28 thereof, consisting of a balance sheet, income statement and statement of cash flows, to the Manager and the Partnership, at the addresses set forth on Exhibit E annexed hereto, as the same may be amended from time to time, no later than 90 days after the end of each Fiscal Year. Nothing herein contained shall prevent Manager's shareholders or the Partnership's general partners or their duly authorized designees or their independent accounting firms from examining the books and records of the Resort at all reasonable times. 4.7.3. MONTHLY REPORTS. On or before the 25th day of each month, Manager shall furnish the Partnership at the addresses set forth on Exhibit E annexed hereto with a statement for the preceding calendar month of the gross income received from rooms, food and beverages, gaming, marina, golf course, condominiums and other sources, guest room occupancy percentage, average room rate and total expenses paid by category during the said month, such statement to be prepared in accordance with the Uniform System of Accounts for Hotels. Monthly reports furnished by Manager pursuant to this Section will be in comparable detail to those reports now prepared by Manager for the El San Juan Hotel and Casino and the Condado Plaza Hotel and Casino. 4.7.4. QUARTERLY FINANCIAL INFORMATION. On or before the expiration of 45 days following the end of each fiscal quarter of the Resort, Manager shall furnish to the Partnership unaudited financial statements of the Resort for that quarter consisting of a balance sheet, income statement and 29 statement of cash flows, prepared in accordance with Section 3.1 of this agreement. 4.7.5. MEETINGS. During the Management Term and at the request of the Partnership or either of the General Partners thereof, the Manager shall cause its representatives to meet in Puerto Rico with representatives of the Partnership or such General Partners, as the case may be, no more frequently than once per month, for the purpose of reviewing the financial results of the operations of the Resort and to otherwise respond to all reasonable inquiries of the Partnership or such General Partners concerning the operations of the Resort. 4.8. BANK ACCOUNTS. Manager shall establish such bank accounts as Manager deems appropriate for the operation of the Resort. Such bank accounts shall relate solely to the Resort, all Resort Gross Revenues or other Partnership funds shall be deposited, maintained and segregated by the Manager in such accounts and Manager shall not commingle such funds with any of the Manager's funds or any funds of any other person or entity. Such bank accounts shall be established only at financial institutions approved by the Partnership. 4.9. CONCESSIONS. Manager is authorized to consummate, in the name of and for the benefit of the Partnership, arrangements and leases with concessionaires, licensees, tenants and other intended users of any facilities related to the Resort. Copies of all such arrangements and leases 30 shall be furnished to the Partnership. The terms of such arrangements or leases shall be subject to the prior approval of the Partnership although Manager shall have absolute discretion in choosing or selecting the type of facility that shall be given to and conducted by such third party. Manager customarily uses a standard form for such arrangements, however, the terms and provisions thereof as well as in each case the specific economic and additional terms thereof, shall be subject to the Partnership's prior approval which approval shall not be unreasonably withheld. For instance, if Manager deems it appropriate that the Resort have an Italian restaurant run by a third party, the Partnership shall have the right to approve the economic and additional terms of the agreement to be entered into by Manager on behalf of the Partnership as aforesaid but the Partnership shall not be entitled to disapprove of the Manager's decision that the restaurant be run by a third party and be an Italian style restaurant, that decision being recognized as being within the scope of Manager's expertise as a manager of first class, luxury resorts. 4.10. WORKING CAPITAL. The Partnership shall, at its sole expense, provide Manager will sufficient working capital during the Management Term for the uninterrupted and efficient operation of the Resort as a first class, luxury destination mega-resort and in accordance with the Approved Budgets. 31 4.11. LEGAL ACTIONS. Manager may institute, at its sole option, in its name or the Partnership's name, but at the sole expense of the Partnership, legal actions or other proceedings to collect charges or rents, to oust guests or tenants, or to terminate leases or agreements. Manager shall give the Partnership written notice prior to instituting any action or proceeding involving in excess of $25,000 and which relates to the ordinary course of operations of the Resort, other than routine collection matters. Without the prior written consent of the Partnership, Manager shall not institute any legal actions or other proceedings which involve matters outside the ordinary course of operations of the Resort or which are otherwise of an extraordinary or non- routine nature. 4.12. EXPENSES. 4.12.1. PARTNERSHIP'S FINANCIAL OBLIGATIONS. All costs, expenses, funding of operating deficits and working capital, debts, obligations and liabilities of the Partnership or the Resort under this agreement (the "Partnership's Financial Obligations") shall be the sole and exclusive responsibility and obligation of the Partnership. It is understood that statements in this agreement indicating that Manager shall furnish, provide or otherwise supply, present or contribute items or services hereunder shall not be interpreted or construed to mean that Manager is liable or responsible to fund or pay for such items or services. 32 4.12.2. NO OBLIGATION TO FUND. The Partnership shall reimburse Manager upon demand for any money or other property which Manager may in its discretion pay out for any reason whatsoever in performing its duties as manager of the Resort hereunder as provided for in the Approved Budgets whether the payment is for operating expenses or any other charges or debts and whether or not designated herein as an obligation of the Manager, the Partnership or the Resort; provided, however, that it is understood and agreed that Manager shall have no obligation or duty to fund or pay for any of the Partnership's Financial Obligations or advance any of its own funds for the operation of the Resort. 4.12.3. TAXES. As agent for the Partnership and at the Partnership's sole expense, Manager shall cause to be paid all taxes, fees and other charges due by the Partnership to the Government Authorities and other federal, commonwealth, state and local authorities in respect of the operation of the Resort. The Partnership shall retain the right to contest or cause the Manager to contest such taxes, fees and other charges. 4.12.4. FUNDING DEFICITS. With respect to any deficits which may arise as a result of operations of the Resort, the Partnership shall be obligated to fund and pay such deficits which are not covered by the Resort income, within 30 days after written request therefor by Manager. If the Partnership fails or delays in furnishing funds to cover such deficits, Manager shall have no responsibility or liability, and the Partnership shall indemnify and 33 hold harmless Manager with respect to any liability, however arising, which may arise out of or relate to, directly or indirectly, such failure or delay in funding such deficits. The foregoing obligation is subject to the provisions of Section 9.10 hereof. 4.13. CONSENT AND APPROVALS. In acting under this agreement in all matters relative to this agreement and in approving or consenting to any matter under this agreement, the Partnership and Manager shall act in a reasonable manner and consistent with the operation of a Resort as a first class, luxury destination mega-resort. The Partnership shall take into account Manager's advice stemming from its experience as a manager of first class, luxury resorts, and conditions prevailing generally in the hotel and casino resort industry. 5. COMPENSATION OF MANAGER. 5.1. BASIC COMPENSATION FOR MANAGEMENT SERVICES. In consideration for all services rendered by Manager as manager of the Resort pursuant to this agreement on and after the Commencement Date, the Partnership shall pay to Manager, subject to the provisions of Section 5.3 of this agreement, a basic management fee (the "Basic Management Fee") of three and one half (3.5%) percent of Resort Gross Revenues (as hereinafter defined in Section 5.7). The Basic Management Fee shall be payable monthly on the 25th day following the end of each month based upon the monthly operating statements prepared and delivered in accordance with Section 4.7 of 34 this agreement, subject, however, to adjustment as provided in Section 5.3 of this agreement. 5.2. INCENTIVE MANAGEMENT FEES. Subject to the provisions of Section 5.3 and 5.4 of this agreement, for each Fiscal Year during the term of this agreement, the Partnership shall pay Manager an incentive management fee (the "Incentive Management Fee") of ten (10%) percent of Resort Operating Profits (as hereinafter defined), which Incentive Management Fee shall be payable annually on the earlier to occur of (a) five days after the Partnership's receipt of audited financial statements for such Fiscal Year or (b) 120 days after the end of such Fiscal Year. 5.3. FEE ADJUSTMENT. Basic Management Fees paid or payable to Manager prior to the end of any Fiscal Year will be subject to verification and adjustment after receipt of the audited financial statements for the applicable Fiscal Year. If the Management Term is in effect for less than any full Fiscal Year then the Basic Management Fee and the Incentive Management Fee with respect to such partial Fiscal Year shall be based upon actual operations for the portion of the Fiscal Year included in the Management Term. 5.4. SUBORDINATION OF INCENTIVE MANAGEMENT FEES. 5.4.1. SUBORDINATION. (A) Notwithstanding anything herein to the contrary, no Incentive Management Fee with respect to any Fiscal Year shall 35 be paid by the Partnership or accepted by Manager until (i) all of the interest and principal due and payable during such month or Fiscal Year, as the case may be, with respect to the First Mortgage Loan and the Subordinated Mortgage Loan (as those terms are defined in the Venture Agreement) (the "Loans") shall have been paid or provided for by the Partnership, and (ii) all interest and principal on any Additional Loan or Deficiency Loan and payments of any Preferred Return and Deferred Preferred Return, as those terms are defined in the Venture Agreement, due for such Fiscal Year and any prior Fiscal Year shall have been paid or provided for by the Partnership (all of the foregoing being herein referred to as "Senior Obligations"). All payments of the Incentive Management Fee with respect to any Fiscal Year shall be subordinate to the Senior Obligations in accordance with this Section 5.4 and any payments received by Manager in violation of the foregoing shall be held in trust by Manager for the benefit of the holders of the Senior Obligations and shall be paid over or delivered to the holders of the Senior Obligations in accordance with their respective payment priorities. In addition, in the event of (a) a default under the Loans causing acceleration of the Loans or (b) a sale by the Partnership of all or substantially all of the Resort or (c) the condemnation or insured casualty loss of all or substantially all of the Resort or (d) the liquidation, dissolution or winding up of the Partnership, no Incentive Management Fee shall be paid to Manager until all Senior Obligations have been paid in full. 36 (B) In the event that notwithstanding the provisions of this Section 5 subordinating the payment of the Incentive Management Fee to the Senior Obligations in the circumstances set forth herein, Manager shall receive any payment in respect of the Incentive Management Fee at a time when such payment is prohibited by this Section 5 because the subordination provisions of Section 5.4.1 are deemed invalid or unenforceable by a court of competent jurisdiction, then and in such event such payment shall be received and held in trust by Manager for the benefit of the holders of the Senior Obligations and shall be paid over or delivered to the holders of the Senior Obligations in accordance with their respective payment priorities. In such event, Manager shall become subrogated to the rights of such holders to the extent it has turned over payments so received. (C) Any Incentive Management Fee due Manager but which is not paid by the Partnership by reason of the foregoing subordination shall be accrued and carried over, with simple interest at the rate of 10% per annum, until the Partnership shall have paid or provided for payment of the Senior Obligations to the extent provided in this Section 5.4.1 and shall thereafter be paid to Manager. If requested, Manager shall enter into an appropriate subordination agreement evidencing the foregoing if requested by the lenders of the First Mortgage Loan and/or Subordinated Mortgage Loan. Except for the Loans, the Deficiency Loans, the Additional Loans, the Preferred Return and Deferred Preferred Return, the Partnership shall not, 37 without the prior written consent of Manager, enter into any agreement which requires the Partnership to subordinate the Basic Management Fee or the Incentive Management Fee. 5.4.2. PAYMENT OF LOANS. Subject to Section 9.10 hereof, the Partnership shall pay or provide for the payment, when due, of all principal and interest and other amounts under the Senior Obligations so that the Partnership shall be entitled to pay the Incentive Management Fees provided for by this agreement. 5.5. LOSSES. Losses in any Fiscal Year shall be borne exclusively by the Partnership and shall not reduce the amount of any compensation which Manager may be entitled to receive pursuant to this agreement for any prior or subsequent Fiscal Year. No part of such loss shall be charged against, recaptured out of or otherwise serve to diminish or affect the Resort Gross Operating Profit for any prior or subsequent Fiscal Year. 5.6. MANAGER LOANS. In the event the General Partners of the Partnership make Deficiency Loans prior to the expiration of five years from the Commencement Date and the KG General Partner makes KG Loans, as those terms are defined in the Venture Agreement, then, so long as such KG Loans remain outstanding, Manager shall make non-recourse loans ("Manager Loans") to the WKA General Partner, as that term is defined in the Venture Agreement, out of payments received by it in respect of the Basic Management Fee to the extent and in an amount equal to 1% of Resort Gross Revenues as 38 provided in the agreement (the "Manager Loan Agreement") to be executed concurrently herewith among Manager, the WKA General Partner and Kumagai Caribbean, Inc. in the form annexed hereto as Exhibit F. Manager hereby authorizes and directs the Partnership, for so long as the KG Loans remain outstanding, to pay that portion of the Basic Management Fee required to be loaned to the WKA General Partner as Manager Loans directly to the KG General Partner at the address provided in the Venture Agreement. Notwithstanding the payment of such sums to the KG General Partner, such sums shall be deemed to satisfy, to the extent thereof, the obligation of the Partnership to Manager under the terms hereof with respect to the Basic Management Fee. It is understood and agreed that the KG General Partner is an express third party beneficiary of the foregoing agreement. 5.7. CERTAIN DEFINITIONS. For purposes of this agreement: 5.7.1. RESORT GROSS REVENUES. "Resort Gross Revenues" shall mean all gross revenues from all operations of the Resort, including, without limitation, all revenues from rooms, golf course (including dues and the first $5,000 of each initiation or membership fee but not amounts in excess thereof), marina, food and beverage, telephone, telex, interest, casino net wins, condominium net rentals, rentals or other payments from lessees, licensees, or concessionaires (but not including the licensees' or concessionaires' receipts), proceeds of business interruption insurance, and all other receipts (exclusive of tips, service charges added to a customer's bill or 39 statement in lieu of gratuities, which are payable to Resort employees, taxes collected and remitted to others, and the value of complimentary rooms, food and beverages, except those purchased by the casino), minus actual credits and refunds made to customers, guests or patrons. Subject to the foregoing adjustments, Resort Gross Revenues shall be determined in accordance with generally accepted accounting principles and the Uniform System of Accounts for Hotels as set forth in Section 3.1 of this agreement, except that in the event of conflict the definition of "Resort Gross Revenues" herein shall be controlling. 5.7.2. RESORT OPERATING PROFITS. "Resort Operating Profits" shall mean Resort Gross Revenues less all operating expenses of the Resort whether designated herein as an obligation of Manager, the Partnership or the Resort,, including, without limitation, (a) the Basic Management Fee; (b) marketing expenses; (c) repair and maintenance; (d) utility charges; (e) reserve for replacement of furniture, fixtures and equipment; (f) administrative and general expenses (including bad debt reserve) and (g) premiums for accident, health, workers compensation and other insurance furnished to or for the benefit of employees of the Resort and premiums for insurance of a similar nature; but prior to deducting (i) premiums for liability, property and casualty insurance; (ii) depreciation of building, plant, furniture, fixtures and equipment; (iii) amortization of pre-opening expenses; (iv) financing costs including interest charges, principal payment and debt service; (v) capital 40 expenditures and payments on leases other than amounts included in the reserve for replacement of furniture, fixtures and equipment; (vi) property taxes and taxes on income; (vii) the Incentive Management Fee; (viii) real property rentals. 5.7.3. VENTURE AGREEMENT. The "Venture Agreement" shall mean that certain joint venture agreement dated January 12, 1990 between Kumagai Caribbean, Inc. and WKA El Con Associates pursuant to which the Partnership was formed. 6. INSURANCE. 6.1. INSURANCE. Manager shall procure and maintain, on behalf of and at the expense of the Partnership, consistent with the Approved Budgets, at all times during the Management Term, all such insurance as Manager and the Partnership shall deem advisable including, without limitation, fidelity liability insurance covering all of the Resort's employees authorized to deal with Resort funds, and the premiums for such insurance shall be included in the Annual Budgets and Approved Budgets. The Partnership shall maintain all necessary insurance for the Resort and the premiums therefor shall be included in the Approved Budgets. Manager shall not be required to maintain separate insurance. 6.2. INSURANCE STANDARDS AND REQUIREMENTS. The Partnership and Manager shall keep each other advised of applicable laws, rules or regulations and third parties having the right to determine insurance 41 requirements for the Resort, including without limitation, the agreements under which the Loans are made and all insurance procured pursuant to Section 6.1 of this agreement shall meet or exceed any requirements of such applicable laws, rules or regulations and third parties having the right to determine insurance requirements for the Resort. Insurance procured hereunder shall be placed with insurance companies believed by Manager to be reputable and financially sound. All insurance hereunder shall name both Manager and the Partnership, as their interests shall appear and to the extent permitted by the insurance carrier shall name Manager as an additional insured at least to the extent of the Partnership's obligations under Section 6.3.1 hereof. 6.3. INDEMNIFICATION. 6.3.1. INDEMNIFICATION OF MANAGER. The Partnership shall defend and promptly indemnify Manager and save and hold it harmless from, against, for and in respect of and pay any and all damages, losses, obligations, liabilities, claims, encumbrances, deficiencies, costs and expenses, including without limitation, actual attorneys' fees and other costs and expenses incident to any suit, action, investigation, claim or proceeding, suffered, sustained, incurred or required to be paid by Manager by reason of (a) any breach or failure of any observance or performance of any representation, warranty, covenant, agreement or commitment made by the Partnership hereunder or relating to or as a result of any such representation, warranty, covenant, agreement or commitment being untrue or incorrect in any respect, 42 (b) injury or death to persons or damage or destruction of property due to any cause whatsoever, either in or about the Resort or elsewhere, as a result of the performance of this agreement by Manager, its agents, officers, directors or employees, or otherwise, irrespective of whether alleged to be caused, wholly or partially, by Manager, its agents, officers, directors or employees or (c) for any money or other property which Manager is required to pay out for any reasons whatsoever in performing its duties under this agreement, whether the payment is for operating expenses or any other charges or debts incurred or assumed by Manager or any other party, or judgments, settlements, or expenses in defense of any claim, civil or criminal action, proceedings, charge, or prosecution made, instituted or maintained against Manager or the Partnership, jointly or severally, because of the condition or use of the Resort, or acts or failures to act of Manager, its agents, officers, directors or employees, or arising out of or based upon any law, regulation, requirement, contract or award. Notwithstanding the foregoing, the Partnership shall not be liable to Manager pursuant to this Section 6.3.1 if any liability described above results from the willful misconduct, fraud or gross negligence by Manager, its officers, directors or employees who are not employed substantially full time in the management or operation of the Resort. 6.3.2. INDEMNIFICATION OF THE PARTNERSHIP. Manager shall defend and promptly indemnify the Partnership and save and hold it harmless from, against, for an in respect of and pay any and all damages, 43 losses, obligations, liabilities, claims, encumbrances, deficiencies, costs and expenses, including without limitation, actual attorneys' fees and other costs and expenses incident to any suit, action, investigation, claim or proceeding, suffered, sustained, incurred or required to be paid by the Partnership by reason of any injury or death of any person or damage or destruction of property due to the willful misconduct, gross negligence or fraud of Manager, its officers, directors or employees who are not employed substantially full time in the management or operation of the Resort. 6.3.3. PROCEDURE FOR INDEMNIFICATION. For purposes of this Section 6.3, the party entitled to indemnification shall be known as the "Injured Party" and the party required to indemnify shall be known as the "Other Party." If the Other Party shall be obligated to the Injured Party pursuant to this Section 6.3 or if a suit, action, investigation, claim or proceeding is begun, made or instituted as a result of which the Other Party may become obligated to the Injured Party hereunder, the Injured Party shall give prompt written notice to the Other Party of the occurrence of such event. The Other Party shall defend, contest or otherwise protect against any suit, action, investigation, claim or proceeding at the Other Party's own cost and expense. The Injured Party shall have the right, but not the obligation, to participate at its own expense in the defense thereof by the counsel of its own choice. If the Other Party fails timely to defend, contest or otherwise protect against any suit, action, investigation, claim or proceeding, the Injured Party 44 shall have the right to defend, contest or otherwise protect against the same and upon ten days' written notice to the Other Party may make any compromise or settlement thereof and recover the entire cost thereof from the Other Party including without limitation, actual attorneys' fees, disbursements and all amounts paid as a result of such suit, action, investigation, claim or proceeding or compromise or settlement thereof. In the event the Injured Party elects at any time not to seek or continue to rely on indemnification from the Other Party with respect to any claim, suit, action or proceeding, it shall have the right to defend, contest or otherwise protect against the same at its sole cost and expense and the Other Party shall have no liability to the Injured Party in respect of such claim, suit, action or proceeding and no right to defend or participate in the defense of such claim, suit, action or proceeding. Anything to the contrary herein notwithstanding, prior to finally settling any such claim, suit, action or proceeding, the Other Party shall give the Injured Party notice of its intention to settle same and the terms of such proposed settlement. If the Injured Party shall object to such proposed settlement within ten days after its receipt of such notice, then the Injured Party shall thereafter, at its sole expense, assume the control and defense of such claim, suit, investigation action or proceeding. In such event, the Other Party shall not be relieved from its obligations hereunder but such obligation shall be limited with respect to the amount of such claim, suit, investigation action or proceeding in the sense that it may not be greater than the amount for which the same 45 could have been settled as proposed by the Other Party and will not be greater than the amount for which it is ultimately resolved. If the Injured Party does not object to the terms of the proposed settlement within the aforesaid ten day period, then the Other Party shall have the right to consummate such proposed settlement upon the terms set forth in the aforesaid notice. Failure to give the Other Party timely notice of any claim, suit, action or proceeding shall in no way relieve such party from its obligation to indemnify the Injured Party except to the extent of losses actually caused to the Other Party by reason of such failure. 7. DAMAGE TO RESORT AND CONDEMNATION. 7.1. CASUALTY DAMAGE. 7.1.1. THE PARTNERSHIP TO RESTORE. The Partnership shall, subject to the provisions of this Section 7.1, repair, restore, rebuild or replace any damage to, or impairment or destruction of the Resort from fire or other casualty provided, however, that such obligation shall be limited to the amount of insurance proceeds actually received by the Partnership in respect of such casualty plus $3,000,000. If the Partnership fails to undertake such work within 90 days after the casualty, or shall fail to complete the same diligently, Manager may, but shall not be obligated to, undertake or complete such work for the account of the Partnership and shall be entitled to be repaid by the Partnership therefor, and the proceeds of insurance shall be made available to Manager for such purpose. If the Partnership fails to undertake 46 such work within 90 days after fire or other casualty, or shall fail to complete the same diligently, Manager, without prejudice to its rights against the Partnership arising from any breach by the Partnership of its obligations under this Section 7, may, at its election, terminate this agreement upon five days' written notice to the Partnership. 7.1.2. LIMITATION ON RESTORATION. If the Resort shall be wholly destroyed or Substantially Destroyed (as hereafter defined) during the term of this agreement by fire or other casualty, the Partnership shall have the right and option, upon notice served upon Manager within 90 days after such fire or other casualty, to decide not to make any repair, restoration, rebuilding or replacement and to terminate this agreement upon 30 days' written notice. For purposes of this Section, "Substantially Destroyed" shall mean damage to the Resort in excess of $40,000,000. 7.2. CONDEMNATION. 7.2.1. TOTAL CONDEMNATION. If the whole of the Resort shall be taken or condemned in any eminent domain, condemnation, compulsory acquisition or like proceeding by any competent authority for any public or quasi-public use or purpose, or if such of the Resort's facilities shall be so taken or condemned resulting in the Resort being Substantially Destroyed or if such a portion of the Resort shall be taken or condemned so as to make it imprudent or unfeasible, in Manager's reasonable opinion, to use the remaining portion as a resort of the type and class immediately preceding such 47 taking or condemnation, then in any of such cases, at the Partnership's election given in writing to Manager, the term of this agreement shall cease and terminate as of the later of the date of such taking or condemnation or Manager's receipt of notice of the Partnership's election to terminate this agreement. 7.2.2. PARTIAL CONDEMNATION. If such taking or condemnation results in the Resort not being deemed Substantially Destroyed and such taking or condemnation does not make if unfeasible or imprudent, in Manager's reasonable opinion, to operate the remainder as a resort of the type and class immediately preceding such taking or condemnation, this agreement shall not terminate, but the Partnership, to the extent of the condemnation award plus $3,000,000, shall repair any damage to the Resort, or any part thereof, or alter or modify the Resort, or any part thereof, or reconstruct any facility so taken or condemned so as to render the Resort a complete and satisfactory architectural unit as a resort of the same type and class as it was immediately preceding the taking or condemnation. 8. TERMINATION. 8.1. RIGHT OF TERMINATION. 8.1.1. Notwithstanding anything herein to the contrary, Manager may terminate this agreement if the Partnership shall fail to keep, observe or perform any covenant, agreement or provision of this agreement required to be kept, observed or performed by the Partnership, such 48 termination to become effective thirty days after Manager shall have given to the Partnership written notice of such failure, and such failure remains uncured by the Partnership during such thirty-day period or, if such failure cannot be cured within such thirty-day period, the Partnership has failed during such thirty-day period to proceed promptly and diligently to cure such failure. 8.1.2. The Partnership shall have the right to terminate this agreement upon thirty (30) days prior written notice to Manager in the event that (a) WKA El Con Associates fails to pay at maturity (nine years after the Commencement Date) the full amount of all outstanding KG Loans, as that term is defined in the Venture Agreement; (b) WKA El Con Associates fails to immediately apply amounts received by it from the Partnership in respect of Deficiency Loans in repayment of outstanding KG Loans; (c) WKA El Con Associates fails to immediately apply the proceeds of Manager Loans in repayment of outstanding KG Loans or (d) Manager fails to make any required Manager Loan immediately upon its receipt of the Basic Management Fee as provided in Section 5.6 hereof and the Manager Loan Agreement. Such right shall be exercisable only during the 180 day period immediately following such default. 8.1.3. The Partnership shall have the right to terminate this agreement upon thirty (30) days prior written notice to Manager in the event that Manager shall have failed to meet the Performance Standards, as hereafter defined, for any two consecutive Fiscal Years commencing with the 49 sixth full Fiscal Year during the Management Term. Manager shall be deemed to have failed to meet the Performance Standards in any Fiscal Year if the average revenues per room and average occupancy levels of the Resort are both less than 80% of the average revenues per room and average occupancy levels of Hyatt Dorado Beach Hotel and Candelero Hotel at Palmas del Mar, collectively, during the comparable period. 8.1.4. The Partnership shall have the right to terminate this agreement effective upon a consummation of a sale by the Partnership of all or substantially all of the Resort, provided the Partnership shall have given Manager at least 30 days prior written notice and provided further that if such sale occurs during the Management Term, the Partnership shall pay Manager the Liquidation Share (as hereafter defined). 8.1.5. This agreement may be terminated upon 30 days prior written notice to Manager in connection with a sale or other disposition of the Resort in connection with proceedings to foreclose the First Mortgage Loan or any other mortgage constituting a first lien of the Resort. 8.2. PAYMENTS. Upon termination of this agreement for any cause or reason including those set forth in Section 7 and Section 8.1 hereof, all amounts owing from the Partnership to Manager pursuant to this agreement for all periods prior to the date of termination, including the Basic Management Fee, the Incentive Management Fee and all expenses for which Manager is entitled to reimbursement, shall become immediately due and 50 payable provided, however, that the Incentive Management Fee shall be payable only in accordance with Section 5.4.1(A) hereof. The Partnership shall promptly determine and pay such amounts and if this agreement shall have been terminated as provided in Section 8.1.4, the Partnership shall immediately pay Manager an amount equal to Manager's Liquidation Share at the date of termination. Effective upon such termination, the Management Term shall cease and Manager and the Partnership shall cease to have any continuing obligations to each other except with respect to such payments, causes of action by reason of any breach prior to such termination and the indemnification obligations set forth in Section 6.3 hereof. The payment by the Partnership of amounts due upon termination shall not operate as a waiver of any claims the Partnership may have against Manager for any breach by Manager of the terms of this agreement. 8.3. MANAGER'S LIQUIDATION SHARE. For purposes of this Section 8, "Manager's Liquidation Share" shall be an amount equal to 75% of the sum of the Individual Year Amounts for each Fiscal Year or portion thereof remaining between the date of determination ("Determination Date") and the date occurring 20 years after the Commencement Date. The "Individual Year Amount" for any Fiscal Year shall be an amount equal to the average of the Basic Management Fees and the Incentive Management Fees payable (whether actually paid or accrued) to Manager hereunder for the three full Fiscal Years which shall have passed immediately prior to the 51 Determination Date (or the average of all Fiscal Years if at least three full Fiscal Years have not passed prior to the Determination Date or $3,000,000 if at least one full Fiscal Year has not passed prior to the Determination Date) discounted to the Determination Date assuming an 8% simple interest factor and assuming further that each year's payment would have been made on the first day of such year. 8.4. NULL AND VOID. If (a) the Partnership shall not acquire the land and buildings for the Resort before September 30, 1990, or (b) the Partnership elects to abandon the Project or sell the Resort after such acquisition but prior to the Commencement Date, then in either of such events this agreement shall be deemed cancelled and of no force and effect and no party hereto shall have any obligation to the other hereunder except that the Partnership shall reimburse Manager for expenses incurred prior thereto which are otherwise expenses of the Partnership pursuant to the terms hereof and if the Project is abandoned or the Resort sold prior to the Commencement Date, the Partnership shall pay to the Manager any portion of the Development Fee earned through the date of termination. 9. MISCELLANEOUS. 9.1. ENTIRE AGREEMENT. This agreement constitutes the entire agreement of the parties with respect to the subject matter hereof. No change, modification, amendment, addition or termination of this agreement or any part 52 thereof shall be valid unless in writing and signed by or on behalf of the party to be charged therewith. 9.2. COUNTERPARTS. This agreement may be executed in one or more counterparts, and shall become effective when one or more counterparts has been signed by each of the parties. 9.3. NOTICES. Except as otherwise provided herein, any and all notices or other communications or deliveries required or permitted to be given pursuant to any of the provisions of this agreement shall be deemed to have been duly given for all purposes if sent by certified or registered mail, return receipt requested and postage prepaid, sent by express mail or other responsible overnight delivery service, hand delivered or sent by telegraph, telex or telephone facsimile as follows: If to the Partnership, at: c/o WMS Industries Inc. 767 Fifth Avenue - 23rd Floor New York, New York 10153 Attention: President Telecopy: (212) 319-9789 and Kumagai Caribbean, Inc. c/o Williams Hospitality Management Corp. P.O. Box 50053 San Juan, Puerto Rico 00902 Attention: President Telecopy: (809) 791-7500 with copies to: 53 Whitman and Ransom 200 Park Avenue New York, New York 10166 Attention: Jeffrey N. Siegel, Esq. Telecopy: (212) 351-3131 Jones, Day, Reavis & Pogue 4100 Lincoln Plaza 500 North Akard Dallas, Texas 75201 Attention: Brian D. Lafving, Esq. Telecopy: (214) 871-0729 If to Manager, at: c/o Mr. Hugh A. Andrews Williams Hospitality Management Corp. P.O. Box 50053 San Juan, Puerto Rico 00902 Telecopy: (809) 791-7500 with a copy to: Whitman and Ransom 200 Park Avenue New York, New York 10166 Attention: Jeffrey N. Siegel, Esq. Telecopy: (212) 351-3131 or at such other address as any party may specify by notice given to other party in accordance with this Section 9.3. The date of giving of any such notice shall be three business days following the date sent by certified or registered mail, the next business day following delivery to a responsible overnight delivery service, the date hand delivered, the date sent by telegraph, telex or telephone facsimile. 54 9.4. WAIVERS. No waiver of the provisions hereof shall be effective unless in writing and signed by the party to be charged with such waiver. No waiver shall be deemed a continuing waiver or waiver in respect of any subsequent breach or default, either of similar or different nature, unless expressly so stated in writing. 9.5. SEVERABILITY. Should any clause, section or part of this agreement be held or declared to be void or illegal for any reason, all other clauses, sections or parts of this agreement which can be effected without such illegal clause, section or part shall nevertheless continue in full force and effect. 9.6. CHOICE OF LAW. This agreement shall be governed, interpreted and construed in accordance with the laws of the State of Delaware. 9.7. NON-ASSIGNABILITY. This agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns except that no assignee or successor of the Partnership shall be entitled to enforce any of the Partnership's rights under Section 9.10 hereof. This agreement shall not be assignable by any of the parties hereto without the prior written consent of all other parties hereto and any attempt to assign this agreement shall be void and of no effect, except that (i) Manager shall have the right, without consent of the Partnership, to assign all or any part of this agreement to a wholly owned subsidiary of Manager which shall assume the 55 obligations of Manager hereunder but such assignment shall not relieve Manager of any liability hereunder and (ii) the Partnership shall have the right to assign this agreement after the Commencement date without the consent of Manager in connection with a sale of the entire Resort provided that the purchaser of the Resort shall assume and be responsible only for the obligations hereunder with respect to periods following the date of such sale and the Partnership shall be responsible under this agreement only for obligations hereunder with respect to periods prior to the date of such sale. The Partnership shall not be responsible for obligations hereunder for periods following the date of such sale. 9.8. CAPTIONS. The headings or captions under sections of this agreement are for convenience and reference only and do not in any way modify, interpret or construe the intent of the parties or effect any of the provisions of this agreement. 9.9. NON-RECOURSE TO PARTNERS. The obligations of the Partnership hereunder shall be non-recourse to the General Partners of the Partnership and Manager shall look solely to the assets of the Partnership to satisfy such obligations. 9.10. LIMITATION OF REMEDIES. The general partners of the Partnership have agreed to make capital contributions to the Partnership of not less than $30,000,000 and to make Deficiency Loans to the Partnership of up to $20,000,000 in principal amount outstanding, all as provided in the Venture 56 Agreement and each of the general partners of the Partnership hereby covenants with Manager to make such capital contributions and Deficiency Loans as and to the extent provided in the Venture Agreement. Neither the Partnership nor the General Partners of the Partnership shall have any obligations to make, or any liability to Manager for damages incurred by Manager as a result of any failure to refusal by the General Partners to make, any additional loans or capital contributions or otherwise provide financing to the Resort except that Partnership shall remain responsible to Manager for amounts payable under Section 5.1, 5.2, 4.12.2 and 6.3 hereof. The parties acknowledge that notwithstanding such contributions and Deficiency Loans and the proceeds of Loans, the possibility exists that the Partnership may have insufficient funds available to complete the Project as contemplated or that such funds, together with revenues generated from the operations of the Resort may be insufficient to enable the Partnership to fully perform certain of its obligations during the Management Term including those obligations set forth in Sections 3.3.1, 3.3.5, 4.1.1, 4.1.2, 4.5, 4.10, 4.12.1, 4.12.2, 4.12.4 and 4.13 hereof. If, despite the fact that the capital contributions and proceeds of Deficiency Loans and the Loans have all been used in connection with the Project and the operations of the Resort, the Partnership has insufficient funds available to meet its obligations under the Loans and/or this agreement, other than the obligation to pay the Basic Management Fee as provided in Section 5 hereof and to reimburse Manager for expenses under Section 4.12.2 hereof, 57 at the Partnership's request, Manager shall refrain from enforcing its rights under such sections, other than the right to be paid the Basic Management Fee under Section 5.1 hereof and to be reimbursed for expenses under Section 4.12.2 hereof, to the extent necessary to afford the Partnership the opportunity to continue to operate the Resort, to meet its obligations to its lenders, or to obtain refinancing or additional financing, as the Partnership shall determine. Manager understands that in such event certain measures may be required to be taken by the Partnership to cut back on the expenses associated with the operation of the Resort which may adversely affect the operation of the Resort as a first class, luxury destination mega-resort and notwithstanding anything to the contrary in this agreement, Manager shall cooperate with the Partnership to reduce expenses revise budgets including Approved Budgets and otherwise comply with all reasonable requests of the Partnership designed to continue the Resort as a going concern. All revised budgets, when approved by the Partnership, shall thereafter constitute Approved Budgets for purposes of this agreement, including Section 4.12.2 hereof. In such event, Manager shall nevertheless continue management of the Resort subject to the terms of this agreement, unless and until this agreement has been terminated as provided herein; however, Manager's obligations to operate the Resort as a first class, luxury destination mega-resort and to otherwise perform certain obligations hereunder shall be correspondingly suspended to the extent funds are not available for such level of operation. 58 The parties acknowledge that Manager's undertaking not to enforce its remedies under such circumstances is extraordinary and shall not be broadly construed. Nothing in this Section shall be deemed to constitute a waiver of any of Manager's rights to receive the Basic Management Fee and to be reimbursed for its expenses as provided in Section 4.12.2 hereof. This Section is only an agreement by Manager to temporarily refrain from asserting certain of its rights under this agreement and to claim damages as a result thereof. All such rights shall be reinstated in full on a going forward basis and Manager shall be entitled to require full compliance by the Partnership with its obligations under this agreement when the Partnership's financial circumstances permit. In the event expenses or operations of the Resort are curtailed under this Section 9.10 so that the Resort cannot be operated at a first class, luxury level, the Partnership's right to terminate this agreement under Section 8.1.3 hereof shall have no force and effect during the period that such expenses or operations were curtailed and once such expenses and operations have returned to normal, shall be applicable only to Fiscal Years commencing one full Fiscal Year after they shall have returned to normal. Nothing in this Section 9.10 shall be deemed to limit or curtail Manager's right to terminate this agreement under the provisions of Section 8.1.1 in the event the Partnership is unable to perform its obligations for any reason whatsoever, including those referred to in this Section 9.10. 59 IN WITNESS WHEREOF, the parties hereto have caused this agreement to be signed on the date and year first above written. EL CONQUISTADOR PARTNERSHIP L.P. By: WKA EL CON ASSOCIATES, a general partner By: WMS EL CON CORP., Partner By: /s/____________________________ Norman J. Menell, President and By: KUMAGI CARIBBEAN, INC., a general partner By: /s/____________________________ Takayuki Furuta, Chairman WILLIAMS HOSPITALITY MANAGEMENT CORPORATION By: /s/____________________________ Hugh A. Andrews, President 60 FIRST AMENDMENT TO THE DEVELOPMENT SERVICES AND MANAGEMENT AGREEMENT BETWEEN EL CONQUISTADOR PARTNERSHIP L.P. AND WILLIAMS HOSPITALITY MANAGEMENT CORPORATION This amendment ("Amendment") is made and entered into as of the 30th day of September 1990, by and between El Conquistador Partnership L.P., a Delaware limited partnership ("Partnership"), and Williams Hospitality Management Corporation, a Delaware corporation ("Manager"). W I T N E S S E T H : WHEREAS, the Partnership and the Manager are parties to a development services and management agreement dated January 12, 1990 with respect to the El Conquistador Hotel to be acquired and developed by the Partnership in Fajardo, Puerto Rico; and WHEREAS, the Partnership and the Manager desire to amend the Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, the parties hereto hereby agree as follows: Section 8.4, paragraph (a), clause (i) of the Agreement is hereby amended to change the date of September 30, 1990 set forth therein to January 31, 1991. All other provisions of the Agreement shall remain in full force and effect except as amended hereby. EL CONQUISTADOR PARTNERSHIP, L.P., a Delaware limited partnership By: WKA El Con Corp., General Partner By: /s/___________________________ Norman J. Menell, President By: Kumagai Caribbean, Inc., General Partner By: /s/___________________________ Shunsuke Nakane WILLIAMS HOSPITALITY MANAGEMENT CORPORATION By: /s/__________________________ Hugh Andrews, President SECOND AMENDMENT TO THE DEVELOPMENT SERVICES AND MANAGEMENT AGREEMENT BY AND BETWEEN EL CONQUISTADOR PARTNERSHIP L.P. AND WILLIAMS HOSPITALITY MANAGEMENT CORPORATION THIS AGREEMENT is made and entered into as of the 31st day of January 1991, by and between El Conquistador Partnership L.P., a Delaware limited partnership (the "Partnership"), and Williams Hospitality Management Corporation, a Delaware corporation (the "Manager"). W I T N E S S E T H : WHEREAS, the Partnership and the Manager are parties to a development services and management agreement dated January 12, 1990, as amended by agreement dated September 30, 1990 (the "Agreement"), with respect to, among other things, the construction, renovation and development by the Partnership of the El Conquistador Resort and Country Club in Fajardo, Puerto Rico (capitalized terms used herein and not otherwise defined shall have the same meaning ascribed to such terms in the Agreement); and WHEREAS, the Partnership's acquisition of the land and buildings on which the Resort will be located has been delayed beyond January 31, 1991; and WHEREAS, the Manager has requested that the Partnership not permit the Agreement to automatically terminate as a result of the Partnership's failure to acquire the land and buildings for the Resort by January 31, 1991 as currently provided in Section 8.4 of the Agreement; and WHEREAS, the Partnership has requested that as a condition to continuing the Agreement beyond January 31, 1991, that the Manager defer payment of portions of the Development Fee; and WHEREAS, the Partnership and the Manager believe it is mutually beneficial to amend the Agreement to accommodate their respective requests. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in consideration of the premises and mutual covenants set forth herein, the parties hereto agree as follows: 1. Section 8.4 of the Agreement is hereby amended to change the date on which the Agreement shall be deemed to automatically terminate by reason of the failure by the Partnership to acquire to land and buildings on which the resort will be located from January 31, 1991 to February 15, 1991. 3. Except as specifically set forth above all other provisions of the Agreement are hereby ratified and confirmed and shall remain in full force and effect. IN WITNESS WHEREOF the parties hereto have set their hand and seal as of the date and year first above written. EL CONQUISTADOR PARTNERSHIP L.P. Delaware limited partnership By: WKA El Con Associates, General Partner By: /s/ Norman J. Menell ---------------------------------------- Norman J. Menell, Authorized Signatory By: Kumagai Caribbean, Inc., General Partner By: /s/ Shunsuke Nakane ---------------------------------------- Shunsuke Nakane, President 2 WILLIAMS HOSPITALITY MANAGEMENT CORPORATION By: /s/ Hugh A. Andrews ----------------------------------------- Hugh A. Andrews, President 3 EX-10 5 EXHIBIT 10.2 NUMBER TWELVE (12) DEED OF LEASE In the City of San Juan, Commonwealth of Puerto Rico, this fifteenth (15th) day of December, nineteen hundred ninety (1990). BEFORE ME, SILVESTRE M. MIRANDA, Attorney-at-Law and Notary Public in and for the Commonwealth of Puerto Rico, with residence and offices in San Juan, Puerto Rico. APPEAR AS PARTY OF THE FIRST PART: ALBERTO BACHMAN UMPIERRE, Social Security Number 582-166-174, of legal age, married to Margarita Gonzalez Rivera, property owner and resident of San Juan, Puerto Rico and LILLIAM BACHMAN UMPIERRE, Social Security Number ###-##-####, of legal age, married to Jose Fuertes Garzot, property owner and resident of San Juan, Puerto Rico, hereinafter, collectively, the "Landlord". AS PARTY OF THE SECOND PART: EL CONQUISTADOR PARTNERSHIP, L.P., taxpayer identification number 06-1288145, a partnership organized and existing under the laws of the State of Delaware, United States of America, hereinafter "the Tenant", represented herein by its General Partners WKA EL CON ASSOCIATES, taxpayer identification number 06-1288143, a partnership organized and existing under the laws of the State of New York, United States of America, herein represented by its General Manager, HUGH ANDREWS, Social Security Number ###-##-####, of legal age, married, business executive and resident of San Juan, Puerto Rico, whose authority for the execution of this deed he will evidence whenever required; and KUMAGAI CARIBBEAN, INC., taxpayer identification number 75-2303665, a corporation organized and existing under the laws of the State of Texas, United States of America, represented herein by its President SHUNSUKE NAKANE, Social Security Number ###-##-####, of legal age, married and resident of San Juan, Puerto Rico, whose authority for the execution of this deed he will evidence whenever required. I, the Notary, hereby certify that I personally know the persons appearing herein and I further attest through their statements as to their age, civil status, professions, and residence. They assure me that they have and in my judgment they do have the necessary legal capacity to execute this instrument, and therefore they freely and voluntarily 2 STATE FIRST: Title: Landlord is the owner in fee simple of the real property which is described in the Spanish Language in the corresponding Registry of the Property, as follows (hereinafter the "Demised Premises"): "RUSTICA: Predio compuesto de 100 cuerdas, equivalentes a 39 hectareas, 30 areas y 4 centiareas, terreno quebrado y llano, destinado a pastos, situado en el islote denominado Palomino, en el Mar Caribe y frente al Puerto de Fajardo, al Este del mismo, colinda por sus cuatro puntos cardinales con el mencionado Mar Caribe. Enclave una casa y un ranchon para peones y distintas cercas." SECOND: Recording Data: The Demised Premises are recorded at page thirty five overleaf (35vto) of volume three hundred twenty six (326) of Fajardo, Property Number Five Hundred Fifty (550). The Demised Premises were acquired by Landlord by inheritance from their parents, Mister Alberto Bachman and Mistress Angelica Umpierre pursuant to Deeds of Will numbers one hundred fifty seven (157) and one hundred fifty eight (158), executed before Notary Public Jorge M. Morales on November five (5), nineteen hundred and fifty two (1952), recorded at page thirty five (35) overleaf of volume three hundred twenty six (326) of Fajardo, Property Number five hundred fifty (550). 3 THIRD: Liens and Encumbrances: The Demised Premises are free and clear of all liens and encumbrances. FOURTH: Landlord and Tenant have agreed on the lease of the Demised Premises by Tenant from Landlord, and consequently now carry out their agreement under the following terms and conditions: One: Lease of Demised Premises and Improvements Thereon. A. Landlord, in consideration of the terms, covenants, and agreements hereinafter set forth, hereby grants, demises, and lets the Demised Premises to Tenant, and Tenant hereby takes and hires the Demised Premises from Landlord, on the terms, covenants, provisions, and agreements hereinafter provided, to have and to hold for and during the term hereof and any renewals thereto together with any and all improvements presently existing or hereinafter constructed on the Demised Premises, and together with all and singular the appurtenances, rights, interest, easements, and privileges in anywise appertaining thereto. B. The parties hereto have agreed to exclude from the lease, a portion of the Demised Premises which is described below, together with all improvements existing or hereinafter 4 constructed thereon, which portion Landlord shall retain for their exclusive use (hereinafter the "Reserved Area"): "RUSTICA: Predio de terreno de forma irregular situado en la portion Noreste del islote denominado Palomino, en el Mar Caribe y frente al Puerto de Fajardo, al Este del mismo, Municipio de Fajardo, con una cabida superficial de nueve cuerdas con nueve mil novecientos ochenta y un diez milesimas de otra (9.9981) equivalentes a treinta y nueve mil doscientos noventa y seis metros cuadrados con veintinueve centesimas de otro (39,296.29), en lindes, por el Norte, en varias alineaciones con el Mar Caribe y con la finca de la cual se segrega; por el Sur, en Varias alineaciones, con el Mar Caribe y con la finca de la cual se segrega; por el Este, on distintas alineaciones con el Mar Caribe y la finca de donde se segrega, y por el Oeste, en varias alineaciones, con la finca de la cual se segrega y el Mar Caribe." Once the Reserved Area is segregated from the Demised Premises, the description of the Demised Premises, as a remnant, shall be as follows: "RUSTICA" Predio compuesto de noventa mil punto cero cero diecinueve (90.0019) cuerdas equivalentes a treinta y cinco (35) hectareas, treinta y siete (37) areas, cuarenta y dos (42) centiareas, cincuenta (56) miliareas, de forma irregular, terreno quebrado y llano, destinado a pastos y otros usos, situado en el islote denominado Palomino, en el Mar Caribe y frente al Puerto de Fajardo, al este del mismo, en el Municipio de Fajardo; colinda por sus cuatro puntos cardinales esta finca con el Mar Caribe y con parcela segregada propiedad de Alberto Bachman Umpierre y Lilliam Bachman Umpierre. Enclava una casa de hormigon un ranchon para peones y otras estructuras y cercas." C. Landlord hereby authorizes and empowers Tenant to take at Tenant's cost such action as might be necessary in order to segregate the Reserved Area from the Demised Premises in order that such Reserved Area becomes a separate and independent 5 parcel of land for purposes of the Registry of the Property of Puerto Rico. In relation therewith, Landlord hereby empowers the Tenant to file at Tenant's Cost and on behalf of Landlord with the governmental agencies and departments having jurisdiction, any and all requests or petitions proper or necessary to accomplish such purpose. Upon the issuance of the corresponding segregation permit, the Landlord agrees to execute a deed of segregation, at no cost to Landlord, in order to record such subdivision in the Registry of the Property of Puerto Rico. Once such segregation has been finalized, the Demised Premises shall be deemed to exclude the "Reserved Area". Within ten (10) business days from the date such segregation permit is obtained, the parties hereto agree to execute a deed of segregation of land so that the Reserved Area and the Demised Premises may be recorded as separate and independent properties and the Reserved Area be excluded of record from this Lease. D. Landlord agrees that the Reserved Area is to be used by them, their immediate family and invitees solely for residential and recreational purposes and that no commercial activity shall be allowed therein. Landlord shall not carry out or permit others to carry out any activity in the Reserved Area which might be detrimental to the use of the Demised Premises by tenant for the 6 purposes stated herein, or which shall interfere with Tenant's rights to peacefully enjoy and occupy the Demised Premises. Landlord shall take such action as might be necessary in order that no pets, animals or livestock owned or controlled by Landlord be allowed into the Demised Premises. Any construction made by Landlord in the Reserved Area shall not exceed two stories in height and shall be adequately maintained and landscaped by Landlord. Tenant, at its option, may construct a fence around the Reserved Area. Two: Term and Duration: A. The initial term of this lease (hereinafter the "Initial Term") shall be for a period of thirty two (32) years commencing (hereinafter the "Commencement Date") on December first nineteen hundred and ninety (1990). Notwithstanding the aforesaid, in the event that Tenant fails to acquire from the government of the Commonwealth of Puerto Rico, title to the real properties located at Fajardo, Puerto Rico comprising the former El Conquistador Hotel (hereinafter the "Hotel Properties") on or before January thirty one (31), nineteen hundred ninety one (1991), then, unless the parties hereto extend such term, this agreement shall be left without effect and without further liability to any of the parties hereto. Notwithstanding the 7 provisions of paragraph Three (B) of this Agreement, the rent for the first two months of this contract shall not become due and payable until February first (1st), Nineteen Hundred Ninety One (1991) and then only if Tenant acquires title to the Hotel Properties on/or before January thirty one (31), nineteen hundred ninety one (1991). B. Tenant shall have the option to extend this Lease on the same terms and conditions as stated herein, for two additional consecutive five year periods. The first five year extended period (hereinafter the "First Extended Term") shall commence immediately upon the expiration of the Initial Term and the second five year extended period (hereinafter the "Second Extended Term") shall commence immediately upon the expiration of the First Extended Terms. C. Tenant shall be deemed to have exercised its right and option to extend the term of this Lease in the manner indicated above, unless Tenant (i) at least one year prior to the expiration of the Initial Term, notifies Landlord of its intention not to extend the same, in which case this Lease shall terminate upon the expiration of the Initial Term, or (ii) at least one hundred and eighty days prior to the expiration of the First Extended Term, notifies Landlord of its intention not to further extend the Lease, in which 8 case this Lease shall terminate upon the expiration of the First Extended Term. D. Unless Tenant exercises its right and option not to extend the term of this Lease for the First Extended Term, it shall pay to Landlord as additional consideration, the lump sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) which shall become due and payable not later than fifteen days from the date of commencement of the First Extended Term. Unless Tenant exercises its option not to extend the term of this lease for the period comprised in the Second Extended Term, it shall pay Landlord as additional consideration the lump sum of SEVENTY FIVE THOUSAND DOLLARS ($75,000.00), which sum shall become due and payable not later than fifteen days from the date of commencement of the Second Extended Term. Three: Basic or Fixed Rent: A. Tenant covenants and agrees to pay to Landlord at the address mentioned on paragraph Twenty Seven, or at such other place or places as Landlord shall from time to time designate in writing, for and throughout each Lease Year (as defined hereinafter) of this Lease, without demand or deduction, except to cure any default by Landlord or as in this Lease otherwise specifically provided, a net annual basic rental (hereinafter 9 sometimes referred to as the "Annual Basic Rent") in addition to and above all the other sums and all other and additional payments to be made and paid by Tenant to Landlord as set forth in this Lease, as follows: (i) From the Commencement Date of this lease and thereafter during the first consecutive seventeen months, a monthly Rent of three thousand three hundred thirty three dollars ($3,333.00), payable in advance on the first day of each month. (ii) Commencing on the eighteenth month of this Lease and thereafter during the next six months, a monthly rent of fifteen thousand dollars ($15,000.00) per month, payable in advance on the first day of each month. (iii) Commencing on the first day of the third Lease Year and thereafter during the next five consecutive Lease Years, an Annual Basic Rent of ONE HUNDRED EIGHTY THOUSAND DOLLARS ($180,000.00). (iv) Commencing on the first day of the eighth (8) Lease Year and thereafter during the next five (5) consecutive Lease Years, an Annual Basic Rent of TWO HUNDRED AND TEN THOUSAND DOLLARS ($210,000.00). (v) Commencing on the first day of the thirteenth Lease Year and thereafter during the next five consecutive Lease Years 10 an Annual Basic Rent of TWO HUNDRED FORTY THOUSAND DOLLARS ($240,000.00). (vi) Commencing on the first day of the eighteenth Lease Year and thereafter during the next five consecutive Lease Years an Annual Basic Rent of TWO HUNDRED SEVENTY THOUSAND DOLLARS ($270,000.00). (vii) Commencing on the first day of the twenty third Lease Year and thereafter during the next five consecutive Lease Years an Annual Basic Rent of THREE HUNDRED THOUSAND DOLLARS ($300,000.00). (viii) Commencing on the first day of the twenty eighth Lease Year and thereafter during the next five consecutive Lease Years an Annual Basic Rent of THREE HUNDRED THIRTY THOUSAND DOLLARS ($330,000.00). (ix) If Tenant exercises its option to extend the term of this Lease, an Annual Basic Rent of THREE HUNDRED SIXTY THOUSAND DOLLARS ($360,000.00) per year during the First Extended Term and THREE HUNDRED NINETY THOUSAND DOLLARS ($390,000.00) per year during the Second Extended Term. The term Lease Year is defined to mean each period of twelve consecutive calendar months during the term hereof, 11 commencing on the Commencement Date and on each anniversary thereafter. B. The Annual Basic Rent shall be paid in equal consecutive monthly installments payable in advance on or before the first day of each calendar month. Any installment of Basic Rent not paid on/or before the fifteenth (15th) day of each month, shall accrue interest at the rate of ten (10%) per cent per annum from its due date until payment thereof. Such interest shall become payable on the fifteenth day of the following month. C. It is agreed that there shall be no abatement or apportionment at any time of any rents or any other sums, amounts, payments or impositions to be paid by Tenant under any of the terms, covenants, conditions, provisions of this Lease except to cure a default by Landlord or as is otherwise specifically provided in this Lease. D. Tenant covenants to pay to Landlord the Annual Basic Rent and all other sums and additional payments to be made by Tenant hereunder, at the times and in the manner in this Lease provided, all of which rent, sums and payments are to be paid in lawful money of the United States of America, which shall be legal tender in payment of all debts and dues, public or private, at the time of payment, or by good check without any deduction, 12 diminution, abatement, or rebate of whatsoever kind, nature, and description, except to cure a default by Landlord or as otherwise specifically provided in this Lease. Four: Use and Occupancy. Tenant may use and occupy the Demised Premises or any portion or portions thereof for any and all lawful recreation, hotel and tourism related purpose(s) and any use ancillary thereto or ancillary to the operation of the Hotel Properties. Five: Assignment and Subletting: Tenant shall have the right, at any time and from time to time, both to assign its interest in this Lease, or to sublet the whole or any portion or portions of the Demised Premises for the use and purposes permitted under this Lease, but no such assignment or subletting shall release Tenant's obligations hereunder, unless Landlord specifically consents to such release in writing, which consent shall not be unreasonably denied provided the assignee is an entity of equal or better financial solvency than Tenant. Six: Taxes and Assessments: A. Tenant covenants and agrees to pay from the Commencement Date and throughout the duration of this Lease and before any fine, penalty, or costs shall be added thereto for nonpayment thereof, all real estate taxes assessed upon the 13 Demised Premises let to and occupied by Tenant, and all structures erected therein, which are assessed and become due and payable during the term hereof, and which pertain to the term of this Lease, when they shall respectively become due and payable. Notwithstanding the foregoing, Tenant shall not be chargeable with nor obligated to pay any real property tax assessed prior to the Commencement Date, any income, inheritance, devolution, gift, franchise, corporate, gross receipts, capital levy, or estate tax, which may be at any time levied or assessed against, or become a lien upon, the Demised Premises or the rents payable hereunder, but Landlord at its own costs and expense, covenants and warrants to discharge same so as to keep the Demised Premises free of all such liens, it being the intent hereof that Tenant shall be required to pay only such taxes, governmental impositions and assessments as are properly known as real estate taxes or real estate assessments and are assessed against the real estate (inclusive of the buildings and improvements thereof) as such. Written evidence of the payment of said taxes, governmental impositions, special assessments, levy, or general assessments (all of which may sometimes collectively be referred to in this Lease as "impositions" or "Impositions") shall be furnished by Tenant to Landlord within thirty (30) days after 14 payment thereof. However, it is expressly understood and agreed that if any assessments, special and/or general, are assessed or levied against the Demised Premises during such time as this Lease is in force and effect and payment thereof is permitted or provided to be made in installments over a period of years, Tenant shall be obligated to pay only those installments which become due and are required to be paid during such time as this lease is in force and effect. If any such installment covers a time period prior to the expiration of this Lease, such installment shall be apportioned among the parties as of the expiration date of this Lease. Likewise, if a regular real estate tax assessment is made for a particular fiscal year during the term of this Lease, but which does not become payable until after the expiration of this Lease, the amount of such tax shall be apportioned among the parties as of the date of expiration of this Lease. If, however, Tenant, in good faith, shall desire to contest the validity or amount of any tax, governmental imposition, levy, or special or general assessment herein agreed to be paid by it, Tenant shall notify Landlord in writing of its intention to contest the same, and Tenant shall not be required to pay, discharge, or remove such tax, governmental imposition, levy, or special or general assessment so long as it shall, in good faith, at its own expense, contest the same or the 15 validity thereof by appropriate proceedings, in the name of Landlord, if necessary; and pending any such proceedings, Landlord shall not pay, remove, or discharge any such tax, governmental imposition, levy, or special or general assessment thereby contested, and such delay of Tenant in paying the same until final determination of such disputed matter shall not be deemed a default under the terms and conditions of this Lease, but if such delay exposes said property to sale for such nonpayment, Tenant shall pay, under protest, reserving Tenant's rights hereunder, any such tax, governmental imposition, levy, or special or general assessment, and if Tenant fails to pay, Landlord shall have the right to do so after ten day notice to Tenant, and upon such payment by Landlord, under protest, Tenant shall, immediately after proof of such payment shall have been submitted to it by Landlord, and on demand therefor, pay Landlord the amount of any such payment so made by Landlord. Tenant shall have the right, if permitted by law, to pay under protest any Impositions and reserve its right under this Lease. Landlord shall cooperate with Tenant at no cost to Landlord in any tax contest or proceeding. B. Landlord further covenants and agrees that if there shall be any refunds or rebates on account of any tax, 16 governmental imposition, levy, or special or general assessments paid by Tenant under the provisions of this Lease, such refund or rebate shall belong to Tenant, unless such refund or rebate relates to a payment previously made by Landlord. Any such refunds or rebates which shall be received by Landlord shall be trust funds and shall be forthwith paid to Tenant. C. Except as otherwise specified in this Lease, the real estate taxes, governmental impositions, special assessments, and general assessments for the respective tax fiscal years in which this Lease shall commence and terminate, and whether or not the same have become liens upon the Demised Premises, shall be apportioned at the Commencement Date and at the date of final termination respectively, so that Tenant shall pay only those portions thereof which correspond with the portions of said respective fiscal years as are within the term hereby leased. D. If a separate tax assessment is not then in effect for the Reserved Area, including any structure erected therein, then the parties hereto shall endeavor to establish in good faith a relative value among the Reserved Area and the Demised Premises in order to distribute equitably among Landlord and Tenant the resulting real property tax. If no such agreement is achieved, the parties agree that the Reserved Area represents ten percent (10%) 17 of the total land tax currently assessed upon the Demised Premises. Landlord further agrees that Tenant may deduct the portion of the real estate tax corresponding to the area reserved to Landlord, from the Annual Basic Rent and pay the same over to the corresponding taxing authority. Seven: Tax Exemption. Tenant agrees that it shall request from the corresponding governmental authorities that the benefits granted under the provisions of the Tourism Incentives Act [Act Fifty Two (52) of June second (2nd), nineteen eighty three (1983)] as amended, or if such Act is no longer in effect, then under any substitute statute providing for similar benefits; be extended to Tenant's operations at the Demised Premises. Tenant further agrees that, it shall also request that landlord's tax exemption benefits under the terms of Act Fifty Two (52) or any substitute statute then in effect, be extended to Landlord as owner of real property used in tourism development activities. If during the Twenty First Lease Year (i) Tenant is not enjoying the benefits granted under the Tourism Incentives Act [Act fifty two (52) of June second (2nd) nineteen eighty three (1983)], as amended, or if such Act is no longer in effect, then under any substitute statute providing for similar benefits, or if during the Twentieth Lease Year Tenant has been unable to renew 18 or extend the benefits of Act fifty two (52) of June second (2nd) nineteen eighty three (1983) and as a result Landlord is unable to enjoy the benefits of such Act of any other substitute Act providing for similar benefits, or (ii) if for reasons not attributable to Landlord the government refuses to grant to Landlord tax exemption under said Act or any substitute thereof, after the Twentieth Lease Year; then commencing on the Twenty First Lease Year, and thereafter, for the remainder of the Initial Term and any extension thereto, as long as Landlord is not enjoying tax exemption hereunder, the amount of Annual Basic Rent indicated on paragraph THREE shall be increased by the sum of FIFTEEN THOUSAND DOLLARS ($15,000.00). Provided further that in the event Tenant is required to increase the Annual Basic Rent for the said amount of Fifteen Thousand Dollars ($15,000.00), then Tenant may during the Twenty First Lease Year, at its option, terminate this Lease. Eight: Liability Insurance: A. Tenants covenants and agrees, at its sole cost and expense, and throughout the duration of this Lease, to obtain, keep, and maintain in full force and effect comprehensive liability insurance against claims for damage to persons or property arising out of the use and occupancy of the Demised Premises, or any part 19 thereof, by Tenant, including damages resulting from construction or demolition work carried out by Tenant, in amounts which are usual and customary in the hotel industry, but in no event less than One Million Dollars ($1,000,000) in respect to bodily injury or death to any one person in any one accident, and in limits of not less than Three Million ($3,000,000) Dollars in respect to bodily injury or death to more than one person in any one accident, and in limits of not less than FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) with respect to damages to property of third parties. Tenant shall revise such insurance coverage from time to time at its prudent discretion to reflect cost of living increases and customary practices in the hotel industry. A duplicate original, certificate, or binder of such insurance shall be furnished to Landlord, at the commencement of the term of this Lease and each renewal certificate of such policy shall be furnished to Landlord at least fifteen (15) days prior to the expiration of the policy it renews. Landlord shall be an "Additional Named Insured" in any such policy. B. All insurance provided for herein may be in the form of a general coverage, floater policy or so-called blanket policies and may be furnished by Tenant, or any affiliates of Tenant or any related entity, Tenant's written designee(s) or 20 sublessee(s) designated in writing by Tenant or by any holder of any mortgage referred to in Paragraph Seventeen hereof. The liability coverage set forth in this Paragraph shall be issued by insurers of recognized responsibility. All insurance provided for herein shall contain a thirty (30) day previous notice of cancellation provision in favor of Landlord. C. In the event Tenant fails to cause the aforesaid insurance policies to be written and pay the premiums for the same and deliver all such certificates of insurance or duplicate originals thereof to Landlord, Landlord shall nevertheless have the right, without being obligated to do so, to effect such insurance and pay the premiums therefor, after 10 days notice to Tenant, and all such premiums paid by Landlord shall be repaid to Landlord on demand. Nine: Casualty Insurance: A. Tenant covenants that it will, during the term of this Lease, keep or cause to be kept the building(s) and improvements on the Demised Premises insured with a responsible and reputable insurance company or companies against loss or damage by fire, earthquake and windstorm, and such other hazards as are currently embraced in the standard extended coverage endorsement in the jurisdiction where the Demised Premises are located, and in an 21 amount equal to Eighty percent (80%) of the full insurable value of said buildings and improvements, or the full replacement value thereof, whichever Tenant shall elect, but in any event in an amount sufficient to prevent Tenant from becoming co-insurer. The insurance policies shall contain the standard mortgagee endorsement, including Landlord as additional loss payee, but subordinate to the prior rights of the mortgagees referenced in paragraph SEVENTEEN hereof. B. All insurance policies carried or caused to be carried by Tenant shall be issued in the name of Tenant and any subtenant(s) of the Demised Premises it designates), the Landlord, and the mortgagee(s) referred to in Paragraph Seventeen, as their respective interests may appear. Tenant shall have the right to make all adjustments of loss, and execute all proofs of loss in its name. Subject to any loss payable endorsements in favor of any of the mortgagee(s) referred to in Paragraph Seventeen hereof, if so required by said mortgagee(s), and subject to the rights (if any) of such mortgagee(s) to apply the proceeds of any insurance loss(es) towards the repayment of the indebtedness and interest secured by such mortgage(s) and the rights of such mortgagee(s) to receive the proceeds in the first instance in order to have the 22 same applied for restoring, rebuilding, and repairing, the proceeds of such insurance in case of loss(es) shall be payable to Tenant. Ten: Waiver of Subrogation: All insurance policies carried by either party covering the Demised Premises, including but not limited to contents, fire, casualty, and other insurance, shall expressly waive any right of the insurer against the other party and the mortgagees described in Paragraph Seventeen hereof. The parties hereto agree that the insurance policies referenced herein will include such waiver clause or endorsement so long as the same shall be obtainable without extra cost, or if extra cost shall be charged therefor, so long as the other party pays such extra cost. If extra cost shall be chargeable therefor, each party shall advise the other thereof and of the amount of the extra cost and the other party, at its election, may pay the same, but shall not be obligated to do so. Eleven: Damage and Destruction Clause: Should the whole or any part or parts of the improvements erected by Tenant or its sublessee or assignee then on the Demised Premises be partially or wholly damaged or destroyed by fire or other insured casualty after the commencement of this Lease, such destruction or damage shall not operate to terminate this Lease, but this Lease shall continue in full force and effect, except as 23 otherwise provided in this Lease. Tenant, at its own cost and expense, shall have the option to restore, rebuild or repair said building(s) and improvements provided, however, that should such damage or destruction be extensive and occurs within fifteen (15) years before the end of this Lease, subject to the written approval of the holder(s) of the mortgages described in Paragraph Seventeen hereof, Tenant shall thereupon have the option of canceling and terminating this Lease on giving Landlord sixty (60) days' written notice of Tenant's intention to do so. If Tenant elects to terminate this Lease in accordance with the foregoing option, the insurance proceeds payable as a result of such damage or destruction of said buildings or improvement shall be paid to Tenant, subject to the rights and interests of the holder(s) of the mortgage(s) described in Paragraph Seventeen hereof. Twelve: Indemnity: A. Subject to the provisions of this Lease, Tenant covenants and agrees that from and after the commencement of the Initial Term of this Lease and during any renewal or extension thereof, Landlord shall not be liable or responsible for damages for any personal injury or injuries, death(s), damages, or losses to any person(s) or property that may be suffered or sustained by Tenant or subtenant(s) or any of their respective agents, servants, 24 employees, patrons, customers, invitees, visitors, licensees, and concessionaires or by any other person or persons in, the Demised Premises, the Reserved Area, or any part thereof, arising from Tenant's failure to keep or cause to be kept the Demised Premises in good condition and repair, or arising or resulting from the use or occupancy of the Demised Premises by Tenant or subtenant(s) or any of their respective agents, servants, employees, patrons, customers, invitees, visitors, licensees, and concessionaires. B. Tenant covenants and agrees to indemnify and save Landlord harmless from and against any and all liability, costs and expenses for damages, losses, injuries, or death to persons or damages or losses to property which may be imposed upon or incurred by or asserted against Landlord as to any of the matters, provisions and conditions set forth in subparagraph A of this Paragraph Twelve, except as to those matters which Landlord has obligation(s) or any liability under this Lease, including without limitation thereof, the negligence of Landlord by acts of commission or omission, or damages sustained by Landlord its agents or invitees occurring within the areas occupied by Landlord. Thirteen: Construction of Buildings and Improvements. A. Subject to the conditions and limitations contained herein, Tenant shall have the option and right at all times during 25 the term of this Lease to build, construct and erect structures and betterments on the Demised Premises in the manner indicated herein, and to do, install or perform any improvement or betterment therein. Subject to the conditions and limitations contained herein, Tenant is likewise authorized to demolish, remove or substitute any structure now or in the future existing in the Demised Premises, and perform such landscaping, land movement, and other land or soil preparation work it considers appropriate. The number of structures and extent of such construction shall be in substantial conformity with the general description of improvements to be done by Tenant as referred to in this paragraph Thirteen, and in substantial conformity with the location of such improvements as appears on the plan identified as Isla Palominos Plan, prepared by Ray, Melendez & Associates, (the "Master Plan"), (except for light structures and shelters to enclose sanitary facilities, whether shelters, overlooks, bars, refreshment and snack and light grill facilities, utilities, and facilities related to such utilities, which are not necessarily shown in the Master Plan and which Tenant may construct outside of the general construction boundaries shown on said Master Plan), a copy of which Master Plan is attached to this deed, and provided further that the aggregate enclosed construction area of all enclosed 26 structures to be erected by Tenant shall not exceed Thirty Five Thousand square feet (35,000 sq. ft.). The parties recognize the improvements shown in the Master Plan and/or described herein are general in nature and may suffer modifications from time to time. Likewise, the exact location, shape and size of the improvements shown in the Master Plan is illustrative only and it is recognized by the parties hereto to be preliminary in nature and may be subject to modifications by Tenant from time to time. Any such modification may be carried out by Tenant without the prior consent of Landlord provided such modification does not change the intended use of the proposed structure(s), or consists merely of a change in location within the general construction boundaries in the South portion of the Demised Premises as shown in the Master Plan or a change in the shape of any such structure, or does not substantially increase the area to be constructed. Notwithstanding the aforesaid, Tenant agrees that it shall not construct more than twenty single, two story or split level cottages to house honeymoon suites and rooms, that the area of each individual cottage shall not exceed Nine Hundred square feet (900 sq. ft.), and that the location of such single, two story or split level cottages shall be within the general area comprising the southeast portion of the Demised Premises as indicated in the Master Plan. If Tenant 27 wishes to make any substantial or major modification to the description of improvements or the structures shown on the aforesaid plan, which modification would result in a major increase in density or in an increase on the number of structures to be constructed or in the area of such structures in an amount which would be in excess of over twenty percent of the number or area of the structures shown in said Plan, or allowed hereinunder, or if Tenant wishes to construct more than twenty single, two story or split level cottages to house honeymoon suites and rooms, or if Tenant wishes to construct other facilities not related to the purposes and uses of the Demised Premises as stated herein, then in any such event, Tenant shall obtain Landlord's prior consent before doing any such modification or construction. It is agreed that with regards to the construction of additional facilities related to the purposes and uses of the Demised Premises as stated herein, Landlord shall not withhold its consent unreasonably, except that Landlord may refuse to grant its consent for any reason to (i) the construction of more than twenty single, two story or split level cottages to house honeymoon suites or rooms, and (ii) any construction outside the boundaries of the general construction boundaries shown in the Master Plan except for the light structure and shelters indicated above. 28 B. If Tenant at any time or times during the initial term of this lease, or any renewal or extension thereof, shall construct any building, buildings, structures, or improvements on the Demised Premises, or any part or parts thereof, the same shall be constructed without cost or expense to Landlord, in accordance with the requirements of all laws, ordinances, codes, orders, rules, and regulations of all governmental authorities having jurisdiction over the Demised Premises. The issuance of certificates of occupancy or equivalent use certificates shall be deemed "prima facie" evidence as to such compliance. C. Tenant, at its own cost and expense, shall have the right to apply for and prosecute with reasonable diligence, all necessary permits and licenses required for the construction of any and all improvements authorized to be constructed herein. Landlord, without cost or expenses to themselves, shall cooperate with Tenant in securing location permits, building and other permits and authorizations necessary from time to time for the performance of any construction, alteration(s) or other work permitted to be done by tenant under this Lease. D. Prior to commencing construction of any building(s) or improvements which are estimated by Tenant to have a construction cost of seventy five thousand dollars or more, Tenant, 29 without cost to Landlord, shall obtain from the general contractor in charge of construction of any building(s) and improvements a performance bond, and a labor and material payment bond, in the amount of the estimated cost of same issued by a reputable surety company licensed to do business in the Commonwealth of Puerto Rico guaranteeing the completion of said building(s) and improvements and payment of all costs therefor and incident thereto, or in some instances, at Landlord's option, to furnish to the Landlord a surety bond naming the Landlord and the Mortgagee(s) mentioned in paragraph Seventeen as additional beneficiaries thereunder, as their interest may appear. Tenant shall require from any such general contractor a liability policy naming Landlord additional insured and additional beneficiary under the contractor's hold harmless agreement. E. Tenant may carry out construction in the Demised Premises in different phases which might extend throughout the duration of this Lease, together with any extensions thereto. Tenant will endeavor to commence the first phase of construction within the first two Lease Years. F. Tenant agrees that the structures to house honeymoon rooms and suites are to be erected in the southeast 30 portion of the Demised Premises within the general area designated in the Master Plan attached to the first certified copy of this deed. G. Title to all improvements, structures, fixtures and betterments made, constructed or installed by Tenant on the Demised Premises shall belong to and remain with Tenant throughout the duration of this Lease, including all extensions hereto and Tenant shall have the right to take all depreciation expense arising therefrom. All improvements consisting of personal property may be removed by Tenant at any time during the term of this Lease or at the termination thereof. H. As long as Tenant determines that a particular structure, building or improvement is adequate or proper for its operations, it shall cause that the same be maintained in good operating condition. I. Upon the expiration of this Lease together with all extensions hereto, or upon its termination for any cause, and upon Tenant surrendering the Demised Premises to Landlord, title to all buildings, structures and other improvements of a permanent or fixed nature constructed by Tenant during the term of this Lease, shall automatically be transferred and conveyed to Landlord, free and clear of liens and encumbrances, at no cost to Landlord. 31 J. Tenant is currently considering constructing on the Demised Premises certain buildings, structures and improvements of a permanent or fixed nature consisting, in general terms of the following: (i) enclosed support facilities such as a lounge, a restaurant, bars, meeting areas, kitchen, service and storage areas, sanitary facilities, passenger shelter in the marina and marina service building, (ii) open area facilities such as swimming pool, terraces, walkways, paths, and service roads, (iii) community support facilities such as communication center, sewer treatment plan, water storage tanks, electricity generators, windmills, desalination plants, lighting facilities, (iv) recreational facilities such as playground facilities including tennis and other sport courts, floating docks for water sport vehicles and marina pier, and others of similar nature and (v) not more than twenty single two story or split level structures for honeymoon suites and guest rooms with an enclosed construction area not to exceed nine hundred square feet (900 sq. ft.) each. Tenant will consult with Landlord prior to constructing additional facilities not included in the aforesaid general description and Tenant shall submit for Landlord's approval subject to and in accordance with the provisions of paragraph Thirteen (A) hereof, copies of all site plans and development plans for all such additional facilities. 32 L. All structures, buildings and improvements will be used by Tenant as part of its hotel, tourism and recreational operations. Fourteen. Temporary Occupation by Landlord and Relocation of Landlord: a) Landlord agrees that not later than seventeen (17) months from the Commencement Date of this Lease it shall remove all of its personal belongings from the Demised Premises and transfer them to the Reserved Area, and shall turn over to Tenant all the structures and facilities existing on the Demised Premises and being currently occupied by Landlord, in order that Tenant may take possession of all of the Demised Premises including all existing structures, and be able to commence uninterrupted construction and/or demolishing work on the Demised Premises. Tenant is authorized to demolish any and all existing structures on the Demised Premises. b) Until Landlord vacates and surrenders to Tenant all the areas and structures occupied by Landlord in the Demised Premises, Landlord shall obtain at its own cost and expense liability insurance against claims for damages to persons or property arising out of Landlord's use or occupancy of the Demised Premises in limits of not less than one million dollars in 33 respect to bodily injury or death to one person and three million dollars in the aggregate for any one accident. Such policy to be issued by reputable insurance company licensed to do business in Puerto Rico and shall name Tenant as additional insured and loss payee. Landlord shall provide Tenant with a certificate of insurance providing for such coverage within ten (10) days from the execution of this Lease, as well as a certificate of insurance upon renewal of such policy. Upon Landlord's failure to obtain such coverage, Tenant may, but shall not be required to obtain such coverage for the account and at the cost of Landlord. c) The indemnity provisions of this agreement in favor of Landlord shall not become effective until Landlord vacates the Demised Premises. Tenant shall not be liable to Landlord, its agents, employees or invitees for any damage, loss or injury while Landlord, its agents, employees and invitees are occupying the Demised Premises or any portion thereof. Until Landlord surrenders the Demised Premises to Tenant, Landlord shall indemnify and make Tenant harmless against any loss, damage or expense arising from any action related to or as a consequence of Landlord's occupancy of the Demised Premises. d) Landlord may visit the Demised Premises during construction, provided Landlord gives Tenant reasonable prior 34 notice, such visit is made during working hours, does not interrupt construction work, and Landlord is accompanied by Tenant's agents. During any such visit Landlord shall abide by all safety precautions and regulations imposed by Tenant or its contractors. In no event shall Landlord enter into the Demised Premises without the safety equipment required from all Tenant's contractors, subcontractors, agents, and employees, and without being accompanied by an authorized representative of Tenant. e) During the initial seventeen months of this Agreement, Tenant shall have access to the Demised Premises with the exception of the dwelling units then being occupied by Landlord. Such access shall be for the purpose of conducting soil tests, measurements, preparation of plans, studies and inspections. In addition to the aforesaid, Tenant shall have the right to commence construction work in the Demised Premises but only in areas sufficiently separated from the dwelling units being occupied by Landlord in order to reasonably avoid any discomfort or hazard to Landlord and Landlord's invitees. In carrying out such work Tenant shall take all proper safety precautions to avoid unsafe or hazardous conditions for Landlord and it's invitees. Tenant shall in addition endeavor to carry out such work during regular business days only. More specifically, Tenant may commence 35 work on planned walkways and trails, landscaping, power generation plan and windmills, water supply, sewers and treatment plant and electric distribution facilities. Should Tenant need to commence work in other areas, or perform any work during any weekend or holidays, it will coordinate with Landlord prior to the commencement of such work. After the initial seventeen months (or sooner if Landlord vacates the Demised Premises prior to the end of the initial seventeen months), Tenant may carry out any other construction and demolition work authorized hereunder. Fifteen: Access by Landlord: During the term of this Lease, provided construction work is not then in progress, Landlord shall have during business hours access to those areas of the Demised Premises which are then open to Tenant's guests and visitors in general. Such access shall be restricted in the same terms and conditions and subject to the same rules of conduct as any other guest or invitee of Tenant. Sixteen: Compliance with Laws: A. Tenant covenants and agrees that during the term of this Lease and any renewals or extensions thereof, it shall endeavor to promptly comply with all applicable laws, ordinances, orders, rules, regulations, and requirements of the Federal, 36 Commonwealth, and Municipal Governments having jurisdiction over the Demised Premises. B. Tenant shall have the right, after prior written notice to Landlord, to contest by appropriate legal proceedings which shall be conducted diligently and in good faith in the name of Landlord or Tenant or both the applicability of any law, ordinance, order, rule, or regulation of the nature hereinabove referred to in Paragraph Sixteen A(16A), and Tenant shall have the right to delay observance thereof and compliance therewith until such contest is finally determined and is no longer subject to appeal, provided that observance and compliance therewith pending the prosecution of such proceeding may be legally delayed without subjecting Landlord to any liability or fine. Seventeen: Leasehold Financing: Tenant and Tenant's assigns (but not Tenant's sublessees of less than the totality of the Demised Premises) shall have the absolute right, at any time and from time to time, to mortgage the leasehold interest (derecho de arrendamiento) herein demised on such terms, conditions, and maturities, not to exceed the term of the Lease (together with all extensions thereto), as Tenant or Tenant's assigns shall determine, and to enter into any and all extensions, modifications, amendments, replacement(s), and refinancing(s) of any such 37 leasehold mortgage as Tenant may desire provided that no leasehold mortgage shall extend beyond the term of this Lease together with any extension thereto. It is the intention of the parties that any leasehold mortgage to be constituted by tenant or its assigns be constituted upon the leasehold estate as a whole and not upon subleases or concessions of a portion of the Demised Premises. Accordingly, if Tenant enters into any sublease of a portion of the Demised Premises or grants a concession for the use of a particular structure or improvement erected therein, such sublease or concessionaire may not mortgage his subcontract or concession agreement separate or independently from the leasehold estate granted herein. While Tenant is authorized to mortgage the leasehold interest created herein, Tenant may not mortgage separately from such leasehold mortgage, the individual structures to be constructed by Tenant in the Demised Premises. If Tenant, or Tenant's successors or assigns, shall mortgage the leasehold interest constituted herein, then, as long as any such leasehold mortgage shall remain unsatisfied of record, the following provisions shall apply, notwithstanding anything to the contrary contained in this Lease. 38 (i) There shall be no voluntary cancellation, surrender, acceptance of surrender, or modification of this Lease or attornment of any subtenant to Landlord without the leasehold mortgage holder's prior written consent. (ii) If the holder of any mortgage on the leasehold estate constituted herein shall register with Landlord his or its name and address in writing, Landlord, on serving on Tenant any notice of default or any other notice pursuant to the provisions of, or with respect to, this Lease, shall at the same time serve a duplicate counterpart of such notice on the holder of the then existing mortgage on this leasehold interest by Registered Mail, return receipt requested, addressed to said holder at the address registered with Landlord, and no notice by Landlord to Tenant hereunder shall be deemed to have been duly given to Tenant unless and until such duplicate counterpart thereof has been so served on the holder of the leasehold mortgage. (iii) Such holder of the leasehold mortgage, in the event Tenant shall be in default hereunder shall have the right, within the period and otherwise as herein provided, to remedy or cause to be remedied such default, and Landlord shall accept such performance by or at the instigation of such leasehold mortgage holder as if the same had been performed by Tenant. No default by Tenant in 39 performing work required to be performed, acts to be done, or conditions to be remedied, shall be deemed to exist, if steps, in good faith, shall have been promptly commenced by Tenant or by said leasehold mortgage holder or by any other party, person, or entity to rectify the same and prosecuted to completion with diligence and continuity, subject to force majeure (Such diligent exercise of rights being referred to as the "Diligence Requirements"). (iv) Anything herein contained to the contrary notwithstanding, during such time as the leasehold mortgage remains unsatisfied of record, if an event or events shall occur which shall entitle Landlord to terminate this Lease, and if before the expiration of sixty (60) days after the date of service of notice of termination under this Lease such holder of the leasehold mortgage shall have paid to Landlord all rent and additional rent and other payments herein provided for then in default, and shall have complied with or shall be engaged in the work of complying with all the Diligence Requirements in respect to the other requirements of this Lease, if any, then in default, then landlord shall not be entitled to terminate this Lease and any notice of termination theretofore given shall be void and of no effect, provided, however, that nothing herein contained shall in any way 40 affect, diminish, or impair Landlord's right to terminate this Lease if such default is not cured within said sixty (60) day period or in the process of being cured pursuant to the Diligence Requirements. (v) In the event Landlord wishes to terminate this Lease before the natural expiration of the term hereof whether by summary dispossession proceedings, service of notice to terminate, or otherwise, due to Tenant's default, as a condition precedent to such termination, Landlord shall by Registered Mail, Return Receipt Requested, serve on the holder(s) of the then existing leasehold mortgage(s) written notice of such termination, together with a statement of any and all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, under this Lease then known to Landlord. Such holder(s) of the leasehold mortgage(s) shall, after having paid to Landlord all rent and additional rent and other payments herein provided for then in default, and having complied, or be engaged in complying will all Diligence Requirements, or upon foreclosure of the leasehold mortgage(s), have the option to obtain a direct lease with Landlord in accordance with and on the following terms and conditions: (a) On the written request of the holder(s) of the said leasehold mortgage(s), within sixty (60) days after service of the 41 aforementioned notice of termination, or upon foreclosure of the leasehold mortgage(s), Landlord shall enter into a new or direct Lease of the Demised Premises with the holder of such leasehold mortgage, nor its designee, as provided in the following Clause (b). (b) Such new or direct Lease shall be entered into at the reasonable cost of the holder of the leasehold mortgage, shall be effective as of the date of termination of this Lease, and shall be for the remainder of the term of this Lease, and at the rent and additional rent and on all the agreements, terms, covenants, and conditions hereof, including without limitation hereof the options to extend the term. (vi) No holder(s) of any leasehold mortgage(s) shall be liable under this Lease unless and until such leasehold mortgage holder shall become the owner of the leasehold estate, and then only for as long as it remains such owner subject to the provisions of this Lease. On any assignment of this Lease by any owner of the leasehold estate whose interest shall have been acquired by, through, or under any foreclosure of a leasehold mortgage or any transfer in lieu of foreclosure, or shall have been derived immediately from any such mortgagee or assignee of such mortgagee, the assignor shall be relieved of any further liability 42 which may accrue hereunder from and after the date of such assignment, it being the intention of the parties that once the leasehold mortgage holder shall succeed to Tenant's interest hereunder, any and all subsequent assignments, whether by such holder, any purchaser at a foreclosure sale or other transferee, or any assignee of either shall effect a release of the assignor's liability. Landlord agrees to execute and deliver, on demand, but at the cost of the assignor requesting the same, in recordable form, any instruments which may reasonably be requested by such assignor to accomplish the aforesaid release, but such release shall not extend to the original Tenant hereunder. Eighteen: Condemnation: A. If the entire Demised Premises or if the entire Hotel Premises be taken by the exercise of the right of eminent domain for any public or quasi-public improvement or use, this Lease and the term hereby granted shall, as a consequence of such taking expire on the date when title to the Hotel Properties or to the Demised Premises so taken shall vest in the appropriate authority or on the date when any possession is required to be surrendered, whichever is later. 43 B. If so substantial a portion of the Demised Premises or of the Hotel Properties or any building or improvements thereon shall be so taken as to make same unusable in Tenant's opinion for the purposes to which the Demised Premises or the Hotel Properties, as the case may be, shall then be devoted (or permitted to be devoted hereunder), then Tenant shall have the right to cancel or terminate this Lease on sixty (60) days written notice to landlord to be given after the date when title to the portion(s) so taken shall vest in the appropriate authority or, at Tenant's option, on the date physical possession is required to be surrendered. C. (i) In the event that an entire or partial taking of the Demised Premises occurs during the first fifteen Lease Years, (provided that such taking is not carried out for the benefit of Tenant, its affiliates, subsidiaries, successors or assigns) Landlord and Tenant shall pursue, in their respective individual and separate names and rights, unless otherwise required by law, such remedies and make such claims as they may have against the authority exercising such right of eminent domain or other lawful taking as if this Lease and the term hereof had not expired (whether or not such expiration shall have occurred on account of such taking) and for the purpose of determining the respective rights and remedies of the parties, or for the purpose of an equitable apportionment of 44 the award for damages, Landlord shall be deemed to be the owner of the land constituting the Demised Premises and Tenant shall be deemed to be the owner of the buildings and all other improvements situated upon said Demised Premises. The award of damages for such taking shall be apportioned between the parties on equitable and just principles in accordance with said respective interests and Tenant shall be entitled to that further award or portion of award for damages to its leasehold and nonremovable fixtures or loss of value of its leasehold (but in no event shall tenant be entitled to the diminution in value rent wise of its leasehold). Rent shall be apportioned and adjusted and advance rent shall be apportioned to the date title vests in the condemnor or the date possession is required to be surrendered, whichever is later. (ii) If such entire or partial taking occurs at any time after the initial fifteen Lease Years, then for purposes of the apportionment of the award for such taking, Landlord shall likewise be deemed to be the owner of the land (including any landscaping thereon) constituting the Demised Premises, but shall also be deemed to have (solely for these purposes) an interest in all improvements, nonremovable fixtures and utilities equal to the amount of the award attributable to such improvements, 45 nonremovable fixtures and utilities multiplied by a fraction the denominator of which shall be seventeen (17) and the numerator shall be the number of Lease Years elapsed after the fifteenth Lease Year. (iii) Notwithstanding the provisions of the preceding two paragraphs, if the taking is carried out for the benefit of Tenant, its subsidiaries, affiliates, successors or assigns, then Landlord shall be deemed to have (solely for these purposes) an interest in the structures and fixed improvements constructed by Tenant on the Demised Premises, equal to the amount of the award for such taking attributable to such structures and fixed improvements, multiplied by a fraction the denominator of which shall be thirty two (32) and the numerator shall be the number of Lease Years (or portion of a Lease Year, if more than six months have transpired of the then current Lease Year) elapsed from the Commencement Date. D. In the event of a partial taking of the Demised Premises, if Tenant shall not cancel the Lease as hereinabove provided in subparagraph B, this Lease shall not terminate, but the rental for the land constituting the Demised Premises shall be reduced in proportion to the amount of land of the Demised Premises taken and Tenant shall make such repairs or construction 46 at its own cost and expense out of the award or portion of award to Tenant, which in Tenant's judgment is made necessary due to such partial taking. E. Landlord shall not be liable to Tenant for any damage suffered by Tenant due to the cancellation of this Lease prior to its natural expiration date by reason of any taking of the Demised Premises by any governmental authority. Nineteen: Fee Mortgages: Landlord shall have the right to execute mortgages on its fee simple title to the Demised Premises provided such mortgages are expressly made subject and subordinate (a) to the provisions of this Lease and (b) to any easement agreement or amendments thereof made by Landlord and Tenant as provided in this Lease (whether made before or after the mortgage(s), and expressly provide that such declaration of easements may be modified or terminated without the consent of Landlord's mortgagee, (c) to any and all new or direct Leases which may be made between a Landlord and the holder(s) of any Leasehold Mortgage(s) described in paragraph Seventeen of this Lease, (d) the Landlord's mortgage by its terms shall obligate the holder of such mortgage to execute promptly after request therefor, in recordable form, subordination agreements in favor of such leasehold mortgagees, and (e) the 47 monthly installments of principal and interest under such mortgages becoming due during the term of this Lease shall not exceed the installments of Annual Basic Rent hereunder. Twenty: Default Clauses: A. If the Tenant shall default in the payment of any installment of basic or additional rent on the date provided for in this Lease, and if such default shall continue for a period of sixty (60) days after receipt by Tenant of written notice of said nonpayment; or in the event that Tenant shall default or fail in the performance of a material covenant or agreement on its part to be performed in this Lease, and such default shall not have been cured for a period of sixty (60) days after receipt by Tenant of written notice of said default from Landlord, or if such default cannot, with due diligence, be cured within sixty (60) days, and Tenant shall not have commenced the remedying thereof within such period or shall not be proceeding with due diligence to remedy it (it being intended in connection with a default not susceptible of being cured by Tenant with due diligence within sixty (60) days, that the time within which to remedy the same shall be extended for such period as may be necessary to complete same with due diligence), then, and in such case, Landlord may terminate this lease on ten day's written notice to Tenant and 48 initiate appropriate legal action or proceedings, to enter upon said Demised Premises or any part thereof and evict Tenant, or any person or persons occupying said premises and so to repossess and enjoy the said premises, subject to the rights of any subtenants having nondisturbance agreement(s) from Landlord. Simultaneously with the sending of notice(s) to Tenant, Landlord shall send a copy of such notice(s) to the record holders of the leasehold mortgage(s) referred to in Paragraph Seventeen hereof that shall affect the premises or portion(s) thereof. B. If, after the commencement of the term of this Lease: (i) the Tenant then in possession of the Demised Premises shall be adjudicated a bankrupt or adjudged to be insolvent; (ii) a receiver or trustee shall be appointed for the aforesaid Tenant's property and affairs; (iii) the aforesaid Tenant shall make a general assignment for the benefit of creditors or shall file a petition in bankruptcy or insolvency or for reorganization or shall make application for the appointment of a receiver; or (iv) involuntary bankruptcy proceedings are filed against it; or (v) any execution or attachment shall be issued against the aforesaid Tenant or any of the aforesaid Tenant's property, whereby the Demised Premises or any building or buildings or any improvements thereon shall be taken or occupied or attempted to be taken or occupied by 49 someone other than the aforesaid Tenant, except as may herein be permitted, and such adjudication, appointment, assignment, petition, execution, or attachment shall not be set aside, vacated, discharged, or bonded within one hundred and twenty (120) days after the issuance of the same, then a default hereunder shall be deemed to have occurred so that the provisions of this Paragraph Twenty shall become effective and Landlord shall have the rights and remedies provided for herein. Twenty One: Effect of Unavoidable Delays: The provisions of this Paragraph Twenty-One shall be applicable if there shall occur, during the term of this Lease or any extension or renewal thereto, any: (i) Strike, lockout, or labor dispute affecting the Demised Premises or any portion thereof; or (ii) Inability to obtain labor or materials or reasonable substitutes therefor; or (iii) Acts of God, governmental restrictions, regulations, or controls, enemy or hostile governmental action, civil commotion, insurrection, revolution, sabotage, or fire or other casualty, or other conditions beyond the control of the Tenant. If Tenant shall, as the result of any such event, fail punctually to perform any Lease obligation other than Tenant's obligations to 50 pay fixed rent or other monetary payments under this Lease, then such obligation shall be punctually performed as soon as practicable after such event shall abate. If Tenant, as a result of any such event, shall be unable to exercise any right or option within any time limit provided therefor in this Lease, such time limit shall be deemed extended for a period equal to the duration of such event. Within fifteen (15) days after the happening of any event for which Tenant shall be entitled to an extension hereunder, Tenant shall send to Landlord written notice describing such event. Twenty Two: Estoppel Certificate: Landlord shall, without charge at any time and from time to time, within ten (10) days after request by Tenant, execute a written statement and forward the same to Tenant, or to any mortgagee identified by tenant, or to any assignee of any mortgagee or purchaser, or to any proposed mortgagee or proposed purchaser, or to any other person, firm or corporation specified by Tenant, whereby Landlord certifies that: (i) That this Lease is unmodified and in full force and effect, (or, if there has been a modification, that the same is in full force and effect as modified and stating the modification); 51 (ii) The dates, if any, to which the basic rent and additional rent, impositions, and other charges hereunder have been paid in advance; (iii) Whether Tenant is or is not in default in the performance of any covenant, condition or agreement on Tenant's part to be performed and the nature of Tenant's default, if any; and such other pertinent information as Tenant or the holder of a mortgage described in Paragraph Seventeen hereof may request. Twenty Three: Utility Easements and Charges: A. Landlord covenants, warrants, and agrees, at Tenant's request and sole expense, from time to time, to execute and deliver to Tenant, in recordable form, within fifteen (15) days after notice from Tenant to do so, any utility easement proper or necessary to provide the Demised Premises with any water, sewer, electricity, telephone or cable TV services, in form and substance acceptable to the utility company providing such service. Landlord covenants and warrants that it will, within ten (10) days after request by Tenant, execute and deliver to Tenant, in recordable form, any subordination agreement(s) as Tenant or any holders of mortgages described in Paragraph Seventeen hereof shall request to accomplish the aforesaid subordination. Landlord agrees that it will not unreasonably withhold its consent to, and that it will 52 execute in recordable form, any modification(s) or termination requested by Tenant of any easement so made, and subsequent subordination(s) if so requested to such modification(s) if any. B. Said easement shall be superior to any mortgages obtained by Landlord. C. If Tenant decides to construct water, sewer and/or electricity generating facilities in the Demised Premises, it shall, as an accommodation to Landlord, but not as an obligation hereunder, permit Landlord to hook-up to such facilities and subject to availability and capacity, provide any such services to Landlord. The hook up of any such service shall be made by Tenant at the sole cost of Landlord. In such event and as long as such facilities have been made available to Landlord, Landlord shall reimburse Tenant the cost, proportional to Landlord's consumption, to Tenant of providing such services. Such cost shall be determined on the basis of the actual cost to Tenant of constructing, distributing, providing and maintaining such facilities and services and generating or processing the same, including the amortization (on the same basis that Tenant amortizes such improvements) of the value of any equipment and installation necessary for the generation and distribution of such utilities together with all direct costs associated to the operation of such 53 equipment, and such overhead as is reasonably determined by Tenant. Nothing contained herein will constitute an obligation of Tenant to construct or provide any particular utility or facility or rendering any such services or continue to provide such facilities, or services from time to time, or to construct any such facility with a particular capacity, and Tenant shall not be liable for the discontinuation, failure or refusal to provide any such service at any time or from time to time, or for any damage that might be sustained by Landlord for such discontinuation. Twenty Four: Holdover: If the Tenant shall hold over as a Tenant after the expiration of the Lease, then such tenancy shall be deemed to be on a month-to-month basis. Twenty Five: Partial Invalidity: If any term, covenant, condition, or provision of this Lease or the application thereof to any person or circumstances shall, at any time or to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which this Lease is held invalid or unenforceable, shall not be affected thereby, and each term, covenant, condition, and provision of this 54 Lease shall be valid and be enforced to the fullest extent permitted by law. Twenty Six: Tenant's Right of First Refusal: Landlord agrees that if at any time during the term of this Lease Landlord receives a bona fide offer to purchase the fee of the Demised Premises, any contract which may be entered into between Landlord and such bona fide purchaser shall provide that the sale of the fee shall be subject to Tenant's right of first refusal as hereinafter set forth. In the event of any sale to anyone other than Tenant herein, the sale shall be subject to this Lease and shall be so affirmed by the purchaser. In the event that Landlord receives a written offer or executes a contract as above set forth, Tenant shall have the option, to be exercised within sixty (60) days after receipt by Tenant of written notice of the terms of such offer or contract, as the case may be, (together with a copy of such offer or of such executed contract, as the case may be), to enter into a contract with Landlord for the purchase of the Demised Premises, and Landlord agrees to enter into such contract with Tenant, on the same terms and conditions as contained in said offer to purchase (or as contained in such executed contract if such contract, as the case may be.) 55 If, after the receipt of such notice, together with a copy of the said offer and of the said contract, if any, Tenant shall fail to exercise its option in writing within the sixty (60) days period indicated above, Landlord shall have the right to conclude the proposed sale on the same terms, and no other, as contained in the offer or contract originally forwarded to Tenant. Notwithstanding Tenant's failure to exercise such option, Tenant's option shall remain in force and be binding on any subsequent owner or owners of the Demised Premises in connection with any subsequent sale to the same extent as if said subsequent owner or owners had been required to do all of the things required of Landlord in this Lease prior to any such sale of the Demised Premises. If Tenant duly exercises its option under the provisions of this Paragraph title to the property shall be transferred to Tenant subject only to such mortgage or mortgages as may have been placed against the fee of the Demised Premises by Landlord or by Landlord's successor in interest. If Landlord shall decide at any time and from time to time to sell the Demised Premises, Landlord shall not place the same in the market or offer the same to the general public until sixty days (60) after offering for sale the same in writing to Tenant. Any modification of the sale terms of the Demised Premises as offered 56 to Tenant, shall become again subject to a new sixty day right of first refusal period. All sales by landlord to their direct descendants shall be exempt from the aforesaid right of first refusal restrictions, but such direct descendants shall, upon acquiring title to the Demised Premises, be subject to the aforesaid right of first refusal restriction, with respect to any subsequent sale or offer. For purposes of this Paragraph Twenty Six, the term Demised Premises shall include the Reserved Area. Twenty Seven: Written Notice: Whenever under the terms of this Lease notice is required, or whenever a written notice or communication is sent, the same shall be in writing and sent by Registered Mail Return Receipt, postage prepaid, or delivered in person, receipt acknowledged, addressed as follows: To Landlord: (a) Lilliam Bacham Umpierre; GPO Box thirty six dash twenty thirty four (36-2034), San Juan, Puerto Rico, zero zero nine three six (00936); (b) Alberto Bachman Umpierre, P.O. Box One Hundred Twenty Six (126), Hato Rey, Puerto Rico, zero, zero, nine one nine (00919). with copy to: Rafael Fuertes, Esq., Condominio El Centro Two (II), Suite Two Hundred Fifty Six (256), Munoz Rivera 57 Avenue Five Hundred (500), Hato Rey, Puerto Rico, zero, zero, nine one eight (00918). To Tenant: El Conquistador Partnership, L.P. c/o Williams Hospitality Company, Inc., El San Juan Hotel & Casino, One Hundred Eighty Seven (187) East Isla Verde Road, Carolina, Puerto Rico, zero, zero, nine one three (00913). with copy to: Silvestre M. Miranda, Esq., Ledesma, Palou & Miranda, Suite Eleven zero three (1103), Banco de Ponce Building, Hato Rey, Puerto Rico, zero, zero, nine, one, eight (00918). Twenty Eight: Binding on Successors and Assigns. Except as otherwise provided in this Lease, all covenants, agreements, provisions, and conditions of this Lease shall be binding on and inure to the benefit of the parties hereto, their respective personal representatives, successors, and assigns. No modification or termination of this Lease shall be binding unless evidenced by an agreement in writing signed by Landlord and Tenant. Twenty Nine: Broker: A. Landlord and Tenant each covenant and agree with the other than neither has retained or contracted with any realtor or person in regard to this Lease. Landlord and Tenant each 58 covenant and agree to hold the other harmless from any claim of any person for any commission or other compensation arising from the negotiation and execution of this Lease to the extent such claim is asserted to arise out of such claimant's contract or claim having been through the party to be charged. The provisions of this paragraph shall survive the termination of this Lease. Thirty: Exculpatory Provisions: Notwithstanding any provision in this Lease to the contrary, Landlord agrees that in the event of any default or breach by Tenant with respect to any of the terms and provisions of this Lease on the part of the Tenant to be performed or observed, which causes Landlord to terminate this Lease prior to its natural expiration date, the obligations and liability of Tenant for breach of contract and damages, shall be limited to the payment to Landlord in a lump-sum an amount equal to the Annual Rent for the Lease Year during which such termination occurs, or to the number of months remaining until the natural expiration of this Lease, whichever less, plus reasonable attorney's fees and court costs and expenses incurred in any action for termination of this Lease and eviction of Tenant. Thirty One: Captions: The captions of the Paragraphs of this instrument are solely for convenience and shall not be deemed a part of this instrument 59 for the purpose of construing the meaning thereof, or for any other purpose. Thirty Two: Surrender. Upon the termination or upon the cancellation of this Lease, for any cause whatsoever, Tenant shall quit and surrender the Demised Premises and all buildings and structures thereon, in good condition and repair, except for depreciation and normal wear and tear. Any improvement which Tenant had discontinued using at the time of said termination which has deteriorated beyond normal wear and tear, may at Tenant's option, be either repaired or destroyed and in the latter case, removed from the Demised Premises by and at the cost of Tenant. Thirty Three: Quiet Enjoyment: Landlord agrees, covenants, and warrants that as long as Tenant faithfully performs the agreements, terms, covenants, and conditions of this Lease within the grace periods and extended periods for any unavoidable delays, Tenant shall peaceably and quietly have, hold, and enjoy the Demised Premises for the term and extensions thereof hereby granted without molestation or disturbance by or from Landlord and free of any and all encumbrances created or suffered by Landlord. 60 Landlord warrants and represents that there is no ongoing litigation, claim or procedure against Landlord or Demised Premises which could affect Tenant's possessory rights hereunder. Thirty Four: No Waiver. No waiver of any covenant or condition contained in this Lease or of any breach of any such covenant or condition shall constitute a waiver of any subsequent breach of such covenant or condition by either party, or justify or authorize the nonobservance on any other occasion of the same or any other covenant or condition hereof of either party. All waivers hereto shall be in writing signed by the parties hereto. Thirty Five: Interpretation. This Lease shall be construed in accordance with the law of the Commonwealth of Puerto Rico. Whenever the contents of any provisions shall require it, the singular number shall be held to include the plural number, and vice versa. The neuter gender includes the masculine and the feminine. Thirty Six: Joint Obligations. All obligations of the parties comprised in the term "Landlord" shall be deemed to be joint and several. Thirty Seven: Entire Agreement. 61 This Lease contains the entire agreement of the parties hereto with respect to the letting and hiring of the Demised Premises described above and this Lease may not be amended, modified, released, or discharged, in whole or in part, except by an instrument in writing signed by the parties hereto, their respective successors or assigns. Thirty Eight: Transfers to Controlled Entity: Landlord may transfer the Demised Premises to a corporation or to a special partnership at any time, provided that Landlord retains thereafter controlling interest in such corporation or special partnership, and provided further that such corporation or special partnership, and Landlord's interest therein, shall be subject to the right of first refusal provisions contained in Section Twenty Six hereof. After the date of any such transfer, such special partnership or corporation shall be deemed to be the Landlord hereunder for all purposes, and, at the request of Tenant, shall execute such document as may be necessary to reflect such substitution of record. Controlling interest for purposes of this paragraph shall refer to an aggregate interest of not less than fifty one percent (51%) in such special partnership or corporation. Thirty Nine: Closing Expenses: 62 The internal revenue stamps to be cancelled in the original and first certified copy of this deed, the recording fees hereof and the corresponding notarial fees shall be for the account of Tenant. ACCEPTANCE I, the Notary, do hereby certify that I advised the appearing parties of the legal effect of the present deed, who waived their right to have attesting witnesses in this instrument, after having duly advised them of such right. I, the Notary, also certify and attest that this document was ready by the parties and having found it in accordance with their wishes and instructions they approve and ratify the contents thereof and sign before me also placing their initials on each and every page of the original of this deed. I, further certify and attest that the appearing parties and I know and fully understand the English language and I attest as to my personal acquaintance to the appearing parties and to their personal qualifications. TO ALL OF WHICH, under my signature, scroll and seal, signing and sealing the same according to law, I, the undersigned Notary, ATTEST. /s/ /s/ 63 /s/ /s/ /s/ 64 EX-10 6 EXHIBIT 10.3 - -------------------------------------------------------------------------------- LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT Dated as of February 7, 1991 between EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership and THE MITSUBISHI BANK, LIMITED, acting through its New York Branch ----------------------------------- $120,000,000 PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY INDUSTRIAL REVENUE BONDS, 1991 SERIES A (EL CONQUISTADOR RESORT PROJECT) CONVERTIBLE INDUSTRIAL REVENUE BONDS 1991 SERIES B (EL CONQUISTADOR RESORT PROJECT) AND INDUSTRIAL REVENUE BONDS 1991 SERIES C (EL CONQUISTADOR RESORT PROJECT) ----------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
PAGE ---- 1. DEFINITIONS................................................................................... 2 2. ISSUANCE OF LETTER OF CREDIT; FEES............................................................ 20 (a) Amount and Terms of Letter of Credit................................................. 20 (b) Annual Letter of Credit Fee.......................................................... 20 (c) Annual Agent's Fee................................................................... 21 (d) Substitution and Amendment Fees...................................................... 21 (e) Drawing Fees......................................................................... 21 (f) Additional Payment................................................................... 21 3. AGREEMENT TO REPAY DRAWINGS; PURCHASE OF BONDS................................................ 22 (a) Reimbursement........................................................................ 22 (b) Payments and Computations. ......................................................... 23 (c) Payment on Non-Business Days......................................................... 23 (d) Book Entries......................................................................... 23 (e) Obligations Absolute................................................................. 23 (f) No Withholdings...................................................................... 24 (g) Pledge of Bonds...................................................................... 25 (h) Credits for Amount Paid on Bonds; Other Credits...................................... 25 (i) Collateral Account................................................................... 25 4. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT........................................................................................ 27 (a) Delivery of the Bonds and Operative Documents........................................ 27 (b) No Default........................................................................... 27 (c) Representations and Warranties....................................................... 27 (d) Certificate of Compliance............................................................ 27 (e) Opinion of Counsel................................................................... 27 (f) Opinion of Bond Counsel.............................................................. 27 (g) Guarantors' Representations and Warranties........................................... 27 (h) Documentation and Proceedings........................................................ 28 (i) Construction Management Agreement.................................................... 28 (j) Fees................................................................................. 28 (k) Management Agreement................................................................. 28 (l) Ground Lease......................................................................... 28 (m) Acquisition Documents................................................................ 28 (n) Title Policy......................................................................... 29 (o) Appraisal............................................................................ 29 (p) Survey............................................................................... 29
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PAGE ---- (q) Environmental Report................................................................. 30 (r) Preliminary Report................................................................... 30 (s) Insurance............................................................................ 30 (t) Real Estate Taxes.................................................................... 30 (u) Formation of Company................................................................. 30 (v) Other Approvals...................................................................... 30 (w) Swap Arrangement..................................................................... 30 (x) Maximum Effective Interest Rate...................................................... 31 (y) GDB Loan Documents................................................................... 31 (z) Budget............................................................................... 31 (aa) Authorization........................................................................ 31 (bb) Accounting........................................................................... 31 (cc) No Flood Plain....................................................................... 31 (dd) Labor Contributions.................................................................. 31 5. INDEMNIFICATION; BROKERAGE.................................................................... 32 6. CONDOMINIUM UNITS............................................................................. 33 7. COVENANTS..................................................................................... 33 (a) Notice of Default.................................................................... 34 (b) ERISA................................................................................ 34 (c) Preservation of Existence............................................................ 34 (d) Successor Letter of Credit........................................................... 34 (e) Additional Indebtedness.............................................................. 35 (f) Payment of Swap Obligations.......................................................... 35 (g) Financial Statements................................................................. 35 (h) Transfers............................................................................ 36 (i) Decision Making...................................................................... 36 (j) Further Assurances................................................................... 37 (k) Compliance with Laws................................................................. 37 (l) Performance of This and Other Agreements. .......................................... 37 (m) Amendments........................................................................... 37 (n) Construction. ...................................................................... 37 (o) Inspection of Project and Books and Records.......................................... 38 (p) Expenses............................................................................. 38 (q) Plans................................................................................ 39 (r) Delivery of Agreement................................................................ 39 (s) Correction of Work................................................................... 39 (t) Revised Budget....................................................................... 39
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PAGE ---- (u) Notices.............................................................................. 40 (v) Plan Changes......................................................................... 40 (w) No Encroachments..................................................................... 40 (x) Insurance............................................................................ 40 (y) Application of Insurance and Condemnation Proceeds................................... 41 (z) Compliance with Documents............................................................ 41 (aa) Bonds................................................................................ 41 (bb) Work Changes......................................................................... 41 (cc) No Contracts......................................................................... 41 (dd) Asbestos............................................................................. 42 (ee) Final Survey......................................................................... 42 (ff) Construction Trust Account........................................................... 42 (gg) Leasing.............................................................................. 42 (hh) Distribution Cash Under Company Partnership Agreements. ............................ 42 (ii) Deficiency Loans..................................................................... 43 (jj) Ground Lease and GDB Documents....................................................... 44 (kk) Compliance with Environmental Laws................................................... 44 (ll) Expropriation........................................................................ 44 (mm) Palominos Island Property............................................................ 45 (nn) Registration and Mortgages of Boats.................................................. 45 (oo) Recordation of True Description...................................................... 45 (pp) Additional Assignments and Chattel Mortgages......................................... 45 (qq) Amounts Secured by Mortgage.......................................................... 46 (rr) Sole Business........................................................................ 46 (ss) Loan Agreement Covenants............................................................. 46 (tt) Termination of Swap Agreements....................................................... 46 8. REPRESENTATIONS AND WARRANTIES................................................................ 46 (a) Due Organization..................................................................... 46 (b) No Violation......................................................................... 47 (c) Consents............................................................................. 47 (d) Enforceability....................................................................... 48 (e) No Litigation........................................................................ 48 (f) No Defaults.......................................................................... 48 (g) Tax Returns.......................................................................... 48 (h) Compliance with ERISA................................................................ 49 (i) Other Facts.......................................................................... 49 (j) Other Representations and Warranties................................................. 49 (k) Financial Statements................................................................. 49 (l) Martin Regulations................................................................... 50
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PAGE ---- (m) Investment Company Act............................................................... 50 (n) Disclosure........................................................................... 50 (o) Management Agreement; Ground Lease and Other Agreements.............................. 50 (p) Location of Company.................................................................. 51 (q) Plans; Construction.................................................................. 51 (r) Availability of Utilities. ......................................................... 51 (s) No Liens............................................................................. 51 (t) Compliance with Building Codes, Zoning Laws, Etc..................................... 51 (u) Budget............................................................................... 52 (v) Security Documents................................................................... 52 (w) Hazardous Materials.................................................................. 52 9. DISBURSEMENTS FOR CONSTRUCTION................................................................ 52 (a) Disbursements for Construction....................................................... 52 (b) Retainages........................................................................... 53 (c) Bank's Consultant.................................................................... 54 (d) Disbursements for Operating Deficits................................................. 54 (e) Documentation to the Bank............................................................ 54 (f) Use of Disbursements................................................................. 54 (g) Determination of Amounts of Disbursements............................................ 55 (h) Final Disbursement................................................................... 55 (i) Disbursements for Deposits or Stored Materials....................................... 55 (j) Reallocation......................................................................... 56 (k) Loan Balance......................................................................... 57 (l) Disbursements after Default.......................................................... 57 (m) Method of Disbursement............................................................... 58 (n) Disbursements for Amounts Due........................................................ 58 (o) Partial Disbursements................................................................ 58 (p) Investment of Bond Proceeds.......................................................... 59 (q) Disbursements for Vehicles........................................................... 59 10. CONDITIONS PRECEDENT TO MAKE THE INITIAL DISBURSEMENT......................................... 59 (a) Equity Contribution.................................................................. 59 (b) Trade Contracts...................................................................... 59 (c) Architect's and Engineer's Agreements and Subcontracts............................... 59 (d) [Intentionally Omitted].............................................................. 60 (e) GDB Loan............................................................................. 60 (f) Representations and Warranties....................................................... 60 (g) Receipt of Documents by Bank......................................................... 60 (h) No Condemnation...................................................................... 63
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PAGE ---- (i) No Default........................................................................... 63 (j) Accounting........................................................................... 63 11. CONDITIONS PRECEDENT TO DISBURSEMENTS AFTER THE INITIAL DISBURSEMENT.................................................................................. 63 (a) Conditions Satisfied................................................................. 63 (b) Representations and Warranties....................................................... 63 (c) Receipt of Documents by Bank......................................................... 64 (d) No Default........................................................................... 65 12. EVENTS OF DEFAULT............................................................................. 65 (a) Events of Default.................................................................... 65 (b) Bank Remedies........................................................................ 69 (c) Bank's Right to Stop Disbursing Funds................................................ 70 (d) Bank's Right to Complete............................................................. 70 (e) No Liability of the Bank............................................................. 71 (f) Termination of Agreement............................................................. 71 (g) Remedies Not Exclusive............................................................... 72 13. NATURE OF THE BANK'S DUTIES................................................................... 72 14. MISCELLANEOUS................................................................................. 73 (a) Amendments and Consents.............................................................. 73 (b) Survival of Representations and Warranties........................................... 73 (c) Expenses............................................................................. 73 (d) Set-off.............................................................................. 74 (e) No Approval of Work.................................................................. 74 (f) Bank's Review........................................................................ 74 (g) Submission of Evidence............................................................... 75 (h) Bank Sole Beneficiary................................................................ 75 (i) Contractors.......................................................................... 75 (j) Entire Agreement..................................................................... 75 (k) Further Assurances................................................................... 75 (l) No Waiver; Cumulative Remedies....................................................... 76 (m) Singular/Plural...................................................................... 76 (n) No Joint Venture..................................................................... 76 (o) Incorporation by Reference........................................................... 76 (p) Binding Effect; Assignment........................................................... 76 (q) Notices.............................................................................. 77 (r) Satisfaction......................................................................... 77
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PAGE ---- (s) Governing Law and Consent to Jurisdiction............................................ 77 (t) Limitation of Liability.............................................................. 78 (u) Counterparts......................................................................... 79 (v) Defined Instruments.................................................................. 79 (w) Accounting Terms and Determinations.................................................. 79 (x) Lawful Interest...................................................................... 79 (y) Consents; Approvals.................................................................. 79 (z) Severability......................................................................... 80 (aa) Headings............................................................................. 80 (bb) Reliance by Bank..................................................................... 80
Exhibit A -- Form of Irrevocable Letter of Credit Exhibit B -- Form of Assignment of Accounts Receivable Exhibit C -- Form of Assignment of Contracts Exhibit D -- Form of Assignment of Rents Exhibit E -- Borrower's Affidavit Exhibit F -- Budget Exhibit G -- Form of Chattel Mortgage Exhibit H -- Condominium Parcels Exhibit I -- Request for Disbursement Exhibit J -- Insurance Requirements for all Labor and Material Exhibit K -- Trade Contractor Consent and Agreement LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT This LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this AGREEMENT) dated as of February 7, 1991 between EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership (the COMPANY), AND THE MITSUBISHI BANK, LIMITED, a Japanese banking corporation acting through its New York Branch (the BANK). WITNESSETH: WHEREAS, pursuant to the Loan Agreement dated as of the date hereof (the LOAN AGREEMENT) between the Company and Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority, a body corporate and politic constituting a public corporation and a governmental instrumentality established and existing under and by virtue of the laws of the Commonwealth of Puerto Rico (the ISSUER), the Issuer has resolved to issue and sell its Industrial Revenue Bonds, 1991 Series A (El Conquistador Resort Project) and Convertible Industrial Revenue Bonds 1991 Series B (El Conquistador Resort Project), as the same may hereafter be converted to Industrial Revenue Bonds, 1991 Series C (El Conquistador Resort Project) in the aggregate principal amount of $120,000,000 (collectively, the BONDS) and to apply the proceeds thereof to finance a portion of the cost of acquiring, developing, constructing and equipping a first-class destination resort hotel and related facilities to be located in Fajardo, Puerto Rico and to be known as the El Conquistador Resort and Country Club; and WHEREAS, Banco Popular de Puerto Rico has been designated to serve as trustee under the Trust Agreement, dated as of the date hereof, between the Issuer and the Trustee (the TRUST AGREEMENT) (together with any successor trustee designated pursuant to the Trust Agreement, the TRUSTEE); and WHEREAS, the Issuer and the Company have requested the Bank to issue its irrevocable letter of credit (together with any substitute therefor or replacement thereof issued in accordance with the terms of such letter of credit or this Agreement, the LETTER OF CREDIT) to provide security for the payment of the principal of, and interest accrued on, the Bonds; and WHEREAS, the obligations of the Company under this Agreement, the Loan Agreement and the four Mortgage Notes, dated as of the date hereof, from the Company to the Issuer in the respective principal amounts of $120,000,000, $6,612,000, $20,000,000 and $2,000,000 (collectively, the NOTE), shall be secured, inter alia, by the Mortgage, dated as of the date hereof, from the Company in favor of the Issuer (the FEE MORTGAGE), the Leasehold Mortgage dated as of the date hereof, from the Company in favor of the Issuer (the LEASEHOLD MORTGAGE), the Collateral Pledge Agreement, dated as of the date hereof, from the Company in favor of the Issuer and the Bank (the PLEDGE AGREEMENT), the Assignment of Contracts dated as of the date hereof, from the Company to the Bank (the ASSIGNMENT OF CONTRACTS), and the Assignment of Management Agreement, dated as of the date hereof, from the Company to the Bank (the -2- ASSIGNMENT OF MANAGEMENT AGREEMENT) (the Note, the Fee Mortgage, the Leasehold Mortgage, the Pledge Agreement, the Assignment and the Assignment of Management Agreement together with any hereafter created Assignments of Accounts Receivable, Assignments of Contracts, Assignments of Rents and Chattel Mortgages, are herein collectively referred to as the SECURITY DOCUMENTS); and WHEREAS, as further inducement to the Bank to issue the Letter of Credit, (i) KG (Caribbean) Corporation, a Texas corporation (KGCC) and Kumagai International USA Corporation, a Texas corporation (KIUSA) shall execute and deliver to the Bank a Completion Guaranty dated as of the date hereof (the COMPLETION GUARANTY), (ii) Kumagai Caribbean Inc., a Texas corporation (KGC) shall execute and deliver to the Bank a Completion Guaranty dated as of the date hereof (the SECONDARY COMPLETION GUARANTY) and (iii) KIUSA and KGC, together with Williams Hospitality Management Corporation, a Delaware corporation (WILLIAMS), shall execute and deliver to the Bank an Environmental Indemnity, dated as of the date hereof (THE ENVIRONMENTAL INDEMNITY; the Environmental Indemnity, the Completion Guaranty and the Secondary Completion Guaranty are herein individually referred to as a GUARANTY and collectively referred to as the GUARANTIES, and KIUSA, KGCC, KGC and William are herein individually referred to as a GUARANTOR and collectively referred to as the GUARANTORS). NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement and unless otherwise expressly indicated, or unless the context clearly requires otherwise: ACCOUNTANT shall mean Ernst & Young, or such other independent certified public accountant reasonably satisfactory to the Bank. ACT shall mean The Puerto Rico Industrial, Medical, Higher Education and Environmental Pollution Control Facilities Financing Authority Act, Act No. 121 of the Legislature of the Commonwealth of Puerto Rico, approved June 27, 1977, as amended, and all future acts supplemental thereto or amendatory thereof. AGGREGATE BUDGET CHANGE AMOUNT shall mean $1,500,000. AGREEMENT shall have the meaning set forth in the first paragraph of this Agreement. AMK shall mean AMK Conquistador, S.E., a Puerto Rico special partnership. -3- ANDREWS FAMILY shall mean Hugh A. Andrews, his spouse and children. ANNUAL AGENT'S FEE shall have the meaning set forth in Paragraph 2(c) hereof. ANNUAL DEBT SERVICE shall mean, for any period for which Annual Debt Service is being determined, the sum of (i) interest paid or payable under the Loan at the Bond Fixed Rate with respect to such period (or, to the extent the Bond Fixed Rate is inapplicable to any portion of the Loan, at the rate provided for with respect to such portion of the Loan), (ii) interest paid or payable under the GDB Loan at the rate provided for thereunder with respect to such period or, to the extent interest swap arrangements are in place with respect to the GDB Loan, at the GDB Fixed Rate with respect to such period, (iii) the Annual Agent's Fee and the Annual Letter of Credit fee payable with respect to such period, and (iv) any fees arising out of any swap arrangements entered into by the Company in connection with the Loan and/or the GDB Loan which are payable with respect to such period. ANNUAL LETTER OF CREDIT FEE shall have the meaning set forth in Paragraph 2(b) hereof. APPLICABLE LIBID RATE shall have the meaning set forth in the Trust Agreement. APPRAISAL shall mean an appraisal in narrative form, prepared by an appraiser retained by the Bank at the Company's sole cost and expense setting forth a fair market value of the Premises, assuming that the Improvements have been completed in accordance with the Plans and that the Mortgage and the GDB Mortgage do not encumber the Premises. ARCHITECT shall mean Ray, Melendez & Associates or any successors engaged by the Company with the prior written consent of the Bank. ARCHITECTS' AGREEMENTS shall mean those certain agreements between the Company and the Architect and the Design Architects, respectively, relating to the design of the Improvements and providing for architectural services in connection with the construction of the Improvements. ARCHITECTS' INITIAL CERTIFICATION shall mean the certification from the Architect to the Bank dated February 7, 1991 annexed hereto. ARPE shall mean the Administration of Regulations and Permits of the Commonwealth of Puerto Rico. ASSIGNMENT OF ACCOUNTS RECEIVABLE shall mean an assignment from the Company to the Bank, which shall be in form and substance substantially similar to that set forth in Exhibit B hereof, pursuant to which the Company collaterally assigns to the Bank its rights in -4- and to all accounts receivable obtained in connection with the Project, including, without limitation, its rights in and to all Condominium Revenues. ASSIGNMENT OF CONTRACTS shall mean an assignment from the Company to the Bank, which shall be in form and substance substantially similar to that set forth in Exhibit C hereof, pursuant to which the Company collaterally assigns to the Bank its rights in and to all contracts, licenses, permits and certain other documents entered into or obtained by the Company in connection with the Project. ASSIGNMENT OF MANAGEMENT AGREEMENT shall have the meaning set forth in the WHEREAS clauses hereof. ASSIGNMENT OF RENTS shall mean an assignment from the Company to the Bank, which shall be in form and substance substantially similar to that set forth in Exhibit D hereof, pursuant to which the Company collaterally assigns to the Bank its rights in and to all rents, issues and profits derived from any leases entered into for space at the Project. BANK shall have the meaning set forth in the first paragraph of this Agreement. BANK COVERAGE REQUIREMENT shall mean that either (i) the Net Earnings for the 24 full calendar-month period next preceding the date of determination has been an amount not less than the Annual Debt Service for such 24 full calendar-month period multiplied by 1.30 or (ii) the Net Earnings for the 12 full calendar-month period next preceding the date of determination has been an amount not less than the Annual Debt Service for such 12 full calendar-month period multiplied by 1.50. BANK'S CONSULTANT shall mean Merritt & Harris, Inc. or such other Person or architectural or engineering consultant as may be designated and engaged by the Bank, at the Company's expense to examine the Budget and the Plans, any changes thereto, and cost breakdowns and estimates with respect to the Project (including, without limitation, all cost breakdowns and estimates set forth in any Request for Disbursement and all accompanying certifications), to make periodic inspections of the progress of the Construction of the Improvements on behalf of the Bank, to advise and render reports to the Bank concerning the foregoing and to otherwise consult with the Bank with respect to the Project. BANK'S CONSULTANT'S REPORT shall mean a report by the Bank's Consultant (i) to the effect that all of the work theretofore completed on the Project has been completed in a good an workmanlike manner, substantially in accordance with the Plans and the Construction Schedule and in compliance with the Legal Requirements, (ii) stating whether the work which is the basis of the applicable Request for Disbursement has been completed within the applicable Line Item therefor, (iii) stating whether the undisbursed amount of the Loan allocable to the Construction of the Improvements is sufficient to complete the Construction of the Improvements -5- in accordance with the Plans, (iv) to the extent that the Bank's Consultant determines that the remaining cost to complete the work which is the subject of a Line Item is less than the undisbursed portion of such line item such that such excess can be reallocated in accordance with Paragraph 9(j) hereof, or the remaining cost to complete the work which is the subject of a Line Item is greater than the undisbursed portion of such Line Item, setting forth such amount and (v) addressing such other matters requested by the Bank to be addressed therein. BOND FIXED RATE shall mean 7.55% per annum. BOND PROCEEDS shall mean the aggregate proceeds obtained from the issuance of the Bonds. BOND PURCHASE AGREEMENT shall mean the Purchase Contract, dated January 25, 1991, among the Underwriter, the Company and the Issuer. BOND SWAP AGREEMENT means an Interest Rate and Currency Exchange Agreement entered into by the Company and the Bank in accordance with Section 4(w) hereof and pursuant to which the Company and the Bank enter into an interest rate swap under which the Company agrees to pay to the Bank amounts calculated on a national amount of $120,000,000 at the Bond Fixed Rate in exchange for the Bank's obligation to pay to the Company amounts calculated on a notional amount of $120,000,000 at rates equal to 88% of the Applicable LIBID Rate. The Bond Swap Agreement shall provide inter alia, that all sums payable by the Bank to the Company pursuant to Section 2(a) thereof, shall be payable by the Bank to the Trustee to be deposited in the Bond Fund. BONDS shall have the meaning set forth in the WHEREAS clauses hereof. BORROWER'S AFFIDAVIT shall mean an affidavit substantially in the form of Exhibit E annexed hereto. BUDGET shall mean a budget prepared by the Company setting forth Total Project Costs in detail satisfactory to the Bank, and the Bank's Consultant, which most current Budget is annexed hereto as Exhibit F, as such Budget may be amended, modified or supplemented from time to time pursuant to the terms of this Agreement and as the Line Items set forth in such Budget may be reallocated pursuant to Paragraph 9(j) hereof. BUSINESS DAY shall mean any day other than a Saturday, Sunday or other day on which banks in New York, New York or San Juan, Puerto Rico are authorized or required by law or executive order to close. -6- CASH COLLATERAL means all funds now or hereafter on deposit in the Cash Collateral Account, together with any and all interest earned thereon, to the extent such interest is on deposit in the Cash Collateral Account. CASH COLLATERAL ACCOUNT has the meaning assigned to that term in Section in 3(i) hereof. CHATTEL MORTGAGE shall mean a mortgage made by the Company in favor of the Issuer in substantially the form attached hereto as Exhibit G, pursuant to which title to particular buses, vessels, limousines and other moving vehicles are mortgaged as required hereunder. CODE shall mean the Internal Revenue Code of 1986, as amended from time to time. COLLATERAL shall mean all of the property, real or personal, tangible or intangible, and all rights thereto, pledged, mortgaged or hypothecated pursuant to the Security Documents. COMPANY shall have the meaning set forth in the first paragraph of this Agreement. COMPANY PARTNERSHIP AGREEMENT shall mean that certain Venture Agreement dated January 12, 1990 between KGC and WKA. COMPLETION DATE shall mean the date that is 24 months after the date of the Initial Disbursement, subject to extension for Unavoidable Delay as provided in Paragraph 7(n) hereof. COMPLETION GUARANTY shall have the meaning set forth in the WHEREAS clauses hereof. CONDOMINIUM PARCELS shall mean the approximately 20-acre portion of land shown on Exhibit H annexed hereto. CONDOMINIUM REVENUES shall mean revenues derived by the Company from the Condominium Units through (i) the rental of the Condominium Units, (ii) the use of the Premises by the occupants of the Condominium Units and (iii) the right of such occupants to use the premises. CONDOMINIUM UNITS shall mean up to 150 residential condominium units that may be developed and constructed on the Condominium Parcels. CONSENTS shall have the meaning set forth in Paragraph 8(c) hereof. -7- CONSTRUCTION or CONSTRUCT, when used with reference to the Project, shall mean construction, installation, renovation or development of the Improvements or any portion thereof. CONSTRUCTION DOCUMENTS shall mean, collectively, the Construction Management Agreement, the Architect's Agreements, all Trade Contracts and all other agreements to which the Company is party or beneficiary pertaining to the Construction of the Improvements. CONSTRUCTION MANAGEMENT AGREEMENT shall mean that certain agreement between the Company and the Construction Manager dated as of January 12, 1990 and amended by First Amendment thereto dated as of September 30, 1990 and Second Amendment thereto dated as of January 31, 1991, providing for the construction of the Improvements upon the terms and conditions set forth therein. CONSTRUCTION MANAGER shall mean KGCC or any successor engaged by the Company with the prior written consent of the Bank. CONSTRUCTION MANAGER CONSENT AND AGREEMENT shall mean that certain agreement dated as of the date hereof between the Construction Manager and the Bank. CONSTRUCTION SCHEDULE shall have the meaning provided in paragraph 10(g)(xii) hereof. CONSTRUCTION TRUST ACCOUNT shall have the meaning set forth in Paragraph 9(a) hereof. COVERAGE DATE shall have the meaning set forth in Paragraph 2(b) hereof. DATE OF ISSUANCE shall mean the date of issuance and delivery of the Letter of Credit. DATE OF SUBSTANTIAL COMPLETION shall mean the date which is 30 days following the date upon which the Company first delivers to the Bank evidence satisfactory to the Bank that Substantial Completion has been achieved. DEBT or DEBTS shall mean, with respect to any Person, (a) indebtedness of such Person for money borrowed (including, without limitation, indebtedness evidenced by notes, bonds, debentures or other similar instruments of such Person), (b) indebtedness represented by the deferred purchase price of property or services acquired by such Person, (c) rentals payable by such Person under any lease of real or personal property which shall have been, or should, under generally accepted accounting principles, be classified as capital lease, (d) obligations of such Person under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise assure a creditor -8- against loss in respect of, indebtedness or obligations of another Person of the type described in clause (a), (b) or (c) above, and (e) liabilities of such Person in respect of unfunded vested benefits under, or withdrawal liability in respect of, plans covered by Title IV of ERISA. DEFAULT shall mean any event which with notice or lapse of time, or both, would become an Event of Default. DEFICIENCY LOANS shall have the meaning set forth in Paragraph 7(ii) hereof. DESIGN ARCHITECTS shall mean Edward D. Stone, Jr. and Associates, Inc., Jorge Rossello Associates, Edward Durrell Stone Associates, P.C., Cosentini Associates, Arthur Hill and Associates, and Peter George Associates, Inc., or any successors engaged by the Company with the prior written consent of the Bank. DISBURSEMENT shall mean each disbursement of all or any portion of the Project Fund. DOLLARS or the sign "$" shall mean dollars in the lawful currency of the United States of America. DRAWING or DRAWINGS shall mean a Principal Drawing and/or an Interest Drawing. ENVIRONMENTAL INDEMNITY shall have the meaning set forth in the WHEREAS clauses hereof. ENVIRONMENTAL LAWS shall mean, collectively, all current and future federal, state, commonwealth and local environmental laws, statutes and regulations, now or at any time hereafter in effect, including, without limitation, the Resource, Conservation and Recovery Act, as amended from time to time, the Comprehensive Environmental Response, Compensation and Liability Act, as amended from time to time, and any so-called Superfund or Superlien law, including, without limitation, the Superfund Amendments an Reauthorization Act of 1986, and the counterparts of such statutes as enacted by state, commonwealth and local governments with jurisdiction over the Project, and any and all regulations promulgated under or judicial or administrative interpretation of any of the foregoing. ENVIRONMENTAL REPORT shall mean an environmental report relating to the Premises and the Improvements, addressed to the Bank, which report shall include, without limitation, geological, soil and hazardous waste evaluations, prepared at the Company's sole cost and expense by Certified Engineering and Testing Company or by another firm of environmental consultants acceptable to the Bank. -9- EQUITY CONTRIBUTION shall have the meaning set forth in Paragraph 10(a) hereof. ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. Section references to ERISA are to ERISA as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. ERISA AFFILIATE shall mean each trade or business (whether or not incorporated) which, together with the Company or a Subsidiary, would be deemed to be a SINGLE EMPLOYER within the meaning of Section 4001 of ERISA. EVENT OF DEFAULT shall have the meaning set forth in Paragraph 12(a) hereof. EXPIRATION DATE shall mean the Stated Expiration Date or such later expiration date of the Letter of Credit, if the same is extended by the Bank pursuant to Paragraph 2(a) hereof. FAJARDO PROPERTY shall mean approximately 220 acres of land located in Fajardo, Puerto Rico, as more particularly described in the Fee Mortgage. FEDERAL FUNDS EFFECTIVE RATE means, for any day, the weighted average of the rates on overnight Federal funds transactions, with members of the Federal Reserve System only, arranged by Federal funds brokers, as published as of such day (or, if such day is not a New York Business Day, for the next preceding New York Business Day) by the Federal Reserve Bank of New York (or, if such rate is not so published for any day which is a New York Business Day, the average of the quotations for such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by the Bank. FEE DATES shall have the meaning set forth in Paragraph 2(b) hereof. FEE MORTGAGE shall have the meaning set forth in the WHEREAS clauses hereof. FINANCIAL STATEMENTS shall mean, as applicable, (i) all statements of financial condition with respect to the Company and the Guarantors previously submitted to the Bank and/or (ii) all updates of such statements and/or other statements of financial condition submitted by the Company and the Guarantors to the Bank as required pursuant to Paragraph 7(g) hereof. FOUR PARTY AGREEMENT shall mean the Four Party Agreement, dated as of the date hereof, among the Bank, the Company, WKA and KGC. GDB shall mean Government Development Bank for Puerto Rico. -10- GDB FIXED RATE shall mean the sum of (x) the effective per annum fixed rate of interest that the Company will be obligated to pay with respect to the GDB Loan upon the Company's entering into an interest rate swap arrangement in connection with the GDB Loan and (y) the GDB Margin. GDB INVESTMENT AGREEMENT shall mean, collectively, (i) the Investment Agreement, dated the date hereof, between GDB and the Trustee, and (ii) the Collateral and Security Agreement, dated the date hereof, among GDB, the Trustee, the Company and Mitsubishi Bank Trust Company of New York. GDB LOAN shall mean a loan by GDB to the Company in the amount of up to $25,000,000 to be used to finance a portion of the Total Project Costs pursuant to the GDB Loan Agreement. GDB LOAN AGREEMENT shall mean the Loan Agreement dated the date hereof between GDB and the Company. GDB MORTGAGE shall mean that certain Mortgage, dated as of the date hereof, made by the Company in favor of GDB, securing the GDB Loan. GDB STANDSTILL AGREEMENT shall mean the Subordination and Standstill Agreement, dated the date hereof, between GDB and the Bank. GENERAL PARTNER shall mean either KGC or WKA, the sole general partners of the Company (KGC and WKA together being the GENERAL PARTNERS). GOVERNMENT ACTS shall have the meaning set forth in Paragraph 5(a) hereof. GOVERNMENT AUTHORITY shall mean any court, agency, authority, board (including, without limitation, any environmental protection, planning or zoning board), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States, the Commonwealth of Puerto Rico, any State of the United States, or the Municipality of Fajardo, whether now or hereafter in existence, having jurisdiction over the Company or the Project. GROSS REVENUES shall mean, for any period with respect to which Gross Revenues are being determined, all revenues of any kind received or derived by the Company from the ownership an operation of the Premises for such period, including, without limitation, room, food and beverage, and other facility revenues, Condominium Revenues, casino net wins, rentals or other payments from leases and concession agreements, annual dues for golf memberships, revenues derived from the resale of golf memberships, the proceeds of any business interruption insurance, and, except as provided below, all revenues received by the Company from all other -11- activities of the Premises, less in each case actual refunds made to customers, guests or patrons. Gross Revenues shall not include the proceeds of the sale of the Condominium Units, revenues derived from the initial sale of golf memberships, tips, service charges added to a customer's bill or statement in lieu of gratuities which are payable to employees of the Project, value of complimentary rooms, food and beverages (except those purchased by the casino forming a part of the Project), and any sales or other use or excise taxes required by law to be collected with respect to the operations of the Premises and remitted to taxing authorities. Notwithstanding the foregoing, Condominium Revenues derived from any Condominium Units for any year shall only be included in Gross Revenues to the extent that the Company has demonstrated to the Bank's satisfaction (including, without limitation, by providing copies of written contracts) that a corresponding number of Condominium Units of equivalent types and sizes will be included in the rental arrangement pursuant to which such units will be rented by Williams on behalf of the owners thereof, for the succeeding year (so that, if the Condominium Units of each type and size included in the rental arrangement for the succeeding year are fewer than the Condominium Units from which such Condominium Revenues were derived, the amount of the Condominium Revenues which may be included in Gross Revenues shall be proportionately reduced). For example, if, in year one, 100 Type A Condominium Units were included in the rental arrangements and produced aggregate revenues of $100,000, but only 50 type A Condominium Units have been included in the rental arrangement for year two, then only $50,000 may be included in Gross Revenues for year one. GROUND LEASE shall have the meaning set forth in Paragraph 4(1) hereof. GUARANTOR and GUARANTORS shall have the meaning set forth in the WHEREAS clauses hereof. GUARANTY and GUARANTIES shall have the meaning set forth in the WHEREAS clauses hereof. HARD COSTS shall mean costs and expenses in connection with the Line Items indicated as being Hard Costs on the Budget annexed hereto as Exhibit F. HAZARDOUS MATERIAL shall mean asbestos, polychlorinated biphenyls, petroleum products and any other substance or material that, whether by its nature or use, is now or hereafter defined as hazardous waste, hazardous substance, pollutant or contaminant under any Environmental Law, or which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or hereafter regulated under any Environmental Law. HOSPITALITY shall mean Hospitality Investor Group, S.E., a Puerto Rico special partnership. -12- IMPROVEMENTS shall mean the improvements to be renovated or constructed on the Premises pursuant to the Plans, consisting of approximately 750 guest rooms, approximately 50,000 square feet of meeting space (including prefunctionary space), six restaurants, approximately 13,000 square feet of retail space, an approximately 10,000 square foot casino, a marina, approximately 100,000 square feet of swimming pools and water features, an 18-hole golf course, an approximately 40,000 square foot clubhouse and spa facility, eight tennis courts, water sports facilities on the Palominos Island Property and related amenities and facilities and all related fixtures, furniture and equipment. INCREASED COSTS shall have the meaning set forth in Paragraph 2(f) hereof. INDEMNIFIED PARTY shall have the meaning set forth in Paragraph 5(a) hereof. INDIVIDUAL BUDGET CHANGE AMOUNT shall mean $100,000. INITIAL DISBURSEMENT shall mean the initial disbursement of any of the Project Fund, other than disbursements to pay costs comprising Annual Debt Service to the extent such disbursements are made from amounts, in the Project Fund in excess of $120,000,000. INITIAL DISBURSEMENT DATE shall mean the date on which the Initial Disbursement is made. INITIAL STATED AMOUNT shall have the meaning set forth in Paragraph 2(a) hereof. INTEREST DRAWING shall have the meaning set forth in the Letter of Credit. INTERNATIONAL TEXTILE shall mean International Textile Products of Puerto Rico, Inc., a Puerto Rico corporation. ISSUER shall have the meaning set forth in the WHEREAS clauses hereof. KGC shall mean Kumagai Caribbean, Inc., a Texas corporation. KGC MORTGAGE shall have the meaning set forth in Paragraph 7(e) hereof. KGCC shall mean KG (Caribbean) Corporation, a Texas corporation. KIUSA shall mean Kumagai International USA Corporation, a Texas corporation. KMA shall mean KMA Associates of Puerto Rico, Inc., a Puerto Rico corporation. -13- KOFFMAN FAMILY shall mean Burton I. Koffman, Richard E. Koffman, their parents, issue (including adopted persons), wives, siblings and direct descendants, and trusts organized for the benefit of any of the foregoing. KUMAGAI shall mean Kumagai Gumi Co., Ltd., a Japanese corporation. LEASEHOLD MORTGAGE shall have the meaning set forth in the WHEREAS clauses hereof. LEGAL REQUIREMENTS shall mean, collectively, (i) all statutes, laws, rules, rulings, orders, regulations, ordinances, judgments, decrees and injunctions of any Governmental Authority (including, without limitation, fire, health, handicapped access, sanitation, ecological, historic, zoning, environmental protection, wetlands and building laws) in any way applicable to the Company or the Premises and the Improvements, or any portion thereof, or to the ownership, use, occupancy, possession, operation or maintenance of the Premises and the Improvements; (ii) all requirements of the local Board of Fire Underwriters or other similar body acting in and for the locality in which the premises are situated and all requirements of each insurance policy covering or applicable to all or any portion of the Premises and the Improvements, or the use thereof, and all requirements of the issuer of each such policy, including any which may require repairs, modifications or alterations (structural or otherwise) in or to the Improvements, or any portion thereof; and (iii) all requirements of each permit, license, authorization and regulation relating to the premises and the Improvements, or any portion thereof, or to the ownership, use, occupancy, possession, operation or maintenance thereof. LETTER OF CREDIT shall have the meaning set forth in the WHEREAS clauses hereof. LIEN shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, or the filing of, or any agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction (other than informational filings in respect of equipment leased under any lease not intended as security, within the meaning of the Uniform Commercial Code) and any comparable financing statement under the laws of the Commonwealth of Puerto Rico. LINE ITEM shall mean a line item of cost set forth in the Budget. LOAN shall mean the loan made by the Issuer to the Company pursuant to the Loan Agreement. -14- LOAN AGREEMENT shall have the meaning set forth in the WHEREAS clauses hereof. MANAGEMENT AGREEMENT shall mean the Development Services and Management Agreement dated January 12, 1990 between Williams and the Company, as amended by the First Amendment thereto dated as of September 30, 1990, and Second Amendment thereto dated as of January 31, 1991. MANAGEMENT SUBORDINATION AGREEMENT shall mean the Management Agreement Subordination and Attornment Agreement, dated as of the date hereof, between the Bank and Williams. MORTGAGE shall mean, collectively, the Fee Mortgage and the Leasehold Mortgage. NET EARNINGS shall mean Gross Revenues minus Operating Expenses. NEW YORK BUSINESS DAY means any day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law or executive order to close. NOTE shall have the meaning set forth in the WHEREAS clauses hereof. OFFICER'S CERTIFICATE shall mean a certificate signed by the General partners. OFFICIAL STATEMENT shall mean the official statement of the Issuer pursuant to which the Bonds are offered for sale. OPERATING DEFICITS shall mean, for any period after the Date of Substantial Completion, an amount equal to the lesser of (1) the Annual Debt Service with respect to such period, and (2) the excess, if any, of (a) the sum of (i) the Operating Expenses with respect to such period, and (ii) the Annual Debt Service with respect to such period over (b) the Gross Revenues with respect to such period. OPERATING EXPENSES shall mean, with respect to any period for which Operating Expenses are being determined, all expenses paid by or on behalf of the Company in connection with the ownership and operation of the Premises and the Condominium Units of such period, including, without limitation, insurance; utilities; funding of reserves for maintenance, capital and non-capital repairs and the repair and replacement of furniture, fixtures and equipment in amounts reasonably approved by the Bank (but in any event commensurate with the guidelines set forth in Section 4.5 of the Management Agreement); general and special real property taxes on and assessments of the Premises; equipment rentals; maintenance and non-capital repairs to -15- the extent not paid for from reserves established therefor; non-capital repair and replacement of furniture, fixtures and equipment to the extent not paid for from reserves established therefor; governmental and license fees; advertising and marketing; payments under the Ground Lease; fees and expenses arising under the Management Agreement; all other operating expenses reasonably necessary for the proper and efficient operation of the Premises as a first class destination resort hotel. Operating Expenses shall not include Annual Debt Service. OPERATIVE DOCUMENTS shall have the meaning set forth in Paragraph 4(a) hereof. OUTSIDE DISBURSEMENT DATE shall mean the date which is one year from the date hereof. PALOMINOS ISLAND PROPERTY shall mean approximately 90 acres of land located on an island approximately three miles to the east of the Fajardo Property, as more particularly described in the Leasehold Mortgage. PBGC shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. PERMITS shall mean, collectively, all applicable authorizations, consents, licenses, approvals and permits of Government Authorities for Construction of the Improvements in accordance with the Plans and all Legal Requirements, and for the performance and observance of all agreements, provisions and conditions herein contained. PERMITTED ENCUMBRANCES shall mean, collectively, the Mortgage, the GDB Mortgage, the KGC Mortgage, if any (subject to the conditions set forth in Paragraph 7(e) hereof), and any other Lien permitted under Paragraph 7(e) hereof, real estate taxes not yet due and payable, those items listed as exceptions to title on the Title Policy issued on the Date of Issuance, and any other Liens consented to in writing by the Bank. PERMITTED TRANSFERS shall mean (a) any transfer, direct or indirect, of the interests of or in KGC, KGCC or KIUSA to Kumagai or to any entity wholly owned and controlled by Kumagai; (b) any transfer, direct or indirect, of the interests of or in WMS El Con to WMS Industries or any entity wholly owned and controlled by WMS Industries; (c) any transfer, direct or indirect, of the interests of or in International Textile or KMA to a member of the Koffman Family or to any entity which is wholly owned by one or more members of the Koffman Family; (d) any transfer, direct or indirect, of the interests of or in AMK to a member of the Koffman Family or to any entity which is owned by one or more members of the Koffman Family; (e) any transfer of the interests of Marcel Arroyo, Marcel Arroyo, Jr. or David Mellon in KMA which is not prohibited by any shareholder's or similar agreement applicable to the transfer of such interests; (f) any transfer, direct or indirect, of interests in Hospitality to members of the Andrews Family or any entity wholly owned and controlled by one or more -16- members of the Andrews Family, provided that Hospitality shall at all times be controlled by Hugh A. Andrews for so long as he shall be alive and competent; (g) any transfer of a limited partner interest in the Company prior to the Stabilization Date which is made with the Bank's prior written consent, which consent may be withheld in the Bank's sole discretion; (h) any transfer of a limited partner interest in the Company after the Stabilization Date which is made with the Bank's prior written consent, which consent shall not be unreasonably withheld, and (i) any transfer of publicly-traded ownership interests in WMS Industries or Kumagai. PERSON shall mean an individual, corporation, partnership, joint venture, trust, association or any other entity or organization, including a government or political subdivision, agency or instrumentality thereof. PLAN shall mean any multiemployer plan or single employer plan, as defined in Section 4001 and subject to Title IV of ERISA, which is maintained, or at any time during the five calendar years preceding the date of this Agreement was maintained, for employees of the Company or a Subsidiary or an ERISA Affiliate. PLANS shall mean the plans, drawings and specifications for the construction of the Improvements, including, without limitation, the architectural, structural, mechanical and electrical plans and specifications therefor prepared or to be prepared by the Company, the Architects, the Design Architects and the Company's engineers and contractors, as approved by the Bank and the Bank's Consultant, together with all revisions and addenda to such plans, drawings and specifications, provided that such revisions and addenda have been approved by the Bank to the extent such approval is required pursuant to Paragraph 7(bb) hereof, which Plans shall include, without limitation, a description of the materials, equipment, fixtures and furnishings necessary for the Construction of the Improvements. PLEDGE AGREEMENT shall have the meaning set forth in the WHEREAS clauses hereof. PRELIMINARY OFFICIAL STATEMENT shall mean the preliminary official statement of the Issuer prior to the sale of the Bonds. PREMISES shall mean the fee simple title to the Fajardo Property (other than those Condominium Parcels which have been released from the lien of the Mortgage pursuant to Paragraph 6 hereof) and the leasehold estate in the Palominos Island Property. PRIME RATE shall mean at any time the lower of (i) the fluctuating rate of interest announced publicly from time to time by The Chase Manhattan Bank, N.A. in New York, New York as its "prime," "base," or "reference" rate and (ii) the fluctuating rate of interest announced publicly from time to time by Citibank, N.A. in New York, New York as its "prime," "base," or "reference" rate, it being understood that such rates shall not necessarily -17- be the best or lowest rates of interest available to such bank's best or more preferred large commercial customers. PRINCIPAL DRAWING shall have the meaning set forth in the Letter of Credit. PROJECT shall mean, collectively, the acquisition of the Fajardo Property, the leasing of the Palominos Island Property and the renovation, development, construction, furnishing and equipping of the Premises and the Improvements. PROJECT DOCUMENTS shall mean (A) the Management Agreement and (B) all licenses, easements or other agreements or instruments pertaining to the Project and to be entered into by the Company with the approval of the Bank (including, without limitation, all architects' agreements, engineers' agreements and subcontracts for the Project). PROJECT FUND shall have the meaning set forth in the Trust Agreement. PURCHASE DRAWING shall have the meaning set forth in the Letter of Credit. REPORTABLE EVENT shall mean an event described in Section 4043(b) of ERISA (with respect to which the 30-day notice requirement has not been waived by the PBGC). REQUEST FOR DISBURSEMENT shall mean a written certified statement of the Company as more particularly set forth in Exhibit I hereto setting forth the amount of the Disbursement sought, which shall constitute an affirmation that the representations and warranties of the Company with respect to the Improvements set forth in Paragraph 8 hereof and in the other Operative Documents remain true and correct as of the date thereof, except to the extent the Bank has been notified in writing to the contrary, and, unless the Bank is notified in writing to the contrary prior to the Disbursement, will be true and correct on the date of such Disbursement. RETAINAGE shall have the meaning set forth in Paragraph 9(b) hereof. SECURITY DOCUMENTS shall have the meaning set forth in the WHEREAS clauses hereof. SOFT COSTS shall mean costs and expenses in connection with the Line Items set forth on the Budget which are not designated as Hard Costs. STABILIZATION DATE shall mean a date which is 30 days following the date upon which the Company first delivers to the Bank audited Financial Statements of the Company, prepared by the Accountant, demonstrating that the Net Earnings for the 12 full calendar month -18- period to which such Financial Statements relate was an amount not less than the Annual Debt Service for such 12 full calendar-month period. STATED AMOUNT shall have the meaning set forth in the Letter of Credit. STATED EXPIRATION DATE shall mean the date which is seven years and 30 days after the Date of Issuance. SUBSIDIARY shall mean any corporation of which at least a majority of the outstanding stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Company and/or one or more of its Subsidiaries. SUBSTANTIAL COMPLETION shall mean the occurrence of all of the following events: (i) the completion of the Construction of the Improvements (excluding punchlist items) in accordance with all Legal Requirements and substantially in accordance with the Plans as to any aspect of Construction and the issuance of applicable use or occupancy permits therefor satisfactory to the Bank and (ii) the delivery to the Bank of certificates, in form and content satisfactory to the Bank, from the Company, the Architects and the Bank's Consultant to the effect that all of the work required to be performed substantially to complete the Improvements in accordance with all Legal Requirements and in accordance with the Plans has been performed. SUCCESSOR LETTER OF CREDIT shall have the meaning set forth in the Trust Agreement. SURVEY shall have the meaning set forth in Paragraph 4(p) hereof. TERMINATION DATE shall have the meaning set forth in the Letter of Credit. TERMINATION PAYMENTS shall mean any and all sums which may become payable by the Company to the Bank pursuant to Section 6 of the Bond Swap Agreement. TERMINATION PAYMENTS GUARANTY shall mean that certain Guaranty, dated the date hereof, pursuant to which KGC and Williams guaranty to the Bank the payment of Termination Payments in excess of $20,000,000. TITLE POLICY shall have the meaning provided in Paragraph 4(n) hereof, and shall include all endorsements thereto. -19- TOTAL PROJECT COSTS shall mean those costs and expenses that are included within the Line Items in the Budget as of the date hereof. TRADE CONTRACT shall mean any contract entered into by the Company, including, without limitation, general construction contracts, with respect to the Construction of the Improvements that satisfies the conditions set forth in the following sentence. Each Trade Contract (A) shall be entered into with a Trade Contractor satisfactory to the Bank in its sole and absolute discretion, (B) shall provide for the Trade Contractor's obligations thereunder to be performed for a fixed price or guaranteed maximum price which, when aggregated with other existing and contemplated Trade Contracts and other costs of Construction of the Improvements, as the same are estimated by the Bank, will not exceed the Budget, (C) shall require the Trade Contractor to provide the Bank with a payment and performance bond satisfactory to the Bank as to form, content and issuer with respect to such Trade Contractor's obligations under its respective Trade Contract, (D) shall require the Trade Contractor to maintain the insurance coverage more particularly described in Exhibit J annexed hereto, (E) shall provide the Trade Contractor's consent to the assignment thereof by the Company to the Bank, and (F) shall be otherwise satisfactory to the Bank in form and content. Trade Contracts shall not include Architect's Agreements. TRADE CONTRACTOR shall mean any contractor engaged in the Construction of the Improvements under a Trade Contract. TRADE CONTRACTOR CONSENT AND AGREEMENT shall mean that certain agreement in the form of Exhibit K annexed hereto. TRANSFER shall mean (i) any sale or transfer by the Company of the Premises or the Improvements, or any portion thereof (other than any transfer, pledge or hypothecation of all or any portion of the Condominium Parcels in accordance with the terms and conditions of Section 6 hereof), or (ii) any transfer, pledge or hypothecation of any direct or indirect equity interest in the Company, including, without limitation, any sale or transfer of a direct or indirect equity interest in the constituent partners of the Company, of WKA, of KIUSA or of Kumagai. TRUST AGREEMENT shall have the meaning set forth in the WHEREAS clauses hereof. TRUSTEE shall have the meaning set forth in the WHEREAS clauses hereof. UNAVOIDABLE DELAY shall mean any delay due to conditions beyond the control of the Company, including, without limitation, strikes, labor disputes, acts of God, the elements, governmental restrictions, regulations or controls, enemy action, civil commotion, fire, unavoidable casualty, mechanical breakdowns or shortages of, or inability to obtain, labor, -20- utilities or material; PROVIDED, HOWEVER, that any lack of funds shall not be deemed to be a condition beyond the control of the Company. UNDERWRITER shall mean Chase Securities (P.R.), Inc. WILLIAMS shall mean Williams Hospitality Management Corporation, a Delaware Corporation. WKA shall mean WKA El Con Associates, a New York general partnership. WMS EL CON shall mean WMS El Con Corp., a Delaware corporation. WMS HOTEL shall mean WMS Hotel Corporation, a Delaware corporation. WMS INDUSTRIES shall mean WMS Industries Inc., a Delaware corporation. WORK CHANGE shall mean any change order, any other amendment or modification to any contract or subcontract and any revision, addendum, modification to or amendment of the Plans for the Improvements (including minor departures from the Plans for the Improvements pursuant to field orders). 2. ISSUANCE OF LETTER OF CREDIT; FEES. (a) Amount and Terms of Letter of Credit. The Bank agrees, on the terms and subject to the conditions herein set forth, to issue the Letter of Credit to the Trustee. The Letter of Credit (i) shall be in substantially the form of Exhibit A attached hereto, (ii) shall have a term ending on the Stated Expiration Date (subject to earlier termination as set forth therein) and shall have an initial Stated Amount of $124,800,000 (as the same may be reduced from time to time by a Principal Drawing or as a result of cancellation of Bonds, the INITIAL STATED AMOUNT). The Bank shall have the option, exercisable in its sole discretion at least one year prior to the Stated Expiration Date, to extend the Expiration Date by up to one year. (b) Annual Letter of Credit Fee. In consideration of the issuance of the Letter of Credit, the Company hereby agrees to pay to the Bank an annual letter of credit fee (the ANNUAL LETTER OF CREDIT FEE) equal to (i) from the date hereof through the Date of Substantial Completion 1.25% per annum of the amount at any time by which $120,000,000 exceeds the balance of the Project Fund, and (iii) thereafter and through the Date which is 30 days after the date upon which the Company delivers to the Bank audited financial statements prepared by the Accountant demonstrating that the Bank Coverage Requirement has been achieved (the COVERAGE DATE), 1.05% per annum of the amount at any time by which $120,000,000 exceeds the balance of the Project Fund, and (iii) thereafter and through the Termination Date, .90% per annum at any time by which $120,000,000 exceeds the balance of the Project Fund. The Annual Letter -21- of Credit Fee shall be payable by the Company in advance installments, in immediately available funds, on the Initial Disbursement Date and on each February 1, May 1, August 1 and November thereafter (collectively, the FEE DATES). The amount of the installment of the Annual Letter of Credit Fee payable on any Fee Date shall be determined based on the Bank's projection of the average amount at any time by which $120,000,000 exceeds the balance of the Project Fund during the period to which such installment relates, and shall be adjusted at the end of such period based on the actual average amount of Bond Proceeds that were outstanding during such period. Any resulting overpayment or underpayment of the Annual Letter of Credit Fee shall be credited against or paid by the Company together with, as the case may be, the next succeeding installment of the Annual Letter of Credit Fee. On the Termination Date, the Annual Letter of Credit Fee shall be prorated for the period from the last Fee Date to the Termination Date, and any underpayment shall made by the Company to the Bank, or any overpayment shall be made by the Bank to the Company. (c) Annual Agent's Fee. In consideration of the issuance of the Letter of Credit, the Company hereby agrees to pay to the Bank an annual agent's fee (the ANNUAL AGENT'S FEE) equal to .25% per annum of the Initial Stated Amount from the date hereof through the Termination Date. The Annual Agent's Fee shall be determined based on the Initial Stated Amount on the date hereof, and on each February 1 after the date hereof, and shall be payable quarterly by the Company in immediately available funds, in advance, on each of the Fee Dates; provided that a prorated portion of the Annual Agent's Fee shall be paid on the date hereof and on the last Fee Date prior to the Termination Date. (d) Substitution and Amendment Fees. In consideration of the issuance of any substitute or amended letter of credit pursuant to the terms of the Letter of Credit, the Company hereby agrees to pay to the Bank, upon each such substitution or amendment, a fee equal to $5,000, or such other amount as shall be, at the time of substitution or amendment, the charge which the Bank is imposing for substitutions or amendments of similar letters of credit. A reinstatement of the Stated Amount pursuant to the terms of the Letter of Credit shall not, in and of itself, be deemed to be a substitution or amendment of the Letter of Credit for the purposes of this subparagraph (d). (e) Drawing Fees. In consideration of the use of the Letter of Credit, the Company hereby agrees to pay to the Bank, upon each disbursement made by the Bank under the Letter of Credit, a fee equal to $500, or such other amount as shall at the time of such disbursement be the charge which the Bank is making for disbursements on similar letters of credit. (f) Additional Payment. In addition to the Annual Letter of Credit Fee, the Annual Agent's Fee, interest payable with respect to Drawings and all other sums due pursuant to this Agreement, the Company hereby agrees promptly to pay to the Bank upon demand by the Bank and from time to time as specified by the Bank, an amount equal to any increase in the -22- Bank's cost or any reduction in the rate of return on the Bank's capital (and any participant's increase in cost or reduction in rate of return) (collectively, INCREASED COSTS) actually incurred or determined by the Bank to have been incurred in issuing or maintaining the Letter of Credit or funding or maintaining Drawings (which increase in cost or reduction in rate of return shall be determined by the Bank's allocation of the aggregate of such cost increases or reduction in rates of return, as the case may be, resulting from such event), including, without limitation, any such costs attributable to present or future reserve, special deposit or similar requirements, present or future capital adequacy requirements, or other regulatory conditions applicable to the Bank. Notwithstanding the foregoing, (i) if the Bank shall issue and/or maintain the Letter of Credit through a lending office of the Bank located outside of the United States, the Company shall not pay any Increased Costs in excess of Increased Costs that would have been incurred if the Letter of Credit had been issued and/or maintained by a lending office of the Bank located in the United States, and (ii) if the Bank shall issue participations in the Letter of Credit, the Borrower shall not pay any Increased Costs with respect to such participant's costs of the nature referred to above to the extent such Increased Costs of such participant exceed what the Increased Costs would have been if the Bank had not issued such participation in the Letter of Credit. A certificate setting forth in reasonable detail such increased cost or reduced rate of return and the calculation of the amount demanded, submitted by the Bank to the Company, shall be conclusive, absent manifest error, as to the amount thereof. 3. AGREEMENT TO REPAY DRAWINGS; PURCHASE OF BONDS. (a) Reimbursement. The Company hereby agrees to pay to the Bank (i) immediately after payment is made under the Letter of Credit pursuant to a Principal Drawing or an Interest Drawing, an amount equal to such amount so paid under the Letter of Credit, (ii) interest on any and all amounts required to be paid as provided in this Paragraph 3(a) from and after the due date thereof until payment in full, payable on demand at the Prime Rate plus 2% (but in no event greater than the maximum rate permitted by applicable law) and (iii) (A) on the Termination Date, an amount equal to all Purchase Drawings and (B) interest on each such Purchase Drawing from the date of each such Purchase Drawing until payment (including prepayment pursuant to paragraph (g) below) in full thereof together with all accrued interest thereon, at the Prime Rate plus 2% per annum (but in no event at a rate greater than the maximum rate permitted by applicable law), payable in arrears on each of the Fee Dates and on the date of payment (including prepayment pursuant to paragraph 3(g) below) of any such amount. Unless waived by the Bank or as otherwise specifically set forth in this Agreement, the Company shall be obligated, without notice of a Drawing or demand for reimbursement from the Bank (which notice is hereby waived by the Company), to reimburse the Bank for all Drawings (other than Purchase Drawings) on the same day as made. The Company and the Bank agree that the reimbursement in full for each Drawing on the date such Drawing is made is intended to be a contemporaneous exchange for new value given to the Company by the Bank. If a Drawing is repaid at or prior to 2:00 P.M. (New York City time) on the same day on which it is made, no interest shall be payable on such Drawing. -23- (b) Payments and Computations. The Company shall make or cause to be made each payment hereunder not later than 2:00 P.M. (New York City time) on the day when due, in Dollars and in immediately available funds, to the Bank at Morgan Guaranty Trust Company of New York ABA #021000238 for credit to the account of Mitsubishi Bank. Limited, New York Branch, Account #631-21-920, Advise: Frank Conigliaro, Assistant Vice President-Planning & Administration (phone #212-667-2670), or at such other place as the Bank may from time to time designate in a notice to the Company. If any sum due hereunder is not paid within 10 days after the date on which the same is due, a late charge in the amount of one percent (1%) of such amount shall immediately become due and payable; if such sum has not been paid within 20 days after the date on which the same is due, an additional late charge in the amount of one percent (1%) of such amount shall immediately become due and payable; and if such sum has not been paid within 30 days after the date on which the same is due an additional late charge in the amount of one percent (1%) of such amount shall immediately become due and payable. All computations of interest and fees hereunder shall be made on the basis of a year of 360 days for the actual number of days elapsed (including the first day but excluding the last day). Any sums paid by the Company to the Bank pursuant to this Agreement shall be applied by the Bank in any order whatsoever, in the absolute and sole discretion of the Bank. (c) Payment on Non-Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, such payment shall be due on the immediately succeeding Business Day. (d) Book Entries. The Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Company resulting from Drawings made from time to time and the amounts of principal and interest payable and paid from time to time hereunder. In any legal action or proceeding in respect of this Agreement, the entries made in such account or accounts shall, in the absence of manifest error, be conclusive evidence of the existence and amounts of the obligations of the Company therein recorded. (e) Obligations Absolute. The obligations of the Company under this Agreement shall be unconditional and irrevocable, and shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of the Letter of Credit, this Agreement or any other Operative Documents; (ii) any amendment or waiver of, or any consent to departure from, any of the provisions of any of the Operative Documents; -24- (iii) the existence of any claim, set-off, defense or other right which the Company may have at any time against the Trustee, any beneficiary or any transferee of the Letter of Credit (or any Persons for whom the Trustee, any such beneficiary or any such transferee may be acting), the Bank or any other Person, whether in connection with this Agreement, any other Operative Documents, the transactions contemplated herein or therein or any unrelated transaction; (iv) any certificate, statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, provided that payment by the Bank under the Letter of Credit against presentation of any such certificate, statement or documents shall not have constituted gross negligence or willful misconduct of the Bank; (v) any non-application or misapplication by the Trustee of the proceeds of any Drawing under the Letter of Credit; (vi) payment by the Bank under the Letter of Credit against presentation of a draft or a certificate which does not comply with the terms of the Letter of Credit, provided that such payment by the Bank shall not have constituted gross negligence or willful misconduct of the Bank; and (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (f) No Withholdings. All payments required to be made by the Company hereunder shall be made free and clear of, and without set-off or counterclaim and without deduction or withholdings for, any and all present and future taxes, levies, imposts, duties, filing and other fees or other charges of any nature whatsoever imposed by any taxing authority, except as provided in this Paragraph 3(f). The Company agrees to pay or cause to be paid directly to the appropriate governmental authority, or to reimburse the Bank for the cost of, any and all present and future taxes, duties, fees and other governmental charges of any nature, including any interest, penalties and expenses arising therefrom or with respect thereto levied or imposed by any Government Authority on or with regard to any aspect of the transactions contemplated by this Agreement whether or not such taxes or other charges were correctly or legally asserted, except such taxes as are imposed on or measured by the Bank's net income by applicable federal, state, commonwealth and local taxing authorities and taxing authorities of the jurisdiction in which the head office of the Bank is located and except such taxes and other charges as are imposed on any participant in the Letter of Credit to the extent that such taxes and other charges exceed the amount that they would have equalled if the Bank had not issued such participation in the Letter of Credit. In the event that the Company is prohibited by operation of law from (i) making payments without set-off or counterclaim or without deduction or withholding as provided above or (ii) paying, causing to be paid, or reimbursing the Bank for -25- the cost of any and all such taxes, duties, levies, imposts, filing and other fees and other charges of any nature, including any interest, penalties and expenses arising therefrom or with respect thereto, as provided above, then the payments due to the Bank hereunder shall be increased to such amount as may be necessary in order that the actual amount received after provision for such taxes, duties, levies, imposts, filing and other fees or other charges shall equal the amount that would have been received if such set-off, counter-claim, deduction or withholding were not required. The Company shall provide evidence that all applicable taxes imposed on the transactions contemplated by this Agreement have been paid to the appropriate taxing authority by delivery to the Bank of the official tax receipts or notarized copies of such receipts within the later of (i) 30 days after the due date for payment of any such tax or (ii) 10 days after the date on which the Company receives the official receipts for the payment of such tax. (g) Pledge of Bonds. As security for the payment of the obligations of the Company pursuant to Paragraph 3(a)(iii) hereof, the Company shall pledge to the Bank, and grant to the Bank a security interest in, all of the Company's right, title and interest in and to the Bonds delivered to the Trustee in connection with Purchase Drawings (the Pledged Bonds), pursuant to a Pledge and Security Agreement dated the date hereof between the Bank and the Company (the Bond Pledge Agreement). At such time as the Bank determines that the Pledged Bonds should be remarketed, it shall deliver to the Trustee the notice required by Section 309 of the Trust Agreement. Upon the sale of the Pledged Bonds or the cancellation of Pledged Bonds that cannot be remarketed and the payment to the Bank of an amount equal to the Purchase Drawing corresponding to the principal amount of Pledged Bonds sold or cancelled, together with (x) accrued interest thereon, as set forth in clause (B) of Paragraph 3(a)(iii) hereof, to the date of such payment or cancellation and (y) all amounts owing in respect of the Interest Drawing, if any, made in conjunction with such Purchase Drawing, then (1) the outstanding obligations of the Company under Paragraph 3(a)(iii) hereof shall be reduced by the amount of such payment, (2) interests shall cease to accrue on the amount paid and (3) the Bank shall release from the pledge and security interest created by the Bond Pledge Agreement a principal amount of Pledged Bonds equal to the principal amount of Pledged Bonds to be sold or cancelled. (h) Credits for Amount Paid on Bonds; Other Credits. The Company shall (A) receive a credit against its obligation to pay interest pursuant to clause (B) of Paragraph 3(a)(iii) to the extent of any amounts actually paid by or on behalf of the Issuer to the Bank in respect of the interest due on any Pledged Bonds under the terms of the Trust Agreement. The Company shall receive a credit against its reimbursement obligation pursuant to Paragraph 3(a)(ii) hereof with respect to any Principal Drawing or Interest Drawing to the extent of any payment with respect to such reimbursement obligation made by the Trustee to the Bank, pursuant to the Trust Agreement from the funds held by the Trustee under the Trust Agreement. (i) Collateral Account. (i) Any sums payable to the Company pursuant to Section 6 of the Bond Swap Agreement and which the Bank elects pursuant to the terms thereof -26- to have deposited as collateral for the Company's performance of its obligations hereunder, shall be deposited with the Bank in an account maintained for the benefit of the Company (the Cash Collateral Account). The Cash Collateral shall be held by the Bank as collateral security for the obligations of the Company hereunder. Unless and until the Cash Collateral is withdrawn or disbursed from the Cash Collateral Account, any funds in the Cash Collateral Account (i) may be commingled with the general funds of the Bank, (ii) shall bear interest at a fluctuating rate per annum, which rate shall be equal to the Federal Funds Effective Rate, and (iii) together with such interest, shall constitute additional security for the Company's performance of its obligations pursuant to this Agreement (a security interest therein being granted hereby to the Bank). The Cash Collateral and any interest accrued thereon may be applied by the Bank to the payment of the obligations of the Company hereunder when and as the same shall be due, in such order as the Bank may elect. Upon termination of the Letter of Credit and this Agreement, and provided the Company shall have paid to the Bank all amounts due and to become due to the Bank hereunder, the Bank shall release and pay to the Company the amount remaining, if any, of the Cash Collateral, together with any interest earned thereon and not theretofore disbursed. -27- 4. CONDITIONS PRECEDENT TO ISSUANCE OF THE LETTER OF CREDIT. The obligation of the Bank to issue the Letter of Credit is subject to the conditions precedent that the Bonds are issued and sold to the purchaser(s) thereof and all of the following conditions are met: (a) Delivery of the Bonds and Operative Documents. This Agreement, the Letter of Credit, the Trust Agreement, the Loan Agreement, the Note, the Security Documents, the Guaranties, the Bond Purchase Agreement, the GDB Standstill Agreement, the Four Party Agreement, the Management Subordination Agreement, the Construction Manager Consent and Agreement, the Architect's Letter, the Official Statement, the GDB Investment Agreement, the Bond Swap Agreement, the Termination Payment Guaranty and the Bond Pledge Agreement (collectively, the Operative Documents) and the Bonds shall have been executed and delivered by authorized Persons of the parties thereto and the Trust Agreement shall have been duly adopted by the Issuer, each in form and substance satisfactory to the Bank. The Bank shall have received an executed copy of each of the Operative Documents. (b) No Default. On the Date of Issuance and after giving effect to the issuance of the Letter of Credit, there shall exist no Default or Event of Default. (c) Representations and Warranties. On the Date of Issuance and after giving effect to the issuance of the Letter of Credit, all representations and warranties of the Company contained herein or in the other Operative Documents, or otherwise made in writing in connection herewith, shall be true and correct in all material respects, with the same force and effect as though such representations and warranties had been made on and as of such date. (d) Certificate of Compliance. There shall have been delivered to the Bank a certificate of the General Partners of the Company, dated as of the Date of Issuance, to the effect that all of the conditions specified in Paragraph 4(b) and 4(c) hereof have been satisfied as of such date. (e) Opinion of Counsel. There shall have been delivered to the Bank an opinion of counsel to the Company, dated as of the Date of Issuance and in form and substance satisfactory to the Bank covering such matters as the Bank may reasonably request. (f) Opinion of Bond Counsel. There shall have been delivered to the Bank an opinion of bond counsel to the Issuer, dated as of the Date of Issuance and in form and substance satisfactory to the Bank, to the effect that the Bonds are legal, valid and binding obligations of the Issuer and covering such other matters as the Bank may reasonably request. (g) Guarantors' Representations and Warranties. On the Date of Issuance and after giving effect to the issuance of the Letter of Credit, all representations and warranties of the Guarantors contained in the Guaranties or otherwise made in writing in connection herewith -28- or with the Guaranties shall be true and correct with the same force and effect as though such representations and warranties had been made on and as of such date. (h) Documentation and Proceedings. All corporate and legal proceedings and all instruments in connection with the transactions contemplated by this Agreement, the other Operative Documents, the Project Documents and the Construction Documents, to the extent that the same have previously been entered into by the Company, shall be satisfactory in form and substance to the Bank and its counsel and the Bank shall have received all information and copies of all documents, instruments, approvals (and, if requested by the Bank, certified duplicates of executed copies thereof) and opinions as the Bank may reasonably request, including, without limitation, records of corporate proceedings, partnership documents and certificates, governmental approvals and incumbency certificates, which it may have requested in connection with the transactions contemplated by this Agreement, the other Operative Documents, the Project Documents, and the Construction Documents, such documents, where appropriate, to be certified by proper officers. (i) Construction Management Agreement. There shall have been delivered to the Bank a copy of the Construction Management Agreement, certified by the General Partners to be true, correct and complete, in form and substance satisfactory to the Bank. (j) Fees. The Bank shall have received (1) the Annual Agent's Fee, pursuant to Paragraph 2(c) hereof, (2) payment of the Bank's counsel fees and the fees of the Bank's Consultant relating to the Project, (3) payment of all other out-of-pocket expenses of the Bank relating to the Project, including, without limitation, any Appraisal, investigation or insurance fees or costs and the cost of the Environmental Report, and (4) payment of any portion of the Facility Fee that has not yet been paid, as such fee is more particularly described in that certain Facility Fee Letter dated October 4, 1990 between the Company and the Bank. (k) Management Agreement. The Management Agreement is in full force and effect. (l) Ground Lease. The Company shall have entered into a ground lease (as amended or supplemented from time to time as permitted by the Operative Documents, the GROUND LEASE) which shall be satisfactory in form and substance to the Bank, pursuant to which the Company shall lease the Palominos Island Property, and which shall be in full force and effect. (m) Acquisition Documents. The Company shall have delivered to the Bank and the Bank shall have approved a copy of the purchase agreement(s) (and all modifications and supplements thereto) and deed(s) pursuant to which the Fajardo Property has been or will be acquired by the Company, together with any redevelopment agreement or similar agreement -29- affecting the Premises or the Improvements and any documents affecting title to the Premises or to the Improvements. (n) Title Policy. The Bank shall have received and approved a title policy (the TITLE POLICY) issued by a title company satisfactory to the Bank in its sole and absolute discretion, marked paid in full, in the amount of the Loan, insuring the Issuer, the Bank and the Trustee, as their respective interests may appear, that the Fee Mortgage, in connection with the Fajardo Property, and the Leasehold Mortgage, in connection with the Palominos Island Property, together with the other Security Documents to be recorded constitute valid first liens on the Premises, and on the other property secured, free and clear of all defects, restrictions, Liens and violations, except the Permitted Encumbrances, and which Title Policy shall contain: (A) no exception for mechanics' or materialmen's liens; (B) no survey exceptions other than those approved by the Bank; (C) a statement that the Title Company agrees to affirmatively insure the priority of each Disbursement against the existence of any other Liens, including mechanic's and materialman's liens, whether choate or inchoate; (D) reinsurance with provisions for direct access against the reinsurers, in amounts and with companies acceptable to the Bank; and (E) such other endorsements or affirmative insurance as the Bank and the Bank's counsel shall require. (o) Appraisal. The Bank shall have received the Appraisal, in form and content satisfactory to the Bank in its sole discretion, which Appraisal states that the fair market value of the Premises equals or exceeds $172,700,000. (p) Survey. The Bank shall have received a survey of the Premises (the SURVEY), in form and content satisfactory to the Bank, certified by Manuel Ray or such other licensed surveyor acceptable to the Bank, certified to the Bank and the title insurance company issuing the Title Policy, and dated as of a date within 30 days prior to the Date of Issuance, showing (i) the outlines of the Premises and the courses and measured distances of the exterior property lines, the exact location of all buildings including the Improvements (as of the date of such survey), (ii) the area of the Premises in square meters, (iii) the exact location of all adjoining streets, (iv) the exact location of any encroachments on the Premises by any improvements on adjoining property (as of the date of such survey) and (v) the exact location of all easements and rights-of-way and other matters of interest to the Bank and recordation information with respect to the Premises. -30- (q) Environmental Report. The Bank shall have received the Environmental Report, satisfactory to the Bank in form and content, and all recommendations set forth in the Environmental Report shall have been implemented to the Bank's satisfaction. (r) Preliminary Report. The Bank shall have received a preliminary report from the Bank's Consultant satisfactory to the Bank in form and content with respect other acceptability of (i) the then-current Plans and associated design materials; (ii) the design of various systems, including, without limitation, architectural, structural, electrical, plumbing, heating, air conditioning and sprinkler systems; (iii) the general conformity of materials specified to overall Project quality objectives; (iv) the contents of soil reports and coordination of foundation design of the Improvements; (v) the conformity of the scope and design set forth in the then-current Plans to the description of the Project otherwise presented to the Bank; (vi) the Company's projected Date of Substantial Completion and Construction Schedule; (vii) the Company's proposed Budget; (viii) the Company's distribution of overall Budget to individual trade cost items; (ix) the adequacy of contingency reserves within the Budget; (x) the value, scope, and limiting conditions of the Trade Contracts and/or subcontracts received for review; and (xi) such other matters as the Bank shall reasonably require. (s) Insurance. The Bank shall have received such policies of casualty, insurance, liability insurance, business interruption insurance, worker's compensation insurance and such other insurance as the Bank may require, issued by companies and in amounts satisfactory to the Bank, all as more particularly set forth in the Pledge Agreement; the conditions set forth in Paragraph 7(x) hereof shall have been satisfied; and the Bank shall have received evidence that the applicable premiums with respect to such insurance policies have been paid and that the insurance thereunder is in full force and effect. (t) Real Estate Taxes. The Bank shall have received evidence of payment of all real estate taxes currently due and payable or delinquent with respect to the Premises and the Improvements situated thereon. (u) Formation of Company. All legal matters in connection with the transaction and the formation and organization of the Company, its partners and the Guarantors shall be satisfactory to the Bank and counsel for the Bank. (v) Other Approvals. The bank shall have received and approved evidence that the Premises cannot be subject to a lien for unpaid real property taxes from any other property. (w) Swap Arrangement. The Company shall have entered into and satisfied all conditions precedent to the effectiveness of the Bond Swap Agreement such that for the period commencing on the third "Business Day" (as such term is employed in the Trust Agreement) following the date hereof up to and including the Stated Expiration Date, the -31- Company's exposure with respect to interest payable on the Loan is fixed or limited to the Bond Fixed Rate. (x) Maximum Effective Interest Rate. The aggregate of the interest payable with respect to the Loan at the Bond Fixed Rate, the Annual Agent's Fee and the Annual Letter of Credit Fee (as projected by the Bank) payable for any year during the term of the Letter of Credit shall not yield an effective rate of interest on the Loan in excess of 11% per annum. (y) GDB Loan Documents. The GDB Loan shall have been entered into in accordance with documentation satisfactory to the Bank in its sole and absolute discretion, which documentation shall include, without limitation, the GDB Standstill Agreement. Copies of each of the documents executed in connection with the GDB Loan shall have been delivered to the Bank, and shall have been certified to be true, correct and complete by the General Partners. (z) Budget. The Budget shall have been delivered to the Bank's Consultant and shall be identical to the Budget annexed hereto as Exhibit F, or shall otherwise be satisfactory to the Bank and the Bank's Consultant. (aa) Authorization. The Bank shall have received copies of (i) a transaction authorization executed by the General Partners authorizing the Company's execution of this Agreement and the other Operative Documents to which the Company is party, (ii) the Company Partnership Agreement and filed certificate of limited partnership of the Company and all amendments thereto, (iii) a certificate of good standing from the State of Delaware for the Company, (iv) evidence that the Company has filed a properly certified copy of the Company Partnership Agreement with the Mercantile Registry of Puerto Rico and that such filing has been accepted, (v) organizational documents of the Company, all of which shall be certified as true, correct and complete by the General Partners and (vi) copies of all other organizational documents of the Company and its partners which the Bank may reasonably request, all of which shall be in form and substance satisfactory to the Bank. (bb) Accounting. The Bank shall have received and approved an accounting of all expenditures for costs shown on the Budget as having been incurred prior to the Date of Issuance. (cc) No Flood Plain. The Bank shall have received and approved a certificate from the Architect or an insurance broker that the Improvements to be Constructed in accordance with the Plans will not be located in a flood hazard plain. (dd) Labor Contributions. The Bank shall have received a certificate from the Secretary of Labor of Puerto Rico evidencing that there is no liability for contributions owing by the Company under the provisions of the Employment Security Act of 1956, as amended. -32- 5. INDEMNIFICATION; BROKERAGE. (a) It is the intention of the parties hereto that this Agreement shall be construed and applied to protect and indemnify the Bank against any and all risks involved in the issuance of the Letter of Credit, all of which risks are hereby assumed by the Company, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future de jure or de facto government or Government Authority (all such acts and omissions herein collectively referred to as GOVERNMENT ACTS). Accordingly, in addition to amounts payable under Paragraphs 2 and 3 hereof, the Company hereby agrees to defend, indemnify and hold the Bank, its affiliates, members, employees, agents and representatives (each an INDEMNIFIED PARTY) harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including, without limitation, attorneys' fees and disbursements) which such Indemnified Party may sustain or incur or be subject to as a consequence, direct or indirect, of (i) the issuance of the Letter of Credit or with respect to any other Operative Documents, other than as a result solely of the gross negligence or willful misconduct of such Indemnified Party, (ii) any breach by the Company of any representation, warranty, covenant, term or condition in, or the occurrence of any default under, this Agreement, any other Operative Documents or the Bonds, together with all reasonable expenses resulting from the compromise or defense of any claims or liabilities arising as a result of any such breach or default, (iii) defense against any legal action commenced to challenge the validity of this Agreement, the bonds or any other Operative Documents, (iv) any misrepresentation of a material fact or any failure to state a material fact (other than any facts relating to and supplied by the Bank) in the Preliminary Official Statement or the Official Statement, (v) the consummation of the transactions contemplated herein or in any of the Operative Documents, and (vi) the Construction, use or occupancy of the Project. In addition, the Bank shall not, in any way, be liable for any failure by the Bank or anyone else to pay any drawing under the Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Bank. (b) Except as otherwise expressly provided herein, the obligations of the Company under this Agreement are primary, absolute, independent, irrevocable and unconditional. The Company understands and agrees that no payment by it under any other agreement (whether voluntary or involuntary or pursuant to court order or otherwise) shall constitute a defense to the several obligations hereunder except to the extent that the Bank has been indefeasibly paid in full. (c) The Company and the Bank hereby each represents and warrants to the other that neither it nor any of its agents has dealt with any brokers, finders or advisors in connection with the transactions contemplated hereby other than (i) Morgan, Hughes and Company and (ii) San Juan Capital Corporation. The Company hereby agrees to pay any fees owed to Morgan, Hughes and Company and San Juan Capital Corporation, respectively, in connection with the transactions contemplated hereby pursuant to separate agreements between -33- the Company and such parties and agrees to defend, indemnify and hold the Indemnified Parties harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including, without limitation, attorneys' fees an disbursements) arising as a result of any claim by any broker, finder or advisors including, without limitation, Morgan, Hughes and Company and/or San Juan Capital Corporation, except to the extent any such claim, demand, liability, damage, loss, cost, charge or expense arises out of an agreement between such broker, finder or advisor and the Bank in connection with the transactions contemplated by this Agreement or any other Operative Documents. The Bank agrees to defend and indemnify the Company and hold it harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including, without limitation, attorneys' fees and disbursements) arising by reason of the foregoing representation by the Bank being untrue or incorrect in any respect. (d) The obligations of the Company under this Paragraph 5 shall survive the payment of the Bonds and the Note and the termination of this Agreement and/or the Letter of Credit. 6. CONDOMINIUM UNITS. The Condominium Units, or a portion thereof, shall be constructed at the option of the Company, subject to the Bank's reasonable approval of the design concept, schematics, plans and specifications for the Condominium Units. If constructed, all or a portion of the Condominium Units may be operated by Williams as part of a rental arrangement providing for up to 450 hotel rooms. If the Bank has approved the design concept, schematics, plans and specifications for the Condominium Units and subject to the Bank's receipt of evidence satisfactory to the Bank that adequate financing is available for the completion of the Condominium Units and that the legal relationship between the Condominium Units and the Project is appropriate and enforceable, and provided no Default or Event of Default exists or is continuing hereunder or under any of the other Operative Documents, portions of the Condominium Parcels will be released from the lien of the Fee Mortgage upon the transfer of such property to the entity which will develop the Condominium Units, with no consideration payable to the Bank therefor, other than amounts payable pursuant to Paragraphs 7(p) or 14(c) hereof. The Bank shall subordinate the Fee Mortgage to necessary easements reasonably approved by the Bank for access roads to and utilities serving the Condominium Parcels so released. Notwithstanding the release of all or any of the Condominium Parcels from the lien of the Fee Mortgage, the Condominium Revenues shall continue to be included in the Collateral given by the Company in connection with the Letter of Credit, this Agreement and the Bonds, and any such release by the Bank shall be subject to the Bank's prior receipt of a fully executed Assignment of Rents in connection therewith. 7. COVENANTS. The Company covenants and agrees that, so long as a Drawing is available under the Letter of Credit or any amount is payable to the Bank under this Agreement: -34- (a) Notice of Default. The Company will furnish to the Bank as soon as possible and in any event within three Business Days after the discovery by the Company or any of its General Partners of any Default or Event of Default, an Officer's Certificate, setting forth the details of such Default or Event of Default and the action which the Company proposes to take with respect thereto. (b) ERISA. As soon as possible and in any event within 10 days after the Company or a Subsidiary knows or has reason to know that a Reportable Event has occurred, that any payment required to be made under Section 412 of the Code is not made before the due date, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver of the minimum funding standard under Section 412 of the Code with respect to a Plan, that a Plan has been or may be terminated, that proceedings may be or have been instituted to terminate a Plan, or that the Company, a Subsidiary or an ERISA Affiliate will or may incur any liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, the Company will deliver to the Bank an Officer's Certificate setting forth details as to such occurrence and action, if any, which the Company, the Subsidiary or the ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be filed with or by the Company, the Subsidiary, the ERISA Affiliate, the PBGC or the plan administrator with respect thereto. Copies of any notices required to be delivered to the Bank under the preceding sentence shall be delivered no later than 10 days after the later of (i) the date such report or notice has been filed with the Internal Revenue Service or the PBGC and (ii) notice has been received by the Company or the Subsidiary. The Company will, as soon as possible and in any event within 60 days of filing, furnish to the Bank a copy of the annual report of each Plan (Form 5500) required to be filed with the Internal Revenue Service, including a copy of any actuarial valuation prepared in connection therewith. (c) Preservation of Existence. The Company will preserve and maintain its legal existence, franchises, rights and privileges in the jurisdiction of its formation and will preserve and maintain its rights and privileges in the Commonwealth of Puerto Rico, and shall comply with all Legal Requirements. (d) Successor Letter of Credit. (i) At any time following the Date of Substantial Completion, the Bank may designate another bank which is willing to issue a Successor Letter of Credit (as defined in the Trust Agreement), on terms not less favorable to the Company that those contained in this Agreement, in which case, provided that such bank and the letter of credit to be issued by such bank meet the requirements of the Trust Agreement with respect to a Successor Letter of Credit, and provided, further, that any up-front fees imposed upon the Company in connection with the issuance of the Successor Letter of Credit are borne by the Bank, the Company shall, at the Bank's request, (A) take such action as shall be required pursuant to the Trust Agreement to substitute such letter of credit for the Letter of Credit issued by the Bank and (B) enter into a modification of this Agreement and such other agreements and -35- take such other action, including, without limitation, such action as may be necessary to supplement the Trust Agreement, as shall be required to consummate the issuance of the Successor Letter of Credit referred to in clause (A) above and to provide for the reimbursement of the issuer of such Successor Letter of Credit for any draws thereunder and such other terms and conditions as such issuer may require, provided that such modification or any such other agreements or actions shall be on such terms and conditions as the Company shall reasonably approve. (ii) Subject to the requirements of the Operative Documents, the Company shall have the right to replace the Letter of Credit at any time on 30 days' prior written notice to the Bank, provided that, prior to such replacement, payment to the Bank is made of all sums due and owing to the Bank at the time of such replacement with respect to the Letter of Credit (including, without limitation, sums due and owing under this Agreement). (e) Additional Indebtedness. The Company will not, directly or indirectly, create or permit or suffer to exist any Debt (i) secured by a mortgage or other Lien on the Premises or Improvements, or any portion thereof, other than (A) the Permitted Encumbrances, (B) capitalized leases for furniture, fixtures or equipment, (C) Liens in favor of GDB created pursuant to the GDB Loan and consented to by the Bank in writing, or (D) a third priority mortgage on the Premises in favor of KGC (the KGC MORTGAGE), as provided in Section 6.03 of the Company Partnership Agreement, provided that KGC executes and delivers to the Bank a standstill agreement on terms substantially similar to those contained in the GDB Standstill Agreement and in any event on terms and conditions satisfactory to the Bank in its sole and absolute discretion, or (ii) secured by a Lien on any direct or indirect equity interest in the Company, except a Lien on the interest of WKA in the Company securing WKA's repayment of a KG Loan (as defined in the Company Partnership Agreement) as provided in Section 6.03 of the Company Partnership Agreement. (f) Payment of Swap Obligations. The Company shall pay all amounts which it may be obligated to pay under the Bond Swap Agreement and the GDB Swap Agreement, and all such amounts which become payable by the Company to the Bank under such agreements shall be deemed amounts payable under this Agreement. (g) Financial Statements. The Company, each of the Guarantors, WKA, Williams, Posadas de Puerto Rico Associates Incorporated, a Delaware corporation, and Posadas de San Juan Associates, a New York partnership (as well as Kumagai and/or WMS Industries, to the extent either is no longer a publicly traded company required to make Annual Reports publicly available), shall deliver to the Bank within 125 days after the close of their respective fiscal years, for the twelve-month period then ended, (i) an audited balance sheet, (ii) an audit statement of operations, (iii) an audited statement of cash flow, (iv) an audited statement of changes in shareholder's equity, and (v) with respect to the Company only, an audited statement of profits and loss on a cash flow basis. The Company, KGC and WKA shall deliver to the -36- Bank within 50 days after the close of each quarter, for the three-month period then ended, (i) a balance sheet, (ii) an unaudited statement of operations, (iii) an unaudited statement of cash flow, (iv) an unaudited statement of changes in shareholder's equity, and (v) with respect to the Company only, an unaudited statement of profits and loss on a cash flow basis, each of which shall be certified to be true and correct by the general partners, if a partnership, or the chief financial officer, if a corporation of the respective entities. Within 10 days after the close of each calendar month occurring after the opening for business of all or any portion of the Project, the Company shall deliver to the Bank the monthly financial reports which the Company prepares for its partners, certified by the General Partners to be true and correct. Within 10 days after the close of each calendar month during which any Deficiency Loans have been made, the Company shall deliver to the Bank a report with respect to such loans in detail reasonably satisfactory to the Bank. Within 125 days after the close of their respective fiscal years, for the twelve-month period then ended, Kumagai and WMS Industries shall deliver to the Bank copies of their respective Annual Reports and WMS Industries shall deliver to the Bank a copy of its Form 10K, all of which shall be certified to be true and correct by its chief financial officer. Within 125 days after the close of each calendar year, each of Hugh A. Andrews, Richard Koffman and Burton Koffman shall deliver their respective personal financial statements to the Company (which statements for Messrs. Koffman may be prepared jointly), certified to be true and correct by such individual. Each of the foregoing statements (other than statements for individual) shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the most recent audited financial statements of the respective entities delivered to the Bank, and each such statement shall present a fair and accurate portrayal of the financial condition of the respective party. In addition to such requirements, all Financial Statements of the Company and of Posadas de Puerto Rico Associates Incorporated and Posadas de San Juan Associates shall be prepared based upon the Uniform System of Accounts for Hotels, copyrighted by the Hotel Association for New York City, 8th edition of 1986, as amended from time to time. All Financial Statements required to be audited hereunder shall be audited by the Accountant in the case of the Company, and in all other cases by an independent certified public accountant reasonably satisfactory to the Bank. Throughout the term of this Agreement, the Company, each Guarantor, Kumagai and WMS Industries (or its successor) shall deliver to the Bank, within 10 days after request therefor, such other financial information and/or Financial Statements with respect to the Company, the Guarantors, Kumagai, WMS Industries (or its successor), as the case may be, as the Bank may reasonably request from time to time. (h) Transfers. The Company shall not make or permit or suffer to be made any Transfer except for any Permitted Transfer. (i) Decision Making. The Company shall recognize and honor the right of the Bank, pursuant and to the extent set forth in the Pledge Agreement, to exercise all rights and remedies and to make all decisions of the Mortgagee under the Mortgage and of the holder of the Note. -37- (j) Further Assurances. The Company will execute, acknowledge where appropriate, and deliver, and use best efforts to cause others to execute, acknowledge where appropriate, and deliver, from time to time promptly at the request of the Bank, all such instruments and documents as in the opinion of the Bank are necessary or advisable to carry out the intent and purpose of this Agreement and the other Operative Documents and will execute and file or record, or use best efforts to cause others to execute and file or record, any financing statements, continuation statements or other documents, and take such other actions as may necessary or advisable to create, perfect, protect and preserve the first mortgage liens and first security interests acquired, or intended to be acquired, by or for the benefit of the Bank under the Operative Documents. (k) Compliance with Laws. The Company will comply with all Legal Requirements, non-compliance with which would have a materially adverse effect on its business, financial condition or results of operations or would materially adversely affect the Company's ability to perform its obligations under this Agreement or any of the Operative Documents. The Company will comply with all conditions, covenants, restrictions, leases, easements, reservations, rights and rights-of-way and all applicable requirements of any insurers related to the Project. (l) Performance of This and Other Agreements. The Company will take all action and do all things which it is authorized by law to take and to do in order to perform and observe all covenants and agreements on its part to be performed and observed under this Agreement and each Operative Document. The Company agrees that the Bon Swap Agreement shall not alter, impair, restrict, limit or modify, in any respect the obligation of the Company to pay interest on the Loan as and when the same becomes due and payable in accordance with the provisions of the Loan Agreement and the Mortgage Note. (m) Amendments. The Company will not surrender, terminate, modify, amend or supplement in any material respect, or give any consent to any surrender, termination, modification, amendment or supplement or make any waiver with respect to any provision of the Company Partnership Agreement (including, without limitation, any provision that would result in a transfer of an interest in the Company or any partner of the Company which is prohibited by any of the Operative Documents or would result in a diminution in the scope and powers of any of the General Partners) and/or any organizational documents of any partner of the Company, any Operative Document, any of the other Construction Documents or the other Project Documents or any other documents relating to the Project, including, without limitation, relating to the use or operation of the Project, without the prior written consent of the Bank in each instance. (n) Construction. The Company will cause the Construction of the Improvements to be prosecuted with diligence and continuity, in a good and workmanlike manner and in accordance with the Plans and the Construction Schedule so as to cause -38- Substantial Completion to occur, free and clear of all claims, liens and encumbrances, within the Budget and on or prior to the Completion Date, as the same may be extended in accordance with the next succeeding sentence, subject to and in accordance with this Agreement, the Construction Documents and Project Documents, to the extent the same specify construction requirements applicable to the Construction of the Improvements. The Plans shall provide for the purchase and installation of fixtures, furnishings and equipment of a sufficient quantity and quality as is appropriate for a first-class destination resort. The Completion Date may be extended for a period of time equal to the number of day during which the Company is prevented from or delayed in proceeding with the Construction of the Improvements by reason of any Unavoidable Delay upon satisfaction of all of the following conditions at the time of any such extension: (i) the Bank shall have received notice from the Company of any requested extension and the anticipated duration thereof, (ii) no Event of Default shall have occurred and be continuing, (iii) the Company shall have delivered to the Bank a revised Budget to the extent such extension shall affect the Budget, and (iv) the Company shall have satisfied the requirements of Paragraph 9(k) hereof, if applicable; provided, however, that in no event shall any such extension extend the Completion Date for Unavoidable Delay for an aggregate period in excess of 180 days. The Company shall promptly notify the Bank of any cessation of Construction of the Improvements for a period in excess of ten days, regardless of whether or not such cessation is due to an Unavoidable Delay. (o) Inspection of Project and Books and Records. The Company will permit the Bank and the Bank's Consultant, or designated representatives of any of them, to enter upon the Project, at any reasonable times, with free access to inspect or examine (i) the Project, (ii) all materials and shop drawings which are or may be kept at the construction site, (iii) any contracts, bills of sale, statements, receipts or vouchers, (iv) all work done, labor performed or materials furnished in and about the Project, (v) all books, contracts and records of the Company relating to the Project and (vi) any other documents which are reasonably related to the Project. The Company will make its representatives available for the Bank or the Bank's Consultant upon reasonable notice to discuss the Company's affairs, finances and accounts relating to the Project and the Company will cooperate, and take all reasonable steps to cause the Construction Manager and the Trade Contractors to cooperate, with the Bank or the Bank's consultant, as the case may be, or any designated representative of either, to enable such Person to perform its functions hereunder. In connection therewith, the Company will keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles, consistently applied, reflecting all financial records of the Company. (p) Expenses. The Company will pay promptly on demand to or for the account of the Bank, as the case may be: (i) the Bank's counsel fees, (ii) the fees and disbursements of the Bank's Consultant and (iii) all other costs and expenses incurred by or on behalf of the Bank in connection with the closing of the Loan or the issuance of the Letter of Credit or with respect to any and all of the transactions contemplated herein or in any other Operative Document. Without limiting the generality of the foregoing, the Company will pay: -39- (A) all taxes and recording expenses, including all filing and notarial fees and mortgage recording fees and taxes, with respect to the Security Documents, and any other documents modifying, extending or consolidating the Security Documents; (B) all finder's fees, placement fees and commissions lawfully due to brokers in connection with the Loan or the issuance of the Letter of Credit, if any, except to the extent provided otherwise in Section 5(c) hereof; (C) all title insurance charges and premiums; and (D) all appraisal, survey, investigation and insurance fees and expenses and all costs of preparing environmental and insurance reports concerning the Project. (q) Plans. The Company shall proceed with diligence and continuity to cause Substantial Completion and completion of the construction to occur in accordance with the Plans and all Legal Requirements. Any material variation of the Construction of the Improvements from the Plans shall be subject to the prior written approval of the Bank. Without limiting the generality of the foregoing, Substantial Completion and completion of the Construction shall be achieved free and clear of Liens or claims for materials supplied or for labor or services performed in connection with the Construction of the Improvements or otherwise, except with respect to the Liens for the performance of work or supply of materials to the extent permitted to remain uncured and unbonded pursuant to the Mortgage. (r) Delivery of Agreement. The Company will deliver to the Bank, promptly after demand, copies of any contracts, bills of sale, statements, receipted vouchers or agreements, under which the Company claims title to any materials, fixtures or articles incorporated in the Project and subject to the Lien of the Mortgage. The Company shall deliver to the Bank copies of all Construction Documents and Project Documents hereafter entered into immediately after the same are entered into. (s) Correction of Work. The Company will, upon demand of the Bank or the Bank's Consultant, promptly correct any structural defect in the Improvements or any departure from the Plans not approved by the Bank and the Bank's Consultant, to the extent any such approval is required pursuant to Paragraph 7(bb) hereof, it being agreed that the making of any Disbursement shall not constitute a waiver of the Bank's right to require compliance with this covenant with respect to any such defects or departures from the Plans. (t) Revised Budget. The Company will, at its sole cost and expense, furnish to the Bank within 180 days after the date hereof and at least once in every calendar quarter thereafter until the Date of Substantial Completion, a revised construction budget which shall -40- be in the form of the Budget an which shall indicate revisions made to date to the Budget, which revised budget shall be satisfactory to the Bank in the Bank's sole and absolute discretion. (u) Notices. The Company shall give notice to the Bank promptly upon the occurrence of: (a) any (i) default or event of default under any material contractual obligation of the Company, (ii) litigation, investigation or proceeding of which the Company has knowledge which may exist between the Company and any Government Authority and (ii) any pending or threatened litigation or action of a Government Authority of which the Company has knowledge concerning the presence, release, threat of release, placement on or in, or the generation, transportation, storage, treatment or disposal at, the Project of any Hazardous Material; (b) any notice given pursuant to any of the Project Documents or the Construction Document alleging that a default or other failure by the Company has occurred thereunder; and (c) any condition which results, or is likely to result, in an Unavoidable Delay in Substantial Completion. Each notice pursuant to this Paragraph 7(u) shall be accompanied by a statement of the Company setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. (v) Plan Changes. The Company shall provide to the Bank's Consultant and, upon the Bank's request, the Bank, copies of all change orders, change bulletins and other revisions of the Plans to the extent the Company has received same, regardless of whether the prior approval by the Bank or the Bank's Consultant of any such order, document or revision is required. (w) No Encroachments. The Improvements shall be Constructed entirely within the perimeter of the Premises and shall not encroach upon or overhang (unless consented to in writing by the affected property owner) any easement or right-of-way or overhang the land of owners, and when erected shall be wholly within any building restriction lines, however established. (x) Insurance. The Company shall provide and maintain at all times insurance in such forms and covering such risks and hazards and in such amounts and with such companies as may be required by the Pledge Agreement, and shall deliver such policies, or signed insurance binders relating thereto, to the Bank. -41- (y) Application of Insurance and Condemnation Proceeds. The application of all insurance or condemnation proceeds realized from the damage, destruction or condemnation of the Project, or any portion thereof, shall be governed by the Pledge Agreement. (z) Compliance with Documents. The Company shall abide by, perform and comply with all material terms and conditions of the Management Agreement, the Construction Management Agreement, the Architect's Agreement, the Trade Contracts, the other Construction Documents and the other Project Documents and the Company, at its sole cost and expense, shall use best efforts to secure or enforce the performance of each and every material obligation, covenant, condition and agreement to be performed by the other parties under any such documents. (aa) Bonds. The Company will cause the Bank to be named as co-obligee on all performance, payment or bid bonds obtained by the Company from each Trade Contractor. All Trade Contracts shall be bonded pursuant to a performance, payment or bid bond satisfactory to the Bank in form, content and issuer. (bb) Work Changes. Notwithstanding anything to the contrary contained herein, the Company will not direct or permit the performance of any work (i) pursuant to any single Work Change which would result, by itself, in an increase in the cost of any Line Item in excess of the Individual Budget Change Amount, (ii) pursuant to any single Work Change which, together with the aggregate of all Work Changes theretofore executed or carried out by the Company, would result in an increase or decrease in aggregate cost of Construction of the Improvements in excess of the Aggregate Budget Change Amount, nor (iii) pursuant to any single Work Change which would have the effect of (x) materially increasing or reducing the gross square footage of the Improvements as a whole or (y) modifying any of the design elements or construction techniques of the Improvements in any way which would adversely affect the quality of the Improvements as a whole; unless in each case it shall have received the prior written approval of the Bank. Approval by the Bank of any such Work Change shall not obligate the Bank to make any Disbursement on account of such Work Changes unless the costs therefor are reflected in the Budget. No Work Change shall be made unless the Company shall have obtained such approvals as shall be necessary under the requirements of ARPE and/or the Planning Board of Puerto Rico. (cc) No Contracts. The Company will not, without the Bank's prior written consent, execute any Trade Contract or become a party to any arrangement for the performance of work or the furnishing of materials at the Project except (a) with the Construction Manager or with those Trade Contractors approved by the Bank and (b) a Trade Contract in substantially the form of, or an arrangement with terms substantially equivalent to the terms provided in, the standard form of contract or trade contract previously delivered to and approved by the Bank. In connection with the foregoing approval, the Company may from time to time deliver to the bank and the Bank's Consultant a list of the names of prospective Trade Contractor's with whom -42- the Construction Manager or the Company may contract for the construction of the Improvements or for the furnishing of labor or materials therefor. Each Trade Contract shall permit the Retainage until the work to be performed thereunder has been completed. (dd) Asbestos. The Company will not install, permit to be installed or suffer to exist in the Improvements friable asbestos or any substance containing asbestos and existing in a manner or for a use deemed hazardous by federal, state or commonwealth regulations respecting such material. (ee) Final Survey. The Company will deliver to the Bank within 60 days after the Date of Substantial Completion an Update of the Survey, dated no earlier than the Date of Substantial Completion, with a certification that no encroachments exist by the Improvements or on the Premises other than those shown on the Survey and consented to, in writing, by the Bank, and indicating the completed Improvements, the dimensions thereof at ground surface level, the distance therefrom to the facing exterior property lines and other buildings and any set-back lines, the location of access to the Project and all utility, water and other easements directly affecting the Project. (ff) Construction Trust Account. The Company will (a) receive and deposit in the Construction Trust Account all Disbursements made pursuant hereto , (b) hold the same and the right to receive future Disbursements to be made hereunder as a trust fund for the purpose of paying only Hard Costs and Soft Costs and (c) apply the Disbursements to the payment of the costs for which the applicable Request for Disbursement was made. (gg) Leasing. To the extent that the Company leases space in the Premises (other than renting guest rooms to transient guests), the Company shall lease and cause the lessee to operate the space to be leased in a manner compatible with the operation of the Premises as a first class destination resort hotel. From time to time upon the request of the Bank, the Company shall provide to the Bank such information as the Bank shall request with respect to the Company's leasing activities and policies. All leases for all or any portion of the Premises shall be subordinate in all respects to this Agreement and to the Security Documents. The Company shall not enter into a lease for any space in the Premises without first delivering to the Bank an Assignment of Rents in connection therewith. (hh) Distribution Cash Under Company Partnership Agreements. The Company shall not make more than one distribution of Distributable Cash (as defined in the Company Partnership Agreement ) with respect to any fiscal year of the Company, and such distribution shall not be made earlier than the date which is 30 days after audited Financial Statements of the Company demonstrating the existence and the amount of such Distributable Cash have been delivered to the Bank. -43- (ii) Deficiency Loans. Any funds advanced to the Company as Deficiency Loans (as defined in the Company Partnership Agreement), whether or not at the direction of the Bank, shall be applied only to the operating costs or other fees and expenses related to the operation of the Project; provided, however, that (A) up to $6,000,000 of such funds available for Deficiency Loans under the Company Partnership Agreement may be used by the Company to pay any portion of the Total Project Costs for which the Company has insufficient funds and (B) the foregoing restriction shall be of no effect from and after the Coverage Date. After the Date of Substantial Completion and until the Coverage Date, the Bank will have the right to cause the Company, acting through WKA, (A) at such times as the Bank shall determine in the reasonable exercise of its judgment that an Operating Deficit exists with respect to any month, to require the General Partners to make Deficiency Loans in amounts of up to $20,000,000 in the aggregate (less (x) any such Deficiency Loans for such purpose which may have previously been voluntarily advanced and (y) any additional Deficiency Loans of up to $6,000,000 in the aggregate which may have previously been voluntarily advanced to pay Total Project Costs to the extent hereinabove permitted), and (B) to apply such funds on account of such Operating Deficits. The Bank shall have no right to cause Deficiency Loans to be made to pay principal under the Bonds, the Loan Agreement or hereunder. In the event that WKA elects not to make the Deficiency Loan pursuant to Section 6.03 of the Company Partnership Agreement, the Bank may exercise the right of WKA pursuant to Section 6.03 of the Company Partnership Agreement to require KGC to make the Deficiency Loan on behalf of WKA through the making of a KG Loan (as defined in the Company Partnership Agreement). In the event of a default by KGC in its obligations to make a KG Loan, the Bank shall have the right, under the Four Party Agreement, to cause the Company or WKA, respectively, to exercise such available rights and remedies with respect thereto as the Bank shall determine. The Bank's right to require Deficiency Loans to be made shall cease during the pendency of any bankruptcy proceeding with respect to the Company or in the event of the commencement of any foreclosure or similar proceeding with respect to the Company's interest in the Project. If any Deficiency Loan is made to enable the Company to make the deposit of interest on the Bonds required under Section 401(c) of the Loan Agreement, then any Net Earnings, up to the amount of such Deficiency Loan, for the period from the date of such deposit on the Interest Payment Date to which such deposit relates, shall be paid to the Bank to be held by the Bank for the benefit of the Company as collateral security for the obligations of the Company hereunder and, subject to the conditions to disbursement contained herein, disbursed by the Bank on account of the next succeeding Disbursements with respect to Operating Deficits. Unless and until such funds are withdrawn or disbursed from such account, any funds in such account (i) maybe commingled with the general funds of the Bank, (ii) shall bear interest at a fluctuating rate per annum, which rate shall be equal to the Federal Funds Effective Rate, and (iii) together with such interest, shall constitute additional security for the Company's performance of their obligations pursuant to this Agreement (a security interest therein being granted hereby to the Bank). Upon the occurrence and during the continuation of any Event of Default, any sums in such account and any interest accrued thereon may be applied by the Bank to the payment of the obligations of the Company hereunder when and as the same shall be due, in such order, as the Bank may elect. Upon -44- termination of the Letter of Credit and this Agreement, provided the Company shall have paid to the Bank all amounts due and to become due to the Bank hereunder, the Bank shall release and pay to the Company the amount remaining, if any, of such funds, together with any interest earned thereon and not theretofore disbursed. (jj) Ground Lease and GDB Documents. The Company shall comply with all of the terms and conditions of the Ground Lease and of the documents executed in connection with (i) the GDB Loan (for so long as the GDB Loan is outstanding), respectively, and such documents shall remain in full force and effect at all times in accordance with their terms. The Company shall not cause or suffer any event of default on its part to occur under such documents. It is expressly agreed that so long as the GDB is prevented by reason of the GDB Standstill Agreement from exercising any rights or remedies against the Company or any of the Collateral, then any failure by the Company to comply with any non-monetary term or condition of the documents executed in connection with the GDB Loan shall not, by itself, be deemed a breach by the Company of this Section 7(jj) or a Default or Event of Default under this Agreement or any Operative Document. (kk) Compliance with Environmental Laws. The Company will comply with any and all Legal Requirements and Environmental Laws with respect to the discharge, removal and disposal of Hazardous Material, and the Company shall pay immediately when due the costs of removal and disposal of any such Hazardous Material, and shall keep the Project free of any Lien imposed pursuant to such Legal Requirements or Environmental Laws. In addition to all other rights available to the Bank in connection therewith, if the Company fails to comply with any requirement of this paragraph, the Bank may, but shall not be obligated to, cause the Project to be freed from the Hazardous Material, with the cost of the removal and disposal thereof being payable by the Company upon the Bank's demand therefor. The Company further agrees not to release or dispose of any Hazardous Material at the Project without the express written approval of the Bank , and any such release or disposal will be in compliance with all Legal Requirements and conditions established by the Bank, if any. The Bank shall have the right upon reasonable notice to conduct an environmental audit of the Project at any time and at the Company's sole cost and expense; provided, however, that if the Bank requests such audit more often than once in any calendar year, such additional audit shall be conducted at the Bank's cost and expense. The Company shall cooperate in the conduct of any such environmental audit. The Company shall give the Bank and its agents and employees access to the Project to remove Hazardous Material, and the Company agrees to indemnify and hold the Bank harmless from and against all loss, costs, damages and expenses (including, without limitation, attorneys' fees and disbursements) that the Bank may sustain by reason of the assertion against the Bank by any party of any claim in connection with such Hazardous Material. (ll) Expropriation. The Company agrees to take all actions, execute and deliver all documents and pay all costs and expenses (including, without limitation, payment of the purchase prices therefor) in connection with (i) the acquisition, including, if necessary, the -45- expropriation by the Lands Administration of Puerto Rico and the subsequent sale to the Company of those parcels of land adjacent to the Project and presently owned by Justino Diaz Santini, and identified on the Boundary Survey Map dated February 19, 1990 prepared by David Lebron Lopez, P.L.S. as Tract and G-1c/1d, (ii) the spreading of the lien of the Fee Mortgage to cover such property or the granting of a separate mortgage to cover such property, and (iii) the endorsement of the Title Policy to include the lien of the Fee Mortgage or such new mortgage with respect to such property. (mm) Palominos Island Property. The Company agrees to take all actions, execute and deliver all documents and pay all costs and expenses necessary to effect the segregation of the premises demised to the Company under the Ground Lease into two separate parcels, consisting of (a) the demised premises less that portion of the demised premises defined in the Ground Lease as the "Reserved Area" and (b) the Reserved Area. (nn) Registration and Mortgages of Boats. The Company agrees to enter into Chattel Mortgages for all boats and ships purchased by the Company for use at the Project, provided, however, that if any such vessel otherwise meets the requirements necessary to qualify as a preferred vessel under federal laws, the Company will take all acts necessary to qualify such vessel as a preferred vessel an will enter into a mortgage therefor, in form and substance satisfactory to the Bank, and otherwise in compliance with federal law and the Company shall, at its own cost and expense, cause such mortgage to be properly filed of record. (oo) Recordation of True Description. The Company agrees to take all actions, execute and deliver all documents and pay all costs and expenses necessary to obtain a resolution from the Planning Board of Puerto Rico restating the surface area of the Premises, as described of record in the Registry of Property to be the same as the surface area of the Premises as described on the Survey. (pp) Additional Assignments and Chattel Mortgages. The Company agrees to enter into Assignments of Accounts Receivable and Assignments of Contracts at all such times as the same may be required in order to ensure that the Bank has a valid security interest in all accounts receivable and all contracts and agreements of the Company, respectively, to the extent permitted by law. The Company further agrees to enter into an Assignment of Rents each time that a new lease is entered into for any portion of the Project and each time that a Condominium Parcel is released pursuant to Section 6 hereof. In addition, the Company shall execute and deliver a Chattel Mortgage to the Bank in connection with any buses, limousines or other moving vehicles purchased by the Company for use at or in connection with the Project, except to the extent otherwise provided in Section 7(oo) above, and shall cause same to be properly filed for record in the corresponding Section of the Property Registry of Puerto Rico and/or the Department of Transportation and Public Works of Puerto Rico, as applicable, at the sole cost and expense of the Company. -46- (qq) Amounts Secured by Mortgage. Any costs and expenses incurred by or amounts advanced by the Bank pursuant to the terms hereof (including, without limitation, any amounts advanced pursuant to Section 7(kk) hereof) and all other Reimbursement Obligations (as defined in the Pledge Agreement) including, without limitation, the obligation of the Company to make Termination Payments under the Bond Swap Agreement to the extent such Termination Payments do not exceed $20,000,000 shall be secured by the Fee Mortgage and by the Leasehold Mortgage and, to the extent permitted by applicable law, are included in the "credit for additional advances" recited respectively therein. (rr) Sole Business. Puerto Rico is and shall be the only jurisdiction in which the Company owns real property or conducts business and the sole business conducted by the Company at any time is and shall be the development and operation of the Project as a first class destination resort. (ss) Loan Agreement Covenants. The Company shall comply with all of the covenants of the Company set forth in the Loan Agreement. (tt) Termination of Swap Agreements. Unless there shall have occurred an Event of Default (as defined in the Bond Swap Agreement) by the Bank or the other counterparty under the agreement in question, the Company shall not terminate, modify, cancel or surrender, or permit the termination, modification, cancellation or surrender of the Bond Swap Agreement without the prior written consent of the Bank. 8. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Bank as follows (which representations and warranties shall survive the execution and delivery of this Agreement and the other Operative Documents, regardless of any investigation made by the Bank or on its behalf); (a) Due Organization. (1) The Company is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and duly qualified to do business in the Commonwealth of Puerto Rico and in every other jurisdiction where it is currently doing business, has all necessary power and authority to own its properties, to conduct its business as presently conducted or proposed to be conducted, and to enter into and perform its obligations under this Agreement, the other Operative Documents and the Construction Documents to which the Company is a party, and possesses all licenses and approvals necessary for the conduct of its business as it exists at such time. True and complete copies of the Company Partnership Agreement, the general partnership agreement of WKA and the organizational documents of KGC have been delivered to the Bank. (2) The sole general partners of the Company are KGC and WKA, each of which has a 15% general partnership interest and a 35% limited partnership interest in the Company. KGC is a wholly-owned subsidiary of KIUSA; and KIUSA is a wholly-owned -47- subsidiary of Kumagai. The sole partners of WKA are (i) WMS El Con, with a 46.54% interest, (ii) AMK, with a 37.23% interest and (iii) Hospitality, with a 16.23% interest. WMS El Con is a wholly-owned subsidiary of WMS Hotel, which in turn is a wholly-owned subsidiary of WMS Industries. The sole partners of AMK are International Textile and KMA, each of which has a 50% partnership interest. International Textile is 100% owned, directly or indirectly through one or more corporations, by the Koffman Family. KMA is 82% owned by International Textile and 18% owned by Marcel Arroya, Marcel Arroya, Jr. and David Mellon, employees of International Textile. Hospitality is wholly owned by Hugh A. Andrews and his wife, and is controlled by Hugh A. Andrews. (3) The Company and, to the best of the Company's knowledge, each of the entities listed in Paragraph 8(a)(2) above are duly organized, validly existing and in good standing under the laws of their respective States or Commonwealth of incorporation or formation, as the case may be, and the Company and, to the best of the Company's knowledge, KGC, KGCC, WKA, AMK, International Textile, Hospitality and KMA are duly qualified to do business in the Commonwealth of Puerto Rico and in every other jurisdiction in which they are currently doing business, have all necessary power and authority to own their respective properties, to conduct their respective businesses as presently conducted or proposed to be conducted, and to enter into and perform their respective obligations, if any, under this Agreement, the other Operative Documents and the Construction Documents to which the Company is a party, and possesses all licenses and approvals necessary for the conduct of their respective businesses as conducted at such time. (b) No Violation. The consummation of the transactions herein contemplated and the execution, delivery and performance by the Company of its obligations under this Agreement, the other Operative Documents, the Project Documents and the Construction Documents to which it is a party and all other agreements to be executed by the Company in connection herewith or therewith have been duly authorized by all necessary partnership and corporate action, and do not and will not violate any Legal Requirement or any law or any regulation, order, writ, judgment, injunction or decree of any Government Authority, or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or result in the creation or imposition of any Lien upon any of the assets of the Company (except as contemplated hereby and by the other Operative Documents) pursuant to the terms of the Company's Partnership Agreement, or any mortgage, indenture, agreement or instrument to which the Company is a party or by which it or any of its properties is bound. The Project and the use, occupancy, operation and condition thereof, in its present stage, are in compliance with all applicable governmental laws, rules and regulations. (c) Consents. All authorizations, consents and approvals of, notices to, registrations or filings with, or other actions in respect of or by, any governmental body, agency or other instrumentality or court (collectively, the CONSENTS) required in connection with the execution, delivery and performance by the Company of this Agreement, the other Operative -48- Documents, the Project Documents and the existing Construction Documents and all other agreements to be executed by the Company in connection herewith or therewith to which it is a party have been duly obtained, given or taken and are in full force and effect or will be duly obtained, given or taken and will be in full force and effect when required, and the Company agrees that all Consents required for the Construction and operation of the Improvements and otherwise in connection with the carrying out or performance of any of the transactions required or contemplated hereby or thereby will be obtained when required. (d) Enforceability. This Agreement, the other Operative Documents, the existing Project Documents and the existing Construction Documents to which the Company is a party have been duly executed and delivered on behalf of the Company and are legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms. (e) No Litigation. There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, public board or body pending or, to the best knowledge of the Company after due inquiry, threatened against or affecting the Company or the Project, or any portion thereof (including, without limitation, any condemnation or eminent domain proceeding against the Project, or any portion thereof), or any of the Guarantors, WMS Industries, Hugh A. Andrews, Burton Koffman or Richard Koffman, wherein an unfavorable decision, ruling or finding would have an adverse effect on the properties, business, condition (financial or other) or results of operations of the Company, the transactions contemplated by this Agreement, the Project, the other Operative Documents, the Project Documents and the existing Construction Documents or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement, the other Operative Documents, the Project Documents and the existing Construction Documents to which it is a party. (f) No Defaults. The Company is not in default under nor are there any violations or notices or other records of violation of any law or any regulation, order, writ, injunction or decree of any court or governmental body, agency or other instrumentality applicable to the Company (including, without limitation, any zoning, health, safety, building, environmental or other statute, ordinance or restriction affecting all or any part of the Project or any use or condition thereof), and no default has occurred and is continuing under any Debt or any Indenture or other agreement or instrument governing outstanding Debt of the Company, or any other contract, agreement or instrument to which the Company is a party or by which it or its property is bound, and no event has occurred which with the giving of notice or the passage of a time or both would constitute such a default. (g) Tax Returns. The Company has filed all tax returns, or extensions thereof, required by law to be filed, and has paid all taxes, assessments and other governmental charges levied upon the Company and its properties, assets, income and franchises which are due and -49- payable, other than those presently payable without penalty or interest. The charges, accruals and reserves on the books of the Company in respect of federal, state and commonwealth income taxes for all fiscal periods are adequate in the opinion of the Company. (h) Compliance with ERISA. Each Plan, if any, is in substantial compliance with ERISA, all contributions required to be made to any Plan by its terms, the Code or ERISA (including any quarterly installments required under Section 412(m) of the Code) have been made by the applicable due date, no Plan is insolvent or in reorganization, no Plan has an accumulated or waived funding deficiency within the meaning of Section 412 of the Code, neither the Company nor a Subsidiary nor an ERISA Affiliate has incurred any material liability (including any material contingent liability) to or on account of a Plan pursuant to Section 4062, 4063, 4064, 4201 or 4204 of ERISA, no proceedings have been instituted to terminate any Plan, and no condition exists which presents a material risk to the Company or a Subsidiary of incurring a liability to or on account of a Plan pursuant to any of the foregoing Sections of ERISA. (i) Other Facts. There is no fact particular to the Company or the Project known to the Company after due inquiry which directly adversely affects or in the future may (so far as the Company can now foresee after due inquiry) directly adversely affect the business, property, assets or financial condition of the Company which has not been set forth in this Agreement or in any other Operative Documents. This representation shall not be deemed to extend to general economic, political, military or other conditions or situations in the Commonwealth of Puerto Rico or elsewhere in the world. (j) Other Representations and Warranties. The Company hereby makes to the Bank each of the representations and warranties made by the Company contained in the Operative Documents to which the Company is a party as if such representations and warranties were set forth in full herein. (k) Financial Statements. The Financial Statements of the Company, the Guarantors and WMS Industries, previously delivered to the Bank fairly present the financial position of the Company, the respective Guarantors and WMS Industries, as of such dates and the results of their operations and changes in their financial positions for the period then ended, all in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the most recent financial statements of the respective entities delivered to the Bank. Neither the Company, any of the Guarantors nor WMS Industries has any contingent obligations, liabilities for taxes or other outstanding liabilities or obligations, fixed or contingent, which are material, individually or in the aggregate, except that, with respect to clauses (i), (ii) and (iii) hereafter the Company has the following outstanding obligations, and with respect to clauses (ii) and (iii) hereafter, the Guarantors have the following outstanding obligation: (i) the Loan, (ii) those liabilities and obligations in connection with the Project that have been disclosed to the Bank and (iii) those liabilities and obligations disclosed -50- in the financial statements described in this clause (k). Since the respective dates set forth in the first sentence of this clause (k) there has been no adverse change in the condition (financial or other), business, operations or prospects of the Company or of any of the Guarantors or WMS Industries. Neither the aforesaid financial statements of the Company and the Guarantors nor any certificate or statement furnished to the Bank by or on behalf of the Company in connection with the transactions contemplated hereby (including, without limitation, any financial statements of other resorts owned or controlled by the Company), nor any representation nor warranty in this Agreement, when taken collectively as a whole and in the context made and to whom made, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein or herein not misleading in light of the circumstances in which they were made. (l) Martin Regulations. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. No part of the proceeds of the Bonds will be used to purchase or carry any margin stock,or to extend credit to others for that purpose, or for any purpose that violates the provisions of Regulation U or X of the Board of Governors of the Federal Reserve System. (m) Investment Company Act. The Company is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (n) Disclosure. The Preliminary Official Statement, as of its date, and the Official Statement, as of its date and as of the date hereof, did not and do not contain any untrue statement of material fact or omit to state any material fact (other than any fact relating to and supplied by the Bank) necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (o) Management Agreement; Ground Lease and Other Agreements. The Management Agreement is in full force and effect; no event has occurred and is continuing which constitutes a default on the part of the Company under the Management Agreement, or would constitute any such default but for the giving of notice of lapse of time or both; and no event has occurred or is continuing which would excuse Williams from its obligation under the Management Agreement to use best efforts to operate the Project as a first class luxury destination mega-report in accordance with the provisions of the Management Agreement and consistent with the standards of other comparable properties in the area and customary practices in the resort industry. The Ground Lease is in full force and effect, and no event has occurred or is continuing which constitutes a default on the part of the Company under the Ground Lease, or would constitute any such default but for the giving of notice or lapse of time or both. The Construction Management Agreement, the Architect's Agreement, the Trade Contracts, the other -51- Construction Documents and the other Project Documents heretofore executed by the Company are in full force and effect, not having been amended, modified, terminated or otherwise changed, or the provisions thereof waived, except as permitted hereunder. (p) Location of Company. The place of business or chief executive office of the Company is located c/o Williams Hospitality Management Corporation, 187 East Isla Verde Road, Carolina, Puerto Rico 00913, Attention: Hugh A. Andrews. The Company will give the Bank prior written notice of any relocation of such office. (q) Plans; Construction. The Plans are satisfactory to the Company and have been approved, to the extent required by applicable law, ordinance or regulation or any effective restrictive covenant, by all Government Authorities and the beneficiaries of any such covenant, respectively. All Construction, if any, heretofore performed in connection with the Improvement has been performed within the perimeter of the Premises or within the area of an easement benefitting the Premises and with respect to which such Construction is permitted and in accordance with the Plans and all Legal Requirements, and such Construction has been fully paid for or else payment is not yet due or payment is being disputed in good faith, provided that any such disputes have been fully disclosed to the Bank and such failure to pay would not adversely affect the Company's ownership rights in the Project. There are no structural defects in the Improvements (to the extent currently constructed), no violation of any Legal Requirement exists with respect thereto and the anticipated use thereof complies with all restrictive covenants affecting the Project and all Legal Requirements, including all applicable zoning and environmental protection ordinances and regulations. (r) Availability of Utilities. All utility services and facilities necessary for the Improvements and, upon completion of Construction, the operation and occupancy of the Improvements for their intended purposes and which must be obtained from sources located outside the boundaries of the Premises are available at the boundaries of the Premises, including water supply, storm and sanitary sewer facilities, and electric and telephone facilities. (s) No Liens. Except for the Operative Documents, the Construction Documents, the Project Documents, the Permitted Encumbrances and any lien in favor of GDB created pursuant to the GDB Loan and consented to by the Bank, the Company has made no contract or arrangement of any kind, the performance of which by the other party thereto would give rise to a Lien against all or any portion of the Collateral. (t) Compliance with Building Codes, Zoning Laws, Etc. The current zoning law and declarations covering the Project permit the Construction of the Improvements to be completed and, upon completion of Construction, the Improvements to be used as contemplated by this Agreement. The Project and, upon completion of Construction, Improvements and the proposed use thereof will be in all respects in compliance with all Permits and all Legal Requirements. -52- (u) Budget. The Budget contains all costs and expenses reasonably anticipated to be incurred in connection with the Construction, equipping and leasing of the Improvements. (v) Security Documents. The provisions of each Security Document are effective to create a legal, valid and enforceable Lien on or security interest in all of the Collateral described therein, subject to the proper filing thereof, and when the appropriate recordings and filings have been effected in public offices, each of the Security Documents will constitute a perfected Lien on and security interest in all right, title, estate and interest in the Collateral described therein, prior and superior to all other Liens, except as permitted under the Operative Documents. (w) Hazardous Materials. Except as specifically disclosed in the Environmental Report, the Premises and the Improvements are not currently and, to be best of the Company's knowledge, have never been subject to Hazardous Materials or their effects. Other than as disclosed in the Environmental Report, the Premises and the improvements thereon are in full compliance with the Environmental Laws. There are no claims, litigation, administrative or other proceedings, whether actual or threatened, or judgments or orders, regarding any Hazardous Materials relating in any way to the Premises or the Improvements. 9. DISBURSEMENTS FOR CONSTRUCTION (a) Disbursements for Construction. Each Disbursement shall be made by the Trustee pursuant to Requests for Disbursements from time to time, from the principal office of the Trustee or from such other place as the Trustee may designate, and must be accompanied by a certificate of an Authorized Officer of the Bank authorizing and directing such Disbursement. Each Disbursement authorized by the Bank in accordance with the terms hereof shall be made in accordance with the terms hereof and shall be made to or deposited in the separate bank account of the Company at ScotiaBank de Puerto Rico (the CONSTRUCTION TRUST ACCOUNT) which shall not be drawn upon except to pay for Hard Costs and Soft Costs approved by the Bank, and shall be established so that the Bank and the Trustee receive or are entitled to receive, on request, from the depositary bank duplicate copies of regular monthly statements of all deposits and withdrawals (including checks). Each Request for Disbursement under the Loan shall be made in writing, shall be submitted to the Bank with a copy to the Bank's Consultant not less than 10 Business Days prior to the proposed date for such Disbursement and shall specify the Hard Costs and Soft Costs to be paid with the proceeds of the requested Disbursement, including, without limitation, the amount of any Retainage previously withheld and which has then become payable by the Company. Each Request for Disbursement which requests payment for Hard Costs (other than for payment of the Construction Manager's fixed monthly fee payable under the terms of the Construction Management Agreement) shall be accompanied by (i) the Trade Contractor's requisitions for payment, dated on or about the date of such Request for Disbursement, accompanied by true copies of unpaid invoices and receipted bills and noting that the only amounts due and owing (other than any retainage pursuant to the -53- terms of the applicable Trade Contract or subcontract) are the amounts to be paid to trade contractors out of the Disbursement being requested or amounts due and payable but which are being disputed by the Company and which are not included in such Request for Disbursement, each of which shall be certified as true and complete by the Company, (ii) a list of all Trade Contracts executed since the date of the then last preceding Disbursement, together with a certification that copies of the same and all contracts with any contractor or subcontractor involved with the Construction of the Improvements executed by or on behalf of the Company since the date of the then last preceding Disbursement have been submitted to the Bank's Consultant prior to the date of such Request for Disbursement, (iii) a list of all Work Changes, together with a statement by the Company that copies of the same have been submitted to the Bank's Consultant prior to the date of such Request for Disbursement, and (iv) evidence satisfactory to the Bank that the full amount of the proceeds of the last preceding Disbursement has been paid out by the Company in accordance with the terms and conditions of this Agreement. In the case of any Disbursement to pay any Soft Cost (other than interest due with respect to the Loan or payment of the fixed monthly fees payable under the terms of the Management Agreement), such Request for Disbursement shall be accompanied by true copies of the unpaid invoices and a description of the costs for which the Disbursement being made, as well as such additional supporting information as the Bank shall reasonably request to the effect that such costs have been properly incurred and are due and payable and are within budgeted amounts. The Bank shall not be required to make any Disbursement for payment of amounts owed under any Trade Contract for which the Bank has not previously received an Assignment of Contracts. All Disbursements shall be made on a monthly basis and, with respect to Disbursements for interest under the Loan, shall be made on the date on which the Partnership is obligated to pay such interest pursuant to Section 401(c) of the Loan Agreement. In the case of Disbursements to pay interest due with respect to the Loan, any Request for Disbursement shall be reduced by the amount of the Net Earnings reasonably estimated by the Borrower with respect to the period commencing on the date of the previous Request for Disbursement and ending on the date of the current Request for Disbursement. The next succeeding Request for Disbursement shall be accompanied by a statement by the Borrower certifying the actual amount of the Net Earnings for the prior period and such Request for Disbursement shall be adjusted to take into account any variation between the estimated Net Earnings and the actual Net Earnings for such prior period as certified. To the extent that the Borrower's obligations under Section 2 of the Bond Swap Agreement for any period exceeds the interest on the Bonds for such period, such excess shall be disbursed from the Project Fund to the Bank as counterparty under the Bond Swap Agreement. (b) Retainages. All Disbursements for Hard Costs (other than for payment of the Construction Manager's fixed monthly fee payable under the terms of the Construction Management Agreement) shall be subject to a retention (each a RETAINAGE) equal to the greater of (i) 10% of the requested amount or (ii) the amounts actually withheld or to be withheld pursuant to the contract relating to such Hard Costs, which Retainage shall be disbursed after the later to occur of (A) the date on which the Bank has received evidence satisfactory to the -54- Bank of the completion of the work of the trade in question in accordance with the requirements of the contract therefor and (B) the date on which the Bank has received releases or other evidence satisfactory to the Bank in its sole discretion that the contractor in question has no other claim of payment against the Company other than the amount of the applicable Retainage. (c) Bank's Consultant. The Company acknowledges that the Bank, pursuant to a separate agreement and at the Company's expense, has retained the Bank's Consultant to review the Budget, the Plans and such other matters relating to the Construction of the Improvements as the Bank shall request, and to furnish reports to the Bank from time to time on the progress of Construction with each Request for Disbursement for Hard Costs and as otherwise requested by the Bank. In order to enable the Bank's Consultant to complete its reports to the Bank, the Company shall permit the Bank's Consultant, at any reasonable time and as frequently as the Bank shall require, (i) to inspect the Project and (ii) to inspect and review all documentation with respect thereto, including, without limitation, (x) all change orders and field orders which modify the Plans or any contract or subcontract or which change the price, schedule or any other aspect of the Construction of the Improvements, (y) all contracts or, to the extent the same are in the Company's possession, subcontracts relating to the Construction of the Improvements and (z) such other information as the Bank's Consultant shall request relating to (1) the Construction of the Improvements (including copies of receipts, invoices and other supporting documentation to substantiate the costs to be paid from the proceeds of any requested Disbursement) and/or (2) the state of the Company's claimed title to any materials, fixtures or articles incorporated or to be incorporated in the Project. (d) Disbursements for Operating Deficits. Notwithstanding anything herein to the contrary, Disbursements for Operating Deficits, to the extent provided in the Budget under the Line Item for "Interest Reserves" (OPERATING DEFICIT ADVANCES) shall be made not more frequently than once per calendar month and on the same date as the Disbursement for other costs is made for such month. At least ten days prior to the proposed date for an Operating Deficit Advance, the Borrower shall deliver to the Bank a request for an Operating Deficit Advance, together with such financial statements and other information as the Bank shall require in order to confirm that the amount of the Operating Deficit Advance requested is less than or equal to the then outstanding amount of Operating Deficits. (e) Documentation to the Bank. All documents required to be submitted to the Bank as a condition of each Disbursement shall be furnished to the Bank at its office referred to in Paragraph 14(g) hereof, or to such other address or to the attention of such other Person as shall be designated in writing by the Bank in a notice to the Company. (f) Use of Disbursements. All Disbursements shall be used by the Company to pay for Hard Costs and Soft Costs with respect to which such Disbursement was made. -55- (g) Determination of Amounts of Disbursements. Disbursements, or portions thereof, allocable to Hard Costs (other than to payment of the Construction Manager's fixed monthly fee payable under the terms of the Construction Management Agreement) shall be made on the basis of the documented cost of (i) the work in place or completed or (ii) subject to the provisions of Paragraph 9(i) below the construction materials stored on or off of the Premises or in fabrication, in each case as certified by the Company and the Construction Manager and verified by the Bank's Consultant. (h) Final Disbursement. The final Disbursement of the proceeds of the Loan shall be conditioned on, in addition to those items listed in this Agreement, the Bank's receipt, prior to authorizing or directing the Trustee to make such Disbursement, of (A) written assurance satisfactory to the Bank from the Bank's Consultant to the effect that Construction of the Improvements has been completed, and any necessary utilities have been finished and made available for use, in accordance with the Plans and (B) the final Survey of the Project described in Paragraph 7(ee). (i) Disbursements for Deposits or Stored Materials. Disbursements for deposits placed with suppliers, or for materials stored at any location, whether on the Project or otherwise, or in fabrication, shall be made, in the amount of such deposits or the documented cost to the Company of such materials, as the case may be, each such Disbursement to be made strictly in accordance with the following terms and conditions: (A) the Company shall deliver to the Bank (i) with respect to such deposits, assignments of the Company's interest in the contracts pursuant to which the deposits were made, and acknowledgements of and consents to such assignments by the other contracting party, and (ii) in the case of stored materials bills of sale or other evidence satisfactory to the Bank of the cost of, and the Company's title in and to, such materials; (B) the Company shall deliver to the Bank (i) evidence satisfactory to the Bank that (x) security measures have been taken to protect such stored materials from theft, casualty or deterioration including, if requested by the Bank, storage in a bonded warehouse and (y) such stored materials are identified to the Project and are segregated so as adequately to give notice to all third parties of the Company's title in and to such materials and (ii) written evidence from the supplier of the stored materials identifying such materials and indicating that ownership thereof is vested, or upon payment therefore will vest, in the Company, free and clear of all Liens; (C) the Company shall provide proof satisfactory to the Bank that such stored materials are insured against all risk of loss for their full replacement cost -56- or such lesser amount as may be approved by the Bank and that such insurance contains a standard mortgagee loss payable endorsement; (D) if such materials are stored off-site, the Bank shall have received evidence satisfactory to the Bank (which may include a Chattel Mortgage) of the Bank's perfected first priority lien on and security interest in such materials; (E) any such deposits shall be with suppliers in the United States or Puerto Rico and shall be either (i) for materials the cost of purchase and installation of which is guarantied pursuant to the Completion Guaranty, or (ii) with a supplier whose obligations under the relevant contract are secured by a bond or other third-party guaranty satisfactory to the Bank in its sole discretion. (F) (x) the aggregate amount disbursed under this Agreement in respect of such deposits with suppliers or for materials stored off the Premises or materials in fabrication of any time outstanding shall not exceed $4,000,000; and (G) in the event any such stored materials are stolen, lost or in any other manner misplaced, destroyed or rendered unusable, the Bank shall not be obligated to authorize or direct the Trustee to make a Disbursement with respect thereto if such materials are stolen, lost or in any other manner misplaced, destroyed or rendered unusable prior to the making of any Disbursement with respect thereto or otherwise to make any Disbursement on account of the cost of replacement thereof (unless such Disbursement is within the Budget or unless such Disbursement involves the release of insurance proceeds required to be released to the Company pursuant to the terms of the Pledge Agreement). (j) Reallocation. If at any time the Bank determines that the cost to complete a Line Item as set forth in the Budget exceeds the undisbursed portion of the Bond Proceeds to be advanced from the Project Fund allocable to such Line Item, the Bank shall only be required to make an additional Disbursements on account of such Line Item (i) to the extent of the undisbursed portion of the Bond Proceeds to be advanced from the Project Fund allocable to such Line Item, (ii) from other Line Items to the extent of any savings in such other Line Item as demonstrated by the Company to the satisfaction of the Bank in its sole and absolute discretion, and (iii) from the undisbursed portion of the Line Item for contingency for Hard Costs or Soft Costs, as the case may be, provided that in any event the percentage of such Line Item for contingency which remains undisbursed at any time shall not be less than the percentage of the Hard Costs or Soft Costs portion of the Budget for the Project, as the case may be, which has not yet been disbursed at such time. The Company shall be responsible to advance from its own funds all additional amounts required to complete the Line Item in question in accordance with the Plans; provided, however, that any cash or equivalent security deposited with the Bank -57- by the Company pursuant to Paragraph 9(k) below with respect to the Line item in question shall reduce the total of the additional amounts so required by an equivalent amount. (k) Loan Balance. Anything in this Agreement contained to the contrary notwithstanding, it is expressly understood and agreed that the Loan shall at all times be in balance. The Loan shall be deemed to be in balance only at such time and from time to time as the Bank may determine that the aggregate of the undisbursed Bond Proceeds (and after provision for any reallocation then permissible pursuant to Paragraph 9(j)) above and applicable Retainage, if any) is sufficient to pay the aggregate of the cost of completing the Construction of the Improvements and the other costs contemplated in the Budget, as estimated by the Bank and the Bank's Consultant, including, without limitation, the undisbursed contingency amount provided for in the Budget and the payment of interest due with respect to the Loan through the then-anticipated Date of Substantial Completion. The Company agrees that, if the Bank determines than the amount of such undisbursed Bond Proceeds shall at any time be or become insufficient for such purpose regardless of how such condition may be caused, then as a condition precedent to the Bank's direction or authorization of the Trustee to make any further Disbursements, the Company shall deposit with the Bank cash or equivalent security or such other security as is acceptable to the Bank in its sole and absolute discretion in an amount reasonably determined by the Bank to eliminate such deficiency. In determining the cost of completing any portion of the Construction of the Improvements which is the subject of a fixed price contract or a guaranteed maximum price contract, (a) a reasonable contingency, as determined by the Bank, shall be added to the face amount of such fixed price contract or guaranteed maximum price contract, as the case may be, and (b) the Bank shall consider the value of work relating to the Construction of the Improvements for which a contract has been entered into and the value of such work for which a contract has not been entered into. Any funds deposited with the Bank pursuant to this Paragraph 9(k) on account of any deficiency may be applied by the Bank to pay costs of the Line Items as to which such projected or anticipated deficiencies exist before the Bank shall direct or authorize the Trustee to disburse proceeds of the Loan to pay such costs. In the event that the Company shall deposit cash or deliver other security as aforesaid, and if, after completion of the portion of the Improvements with respect to which such deficiency was claimed, any funds remain undisbursed with respect to the costs in connection with which such deposit was made, the Bank will pay the surplus portion of such deficiency to the Company out of the undisbursed proceeds of the surplus cash deposited by the Company as aforesaid for such claimed deficiency and/or release to the Company any remaining cash, cash equivalent security or other security, as the case may be. (l) Disbursements after Default. At its option, the Bank may, after the occurrence and during the continuance of a Default or an Event of Default, authorize or direct the Trustee to make all Disbursements for work performed or materials furnished directly to Trade Contractors or to the Construction Manager, as the case may be, by deposit in an appropriately designated special bank account and/or by check payable to the Person to whom a Disbursement is to be made, and the execution of this Agreement by the Company shall, and -58- hereby does, constitute an irrevocable direction and authorization to so disburse the funds. No further direction or authorization from the Company shall be necessary or required for such direct Disbursements and all such Disbursements shall satisfy pro tanto the obligations of the Bank hereunder and shall be secured by the applicable Security Documents as fully as if made to the Company, regardless of the disposition thereof by any Trade Contractor or the Construction Manager. (m) Method of Disbursement. Subject to the provisions of this Agreement and the Loan Agreement, the Bank will direct the Trustee to disburse from the Project Fund into the Construction Trust Account and the Company will accept the amount of the Loan in installments as follows: The Initial Disbursement will be made upon the satisfaction of the applicable conditions set forth in Paragraph 10 hereof and all subsequent Disbursements shall be made not more frequently than monthly thereafter, upon the satisfaction of the applicable conditions set forth in Paragraph 11 hereof, in amounts which shall be equal to the aggregate of the Hard Costs and Soft Costs incurred by the Company through the end of the period covered by the relevant Request for Disbursement, less: (i) the Retainage; and (ii) the total of the Disbursements theretofore authorized or directed by the Bank to be made by the Trustee; and, at the election of the Bank, less: (iii) any costs covered by the relevant Request for Disbursement not approved, certified or verified as provided herein and/or any Hard Costs and/or Soft Costs covered by a previous Request for Disbursement for which the items required pursuant to Paragraph 9(a) hereof have not been received by the Bank and the Bank's Consultant. (n) Disbursements for Amounts Due. Notwithstanding anything in this Agreement which may be to the contrary, the Bank shall at all times have the right, without regard to the Budget and the amount or classification of Line Items and by its own action, to authorize or direct the Trustee to advance funds into the Construction Trust Account for the purpose of paying (i) interest and any other sums then due and payable to the Bank with respect to the Letter of credit or pursuant to the Operative Documents or this Agreement and/or (ii) interest and any other sums then due and payable to GDB with respect to the GDB Loan and/or (iii) any amounts payable to the Bank under the Bond Swap Agreement. (o) Partial Disbursements. If any or all conditions precedent to making a Disbursement have not been satisfied on the applicable funding date for such Disbursement, the -59- Bank may, but shall not be obligated to, authorize or direct the Trustee to disburse only that portion of the requested Disbursement for which all of the conditions have been satisfied. (p) Investment of Bond Proceeds. The Bond Proceeds will be held by the Trustee in the Project Fund and will be invested in accordance with the Investment Agreement dated the date hereof between the Trustee and the GDB. (q) Disbursements for Vehicles. Notwithstanding anything herein to the contrary and in addition to the other requirements hereunder, the Bank shall not be required to make any Disbursement hereunder for the acquisition by the Company of any boats, buses, limousines or other moving vehicles unless the Company has executed and delivered a Chattel Mortgage (or, in the case of boats, such other mortgage as is required pursuant to Section 7(oo) hereof) in connection therewith prior to the date of any Disbursement therefor, and has, at its sole cost and expense, caused such Chattel Mortgage to be properly filed for record in the corresponding Section of the Property Registry of Puerto Rico and/or the Department of Transportation and Public Works of Puerto Rico, as applicable. 10. CONDITIONS PRECEDENT TO MAKE THE INITIAL DISBURSEMENT. The Bank shall not be obligated to authorize or direct the Trustee to make the Initial Disbursement under the Trust Agreement unless, in addition to the conditions set forth in the Loan Agreement and in Paragraph 9 hereof, the following conditions have been satisfied. (a) Equity Contribution. The Bank shall have received evidence satisfactory to the Bank in its sole and absolute discretion that the Company shall have invested at least $30,000,000 (the aggregate amount so advanced being the EQUITY CONTRIBUTION) on account of Total Project Costs in the Project prior to the date of the Initial Disbursement); (b) Trade Contracts. (1) Trade Contracts shall have been entered into for all contracts which are, in the Bank's sole and absolute judgment, major contracts and in any event for Trade Contracts representing not less than 75% of the Hard Costs of the Project as set forth in the Budget, (2) if the Company determines to engage in local construction manager, the agreement with such construction manager shall have been entered into and approved by the Bank, (3) all payment and performance bonds required in connection with any then existing Trade Contract shall have been delivered to the Bank, and (4) copies of all existing Trade Contracts, and copies of all amendments thereto, together with Trade Contractor Consents and Agreements with respect to each such Trade Contract and Assignments of Contracts with respect to each such Trade Contract shall have been delivered to the Bank and are satisfactory to the Bank in its sole and absolute discretion; (c) Architect's and Engineer's Agreements and Subcontracts. All architect's and engineer's agreements contributing to the Plans and all subcontracts determined to be material by the Bank, in its reasonable discretion, which have been entered into prior to the -60- Initial Disbursement Date, shall be satisfactory to the Bank in form and content and as to the party performing the services which are the subject of such agreements; (d) [Intentionally Omitted]; (e) GDB Loan. The Bank shall have received evidence satisfactory to the Bank that the GDB Loan shall have been fully disbursed and the proceeds thereof shall have been applied on account of Total Project Costs in accordance with documentation satisfactory to the Bank; (f) Representations and Warranties. The representations and warranties made by the Company in Paragraph 8 hereof and the representations and warranties made by the Company and/or the Guarantors in any other Operative Documents shall be true and correct in all material respects on and as of the date of such Disbursement with the same effect as if made on such date; (g) Receipt of Documents by Bank. The Bank shall have received and approved the following items and documents, duly executed and in recordable form where applicable, on or before the Initial Disbursement Date, in each case in form and substance satisfactory to the Bank: (i) payment of the Annual Letter of Credit Fee, the Annual Agent's Fee, the Bank's counsel fees and the fees of the Bank's Consultant relating to the Project, as well as all other out-of-pocket expenses of the Bank relating to the Project, including, without limitation, any Appraisal, investigation or insurance fees or costs and the cost of the Environmental Report, to the extent any of the foregoing are then due and payable; (ii) the Financial Statements then in existence and required to be or to have been delivered pursuant to the terms of this Agreement; (iii) advice from the Bank's Consultant in form and content satisfactory to the Bank, to the effect that (i) the Plans and associated design materials relating to the Project have been reviewed and approved by the Bank's Consultant and, to the extent required, by the Governmental Authorities (including, without limitation, ARPE and/or The Planning Board of Puerto Rico), (ii) the Improvements, when completed as shown on the Plans, will comply with applicable zoning and environmental protection ordinances and regulations, (iii) all public utilities necessary for the full utilization of the Improvements for their intended purposes are available at or within the perimeter of the Premises, (iv) the necessary approval of the Environmental Impact Statement for the Project has been obtained from the Environmental Quality Control Board, as well as the necessary approval of the site and master development plan for the Project from the Planning Board, and (v) the following are acceptable to the Bank's Consultant: (A) the then current design of various systems, including, without limitation, -61- architectural, structural, electrical, plumbing, heating, air conditioning and sprinkler systems, (B) the general conformity of specified materials to overall Project quality objectives, (C) the contents of soil reports and coordination of foundation design of the Improvements, (D) the conformity of the scope and design set forth in the Plans to the description of the Improvements set forth in this Agreement and as otherwise presented to the Bank; (E) the projected Date of Substantial Completion and the Construction Schedule, (F) the Budget, (G) the Company's allocation of the Budget to Individual Line Items, (H) the adequacy of the Line Items for contingencies in the Budget, (I) the value, scope and limiting conditions of the Construction Documents then in effect and/or trade contracts and subcontracts received for review and (J) all other matters as the bank shall reasonably require; (iv) the Bank's Consultant's Report; (v) any additional opinion(s) of counsel for the Company requested by the Bank, in form and substance satisfactory to the Bank and the Bank's counsel; (vi) copies of all Permits issued by all Governmental Authorities, evidencing the authorization of the Company to commence and complete Construction of the Improvements, all of which shall be satisfactory to the Bank, and evidence satisfactory to the Bank that other governmental approvals necessary for the Construction and operation of the Improvements are obtainable by nondiscretionary administrative procedures without the need for any variance or waiver, whether through public hearing or otherwise, of applicable zoning ordinances, land use regulations, building codes or similar governmental laws and regulations; (vii) an update to the Environmental Report, if requested by the Bank, together with evidence satisfactory to the Bank that the Company has fully complied with all recommendations set forth in the Environmental Report and with the update thereto, if an update has been so requested; (viii) evidence that the insurance required pursuant to Paragraph 7(x) hereof and the Pledge Agreement is in full force and effect and evidence of the payment of the premiums therefor; (ix) evidence of errors and omissions insurance carried by the Architect and by each Design Architect and evidence of the maintenance of the insurance required to be maintained by each Trade Contractor under its Trade Contract; (x) if requested by the Bank, an updated Survey, satisfactory in form and content to the Bank and the Bank's counsel in their sole and absolute discretion; -62- (xi) evidence satisfactory to the Bank that the Company has paid all real estate taxes on, and assessments of, the Project which are due and payable and, if delinquent, all penalties and interest thereon; (xii) a copy of the construction schedule prepared by the Construction Manager showing a trade-by-trade breakdown (to the extent that the information necessary to prepare such breakdown can then be ascertained) of the estimated periods of time for Construction of the Improvements beginning with the commencement of footings and foundations and ending with completion of Construction of the Improvements in accordance with the Plans (the CONSTRUCTION SCHEDULE); (xiii) to the extent not previously delivered, copies of the Project Documents and the other Operative Documents, each of which shall be certified by the General Partners as true, correct and complete. (xiv) a Request for Disbursement with respect to the Initial Disbursement; (xv) a Borrower's Affidavit dated the date of the Initial Disbursement, with appropriate insertions and attachments, in form and substance satisfactory to the Bank and the Bank's counsel, executed by the General Partners; (xvi) to the extent not previously delivered, copies of the Architect's Agreements, certified by the General Partners to be true, correct and complete; (xvii) the standard form of contract or trade contract to be used by the Company in connection with the Construction of the Improvements, which shall be satisfactory in form and content to the Bank; (xviii) a consent to the Assignment from each architect relating to the Project, in form and content satisfactory to the Bank; (xix) an executed counterpart of all space leases (if any), certified by the General Partners to be true, correct and complete, together with an executed notice to each tenant of the assignment thereof to the Bank pursuant to the applicable Assignment of Rents; (xx) copies of the Plans (including all approved Work Changes) initialled to show the Company's approval, which are satisfactory to the Bank; (xxi) an updated Appraisal of the Project, if any change or circumstance occurs from the date of the issuance of the Letter of Credit that causes the Bank to determine that such an update is reasonably appropriate; -63- (xxii) an opinion of the Architect and any engineers preparing or contributing to the Plans stating that the Construction of the Improvements is permitted under, and such Improvements, when Constructed in accordance with the Plans and occupied, shall be in compliance with all applicable zoning ordinances, land use regulations and similar laws and governmental rules and regulations relating to the Premises; (xxiii) such other documents, instruments, opinions, certificates and approvals (including, without limitation, estoppel certificates and non-disturbance and attornment agreements) and such modifications and supplements to any of the Operative Documents as the Bank shall have reasonably requested; (h) No Condemnation. No part of the Project shall have been condemned, or threatened with condemnation, or in the event of such condemnation, the Bank shall have received insurance or condemnation proceeds sufficient, in the judgment of the Bank, to effect the satisfactory restoration of the affected part of the Project and to permit Substantial Completion in accordance with the Plans and the Budget prior to the Completion Date; (i) No Default. On the Initial Disbursement Date, no Default or Event of Default hereunder shall have occurred and be continuing and no default of any of the Company's obligations under any of the other Operative Documents shall have occurred and be continuing; and (j) Accounting. The Bank shall have received an accounting to its satisfaction of all expenditures for costs shown on the budget as having been incurred from the Date of Issuance to the Initial Disbursement Date. 11. CONDITIONS PRECEDENT TO DISBURSEMENTS AFTER THE INITIAL DISBURSEMENT. The Bank shall not be obligated to authorize or direct the Trustee to make any Disbursement subsequent to the Initial Disbursement, unless in addition to the conditions set forth in Paragraph 9 hereof, the following conditions are satisfied: (a) Conditions Satisfied. All conditions set forth in Paragraph 10 hereof shall have been satisfied; (b) Representations and Warranties. On the date of each such subsequent Disbursement, the representations and warranties made by the Company in Paragraph 8 and the representations and warranties made by the Company and/or the Guarantors in any other Operative Document shall be true and correct in all material respects on and as of the date of such Disbursement with the same effect as if made on such date; -64- (c) Receipt of Documents by Bank. The Bank shall have received the following items and documents, duly executed and in each case in form and substance satisfactory to the Bank; (i) a Bank's Consultant's Report, dated the date of the requested Disbursement, together with a revised and updated Budget; (ii) copies of all Trade Contracts and all architect's and engineer's agreements executed since the date of the last preceding Request for Disbursement and copies of all amendments to any Trade Contract, or architect's or engineer's agreement executed since the date of the last preceding Request for Disbursement, together with copies of all performance and payment bonds with respect to the Trade Contractors under such Trade Contracts and together with a Trade Contractor Consent and Agreement with resect to each such Trade Contract, and together with assignments to the Bank of all such agreements and contracts; (iii) such further builders' risk or other insurance relating to the Construction of the Improvements as shall be required hereunder or by the other Operative Documents or, to the extent the same relate to the Project, as shall otherwise be reasonably requested by the Bank; (iv) in the case of Disbursements to pay costs which are shown as non- construction related Soft Costs in the Budget, such evidence as the Bank may require to the effect that such costs have been properly incurred and are due and payable; (v) all documents, reports, certificates, affidavits and other information as the Bank may require to evidence compliance by the Company with all of the provisions of this Agreement; (vi) a Borrower's Affidavit with appropriate insertions and attachments, in form and substance satisfactory to the Bank and to the Bank's counsel, executed by the General Partners, and a Request for Disbursement, each dated the date for such Disbursement; (vii) satisfactory evidence (including, without limitation, contracts, bills of sale or other agreements) that title to all materials and fixtures incorporated in the Construction of the Improvements and all materials stored on-site or off-site or in fabrication shall vest in the Company immediately upon delivery thereof to the Project; (viii) payment of the Bank's counsel fees and the fees of the Bank's Consultant relating to the Project, as well as all other out-of-pocket expenses of the Bank relating to the Project and incurred since the date of the preceding Request for Disbursement to the extent the foregoing are then due and payable, including, without limitation, all Appraisal, -65- investigation and insurance fees and expenses and all costs and expenses of the Environmental Report; (ix) evidence satisfactory to the Bank that the full amount of all prior Disbursements has been paid out by the Company or its contractors in accordance with this Agreement and that no Liens exist against the Project or the Improvements; (x) evidence satisfactory to the Bank of payment in full by the Company to all Persons entitled to assert a mechanics' or materialmen's lien for work done prior to the Disbursement; (xi) if requested by the Bank, a survey inspection and update of the Survey satisfactory in form and content to the Bank and the Bank's counsel in their sole and absolute discretion; (xii) if requested by the Bank, updates of the opinions of the Architect and engineers described in clause (xxii) of Section 10(g) hereof. (xiii) such other instruments, documents and information pertaining to the Disbursement as the Bank may reasonably request; and (d) No Default. On the date of each such subsequent Disbursement, no Default or Event of Default hereunder shall have occurred and be continuing and no default of any of the Company's obligations under any of the other Operative Documents shall have occurred and be continuing, other than the failure of the Company to comply with its obligations pursuant to Section 4.01(c) of the Loan Agreement to deposit amounts required to be paid 124 days in advance of the due date therefor. 12. EVENTS OF DEFAULT. (a) Events of Default. It shall be deemed an Event of Default if any of the following events shall occur and be continuing, unless such event has been previously consented to by the Bank: (i) any amount payable hereunder (including, without limitation, under Paragraph 2 or Paragraph 3(a)) shall not be paid when due; or (ii) any representation, warranty or other statement made or deemed to have been made by the Company or any Guarantor under or in connection with this Agreement, any Operative Document or any document, instrument or certificate executed or delivered in connection herewith or therewith shall prove to have been incorrect or misleading in any material respect when made or deemed to have been made; or -66- (iii) the Company shall fail to perform or observe any term, covenant or agreement on its part to perform or observe contained in this Agreement or in any other Operative Document (other than the failure of the Company to comply with the terms of Section 4.01(c) of the Loan Agreement) or any Guarantor shall fail to perform or observe any term, covenant or agreement on its part to perform or observe contained in any Guaranty (in any such cases, other than as elsewhere specifically addressed in this Paragraph 12) and (A) with respect to any such term, covenant or agreement contained herein, any such failure shall remain unremedied for 30 days after notice and (B) with respect to any such term, covenant or agreement contained in any of the other Operative Documents, (other than the failure of the Company to comply with the terms of Section 4.01(c) of the Loan Agreement)or any Guaranty any such failure remains unremedied after any applicable grace period specified in such Operative Document or Guaranty; provided, however, that if such failure described in this subparagraph (iii) is of a nature such that it cannot be cured by the payment of money and if such failure requires work to be performed, acts to be done or conditions to be removed which cannot by their nature, with due diligence be performed, done or removed, as the case may be, within such 30-day period or such other applicable grace period, as the case may be, and the Company or the Guarantor, as the case may be, shall have commenced to cure such failure, within such 30-day period or such other applicable grace period, as the case may be, such period shall be deemed extended for so long as shall be required by the Company or the Guarantor, as the case may be, in the exercise of due diligence to cure such failure, but in no event shall such 30-day grace period or such other applicable grace period, as the case may be, be so extended to be a period in excess of [60] days; or (iv) the Company shall fail to perform or observe its covenant in Paragraph 7(e), Paragraph 7(h) or Paragraph 7(ii) hereof; or (v) there shall have been asserted in writing by or on behalf of the Company or any Guarantor or Williams that any provision of this Agreement or any Guaranty or the Management Agreement, as the case may be, is not valid and binding on the Company or any Guarantor or Williams, as the case may be, or declaration shall have been sought by or on behalf of the Company or any Guarantor or Williams, as the case may be, that any such provision is null and void, or there shall have been commenced by or on behalf of the Company or any Guarantor or Williams, as the case may be, a proceeding to contest the validity or enforceability thereof, or there shall have been a denial by or on behalf of the Company or any Guarantor or Williams, as the case may be, that it has any further liability or obligation under this Agreement or any Guaranty or the Management Agreement, as the case may be; or (vi) The Company or any Guarantor shall fail to pay any material Debt or Debts of the Company or any Guarantor, as the case may be (but excluding Debt under this Agreement or any Guaranty), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument -67- relating to such Debt or Debts; or any other default under any agreement or instrument relating to any such Debt or Debts, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate the maturity of such Debt or Debts or to accelerate or cause the holder of such Debt or Debts (or any trustee or agent for the holders thereof) to threaten, expressly or by implication, the acceleration of the maturity of such Debt or Debts; or any Debt or Debts shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (vii) the Company or any Guarantor (A) shall suffer or permit to be entered a decree or order of a court or agency or supervisory authority having jurisdiction determining it to be insolvent or providing for the appointment of a conservator, receiver, liquidator, trustee or any similar Person appointed in connection with any insolvency, readjustment of debt, marshalling of assets and liabilities, bankruptcy, reorganization or similar proceedings of or relating to it or of or relating to all, or substantially all, of its property, or for the winding-up or liquidation of its affairs or (B) shall suffer or permit to be instituted proceedings under any law relating to bankruptcy, insolvency or the reorganization or relief of debtors to be instituted against it, and such proceedings remain undismissed or pending and unstayed for a period of 60 days; or (viii) the Company or any Guarantor shall (A) consent to the appointment of a conservator, receiver, trustee, liquidator or custodian in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to it or of or relating to all, or substantially all, of its property or for the winding-up or liquidation of its affairs, (B) admit in writing its inability to pay its debts generally as they become due, (C) file a petition, or otherwise institute, or consent to the institution against it of, proceedings to take advantage of any law relating to bankruptcy, insolvency or reorganization or the relief of debtors, (D) make an assignment for the benefit of its creditors or (E) suspend payment of its obligation; or (ix) the rendering of judgment(s) for the payment of money against the Company in excess of $250,000 in the aggregate, or against any Guarantor in excess of $1,000,000 in the aggregate, and the continuance of any such judgment(s) unsatisfied and without stay of execution thereon for a period of 30 days after the entry of such judgment(s), or the continuance of such judgment(s) unsatisfied for a period of 30 days after the termination of any stay of execution thereon entered within such first mentioned 30 days; or (x) any Event of Default under and as defined in any Operative Document shall have occurred and be continuing, or in the case of an Operative Document in which the term EVENT OF DEFAULT is not defined, any default by the Company or a Guarantor, as the case may be, beyond applicable grace and cure periods and after the giving of any -68- required notice to the Company or the Guarantor, as the case may be, shall have occurred and be continuing; or (xi) the Management Agreement or the Ground Lease shall at any time cease to be in full force and effect for any reason other than by termination thereof by the Company in accordance with its terms and the terms of this Agreement and/or any applicable Operative Document; or (xii) a Plan shall fail to maintain a minimum funding standard required by Section 412 of the Code for any plan year or a waiver of such standard is sought or granted under Section 412(d) of the Code, or a Plan is, shall have been or is likely to be terminated or the subject of termination proceedings under ERISA, or the Company or a Subsidiary or an ERISA Affiliate has failed to pay the full amount of any installment required under Section 412(m) of the Code or has incurred or is likely to incur a liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result from any such event or events either a liability or a material risk of incurring a liability to the PBGC or a Plan, which could have a material or adverse effect upon the business, operations or financial condition of the Company or a Subsidiary; or (xiii) Construction of the Improvements shall not be carried on with dispatch or there is any cessation of Construction of the Improvements for a period in excess of 10 consecutive Business Days, unless the cessation of Construction shall have been caused by an Unavoidable Delay of which notice has been given to the Bank pursuant to Paragraph 7(n) hereof; or (xiv) the Bank or the Bank's Consultant, or the respective representatives of either, shall not be permitted at all reasonable times after reasonable notice, to enter upon the Project for the purposes set forth in Paragraph 7(o) hereof or the Company shall fail to furnish to the Bank or the Bank's Consultant, or the respective representatives of either, within a reasonable time after request therefor, copies of such plans, shop drawings, specifications or other materials as the Bank or the Bank's Consultant, or the respective representatives of either may reasonably request; or (xv) The Company assigns this Agreement or any Disbursement to be made under the Trust Agreement or the Loan Agreement, or any interest in either, except as may be permitted hereunder; or (xvi) as of the close of business on the Completion Date, Substantial Completion has not occurred, or if the Bank or the Bank's Consultant determines during the course of Construction of the Improvements that the Improvements cannot be completed by the Completion Date (including if the Improvements are partially or totally damaged or destroyed by fire, or any other cause, or condemned and the restoration thereof cannot, in the Bank's -69- judgment, reasonably be expected to be completed so that the Improvements will be completed on or before the Completion Date); or (xvii) any material default by the Company shall occur and shall continue, beyond any applicable grace period provided for therein, under the Management Agreement, the Construction Management Agreement, the Architect's Agreement, the Trade Contracts or any other Construction Document; or (xviii) the Company shall fail to advance additional funds as provided in Paragraph 9(j) hereof or deposit with the Bank cash or cash-equivalent or other acceptable security for the benefit of the Bank as provided in Paragraph 9(k) hereof, in either case within the time period specified in the applicable provision; or (xix) any Operative Documents, Construction Document or Project Document is amended, modified or terminated without the prior written consent or approval of the Bank to the extent such written consent or approval is required pursuant to this Agreement; or (xx) the Initial Disbursement shall not have occurred by the Outside Disbursement Date; or (xxi) the occurrence of an Event of Taxability (as such term is defined in the Loan Agreement); or (xxii) the occurrence of a default by the Company in the performance of the Company's obligations under the Bond Swap Agreement or the GDB Swap Agreement. (b) Bank Remedies. If an Event of Default shall have occurred then, and in any such event at any time thereafter if such Event of Default is continuing, the Bank may, in its discretion: (i) by notice to the Company declare all amounts payable hereunder or under any Operative Document to be immediately due and payable, whereupon the same shall become immediately due and payable without demand, presentment, protest or further notice of any kind, all of which are hereby expressly waived by the Company; and/or (ii) exercise all or any of its rights and remedies under or in respect of the Operative Documents (including, without limitation, its rights and remedies under the Security Documents and any Guaranty); and/or (iii) by notice to the Trustee and the Issuer, require the Trustee to accelerate payment of all Bonds and interest accrued thereon and/or purchase the Bonds as -70- provided in Section 7.01(i) of the Loan Agreement or Section 305 of the Trust Agreement, respectively; and/or (iv) in the event that the Guarantors under the Completion Guaranty are obligated to complete the Project and/or the Bank or the Bank's designees or assignees undertake to complete the Project, the Bank or its designees or assignees shall have the right to cause the Bond proceeds to be disbursed on the same terms and conditions as if the Guarantors under the Completion Guaranty, the Bank or such designees or assignees of the Bank were the Company; and/or (v) terminate the Letter of Credit by written notice to the Trustee, the effect of which shall be to cause the Letter of Credit to expire on the sixteenth calendar day after the date on which a notice of termination is received by the Trustee; and/or (vi) exercise any or all other rights and remedies existing at law or in equity or by statute including, without limitation, the rights and remedies of a secured creditor under the Uniform Commercial Code (or any substitute therefor) of any applicable jurisdiction. (c) Bank's Right to Stop Disbursing Funds. In addition to any other rights and remedies the Bank may have pursuant to the other Operative Documents, or as provided by law, and without limitation thereof, if any Default or Event of Default shall occur, then the Bank shall not be obligated to instruct the Trustee to make any further Disbursements until such Default or Event of Default is remedied; PROVIDED, HOWEVER, the Bank may instruct the Trustee to make any Disbursement so long as any such Default or Event of Default shall exist without thereby waiving the right to demand payment of the indebtedness and to exercise its rights and remedies pursuant to any one or more of the Security Documents and/or exercise any other remedies available to the Bank pursuant to the other Operative Documents or as provided by law, and without becoming liable to instruct the Trustee to make any other or further advance or Disbursement. (d) Bank's Right to Complete. Upon the happening of any Event of Default, the Bank may, in addition to any other remedies which the Bank may have under this Agreement, the other Operative Documents or pursuant to law, enter upon the Project and into possession of the Project and Construct and complete the Construction of the Improvements substantially in accordance with the Plans, with such changes therein as the Bank may from time to time deem appropriate, all at the sole risk, cost and expense of the Company. The Bank shall have the right, at any and all times, to discontinue any work commenced by the Bank with respect to the Project or to change any course of action undertaken by it and shall not be bound by any limitations or requirements of time whether set forth herein or otherwise. The bank shall have the right and power (but shall not be obligated) to assume any construction contract made by or on behalf of the Company in any way relating to the Project and to take over and use all or any part or parts of the labor, materials, supplies and equipment contracted for, by or on -71- behalf of the Company, whether or not previously incorporated into the Project, all in the sole and absolute discretion of the Bank. In connection with any portion of the Project undertaken by the Bank pursuant to the provisions of this Paragraph 12(d), the Bank may (i) engage builders, contractors, architects, engineers, inspectors and others for the purpose of furnishing labor, materials, equipment and fixtures in connection with the Project, (ii) pay, settle or compromise all bills or claims which may become Liens against the Project, or which have been or may be incurred in any manner in connection with the Construction and Substantial Completion or for the discharge of Liens, encumbrances or defects in the title of the Project and (iii) take such other action (including, without limitation, the employment of watchmen to project the Project) or refrain from acting under this Agreement as the Bank may in its sole and absolute discretion from time to time determine without any limitation whatsoever. The Company shall be liable to the Bank for all sums paid or incurred for the Project whether the same shall be paid or incurred pursuant to the provisions of this Paragraph 12(d) or otherwise, and all payments made or liabilities incurred by the Bank under this Paragraph 12(d) of any kind whatsoever shall be paid by the Company to the Bank upon demand with interest at the Prime Rate plus 2% per annum to the date of payment to the Bank, and all of the foregoing sums, including such interest at the Prime Rate plus 2% per annum, shall be deemed and shall constitute advances under the Loan Agreement and be evidenced by the Note and secured by the Security Documents. Upon the occurrence of any Event of Default, the rights, powers and privileges provided in this Paragraph 12(d) and all other remedies available to the Bank under this Agreement and the other Operative Documents or by statute or by rule of law may be exercised by the Bank at any time and from time to time whether or not the indebtedness evidenced and secured by the Note and the Security Documents shall be due and payable, and whether or not the Bank shall have instituted any foreclosure or other action for the enforcement of any of the Mortgage, the Pledge Agreement or the Note. The Company hereby assigns and quitclaims to the Bank all sums advanced pursuant to this Paragraph 12(d), and all sums held by the Bank for the account of the Company, whether in escrow accounts or otherwise, and all other forms of security delivered by the Company as additional security (a security interest therein being granted hereby to the Bank) for the repayment of the Loan, all of which security may be utilized by the Bank for the purposes set forth in this Paragraph 12(d) or applied against the indebtedness evidenced by the Note as the Bank, in its sole and absolute discretion, shall determine (e) No Liability of the Bank. Whether or not the Bank elects to employ any or all of the remedies available to it upon the occurrence of an Event of Default, the Bank shall not be liable for the Construction of or failure to Construct, complete or protect the Project or for payment of any expense incurred in connection with the exercise of any remedy available to the Bank or for the performance or non-performance of any other obligation of the Company. (f) Termination of Agreement. If for any reason whatsoever the outstanding principal amount of the Loan, together with all interest and other indebtedness due and payable in connection therewith and all amounts due or payable hereunder have been paid in full, and the Letter of Credit shall have been terminated, the parties hereto shall be released and -72- discharged from all of their obligations hereunder except for those obligations that expressly survive the termination hereof. (g) Remedies Not Exclusive. No remedy herein conferred or reserved is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or any other Operative Document or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to exercise any remedy reserved to the Bank in this Agreement, it shall not be necessary to give any notice, other than such notice as may be herein expressly required. In the event any provision contained in this Agreement should be breached by any party or thereafter duly waived by the other party so empowered to act, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. No waiver, amendment, release or modification of this Agreement shall be established by conduct, custom or course of dealing, but solely by an instrument in writing duly executed by the parties thereunto duly authorized by this Agreement. 13. NATURE OF THE BANK'S DUTIES. (a) The Company hereby assumes all risks of the acts, omissions or misuse of the Letter of Credit by the Trustee or any beneficiary or transferee of the Letter of Credit. Neither the Bank nor any of its officers or directors shall be responsible for (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document, or any endorsements thereon, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged, (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assigning the Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason, (iii) the failure of the Trustee or any beneficiary or transferee of the Letter of Credit to comply fully with conditions required in order to draw upon the Letter of Credit, (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher, (v) errors in interpretation of technical terms, (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under the Letter of Credit or of the proceeds thereof, (vii) any consequences arising from causes beyond the control of the Bank, (viii) payment by the Bank against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit or (ix) any other circumstances whatsoever in making or failing to make payment under the Letter of Credit; provided, however, that the Bank shall be responsible for any of the above occurrences to the extent that they arise solely as a result of the gross negligence or willful malfeasance of the Bank. In furtherance and extension and -73- not in limitation of the foregoing, the Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. None of the above shall affect, impair, or prevent the vesting of any of the Bank's rights or powers hereunder. (b) In furtherance and extension, and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Bank, under or in connection with the Letter of Credit or the related drafts or documents(s), if taken or omitted in good faith, shall not create any liability on the part of the Bank to the Company. 14. MISCELLANEOUS. (a) Amendments and Consents. This Agreement may only be amended by an instrument in writing signed by all of the parties hereto, provided that the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the prior written consent of the Bank. No course of dealing between the company and the Bank, nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of the Bank hereunder. (b) Survival of Representations and Warranties. All representations and warranties contained herein or made in writing by the Company in connection herewith shall survive the execution and delivery of this Agreement, regardless of any investigation made by the Bank or on its behalf. (c) Expenses. The Company agrees to pay promptly all costs and expenses in connection with the preparation, negotiation, issuance, execution, delivery, filing, recording and administration of the Letter of Credit, this Agreement, the other Operative Documents, the Bonds and any other documents which may be delivered in connection with this Agreement, including, without limitation, all engineers', architects' and investigators' fees, the fees and expenses of the Bank's counsel, construction consultant, insurance consultant and any services selected by the Bank, each with respect to the transactions contemplated by this Agreement, and all costs and expenses (including counsel fees and expenses) in connection with (i) the transfer, drawing upon, change in terms, maintenance, renewal or cancellation of the Letter of Credit, (ii) any and all amounts which the Bank has paid relative to the Bank's curing of any Event of Default resulting from the acts or omissions of the Company under this Agreement, any other of the Operative Documents or the Bonds, (iii) the enforcement of this Agreement or any other of the Operative Documents, (iv) any action or proceeding relating to a court order, injunction, or other process or decree restraining or seeking to restrain the Bank from paying any amount under the Letter of Credit, (v) obtaining and reviewing appraisals and the engineering and environmental reports relating to the Project and (vi) survey costs and title insurance costs. In addition, the Company shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of the -74- Letter of Credit, this Agreement, any other of the Operative Documents or the Bonds, or any other document which may be delivered in connection with this Agreement, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. Notwithstanding the foregoing, no payment shall be required under this Paragraph 14(c) in respect of any cost or expense which the Bank has incurred solely as a result of its own gross negligence or willful misconduct. All costs and expenses described in this Paragraph 14(c) shall be in addition to the facility fee paid by the Company to the Bank in connection with the transaction contemplated hereby and shall be in addition to the Annual Letter of Credit Fee and the Annual Agent's Fee. (d) Set-off. In addition to any rights and remedies the Bank may have, including, without limitation, any rights now or hereafter granted under applicable law, and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time and from time to time, without notice to the Company (any such notice being expressly waived by the Company) and to the fullest extent permitted by law, to set forth and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank, including, without limitation, pursuant to the Bond Swap Agreement, to or for the credit or the account of the Company against any and all of the obligations of the Company now or hereafter existing under this Agreement, irrespective of whether or not the Bank shall have made any demand hereunder. (e) No Approval of Work. No Disbursement authorized hereunder shall constitute an approval or acceptance by the Bank of the work theretofore done in connection with the Project or a waiver of any of the conditions of the Bank's obligation to make or authorize further Disbursements, nor, in the event the Company is unable to satisfy any such condition, shall any such failure to insist upon compliance have the effect of precluding the Bank from thereafter declaring such inability to be an Event of Default as herein provided, it being agreed that any Disbursement made or authorized by the Bank in the absence of strict compliance with any or all of the conditions of the Bank's obligation to make or authorize such Disbursement shall be deemed to have been made pursuant to this Agreement and not in modification of the terms hereof, unless the Bank has specifically waived any such condition or approved a deviation therefrom. (f) Bank's Review. Inspection and approvals of the Plans, the Project and the workmanship and materials used therein shall impose no responsibility or liability of any nature whatsoever on the Bank and no Person shall, under any circumstances, be entitled to rely upon such inspections and approvals by the Bank for any reason. Approvals granted by the Bank for any matters covered under this Agreement shall be narrowly construed to cover only the parties and facts identified in any such approval. -75- (g) Submission of Evidence. Any condition of this Agreement which requires the submission of evidence of the existence or non-existence of a specified fact or facts implies as a condition the existence or non-existence, as the case may be, off such fact or facts and the Bank shall, at all times, be free independently to establish to its satisfaction such existence or non-existence. (h) Bank Sole Beneficiary. All terms, provisions, covenants and other conditions of the obligations of the Bank to authorize Disbursements hereunder are imposed and all trust funds hereunder are held solely and exclusively for the benefit of the Bank and its successors and assigns, and no other Person shall have standing to require satisfaction of such terms, covenants and other conditions in accordance with their terms or be entitled to assume that the Bank will refuse to authorize Disbursements in the absence of strict compliance with any or all of such terms, covenants and other conditions or be entitled to require any particular application of such trust funds. No Person, other than the Bank, its successors and assigns and any Person to whom the Bank shall have granted a participation pursuant to Paragraph 14 (p) herein shall, under any circumstances, be deemed to be a beneficiary of the terms, covenants and other conditions of this Agreement, any or all of which may be freely waived, in whole or in part, by the Bank at any time if, in the Bank's sole discretion, the Bank deems it advisable or desirable to do so, and no Person, other than said parties, shall have any right, remedy or claim under or by reason of this Agreement. (i) Contractors. Except as provided by law, no contractors or subcontractors dealing with the Company shall be, nor shall any of them be deemed to be, third party beneficiaries of this Agreement, but each shall be deemed to have agreed (i) that they shall look to the Company as their sole source of recovery if not paid and (ii) except as otherwise agreed to in writing between the Bank and the contractor(s) or subcontractor(s) in question, that they may not claim against the Bank under any circumstances. Except as provided by law, or as otherwise agreed in writing between the Bank and the contractor(s) or subcontractor(s) in question, each such contractor or subcontractor shall be deemed to have waived in writing all right to seek redress from the Bank under any circumstances whatsoever. Counterpart originals of each of such contractor's or subcontractor's agreement and waiver shall be delivered to the Bank on or before the date hereof. (j) Entire Agreement. This Agreement and the other Operative Documents embody the entire agreement and understanding between the parties with respect to the matters set forth herein and supersede and cancel all prior loan applications, expressions of interest, commitments, agreements and understandings, whether oral or written, relating to the subject matter hereof, except as specifically agreed to the contrary. (k) Further Assurances. The Company hereby agrees promptly to execute and deliver such additional agreements and instruments and promptly to take such additional action -76- as the Bank may at any time and from time to time reasonably request in order for the Bank to obtain the full benefits and rights granted or purported to be granted by this Agreement. (l) No Waiver; Cumulative Remedies. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder or under or in connection with this Agreement or the other Operative Documents or to insist upon the strict performance of any term of this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, or power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under or in connection with this Agreement or the other Operative Documents. The remedies in this Agreement or the other Operative Documents herein are cumulative and not exclusive of any remedies provided by law. (m) Singular/Plural. Whenever appropriate herein or required by the context or circumstances, the masculine shall be construed as the feminine and/or the neuter, the singular as the plural, and vice versa. (n) No Joint Venture. The Company is not and shall not be deemed to be a joint venturer with, or an agent of, the Bank for any purpose. Prior to any Default or Event of Default by the Company under this Agreement and the Bank's exercise of the remedies granted herein the Bank shall not be deemed to be in privity of contract with any contractor or provider of services with respect to the Construction of the Improvements. (o) Incorporation by Reference. The Company agrees that until this Agreement is terminated by the repayment to the Issuer of all principal and interest due and owing on the Note and other sums due and owing pursuant to the Operative Documents, the Note and the other Operative Documents shall be made subject to all the terms, covenants, conditions, obligations, stipulations and agreements contained in this Agreement to the same extent and effect as if fully set forth in and made a part of the Note and the other Operative Documents. In the event of a conflict between any of the Operative Documents and the provisions of this agreement, this Agreement shall be controlling. (p) Binding Effect; Assignment. This Agreement is a continuing obligation and shall (i) be binding upon the Company and its permitted successors and assigns and (ii) inure to the benefit of and be enforceable by the Bank and its successors, transferees and assigns; provided that the Company may not assign all or any part of this Agreement without the prior written consent of the Bank. The Bank may assign, negotiate, pledge or otherwise hypothecate all or any portion of this Agreement, or grant participations herein, in the Letter of Credit, in the Loan, in the Bond Swap Agreement and in the Bank's other rights or security hereunder, including, without limitation, the instruments securing the Company's obligations hereunder or under any Operative Document. No such assignment or participations by the Bank, however, will relieve the Bank of its obligations under the Letter of Credit. All documentation, financial statements, appraisals and other data, or copies thereof, relevant to the Company, any Guarantor -77- or the Letter of Credit may be exhibited to and retained by any such assignee, prospective assignee, participant or prospective participant. (q) Notices. All notices, certificates, demands and other communications provided for herein shall be in writing and mailed (registered or certified mail, return receipt requested, and postage prepaid), hand-delivered, with signed receipt, or sent by nationally-recognized overnight courier, if to the Bank, to its address at 225 Liberty Street, Two World Financial Center, New York, New York 10281, Attention: Real Estate Finance Group (Mr. Akira Fujii or Mr. Russ LoPinto), with a copy similarly delivered to Kaye, Scholer, Fierman, Hays & Handler, 425 Park Avenue, New York, New York 10022, Attention: Warren J. Bernstein, Esq., if to the Company, to its address c/o Williams Hospitality Management Corporation, 187 East Isla Verde Road, Carolina, Puerto Rico 00913, Attention: Hugh A. Andrews, with copies similarly delivered to Whitman & Ransom, 200 Park Avenue, New York, New York 10166, Attention: Jeffrey N. Siegel, Esq.; Kumagai Caribbean, Inc., c/o Williams Hospitality Management Corporation, 187 East Isla Verde Road, Carolina, Puerto Rico 00913, Attention: Mr. Shunsuke Nakane; WMS Industries Inc., 3401 North California Avenue, Chicago, Illinois 60618, Attention: Chief Operating Officer; Messrs. Burton and Richard Koffman, c/o Richford American, 950 Third Avenue, New York, New York 10022, or to such other address with respect to any party as such party shall notify the other parties in writing. All such notices, certificates, demands and other communications shall be effective when received at the address specified as aforesaid. (r) Satisfaction. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory Bank, the determination of such satisfaction shall be made by the Bank in its sole and exclusive judgment. (s) Governing Law and Consent to Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The Company irrevocably (i) agrees that any suit, action or other legal proceeding arising out of or relating to this Agreement, the other Operative Documents or such other documents which may be delivered in connection with this Agreement or the other Operative Documents may be brought in the City and State of New York or in the Courts of the Untied States of America located in the Southern District of New York [, provided, however, that any suit, action or other legal proceeding arising out of or directly concerning the Mortgage or the Pledge Agreement shall be brought in the Commonwealth of Puerto Rico;] (ii) consents to the jurisdiction of each such court in any such suit, action or proceeding and (iii) waives any objection which it may have to the laying of venue of any such suit, action or proceeding in any of such courts and any claim that any such suit, action or proceeding has been brought in an inconvenient forum. The Company irrevocably consents to the service of any and all process in any such suit, action or proceeding by service of copies of such process to the Company at its address provided in Paragraph 14(q) hereof or by personal service on any partner of Whitman & Ransom. In addition to any method of service of process provided for under applicable laws, all service of -78- process under this Paragraph 14(s) may be made by certified or registered mail, return receipt requested, directed to the Company at the address set forth in Paragraph 14(q) hereof, and the service so made shall be complete five days after the same shall have been so mailed. Nothing in this Paragraph 14(s) shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any suit, action or proceeding against the Company or its property in the courts of any other jurisdictions. (t) Limitation of Liability. Notwithstanding anything to the contrary contained in the Loan Agreement, any of the Security Documents or this Agreement (except for Paragraph 5(c) hereof), no recourse shall be had, whether by levy or execution or otherwise, for the payment of the principal of or interest on, or other amounts owned hereunder or under the Loan Agreement or any of the Security Documents, or for any claim based on this Agreement, the Loan Agreement or any Security Documents or in respect thereof, against the Company, any partner of the Company or any predecessor, successor or affiliate of any such partner or any of their assets (other than from the interest of such person in such partner in the Company), or against any principal, partner, shareholder, officer, director, agent or employee of any such partner (other than from the interest of any such partner), nor shall any such persons be personally liable for any such amount or claims, or liable for any deficiency judgment based thereon or with respect thereto, it being expressly understood that the sole remedies of the Bank with respect to such amounts and claims shall be against the assets of the Company, including the Mortgaged Property (as such term is defined in both the Fee Mortgage and in the Leasehold Mortgage) and that all such liability of the aforesaid persons, except as expressly provided in this Paragraph 14(t) and Paragraph 5(c) hereof is expressly waived and released as a condition of and as consideration for the execution of the Security Documents; provided, however, that (A) nothing contained in this Agreement (including, without limitation, the provisions of this Paragraph 14(t)), the Loan Agreement or the Security Documents shall constitute a waiver of any indebtedness evidenced hereby or any of the Company's other obligations under such instruments or shall be taken to prevent recourse to and the enforcement against the Company, including the Mortgaged Property, of all the liabilities, obligations and undertakings contained in this Agreement, the Loan Agreement or any of the Security Documents, (B) this Paragraph 14(t) shall not be applicable to a breach by any person of any independent obligation to the Bank, including, but not limited to, (x) the obligations of the Guarantors under the Guaranties, (y) the obligation of WKA to enforce any or all of its remedies against KGC in the event that KGC fails timely to provide the Deficiency Loans (as defined in the Company Partnership Agreement) as set forth herein and in the other Operative Documents, and (z) any other obligations of any Person under any other guaranty or indemnity agreement executed or delivered in connection with any of the Operative Documents (including, without limitation, the indemnities set forth in Paragraph 5(c) hereof) and (C) this Paragraph 14(t) shall not be applicable to the responsible party to the extent and in respect of any claim the Bank would otherwise have against such party for (1) fraud, (2) misappropriation of funds or other property, or (3) damage to any of the Mortgaged Property or any part thereof intentionally inflicted in bad faith by the Company or any partner, principal, shareholder, officer, director, agent or employee -79- of the Company or any of its partners, or principals of any of the foregoing. For the purposes of the foregoing, the term SHAREHOLDER shall be deemed to include the shareholders of any corporation which is a shareholder of a corporation and the term PARTNER shall be deemed to include the partners of any partnership which is a partner of a partnership. (u) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. (v) Defined Instruments. All of the agreements or instruments defined in this Agreement shall mean such agreements or instruments as the same may, from time to time, be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement. (w) Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the most recent audited financial statements of the Company and the respective Guarantors delivered to the Bank. (x) Lawful Interest. Nothing contained in this Agreement or in any other Operative Document shall be construed to permit the Bank to receive, at any time, interest, fees or other charges in excess of the amounts which the Bank is legally entitled to charge and receive under any law to which such interest, fees, or charges are subject. In no contingency or event whatsoever shall the compensation payable to the Bank by the Company, howsoever characterized or computed, hereunder, or under any other Operative Document, exceed the highest rate permissible under any law to which such compensation is subject. There is no intention that the Bank shall contract for, charge or receive compensation in excess of the highest lawful rate, and, in the event it should be determined that the Bank has contracted from any rate of interest in excess of the highest lawful rate, then ipso facto such rate shall be reduced to the highest lawful rate so that no amounts shall be charged which are in excess over such highest lawful rate has been charged or received, the Bank shall promptly refund such excess to the Company; provided, however, that, if lawful, any such excess shall be paid by the Company to the Bank as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. (y) Consents; Approvals. Wherever in this Agreement the consent or approval of the Bank shall be required, unless specifically provided to the contrary, the Bank shall have the right to withhold, or grant, such consent or approval in its sole discretion. -80- (z) Severability. Any provision of this Agreement which is unenforceable, prohibited or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforcability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. (aa) Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. (bb) Reliance by Bank. The Bank may but shall be under no obligation to rely upon the advice of its legal counsel and of the Bank's Consultant, as well as of all other parties whose advice it obtains in connection with all decisions made by the Bank in connection with any matters discussed herein. IN WITNESS WHEREOF, the parties hereto have caused this Letter of Credit and Reimbursement Agreement to be duly executed and delivered by their respective duly authorized officers as of the day and year first above written. EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Kumagai Caribbean, Inc. By:_____________________________ Shunsuke Nakane, President By: WKA El Con Associates, a New York general partnership By: ____________________________ Name: Norman J. Menell Title: Authorized Signatory THE MITSUBISHI BANK, LIMITED, ACTING THROUGH ITS NEW YORK BRANCH By:______________________________________ Tadaaki Hamada Senior Vice President IRREVOCABLE TRANSFERABLE STANDBY LETTER OF CREDIT NO. C-182 February 7, 1991 Banco Popular de Puerto Rico Banco Popular Center, 5th Floor Hato Rey, Puerto Rico 00819 Dear Sirs: At the request and for the account of El Conquistador Partnership L.P., a Delaware limited partnership (the ACCOUNT PARTY), we hereby establish in your favor, as designated trustee under the Trust Agreement, dated the date hereof between Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority (the ISSUER) and you (such Trust Agreement, as it may be amended or supplemented from time to time in accordance with its provisions, being the TRUST AGREEMENT), pursuant to which $120,000,000 aggregate principal amount of the Issuer's Industrial Revenue Bonds, 1991 Series A (El Conquistador Resort Project), Convertible Industrial Revenue Bonds, 1991 Series B (El Conquistador Resort Project) and Industrial Revenue Bonds, 1991 Series C (El Conquistador Resort Project) (collectively, the BONDS) are being or will be issued, our Irrevocable Transferable Letter of Credit No. C-182 (this LETTER OF CREDIT), in the amount of $124,800,000 (such amount, as reduced and reinstated from time to time in accordance with the provisions hereof, the STATED AMOUNT). An amount not exceeding $120,000,000 (such amount, as reduced and reinstated from time to time in accordance with the terms and conditions hereof, being the PRINCIPAL COMPONENT) may be drawn upon this Letter of Credit, in accordance with the terms and conditions hereof, to pay the unpaid principal, or the portion of the Purchase Price (as defined in the Trust Agreement) corresponding to principal, of the Bonds. An amount not exceeding $4,800,000 (such amount, as reduced and reinstated from time to time in accordance with the terms and conditions hereof, being the INTEREST COMPONENT) may be drawn upon this Letter of Credit, in accordance with the terms and conditions hereof, to pay interest, or the portion of the Purchase Price corresponding to interest, accrued on the Bonds. Draws upon this Letter of Credit may be made, in accordance with the terms and conditions hereof, prior to the Termination Date (as hereinafter defined). This Letter of Credit is issued pursuant to that certain Letter of Credit and Reimbursement Agreement dated that date hereof between the Account Party and us (such agreement, as it may be amended or supplemented from time to time in accordance with its provisions, the LETTER OF CREDIT AGREEMENT). We hereby irrevocably authorize you to draw, in accordance with the terms and conditions hereof, in one or more drawings by one or more of your drafts (a) an amount not exceeding, in the aggregate, the Principal Component, to pay the principal of the Bonds in the event and to the extent that the Trustee (as defined in the Trust Agreement) does not have -2- available sufficient other Eligible Moneys (as defined in the Trust Agreement) for such payment as the same becomes due and payable (each such drawing, a PRINCIPAL DRAWING), provided that each draft on us requesting a Principal Drawing is accompanied by your written and completed certificate in substantially the form of Annex I attached hereto; (b) an amount not exceeding, in the aggregate, the Interest Component, to pay interest, or the portion of the Purchase Price corresponding to interest, accrued on the Bonds in the event and to the extent that the Trustee does not have available sufficient other Eligible Moneys for such payment as the same becomes due and payable (each such drawing, an INTEREST DRAWING), provided that each draft on us requesting an Interest Drawing is accompanied by your written and completed certificate in substantially the form of Annex II attached hereto; (c) an amount not exceeding, in the aggregate, the Principal Component, to pay when due the portion of the Purchase Price corresponding to the principal of Bonds subject to mandatory tender for purchase pursuant to the Trust Agreement (each such drawing, a PURCHASE DRAWING), provided that each draft on us requesting a Purchase Drawing is accompanied by your written and completed certificate in the form of Annex III attached hereto. In no event will you have a right to make any drawings under this Letter of Credit to pay (a) the principal or the Purchase Price of or interest accrued on Bonds the Holder (as defined in the Trust Agreement) of which is (i) the Account Party or (ii) any of Kumagai International USA, Corporation, Kumagai Caribbean, Inc., KG (Caribbean) Corporation or Williams Hospitality Management Corporation (collectively, the Guarantors), (b) any premium payable upon any optional or mandatory redemption of Bonds, or (c) any indemnity payable by the Account Party upon the occurrence of an Event of Taxability (as defined in the Trust Agreement). Funds under this Letter of Credit are available to you against your draft drawn on us, stating on its face "Drawn under The Mitsubishi Bank, Limited, New York Branch, Irrevocable Transferable Standby Letter of Credit No. C-182" and accompanied by your written and completed certificate substantially in the form of Annex I, Annex II or Annex III attached hereto, as appropriate. All drawings under this Letter of Credit will be paid in accordance with the terms and conditions of this Letter of Credit, with our own funds. Each Purchase Drawing honored by us hereunder shall automatically reduce the Principal Component and the amount available to be drawn hereunder by subsequent Purchase Drawings or Principal Drawings by an amount equal to the amount of such Purchase Drawing. Each Principal Drawing honored by us hereunder shall automatically reduce (i) the Principal Component and the amount available to be drawn hereunder by subsequent Purchase Drawings or Principal Drawings by an amount equal to the amount of such Principal Drawing and (ii) the Interest Component and the amount available to be drawn hereunder by subsequent Interest Drawings to an amount equal to 120 days' accrued interest (computed as described below) on the Principal Component as so reduced. Each such reduction shall be effective on the day of the honoring by us of such Purchase Drawing or Principal Drawing, as the case may be, and shall automatically result in a corresponding aggregate reduction in the Stated Amount. Upon the release by the Trustee, at our direction, pursuant to Section 5 of the Pledge Agreement (as defined in the Trust Agreement), of any Pledged Bonds the Principal Component, and the amount available to be drawn hereunder by subsequent Purchase Drawings or Principal -3- Drawings (unless the Principal Component has been previously reinstated with respect to such Purchase Drawing) shall be automatically reinstated by an amount equal to the principal of such Pledged Bonds and the Interest Component shall be automatically reinstated to an amount equal to 120 days' accrued interest on the reinstated Principal Component, computed as described below, each such reinstatement effective on the date of the release of such Pledged Bonds; provided, however, that in no event shall the Principal Component be reinstated to an amount in excess of an amount equal to the aggregate principal amount of the Bonds then Outstanding (as defined in the Trust Agreement). Each Interest Drawing honored by us hereunder shall automatically reduce the Interest Component and the amount available to be drawn hereunder by subsequent Interest Drawings by an amount equal to the amount of such Interest Drawing effective on the day of the honoring by us of such Interest Drawing. Such reduction shall automatically and irrevocably result in a corresponding reduction in the Stated Amount. If you shall not have received from us, within 15 calendar days after the honoring by us of any Interest Drawing, notice to the effect that we have not been reimbursed for such Interest Drawing or that any other "Event of Default" has occurred and is continuing under the Letter of Credit Agreement and instructing you as the Trustee to declare the principal of the Bonds to be immediately due and payable pursuant to Section 803 of the Trust Agreement, then the Interest Component and the amount available to be drawn hereunder by subsequent Interest Drawings shall be automatically reinstated by us, effecting on the sixteenth calendar day after an honoring by us of such Interest Drawing, by an amount equal to the amount of such Interest Drawing. In no event shall the Interest Component be reinstated to an amount in excess of the lesser of (i) $4,800,000 and (ii) an amount equal to 120 days' accrued interest on the then effective Principal Component, computed at a rate of 12% per annum for 120 days on the basis of 360-day year, including the first day but excluding the last day, notwithstanding the actual rate borne from time to time by the Bonds. Each such reinstatement of the Interest Component and the amount available to be drawn hereunder by subsequent Interest Drawings shall automatically result in a corresponding reinstatement of the Stated Amount. Upon receipt by us of your written and completed certificate in substantially the form of Annex IV attached hereto, with respect to the cancellation of Bonds in accordance with Section 508 of the Trust Agreement, the Stated Amount shall be reduced to an amount equal to the amount stated in paragraph 6 of said certificate, and the amounts available to be drawn hereunder by you by any subsequent Principal Drawings, Purchase Drawings or Interest Drawings shall be reduced, effective upon our receipt of such certificate, to the amounts stated in paragraph 4 (for Principal Drawings or Purchase Drawings) and paragraph 5 (for Interest Drawings), respectively, of such certificate. If the Stated Amount shall be partially reduced pursuant to this paragraph, we shall have the right to require you to surrender this Letter of Credit to us on or before the tenth Business Day (as hereinafter defined) following our receipt of such certificate. Upon such surrender, we may, at our option, either (a) amend this Letter of Credit to reflect thereon the amount of such reduction and the corresponding reductions in -4- the amounts available for the various drawings hereunder or (b) cancel this Letter of Credit and issue to you, in substitution therefor, a substitute irrevocable letter of credit in substantially the form hereof, reflecting such reductions. As used in this Letter of Credit, the term "Business Day" shall mean a day other than a Saturday, Sunday or other day on which banks in New York, New York or San Juan, Puerto Rico are authorized or required by law or executive order to close. Demand for payment may be made by you under this Letter of Credit at any time during our business hours on a Business Day at our address set forth below; provided, however, that no demand for payment may be made by you under this Letter of Credit earlier than 10:00 A.M., New York time, on the Business Day before the due date of the principal of, or interest accrued on the Bonds to which such demand for payment relates, or, in the case of a Purchase Drawing, 10:00 a.m., New York time, on the Business Day on which the Trustee receives the notice and documents described in Section 305(A) of the Trust Agreement which relates to such Purchase Drawing. If a demand for payment is made by you under this Letter of Credit at or prior to 2:00 P.M., New York time, on a Business Day and such demand for payment and the documents presented in connection therewith conform to the terms and conditions hereof, payment shall be made to you, in accordance with your payment instructions, of the amount demanded, in immediately available funds, not later than 12:00 P.M., New York time, on the next Business Day, provided, however, that in the case of a Principal Drawing or an Interest Drawing which is not made to pay the portion of the Purchase Price corresponding to interest, such payment shall in no event be made prior to the Payment Date (as defined in the applicable certificate in substantially the form of Annex I, Annex II or Annex III attached hereto). If a demand for payment is made by you under this Letter of Credit after 2:00 P.M., New York time, on a Business Day and such demand for payment and the documents presented in connection therewith conform to the terms and conditions hereof, payment shall be made to you, in accordance with your payment instructions, of the amount demanded, in immediately available funds, not later than 12:00 P.M., New York time, on the second succeeding Business Day, provided, however, that in the case of a Principal Drawing or an Interest Drawing which is not made to pay the portion of the Purchase Price corresponding to interest, such payment shall in no event be made prior to the Payment Date (as defined in the applicable certificate in substantially the form of Annex I, Annex II or Annex III attached hereto). If requested by you, payment under this Letter of Credit may be made by wire transfer of Federal Reserve Bank of New York funds to your account in a bank on the Federal Reserve wire system. If a demand for payment made by you under this Letter of Credit does not, in any instance, conform to the terms and conditions of this Letter of Credit, we shall give you prompt notice that such demand for payment was not effected in accordance with the terms and conditions of this Letter of Credit, stating the reasons therefor and that we are holding any documents at your disposal and will return the same to you, if you so request. Upon being notified that a demand for payment made by you under this Letter of Credit was not effected in conformity with this Letter of Credit, you may attempt to correct such nonconforming demand -5- for payment if, and to the extent that, you are entitled (without regard to the provisions of this sentence) and able to do so. This Letter of Credit applies only to the payment of principal (or the portion of the Purchase Price corresponding to principal) of Outstanding Bonds, and up to 120 days' interest (computed as aforesaid) accrued (or the portion of the Purchase Price corresponding to such interest) on Outstanding Bonds on or prior to the Termination Date, and does not apply to any interest (or the portion of the Purchase Price corresponding to such interest) that may accrue on the Bonds, or any principal (or the portion of the Purchase Price corresponding to principal) of the Bonds that may be payable with respect thereto, after the Termination Date (as hereinafter defined). This Letter of Credit shall expire at 5:00 P.M., New York time, on the earliest to occur of the following dates (the TERMINATION DATE): (a) March 9, 1998 (the EXPIRATION DATE); (b) the date on which you surrender this Letter of Credit to us, accompanied by your written statement certifying that all of the Bonds have been paid in full (or provision has been made for such payment in accordance with the Trust Agreement) or you are otherwise no longer entitled to the benefits of this Letter of Credit; (c) the date on which you surrender this Letter of Credit to us, accompanied by your written statement certifying that (i) the conditions precedent to the acceptance of a Successor Letter of Credit (as such term is defined in the Trust Agreement) have been satisfied and (ii) you have accepted the Successor Letter of Credit; (d) the date that is the sixteenth day after the date on which you receive notice from us to the effect that this Letter of Credit is terminated by reason of the occurrence and continuance of an "Event of Default" under the Letter of Credit Agreement and instructing you to accelerate the Bonds; and (e) the date on which we honor a Principal Drawing based upon the acceleration, mandatory redemption or maturity of the Bonds as a whole; provided, however, that the Bank shall have the option, exercisable in its sole discretion not later than March 9, 1997, to extend the Expiration Date by up to one year. This Letter of Credit shall promptly be surrendered to us by you upon any expiration pursuant to clause (a), (d) or (e) of the preceding sentence. You may transfer your rights under this Letter of Credit in their entirety (but not in part) only to a successor trustee properly appointed and qualified pursuant to Section 914 of the Trust Agreement and such transferred rights may be successively transferred to any subsequent successor trustee properly appointed and qualified pursuant to Section 914 of the Trust Agreement. Transfer of your rights under this Letter of Credit to any such transferee shall be effected upon the presentation to us of this Letter of Credit accompanied by an Instruction to Transfer in substantially the form attached hereto as Annex V. Only you (or a successor as permitted by the terms of this Letter of Credit) may make a drawing under this Letter of Credit. Upon the payment to you, in accordance with your payment instructions, of the amount specified in any draft drawn under this Letter of Credit, we shall be fully discharged of our obligation under this Letter of Credit with respect to such draft, -6- and we shall not thereafter be obligated to make any further payments under this Letter of Credit in respect of such draft, to you or to any other person (including the holder of any Bond) who may have made to you or to the Account Party, or makes to you or to the Account Party, a demand for payment with respect to any Bond. By paying to you an amount demanded in accordance herewith, we make no representation as to the correctness of such amount. This Letter of Credit sets forth, in full, our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the Trust Agreement, the Letter of Credit Agreement or the Bonds), except the drafts and the certificates referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except such drafts and certificates. References to this Letter of Credit shall include the certificates attached hereto. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce, Publication No. 400 (the UNIFORM CUSTOMS). This Letter of Credit shall be deemed to be a contract made under the laws of the State of New York and shall, as to matters not governed by the Uniform Customs, be governed by and construed in accordance with the laws of the State of New York. All demands for payment under this Letter of Credit, as well as all notices and other communications to us with respect to this Letter of Credit, shall be in writing and shall be addressed to us at 225 Liberty Street, Two World Financial Center, 38th Floor, New York, New York 10281, Attention: Planning and Administration Department, with a copy to the attention of Real Estate Finance Group - Akira Fujii and Russ J. Lopinto (or such other office as we shall designate to you in writing), specifically referring thereon to "The Mitsubishi Bank, Limited, New York Branch, Irrevocable Transferable Standby Letter of Credit No. C 182." Such demands for payment, notices and other communications shall be personally delivered or sent by tested telex to the following number: Telex No. 42-0367 (Answerback: BISHIBANKA NYK). All notices and other communications to you with respect to this Letter of Credit shall be in writing and shall be addressed to you at your address set forth above (or such other office -7- as you shall designate to us in writing. Such notices and other communications shall be sent by registered or certified mail, postage pre-paid, or by tested telex to the following number: 62- 0439 (Answerback: UST). Very truly yours, THE MITSUBISHI BANK, LIMITED, acting through its New York Branch By:______________________________________ Tadaaki Hamada Senior Vice President Annex I to Irrevocable Transferable Standby Letter of Credit PRINCIPAL DRAWING CERTIFICATE The undersigned, a duly authorized officer of Banco Popular de Puerto Rico (the TRUSTEE), hereby certifies to The Mitsubishi Bank, Limited, acting through its New York Branch (the BANK), with reference to Irrevocable Transferable Standby Letter of Credit No. _____ issued by the Bank in favor of the Trustee (the LETTER OF CREDIT), that: (1) The Trustee is the designated trustee under the Trust Agreement (such term and all other capitalized terms used herein that are not otherwise defined herein shall have the respective meanings set forth in the Letter of Credit) for the holders of the Bonds. (2) The Trustee is making a demand for payment under the Letter of Credit to pay the principal of the Bonds that is due and payable on _____________, 19____ (the PAYMENT DATE). (3) The Trustee does not have available sufficient other Eligible Moneys to pay the principal of the Bonds that is due and payable on the Payment Date. (4) The amount of the draft accompanying this Certificate (i) represents $____________, being drawn by the Trustee under the Letter of Credit to pay the amount of the principal of the Bonds (other than Pledged Bonds) that is due and payable on the Payment Date, (ii) does not include any amount to pay the principal of the Bonds held by or for the account of the Account Party or the Guarantors, (iii) was computed in accordance with the provisions of the Bonds and the Trust Agreement, (iv) does not exceed the amount of the Principal Component or the amount available to be drawn under the Letter of Credit by a Principal Drawing as in effect on the Payment Date and (v) has not been and is not the subject of a prior or contemporaneous demand for payment under the Letter of Credit. (5) Upon receipt by the Trustee of the amount demanded hereby, (i) the Trustee will apply the same directly to the payment when due of the principal of the Bonds then due pursuant to the Trust Agreement, (ii) no portion of said amount shall be applied by the Trustee for any other purpose and (iii) no portion of said amount shall be commingled with other funds held by the Trustee. The Trustee hereby acknowledges that, pursuant to the terms of the Letter of Credit, (A) the honoring by the Bank of the Principal Drawing made by this Certificate shall automatically -2- reduce (1) the Principal Component and the amount available to be drawn under the Letter of Credit by subsequent Principal Drawings or Purchase Drawings by an amount equal to the amount of such Principal Drawing, as set forth in clause (i) of paragraph (4) of this Certificate and (2) the Interest Component and the amount available to be drawn under the Letter of Credit by subsequent Interest Drawings to an amount equal to 120 days' accrued interest (computed as provided in the Letter of Credit) on the then effective Principal Component; and (B) such reduction shall automatically result in a corresponding reduction in the Stated Amount. Please [deposit] [wire transfer] the amount demanded hereby [in] [to] ____________. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ____________, 19____. BANCO POPULAR DE PUERTO RICO, as Trustee By:_________________________________ Name: Title: Annex II to Irrevocable Transferable Standby Letter of Credit INTEREST DRAWING CERTIFICATE The undersigned, a duly authorized officer of Banco Popular de Puerto Rico (the TRUSTEE), hereby certifies to The Mitsubishi Bank, Limited, acting through its New York Branch (the BANK), with reference to Irrevocable Transferable Standby Letter of Credit No. _____ issued by the Bank in favor of the Trustee (the LETTER OF CREDIT), that: (1) The Trustee is the designated trustee under the Trust Agreement (such term and all other capitalized terms used herein that are not otherwise defined herein shall have the respective meanings set forth in the Letter of Credit) for the holders of the Bonds. (2) The Trustee is making a demand for payment under the Letter of Credit to pay [interest accrued on the Bonds] [the portion of the Purchase Price corresponding to interest accrued on the Put Bonds pursuant to Section 305 of the Trust Agreement that is due and payable on _____________, 199_ (the PAYMENT DATE). (3) The Trustee does not have available sufficient other Eligible Moneys to pay [the interest accrued on the Bonds] [the portion of the Purchase Price corresponding to interest accrued on the Put Bonds pursuant to Section 305 of the Trust Agreement] that is due and payable on the Payment Date. (4) The amount of the draft accompanying this Certificate (i) represents $____________, being drawn by the Trustee under the Letter of Credit to pay the amount of [interest accrued on the Bonds] [the portion of the Purchase Price corresponding to interest accrued on the Put Bonds pursuant to Section 305 of the Trust Agreement] that is due on the Payment Date, (ii) does not include any amount to pay the interest on Pledged Bonds or Bonds held by or for the account of the Account Party or the Guarantors, (iii) was computed in accordance with the provisions of the Bonds and the Trust Agreement, (iv) does not exceed the amount of the Interest Component or the amount available to be drawn under the Letter of Credit by Interest Drawings as in effect on the Payment Date and (v) has not been and is not the subject of a prior or contemporaneous demand for payment under the Letter of Credit. (5) Upon receipt by the Trustee of the amount demanded hereby, (i) the Trustee will apply the same directly to the payment when due of [the interest accrued on the Bonds] [the portion of the Purchase Price corresponding to interest accrued on the Put Bonds pursuant to Section 305 of the Trust Agreement], (ii) no portion of said -2- amount shall be applied by the Trustee for any other purpose and (iii) no portion of said amount shall be commingled with other funds held by the Trustee. The Trustee hereby acknowledges that, pursuant to the terms of the Letter of Credit, (A) the honoring by the Bank of the Interest Drawing made by this Certificate shall automatically reduce the Interest Component and the amount available to be drawn under the Letter of Credit by subsequent Principal Drawings or Interest Drawings by an amount equal to the amount of the draft accompanying this Certificate, as set forth in clause (i) of paragraph (4) of this Certificate; and (B) such reduction shall automatically result in a corresponding reduction in the Stated Amount, subject to reinstatement pursuant to the terms and conditions of the Letter of Credit. Please [deposit] [wire transfer] the amount demanded hereby [in] [to] ____________. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ____________, 199_. BANCO POPULAR DE PUERTO RICO, as Trustee By: Name: Title: Annex III to Irrevocable Transferable Letter of Credit PURCHASE DRAWING CERTIFICATE The undersigned, a duly authorized officer of Banco Popular de Puerto Rico (the TRUSTEE), hereby certifies to The Mitsubishi Bank, Limited, acting through its New York Branch (the BANK), with reference to Irrevocable Transferable Letter of Credit No. _____ issued by the Bank in favor of the Trustee (the LETTER OF CREDIT), that: (1) The Trustee is the designated trustee under the Trust Agreement (such term and all other capitalized terms used herein which are not otherwise defined herein shall have the respective meanings set forth in the Letter of Credit) for the holders of the Bonds. (2) The Trustee is making a demand for payment under the Letter of Credit to pay the portion of the Purchase Price corresponding to principal of the Put Bonds pursuant to Section 305 of the Trust Agreement that is due and payable on _____________, 19____ (the PAYMENT DATE). (3) The amount of the draft accompanying this Certificate (i) represents $____________, being drawn by the Trustee under the Letter of Credit to pay the amount of the portion of the Purchase Price corresponding to principal of the Put Bonds pursuant to Section 305 of the Trust Agreement that is due on the Payment Date, (ii) was computed in accordance with the provisions of the Bonds and the Trust Agreement, (iii) does not exceed the amount of the Principal Component or the amount available to be drawn under the Letter of Credit by a Purchase Drawing as in effect on the Payment Date and (iv) has not been and is not the subject of a prior or contemporaneous demand for payment under the Letter of Credit. (4) Upon receipt by the Trustee of the amount demanded hereby, (i) the Trustee will apply the same directly to the payment when due of the amount of the portion of the Purchase Price corresponding to principal on the Put Bonds pursuant to the Trust Agreement, (ii) no portion of said amount shall be applied by the Trustee for any other purpose and (iii) no portion of said amount shall be commingled with other funds held by the Trustee. The Trustee hereby acknowledges that, pursuant to the terms of the Letter of Credit, (A) the honoring by the Bank of the Purchase Drawing made by this Certificate shall automatically reduce the Principal Component and the amount available to be drawn under the Letter of Credit by subsequent Purchase Drawings or Principal Drawings by an amount equal to the amount of such Purchase Drawing, as set forth in clause (i) of paragraph (3) of this Certificate; and (B) -2- such reduction shall automatically result in a corresponding reduction in the Stated Amount, subject to reinstatement pursuant to the terms and conditions of the Letter of Credit. Please [deposit] [wire transfer] the amount demanded hereby to ____________. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ____________, 19____. BANCO POPULAR DE PUERTO RICO, as Trustee By:________________________________________ Name: Title: Annex IV to Irrevocable Transferable Standby Letter of Credit CERTIFICATE FOR THE REDUCTION OF AMOUNTS AVAILABLE UNDER LETTER OF CREDIT The undersigned, a duly authorized officer of Banco Popular de Puerto Rico (the TRUSTEE), hereby certifies to The Mitsubishi Bank, Limited, acting through its New York Branch (the BANK), with reference to Irrevocable Transferable Standby Letter of Credit No. _____ issued by the Bank in favor of the Trustee (the LETTER OF CREDIT), that: (1) The Trustee is the designated trustee under the Trust Agreement (such term and all other capitalized terms used herein which are not otherwise defined herein shall have the respective meanings set forth in the Letter of Credit) for the holders of the Bonds. (2) The Trustee hereby notifies the Bank that on or prior to the date hereof $____________ principal amount of Bonds have been delivered to the Trustee and cancelled in accordance with Section 508 of the Trust Agreement. (3) Following the cancellation referred to in paragraph (2) above, the aggregate principal amount of all of the Bonds which are OUTSTANDING within the meaning of the Trust Agreement is $________________. (4) The Principal Component and amount available to be drawn by the Trustee under the Letter of Credit by Principal Drawings or Purchase Drawings is reduced to $____________ (such amount being equal to the amount specified in paragraph (3) above), upon receipt by the Bank of this Certificate. (5) The Interest Component and amount available to be drawn by the Trustee under the Letter of Credit by Interest Drawings is reduced to $__________ upon receipt by the Bank of this Certificate, which amount equals interest on the Bonds referred to in paragraph (3) above computed at a rate of 12% per annum for a period of 120 days on the basis of a 360-day year, including the first day but excluding the last day. (6) The Stated Amount of the Letter of Credit is reduced to $______________ (such amount being equal to the sum of the amounts specified in paragraphs (4) and (5) above), upon receipt by the Bank of this Certificate. -2- IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____ day of ____________, 19____. BANCO POPULAR DE PUERTO RICO, as Trustee By: Name: Title: Annex V to Irrevocable Transferable Standby Letter of Credit INSTRUCTION TO TRANSFER [Date] The Mitsubishi Bank, Limited, New York Branch 225 Liberty Street Two World Financial Center New York, NY 10281 Attention: Real Estate Finance Group The Mitsubishi Bank, Limited, New York Branch Irrevocable Transferable Standby Letter of Credit No. ______ (the LETTER OF CREDIT) Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: _______________________________________ [Name of Transferee] _______________________________________ [Address of Transferee] all rights of the undersigned beneficiary under the Letter of Credit. The transferee has succeeded the undersigned as designated trustee under the Trust Agreement referred to in the first paragraph of the Letter of Credit. By this transfer, all rights of the undersigned beneficiary in the Letter of Credit are transferred to the transferee and the transferee shall hereafter have the sole rights as beneficiary thereof. -2- The Letter of Credit is returned herewith, and we ask that this transfer be effective and that you issue a new irrevocable transferable letter of credit in favor of the transferee with provisions consistent with the Letter of Credit. Very truly yours, BANCO POPULAR DE PUERTO RICO, as predecessor Trustee By: Name: Title: EX-10 7 EXHIBIT 10.4 FIRST AMENDMENT TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT This FIRST AMENDMENT TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this AMENDMENT) dated as of May 5, 1992 between EL CONQUISTADOR PARTNERSHIP, L.P., a Delaware limited partnership (the COMPANY), WKA EL CON ASSOCIATES, a New York general partnership (WKA), KUMAGAI CARIBBEAN, INC., a Texas corporation (KGC), and THE MITSUBISHI BANK, LIMITED, a Japanese banking corporation acting through its New York Branch (the BANK). W I T N E S S E T H : WHEREAS, the Company and the Bank entered into that certain Letter of Credit and Reimbursement Agreement dated as of February 7, 1991 (the LC AGREEMENT; all capitalized terms used but not defined herein shall have the respective meanings assigned to them in the LC Agreement); and WHEREAS, the LC Agreement required the Initial Disbursement to occur on or prior to February 7, 1992; and WHEREAS, the conditions to the Initial Disbursement enumerated in the LC Agreement were not fulfilled in all respects by February 7, 1992; and WHEREAS, the Bank has determined, with the concurrence of the Company, that the aggregate amount of undisbursed Bond Proceeds is insufficient to pay the aggregate of the cost of completing the Construction of the Improvements and the other costs contemplated in the Budget, and that the amount required to eliminate such insufficiency is $24,000,000; and WHEREAS, pursuant to Paragraph 9(k) of the LC Agreement, the Bank has required, as a condition to the Initial Disbursement, that the Company and/or its partners deposit with the Bank the amount of $24,000,000 (the Loan Balance Amount); and WHEREAS, a portion of the Loan Balance Amount represents amounts previously expended by the Borrower and with respect to which the Borrower is entitled to reimbursement; and WHEREAS, WKA and KGC have determined to each provide one-half of the Loan Balance Amount as equity and/or a loan to the Company; and WHEREAS, in order to finance a portion of such contributions, WKA and KGC shall together borrow the amount of $8,000,000 from GDB on the date hereof, pursuant to a Credit Facility Agreement dated the date hereof among GDB, WKA and KGC (the GDB Additional Loan Agreement); and WHEREAS, in consideration of the Bank's agreement to allow the Initial Disbursement to occur after February 7, 1992, the Company has agreed to certain changes in the terms and conditions to the LC Agreement. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The following terms defined in the LC Agreement shall be changed to mean the following: COMPANY PARTNERSHIP AGREEMENT shall mean that certain Venture Agreement dated January 12, 1990 between KGC and WKA, as amended by that certain Amendment Agreement dated April 30, 1992 (the Amendment to Venture Agreement). 2 COMPLETION DATE shall mean October 12, 1993. GUARANTIES shall mean the (i) Environmental Indemnity, the Completion Guaranty, the Secondary Completion Guaranty, and (ii) the Completion Guaranty of even date herewith by WKA to the Company. GUARANTORS shall mean KIUSA, KGCC, KGC, Williams and WKA. INITIAL DISBURSEMENT shall mean the initial disbursement by the Bank of the funds held by the Bank pursuant to Section 9(k) of the LC Agreement. SUBSTANTIAL COMPLETION shall mean the occurrence of all of the following events: (i) the completion of the Construction of the Improvements (excluding punchlist items) in accordance with all Legal Requirements and substantially in accordance with the Plans as to any aspect of Construction and the issuance of applicable use or occupancy permits therefor satisfactory to the Bank; (ii) the delivery to the Bank of certificates, in form and content satisfactory to the Bank, from the Company, the Architects and the Bank's Consultant to the effect that all of the work required to be performed substantially to complete the Improvements in accordance with all Legal Requirements and in accordance with the Plans has been performed; and (iii) the Commencement Date under the Management Agreement. 2. The Annual Letter of Credit Fee shall be increased by .20% per annum through the Date of Substantial Completion and by .30% per annum thereafter, so that the percentages 1.25%, 1.05% and .90% which appear in Section 2(b) of the LC Agreement shall be changed to 1.45%, 1.35% and 1.20%, respectively. 3. The Bank consents to the execution and delivery of the Amendment to Venture Agreement. Accordingly, the first three sentences of Section 7(ii) of the LC Agreement 3 are amended in their entirety as follows: (ii) Deficiency Loans. Any funds advanced to the Company as Deficiency Loans (as defined in the Company Partnership Agreement), whether or not at the direction of the Bank, shall be applied only to the operating costs or other fees and expenses related to the operation of the Project; provided, however, that the foregoing restriction shall be of no effect from and after the Coverage Date. After the Date of Substantial Completion and until the Coverage Date, the Bank will have the right to cause the Company, acting through WKA, (A) at such times as the Bank shall determine in the reasonable exercise of its judgment that an Operating Deficit exists with respect to any month, to require the General Partners to make Deficiency Loans in amounts of up to $14,000,000 in the aggregate (less any such Deficiency Loans for such purpose which may have previously been voluntarily advanced), and (B) to apply such funds on account of such Operating Deficits. The Bank shall have no right to cause Deficiency Loans to be made to pay principal under the Bonds, the Loan Agreement or hereunder. Notwithstanding anything in the Company Partnership Agreement to the contrary, neither the Deficiency Loans nor the operating reserve line item of the Budget may be used for the purpose of paying principal or interest under the GDB Additional Loan. 4. From and after the date on which Deficiency Loans in the aggregate amount of $14,000,000 have been made and applied to the payment of Operating Deficits and until the Coverage Date, if the Bank shall determine in the reasonable exercise of its judgment that further Operating Deficits (which, for the purposes of this Paragraph 4, shall not include debt service on the GDB Loan or any Special Loans (as defined in the Company Partnership 4 Agreement)) exist with respect to any month, the Bank may require (i) each of WKA and KGC to make additional loans to the Company in the amount of one-half of such Operating Deficits, and (ii) the Company to apply such funds on account of such Operating Deficits; provided, however, that the obligation of each of WKA and KGC to make such additional loans shall be limited to $3,000,000 in the aggregate (so that the total amount of such additional loans required to be made by the Bank shall not exceed $6,000,000 in the aggregate). If the Bank requires any such loans to be made, the Company hereby irrevocably directs WKA and KGC to pay the proceeds of such loans at the direction of the Bank for application to such Operating Deficits. The failure by WKA and/or KGC to make any such additional loans shall constitute a default under the LC Agreement. The obligations of WKA under this Paragraph 4 shall be severally guarantied by WMS Industries, Hugh Andrews and Burton I. Koffman and Richard E. Koffman (the ADDITIONAL LOAN GUARANTORS) pursuant to guaranties to be executed contemporaneously herewith. It shall be deemed an Event of Default if (i) any of the events described in clauses (v), (vi), (vii) and (viii) of Section 12(a) of the LC Agreement shall occur with respect to any of the Additional Loan Guarantors, and (ii) the Company fails to provide the Bank, within 60 days after the event in question, with reasonably acceptable collateral or guaranties to replace the guaranties of the Additional Loan Guarantors with respect to whom such event occurred. 5. Simultaneously herewith, GDB shall fully advance the GDB Additional Loan, and WKA and KGC shall deposit the Loan Balance Amount with the Bank in the following manner: $3,538,705.36, representing amounts previously expended by the Borrower on account of Total Project Costs, shall be paid to or at the Borrower's direction; $3,560,966.34, representing the remaining portion of the Initial Disbursement, shall be disbursed 5 in accordance with the Request for Disbursement approved by the Bank; and the balance of the Loan Balance Amount $16,900,298.30) shall be paid to the Bank by wire transfer. The Bank shall hold the Loan Balance Amount in an account at the Bank, which account shall bear interest at a fluctuating rate per annum equal to the Eurodollar Time Deposit Rate. The Line Item for Contingency shall be increased by the amount of any interest earned on the Loan Balance Amount. All such interest shall be added to and become part of the Loan Balance Amount, and, to the extent not disbursed to pay Project Costs, shall be released to WKA and KGC upon Substantial Completion of the Project. The Loan Balance Amount may be commingled with the Bank's general funds. Notwithstanding anything in Section 9(k) of the LC Agreement to the contrary, the Bank is hereby irrevocably authorized and directed by the Company, WKA and KGC to apply the Loan Balance Amount to the costs of the first Disbursements for Hard Costs and Soft Costs approved by the Bank, without regard to the particular Line Item(s) to which such costs relate, before the Bank shall direct and authorize the Trustee to disburse proceeds of the Loan to pay such costs. Upon each such application of a portion of the Loan Balance Amount, a corresponding amount shall be deemed to have been loaned by WKA and KGC to the Company. Unless and until the Loan Balance Amount is so applied, the Loan Balance Amount shall constitute additional security for WKA's and KGC's obligations under their respective Completion Guaranties and for the Company's performance of its obligations pursuant to this Agreement (a security interest therein being hereby created). The parties agree that the first $8,000,000 of the Loan Balance Amount disbursed by the Bank shall be deemed to be the proceeds of the loan from WKA and KGC to the Company. 6 6. The Bank confirms that the Initial Disbursement is taking place on the date hereof, notwithstanding that the Initial Disbursement is being funded with a portion of the Loan Balance Amount rather than with Bond Proceeds. 7. The Company shall agree to promptly recommence construction of the Project, so that the following construction activities will commence on or before the dates listed below: - Begin wall footings for the Cliftop remodeling -- May 30, 1992. - Begin Elect/Mech. underground for Cliftop new building -- May 30, 1992. - Begin mobilization for Convention Center -- May 15, 1992. - Begin footing excavation for Convention Center -- May 30, 1992. - Begin mobilization for Hotel core/casino -- May 15, 1992. - Begin footing for Panoramic Elevator at the Hotel core/casino -- May 30, 1992. - Begin footing excavation for Harborside -- June 30, 1992. Failure to comply with the foregoing requirements shall constitute an Event of Default under the LC Agreement. 8. The Bank confirms that it has approved the execution by the Company of the Trade Contracts described on Schedule A annexed hereto in the form presented by the Company to the Bank's Consultant. 9. The following is added to Paragraph 12(a) of the LC Agreement: (xxiii) if any Event of Default relating to the Project shall occur under the 7 GDB Loan Agreement or the Additional GDB Loan Agreement. 10. WKA and KGC agree to use their respective best efforts to assist the Bank in obtaining participants for the Bank's interest in the LC Agreement and the Letter of Credit. Except as amended hereby, the LC Agreement remains in full force and effect. This Agreement may be executed in one or more counterparts. 8 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the day and year first above written. EL CONQUISTADOR PARTNERSHIP L.P. By: KUMAGAI CARIBBEAN, INC. By: /s/ ____________________________ Shunsuke Nakane, President By: WKA EL CON ASSOCIATES By: /s/ ____________________________ Hugh A. Andrews, Authorized Signatory WKA EL CON ASSOCIATES By: /s/ ____________________________ Hugh A. Andrews, Authorized Signatory KUMAGAI CARIBBEAN, INC. By: /s/ ____________________________ Shunsuke Nakane, President 9 THE MITSUBISHI BANK, LIMITED, acting through its New York Branch By: _____________________________ 10 SCHEDULE A EL CONQUISTADOR PARTNERSHIP L.P. TRADE CONTRACTS 1. Purchase Order #1103 dated February 3, 1992 to Stelko Electrical Products, Co. for purchase of Switchgear Units and 38KV Substation for $161,000. 2. Purchase Order #1109 dated February 4, 1992 to Westinghouse Electric Supply, Co. for purchase of Units Substations for $468,000. 3. Purchase Order #1108 dated February 2, 1992 to Zenruss International for purchase of Cooling Towers for $148,000. 4. Purchase Order #1111 dated February 3, 1992 to Trane Export Inc. for purchase of AHU,VAV Boxes for $1,543,000. 5. Purchase Order #1106 dated February 3, 1992 to Techinical Distributors, Inc. for purchase of Pumps for $68,435. 6. Purchase Order #1125 dated February 3, 1992 to United Equipment Corp. for purchase of Pressure Reducing Valves for $12,200. 7. Purchase Order #1122 dated February 3, 1992 to SyncroFlow c/o United Equipment Corp. for purchase of Water Booster Systems and Well Water Pumps for $87,300. 8. Purchase Order #1123 dated February 3, 1992 to Aurora Pump c/o United Equipment Corp. for purchase of Fire Pump for $40,500. 9. Trade Contract of Desarrollos Metropolitanos, S.E. for Convention Center, Hotel Core and Casino, and Seaview Building, dated February 9, 1992, for $37,944,600. 10. Trade Contract of Bird Construction Co. Inc. for Clifftop Buildings and Main Pool, dated February 9, 1992, for $18,050,000. 11 11. Trade Contract of Redondo Construction Corp. for WWTF, dated February 10, 1992, for $1,925,000. 12. Trade Contract of Von Roll Transport Systems Inc. for Funicular, dated February 1, 1992, for $1,708,500. 13. Trade contract of Central Florida Turf Inc. for Golf Course, dated _________________, 199__, for $2,310,660. 14. Trade Contract of Dover Elevator Company for Elevator/Escalator, dated February 7, 1992 for $2,109,213. 15. Trade Contract of Redondo Construction Corp. for General Sitework and Infrastructure, dated August 22, 1991, for $2,163,800, and the following change orders: a) Pump House 1 & 3, for $35,000. b) Water lines to Core Hotel and Casino, for $13,000. c) CO-01/05/08 Lagoon Surcharge, for $93,052. d) CO-02 Golf Course - grading, for $15,860. e) CO-03 Core Hotel and Casino - access to Panoramic, for $1,000. f) C04 Core Hotel and Casino - Demolition, for $3,500. g) CO-06 Sitework, for $11,245. h) CO-10 Earthwork - Adj., for $4,842. 16. Trade Contract of Bermudez & Longo, S.E. for Infra (Elec), dated September 3, 1991, for $885,000. 17. Trade Contract of Hoover Pumping Systems for Fire Pumps, dated February 4, 1992, for $228,000. 12 EX-10 8 EXHIBIT 10.5 ASSIGNMENT AND MODIFICATION AGREEMENT THIS ASSIGNMENT AND MODIFICATION AGREEMENT (this "Agreement") dated as of the 3rd day of August, 1998, is made by and among EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership ("Owner"), CITICORP REAL ESTATE, INC., a Delaware corporation ("CRE"), BANCO POPULAR DE PUERTO RICO, a banking corporation organized and existing under the laws of the Commonwealth of Puerto Rico, as trustee ("Trustee"), PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY, a public corporation and government instrumentality created pursuant to the laws of the Commonwealth of Puerto Rico ("Authority"), and THE BANK OF TOKYO-MITSUBISHI, LTD. (formerly known as The Mitsubishi Bank, Limited), a Japanese banking corporation acting through its New York Branch ("BTM"). R E C I T A L S: WHEREAS, pursuant to the terms of that certain Trust Agreement dated as of February 7, 1991 (as heretofore supplemented and amended, the "Indenture"), by and between the Authority and the Trustee and that certain Loan Agreement dated as of February 7, 1991 (as heretofore amended, the "Loan Agreement"), by and between the Authority and the Owner, the Authority issued (i) its Industrial Revenue Bonds, 1991 Series A (El Conquistador Resort Project), (the "Series A Bonds"), (ii) its Convertible Industrial Revenue Bonds, 1991 Series B (El Conquistador Resort Project), (the "Series B Bonds"), and (iii) its Industrial Revenue Bonds, 1991 Series C (El Conquistador Resort Project), (the "Series C Bonds"), in the aggregate principal amount of $120,000,000 (the Series A Bonds, Series B Bonds and Series C Bonds being hereinafter referred to collectively as the "Bonds"), and loaned the proceeds derived from the sale of the Bonds to the Owner (the "Loan") to finance all or a portion of the cost of the Owner's acquisition, construction and equipping of that certain first-class destination resort hotel and related facilities located in the Las Croabas area of Fajardo, Puerto Rico and known as the El Conquistador Resort and Country Club and more particularly described on Exhibit A attached hereto and made a part hereof (the "Project"); and WHEREAS, as a condition precedent to the issuance of the Bonds and the making of the Loan to the Owner, the Authority required that the Owner deliver or cause to be delivered to the Trustee, for the benefit of the holders of the Bonds, an irrevocable, transferable letter of credit to secure the payment of the principal of, and interest on, the Bonds and to provide for the payment of the purchase price thereof in accordance with the terms of the Indenture; and WHEREAS, BTM issued its irrevocable letter of credit to the Trustee, for the account of Owner (said letter of credit, as heretofore modified, amended or substituted, the "Letter of Credit"), upon and subject to the terms, provisions and conditions set forth in that certain Letter of Credit and Reimbursement Agreement dated as of February 7, 1991 by and between BTM and the Owner (as heretofore modified and amended, the "Reimbursement Agreement"); and WHEREAS, the obligations of the Owner under the Reimbursement Agreement, the Loan Agreement, the Mortgage Note, dated May 4, 1992, made by the Owner and payable to bearer, in the principal amount of $100,000 and each of the four Mortgage Notes, dated February 7, 1991 made by the Owner and payable to the Authority, in the respective principal amounts of $120,000,000, $6,612,000, $20,000,000 and $2,000,000 (as heretofore endorsed, modified, supplemented and/or amended being hereinafter sometimes referred to collectively as the "Notes"), are secured by, among other things, (a) that certain first mortgage made by the Owner by Deed of Mortgage Number One executed in San Juan on February 7, 1991 before Notary Public Leonor M. Aguilar-Guerrero (as heretofore modified, supplemented and/or amended the "Fee Mortgage"), (b) that certain first leasehold mortgage made by the Owner by Deed of Leasehold Mortgage, Number Two executed in San Juan on February 7, 1991 before Notary Public Leonor M. Aguilar-Guerrero (as heretofore modified, supplemented and/or amended, the "Leasehold Mortgage"), (c) that certain Collateral Pledge Agreement, dated as of February 7, 1991, made by the Owner in favor of the Authority and BTM (as heretofore modified, supplemented and/or amended, the "Collateral Pledge Agreement"), (d) that certain Assignment of Contracts Agreement dated as of February 7, 1991, made by the Owner in favor of BTM (as heretofore modified, supplemented and/or amended, the "Assignment of Contracts Agreement"), (e) that certain Assignment of Management Agreement dated as of February 7, 1991, made by the Owner in favor of BTM (as heretofore modified, supplemented and/or amended, the "Assignment of Management Agreement"), (f) that certain Assignment of Accounts Receivable Agreement dated as of February 7, 1991, made by the Owner in favor of BTM (as heretofore modified, supplemented and/or amended, the "Assignment of Accounts Receivable Agreement"), (g) that certain Pledge and Security Agreement dated as of February 7, 1991, made by the Owner in favor of BTM (as heretofore modified, supplemented and/or amended, the "Pledge and Security Agreement"), (h) that certain Management Agreement Subordination and Attornment Agreement dated as of February 7, 1991, between Williams Hospitality Management Corporation and BTM (as heretofore modified, supplemented and/or amended, the "Management Subordination Agreement"), (i) that certain Assignment of Contracts Agreement dated as of May 5, 1992 made by the Owner in favor of BTM (as heretofore modified, supplemented and/or amended, the "Second Assignment of Contracts Agreement"), (j) that certain Collateral Pledge Agreement dated as of May 4, 1992 made by the Owner in favor of BTM (as heretofore modified, supplemented and/or amended, the "Second Collateral Pledge Agreement"), (k) that certain first mortgage made by the Owner by Deed of Mortgage Number Thirty- Two executed in San Juan on May 4, 1992 before Notary Public Juan Antonio Aquino Barrera (as heretofore modified, supplemented and/or amended the "Second Fee Mortgage"), (the Reimbursement Agreement, Notes, Fee Mortgage, Leasehold Mortgage, Collateral Pledge Agreement, Assignment of Contracts, Assignment of Management Agreement, Assignment of Accounts Receivable Agreement, Pledge and Security Agreement, Management Subordination Agreement, Second Assignment of Contracts Agreement, Second Collateral Pledge Agreement, Second Fee Mortgage and all other notes, mortgages, deeds of trust, assignments, guaranties, indemnities, documents, instruments, agreements and certificates executed or delivered in connection therewith and/or evidencing or securing, directly or indirectly, the Owner's obligations thereunder, including, without limitation, each of the documents set forth on Exhibit B attached hereto and made a part hereof, each as heretofore modified, 2 supplemented and/or amended, being hereinafter sometimes referred to collectively as the "L/C Documents"); and WHEREAS, on August 3, 1998, BTM honored a principal drawing on the Letter of Credit made by the Trustee in the amount of $120,000,000, which amount the Trustee has applied or are available for application to the payment of the principal of the Bonds; and WHEREAS, as of August 3, 1998, all of the outstanding Bonds have been called for redemption in accordance with the terms of the Indenture from funds drawn by the Trustee under the Letter of Credit; and WHEREAS, on and as of August 3, 1998, all of the Bonds have been paid in full (or provision has been made for such payment in accordance with the terms of the Indenture), and, as a result, the Letter of Credit has expired in accordance with its terms and has been surrendered by the Trustee to BTM for cancellation; and WHEREAS, pursuant to the terms of the Reimbursement Agreement, Owner is obligated to immediately reimburse BTM for the full amount drawn under the Letter of Credit on August 3, 1998; and WHEREAS, as of the Effective Date (as hereinafter defined), the Owner has paid to BTM $30,000,000 in partial reimbursement for the principal draw on the Letter of Credit; and WHEREAS, after the application of such payments made by the Owner to BTM, the unreimbursed portion of the August 3, 1998 principal draw on the Letter of Credit in the amount of $90,000,000, together with interest thereon as provided in the Reimbursement Agreement (the "Reimbursement Amount") remains outstanding under the Reimbursement Agreement and the Owner is currently obligated under the terms of the Reimbursement Agreement to immediately pay the Reimbursement Amount to BTM; and WHEREAS, CRE desires to purchase from BTM all of BTM's right, title and interest in, to and under the Reimbursement Agreement and each of the other L/C Documents including, without limitation, the right to receive immediate payment of the Reimbursement Amount from the Owner; and WHEREAS, BTM desires to sell to CRE all of BTM's right, title and interest in, to and under the Reimbursement Agreement and each of the other L/C Documents including, without limitation, the right to receive immediate payment of the Reimbursement Amount from the Owner; and WHEREAS, after the assignment of all of BTM's right, title and interest in, to and under the Reimbursement Agreement and each of the other L/C Documents to CRE, the Owner and CRE desire to amend the Reimbursement Agreement and each of the other L/C Documents as set forth herein; 3 WHEREAS, the Owner has requested that CRE extend the term for payment of the Reimbursement Amount and modify and amend certain terms and conditions of the Reimbursement Agreement and the L/C Documents, and CRE is willing to extend the term for payment of the Reimbursement Amount and to make such modifications and amendments upon the terms, provisions and conditions hereinafter set forth; WHEREAS, as a condition to extending the term for payment of the Reimbursement Amount and making the other modifications to the Reimbursement Agreement and the other L/C Documents, CRE has required, among other things, that the Owner execute and deliver, or cause to be executed and delivered, each of the documents, instruments and agreements set forth on Exhibit C attached hereto and made a part hereof (collectively, the "Additional Security Documents") to additionally evidence and/or secure the obligations of the Owner under the Reimbursement Agreement and each of the other L/C Documents, as assigned and amended hereby; NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: 1. Recitals. The recitals set forth herein are true and accurate and are incorporated herein by reference. 2. Definitions. All initially capitalized terms used herein, unless otherwise specifically defined herein, shall have the meanings assigned to such terms in the Reimbursement Agreement, as assigned and modified hereby. 3. Assignment. (a) BTM hereby grants, bargains, sells, conveys, assigns, transfers and sets over to CRE, its successors and assigns, all of BTM's right, title and interest in, to and under the Reimbursement Agreement and each of the other L/C Documents, without recourse and except as set forth herein, without representation or warranty. (b) The Authority hereby grants, bargains, sells, conveys, assigns, transfers and sets over to CRE, its successors and assigns, all of the Authority's rights, title, interests and benefits in, to and under the Indenture, the Loan Agreement and each of the L/C Documents, without recourse, representation or warranty except as set forth herein. (c) The Trustee hereby grants, bargains, sells, conveys, assigns, transfers and sets over to CRE, its successors and assigns, the Trust Estate (as defined in the Indenture) pursuant to the provisions of Section 1301 of the Indenture, together with all of the Trustee's rights, title, interests and benefits in, to and under the Loan Agreement and each of the L/C Documents, without recourse, representation or warranty except as set forth herein except for its rights to indemnification, payment of its expenses and related rights arising under Section 4.05 and 4.06 of the Loan Agreement. 4 4. Acceptance of Assignment. (a) The Owner hereby expressly and unconditionally acknowledges and consents (to the extent that such acknowledgement or consent is required) to the assignment from BTM to CRE of all of BTM's right, title and interest in, to and under the Reimbursement Agreement and each of the other L/C Documents, as herein provided. (b) The Owner hereby expressly and unconditionally acknowledges and consents to the assignment from the Authority to CRE of all of the Authority's rights, title, interests and benefits in, to and under the Loan Agreement and each of the L/C Documents, as herein provided. (c) The Owner hereby expressly and unconditionally instructs the Trustee to assign the Trust Estate to CRE and accordingly acknowledges and consents to the assignment from the Trustee to CRE of the Trust Estate, together with all of the Trustee's rights, title, interests and benefits in, to and under the Indenture, the Loan Agreement and each of the L/C Documents, as herein provided. (d) CRE hereby accepts the assignments from the Trustee, the Authority and BTM of all of their rights, title, interests and benefits in, to and under the Trust Estate, the Reimbursement Agreement, the Loan Agreement and each of the other L/C Documents, as herein provided. (e) The Owner hereby agrees to pay to CRE all amounts required to be paid by Owner under the terms of the Reimbursement Agreement and each of the other L/C Documents, each as assigned and modified hereby, at the times, in the manner and in the amounts provided in the Reimbursement Agreement and each of the other L/C Documents, as assigned and modified hereby, including, without limitation, the payment of the Reimbursement Amount. Further, the Owner agrees to observe and perform each and every term, covenant, provision and condition required to be observed or performed by Owner under the terms of the Reimbursement Agreement and each of the other L/C Documents, as assigned and modified hereby. 5. Representations by Authority and/or Trustee. The Trustee hereby represents and warrants that all of the Bonds have been paid in full (or provision has been made for such payment in accordance with the terms of the Indenture), and, as a result, the Letter of Credit has expired in accordance with its terms and has been surrendered by the Trustee to BTM for cancellation. The Trustee represents and warrants that the BTM has never "wrongfully dishonored" any drawing made by the Trustee in strict compliance with the terms of the Letter of Credit as provided in the Collateral Pledge Agreement. The Authority and the Trustee each hereby acknowledge and agree that all fees and expenses of the Authority and the Trustee and all other amounts due or payable to the Authority and/or the Trustee under, in connection with, or related in any manner with the Bonds, the Indenture, the Loan Agreement or the Letter of Credit have been paid in full. The Trustee hereby represents and warrants that, as of the Effective Date, it has not received written notice, and is not otherwise aware without having undertaken any independent investigation, of any default under the Loan Agreement or any of the L/C Documents. 5 6. Representations of BTM. BTM hereby represents and warrants to CRE that: (a) BTM has good title to the Reimbursement Agreement and each of the other L/C Documents and is the sole owner and holder of BTM's stated interest in the Reimbursement Agreement and each of the other L/C Documents set forth on Exhibit B attached hereto, and BTM's interest therein is not subject to any prior sale, conveyance or assignment by BTM. BTM has full right and authority to sell and assign BTM's rights under the Reimbursement Agreement and each of the other L/C Documents set forth on Exhibit B to CRE and is selling and transferring all of its right, title and interest in, to and under the Reimbursement Agreement and each of the other L/C Documents set forth on Exhibit B to CRE free and clear of any and all liens (including, without limitation, participation interests of third parties). (b) The Reimbursement Agreement and each of the other L/C Documents set forth on Exhibit B, copies of which have been provided by BTM to CRE contemporaneously with the execution of this Agreement, are true, correct and complete copies of the documents such copies purport to be. None of the terms of the Reimbursement Agreement or any of the other L/C Documents have been altered or modified and none of the terms, provisions or conditions thereof have been waived by BTM, except in each case by written instruments which have been delivered by BTM to CRE and which are reflected on Exhibit B hereto. No L/C Document creating a security interest in, or lien upon, real and/or personal property comprising the collateral securing the Reimbursement Agreement or any of the Notes has been satisfied, released, subordinated or rescinded, in whole or in part, and neither the related mortgagor nor, if applicable, the related guarantor or indemnitor has been released, in whole or in part, from its obligations under the Reimbursement Agreement or any of the other L/C Documents or any related guaranty or indemnity agreements, as the case may be, other than pursuant to releases or other instruments set forth on Exhibit B hereto, copies of which have been delivered by BTM to CRE. (c) BTM has not knowingly expressly or impliedly waived any default, breach, violation or event of acceleration under the Reimbursement Agreement or any of the other L/C Documents set forth on Exhibit B. BTM has not given or received written notice of any material default under the terms of the Reimbursement Agreement or any of the other L/C Documents. (d) Neither BTM nor any of its agents or affiliates nor CRE, as assignee of BTM, is or shall be obligated to advance funds for the payment of any amount required by the Reimbursement Agreement or any of the other L/C Documents. (e) There are no escrows, sums or accounts being held by BTM under the Reimbursement Agreement or any of the other L/C Documents on and as of the Effective Date. 6 (f) There is no pending litigation, court order, injunction or decree with respect to which BTM has been served or, to the best of BTM's knowledge after due inquiry, is any such litigation, court order, injunction or decree threatened or existing, in each case with respect to the interest of BTM in the Reimbursement Agreement or any of the other L/C Documents. BTM has not received from any governmental authority written notice of any threatened governmental proceedings with respect to the Reimbursement Agreement or any of the other L/C Documents or any interest of BTM therein. (g) The Bond Swap Agreement has terminated in accordance with its terms, and is of no further force or effect. Neither the Owner nor BTM has any further obligations or liability under the Bond Swap Agreement. (h) BTM is duly organized and existing under the laws of the jurisdiction of its organization, with full corporate power and authority to execute and deliver this Agreement, to enter into the transactions contemplated hereby and to perform all the duties and obligations to be performed by it hereunder. (i) BTM has duly authorized this Agreement and the transactions contemplated hereby and the performance of all the duties and obligations to be performed hereunder by all necessary governmental and corporate action. (j) BTM has duly executed and delivered this Agreement and this Agreement constitutes its valid, legal and binding obligation enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or similar laws or equitable principles relating to or limiting creditors' rights generally. (k) The execution and delivery of this Agreement and the performance of the transactions contemplated hereby will not violate any agreement by which BTM is bound or to which BTM or any of BTM's assets are affected, or its organizational documents or any statute, regulation, rule, order or judgment applicable to it. (l) The proper officers or representatives of BTM are hereby, or by proper proceedings therefor, authorized and empowered, and BTM agrees, subject to the provisions of Section 18(c) hereof, to execute such further instruments as, in the reasonable opinion of counsel to BTM and/or CRE, are reasonably necessary in order to effectuate the assignment set forth in Section 3(a) hereof. 7. Representations of the Owners. The Owner hereby represents and warrants to the Authority, Trustee, CRE and BTM that: (a) Owner is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and is in compliance with all legal requirements 7 applicable to doing business in the Commonwealth of Puerto Rico and is under no legal disability. Owner is not a "foreign person" within the meaning of ' 1445(f)(3) of the Internal Revenue Code. The Owner has complied with all material filing, registration and local laws applicable to it insofar as such laws relate to the Owner carrying on its business as now being conducted in the Commonwealth of Puerto Rico. The Owner has no operations, assets or activities other than the ownership and operation of the Hotel and has no Debts other than (i) the obligations under the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby, (ii) indebtedness to GDB which is outstanding in the aggregate principal amount of $25,000,000, (iii) indebtedness to partners of the Owner and their Affiliates as shown on the June 30, 1998 financial statement of the Owner, a copy of which has been delivered by the Owner to CRE (the "June Financial Statement" and indebtedness to Posadas de Puerto Rico Associates, Incorporated incurred on the date hereof in an aggregate principal amount not to exceed $35,000,000, all of which indebtedness is subordinate to the obligations of the Owner under the Reimbursement Agreement and the other L/C Documents, as assigned and assumed hereby, (iv) certain equipment leases and equipment financings as shown on the June Financial Statement, (v) indebtedness to the Tourism Development Company secured by certain slot machines, in an aggregate principal amount of less than $1,000,000, and (vi) such debts as occur in the ordinary course of business. (b) The partners of the Owner and their respective interests are as follows:
Name Type of Interest Percentage ---- ---------------- ---------- (1) WKA El Con Associates, General 15% a New York general partnership (2) WKA El Con Associates, Limited 35% a New York general partnership (3) Conquistador Holding, General 15% Inc., a Delaware corporation (4) Conquistador Holding, Limited 35% Inc., a Delaware corporation
(c) WKA El Con Associates, a general partner and limited partner of the Owner, is a general partnership duly organized and validly existing under the laws of the State of New York and is under no legal disability. Owner is not a "foreign person" within the meaning of 8 '1445(f)(3) of the Internal Revenue Code. WKA El Con Associates is not required to qualify to do business under the laws of the Commonwealth of Puerto Rico in order to perform its obligations under the Reimbursement Agreement and the other L/C Documents as assigned and amended hereby and to carry on its business as presently being conducted. (d) WHG El Con Corp., a general partner of WKA El Con Associates, is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is in compliance with all legal requirements applicable to doing business in the State of Delaware and is under no legal disability. WHG El Con Corp. is not a "foreign person" within the meaning of '1445(f)(3) of the Internal Revenue Code. WHG El Con Associates is not required to qualify to do business under the laws of the Commonwealth of Puerto Rico in order to perform its obligations under the Reimbursement Agreement and the other L/C Documents as assigned and amended hereby and to carry on its business as presently being conducted. (e) Conquistador Holding, Inc., a general partner and limited partner of the Owner and a general partner of WKA El Con Associates, is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is in compliance with all legal requirements applicable to doing business in the State of Delaware and is under no legal disability. Conquistador Holding, Inc. is not a "foreign person" within the meaning of '1445(f)(3) of the Internal Revenue Code. Conquistador Holding, Inc. is not required to qualify to do business under the laws of the Commonwealth of Puerto Rico in order to perform its obligations under the Reimbursement Agreement and the other L/C Documents as assigned and amended hereby and to carry on its business as presently being conducted. (f) The Reimbursement Agreement and each of the other L/C Documents and any and all documents modifying the terms of the Reimbursement Agreement or any of the other L/C Documents, copies of which have been provided or made available by Owner to CRE contemporaneously with the execution of this Agreement, are true, correct and complete copies of the documents such copies purport to be. The Owner has provided CRE with copies of any and all documents modifying the terms of the Reimbursement Agreement or any of the other L/C Documents as set forth on Exhibit B hereto. None of the terms of the Reimbursement Agreement or any of the other L/C Documents have been altered or modified and none of the terms, provisions or conditions thereof have been waived by BTM; except in each case by written instruments which have been delivered by Owner to CRE on or prior to the date hereof and which are reflected on Exhibit B hereto. No L/C Document creating a security interest in, or lien upon, real and/or personal property comprising the collateral securing the Reimbursement Agreement or any of the Notes has been satisfied, released, subordinated or rescinded, in whole or in part, and neither the related mortgagor nor, if applicable, the related guarantor or indemnitor has been released, in whole or in part, from its obligations under the Reimbursement Agreement or any of the other L/C Documents or any related guaranty or indemnity agreements, as the case may be, other than pursuant to releases or other instruments set forth on Exhibit B hereto, copies of which have been delivered by the Owner to CRE. 9 (g) The Owner has lawful power and authority to enter into this Agreement and each of the Additional Security Documents and to carry out its obligations hereunder, thereunder, and under the Reimbursement Agreement and the other L/C Documents, all as assigned and amended hereby, and has duly authorized the execution and delivery and performance hereof and thereof. The execution and delivery of this Agreement and the Additional Security Documents and the performance or compliance with the terms and conditions of this Agreement, the Additional Security Documents, the Reimbursement Agreement and each of the other L/C Documents (all as assigned and amended hereby) by the Owner will not conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, any mortgage, deed of trust, lease or other agreement or instrument to which the Owner is a party or by which the Owner or any of its partners or any of their property is bound, or the Owner's agreement of limited partnership or any order, rule or regulation applicable to the Owner or any of its partners or any of their property, of any court or governmental body, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the Owner under the terms of any instrument or agreement to which the Owner is a party. (h) All governmental or regulatory orders, consents, permits, authorizations and approvals required for execution, delivery and performance of this Agreement, the Additional Security Documents, the Reimbursement Agreement and the L/C Documents, as assigned and amended hereby, have been obtained. No additional governmental or regulatory actions, filings or registration and no approvals, authorizations or consents of any trustee or holder of any indebtedness or obligation of the Owner or any partner of the Owner or any other person are required for the due execution, delivery and performance by the Owner of this Agreement, the Additional Security Documents, the Reimbursement Agreement and the L/C Documents, as assigned and amended hereby, other than the filing of the UCC Financing Statements set forth on Exhibit C. (i) This Agreement, the Additional Security Documents, the Reimbursement Agreement and the L/C Documents to which the Owner is a party, as assigned and amended hereby, constitute valid, legal and binding obligations of the Owner enforceable against the Owner in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization and other laws affecting the rights or remedies of creditors generally. (j) To Owner's knowledge, there are no actions, suits, investigations, proceedings or arbitrations (whether or not purportedly on behalf of the Owner or any of its partners) at law or in equity or before or by any foreign or domestic court or other governmental authority (a "Legal Action") pending or threatened against the Owner or any partner of the Owner, or against BTM, the Trustee or the Authority, involving the validity or enforceability of this Agreement, the Additional Security Documents, the Bonds, the Indenture, the Loan 10 Agreement, the Reimbursement Agreement, or any of the L/C Documents or that otherwise affect the Owner or any of its partners or any properties or rights of the Owner or any of its partners, including, without limitation, the Hotel, except actions, suits and proceedings that are fully covered by insurance or that would not individually or in the aggregate materially impair the ability of the Owner to perform the Owner's obligations under this Agreement, the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby, or to pay any amounts that may become payable under this Agreement, the Additional Security Documents, the Reimbursement Agreement and the L/C Documents, as assigned and amended hereby. The Owner and each of its partners is in compliance under any order of any court or governmental authority, and in all material respects, under any mortgage, deed of trust, lease, loan or credit agreement or other instrument to which the Owner or any of its partners is a party or by which any of them is bound or affected. Neither the Owner nor any of its partners are (a) in violation of any applicable law, which violation materially adversely affects or may materially adversely affect the business, operations, assets or condition (financial or otherwise) of either the Owner or any of its partners, or (b) subject to, or in default with respect to, any legal requirement that would have a materially adverse effect on the business, operations, assets or condition (financial or otherwise) of either the Owner or any of its partners. There is no Legal Action pending or to the Owner's knowledge threatened against or affecting the Owner or any of its partners questioning the validity or the enforceability of this Agreement, the Additional Security Documents, the Bonds, the Indenture, the Loan Agreement, the Reimbursement Agreement, or any of the L/C Documents. (k) Neither BTM nor any of its agents or affiliates nor CRE, as assignee of BTM, is obligated to advance any further funds for the payment of any amount required by the Reimbursement Agreement or any of the other L/C Documents, as assigned and amended hereby. (l) All amounts previously withdrawn by BTM or any of its agents or affiliates from escrow or reserve deposits relating to the Bonds, the Reimbursement Agreement or any of the other L/C Documents have been applied in accordance with the terms of such documents and these are no further escrows, sums or accounts being held by BTM under the Reimbursement Agreement or any of the other L/C Documents on and as of the Effective Date. (m) No "Event of Default" or "Default" (as such terms are defined in the Reimbursement Agreement, as assigned and amended hereby) has occurred which has not been cured or waived or will result from the execution and delivery of this Agreement, the Additional Security Documents hereby or the consummation of the transactions contemplated herein and therein. The Owner is not in default in any material respect under the terms of the Reimbursement Agreement or any of the other L/C Documents, as assigned and amended hereby. 11 (n) The execution and delivery of this Agreement and the Additional Security Documents, the redemption and payment in full of the Bonds and the assignments and modifications of the Reimbursement Agreement and the other L/C Documents effected hereby and the consummation of the transactions contemplated hereby will not impair the security for repayment of the obligations of the Owner under the Reimbursement Agreement and the L/C Documents, as assigned and amended hereby, nor impair, in any way, the ability of CRE to enforce its rights, remedies and recourse with respect to such security. (o) Neither the Owner nor any of its partners is a party to any other agreement, contract or other instrument containing terms or provisions that are inconsistent or in conflict with any terms or provisions of this Agreement, the Additional Security Documents, the Reimbursement Agreement or any of the other L/C Documents, as assigned and amended hereby. (p) The Ground Lease or a memorandum thereof has been duly and properly recorded in accordance with the laws of the Commonwealth of Puerto Rico; the Ground Lease permits the interest of the lessee thereunder to be encumbered by the Leasehold Mortgage; neither the transfer of the Leasehold Mortgage to CRE nor any such transfer to subsequent assignees requires the consent of the ground lessor and, to the extent notice of the transfer of the Leasehold Mortgage to CRE is required to be given to such ground lessor, such notice has been delivered on or prior to the Effective Date in the form and manner required by the Ground Lease and applicable law; and, there has been no change in the terms of the Ground Lease. (q) The Owner's interest in the Ground Lease is assignable to CRE without the consent of the lessor thereunder (or, if any such consent is required, it has been obtained prior to the Effective Date and delivered to CRE) and, in the event that it is so assigned, is further assignable by CRE and its successors and assigns without a need to obtain the consent of such lessor. (r) The Ground Lease is in full force and effect and no default has occurred under the Ground Lease, nor is there any existing condition which, but for the passage of time or the giving of notice, or both, would result in a default in any material respect under the terms of the Ground Lease. (s) The Owner and each of its partners agree to execute such other modification agreements, supplemental mortgage documents, security agreements, assignments, financing statements, and other instruments as CRE, the Authority or Trustee may reasonably request to further evidence and/or secure the assignments and modifications hereunder. (t) The financial statements of the Owner and each of its partners, if any, heretofore furnished to CRE in connection with this Agreement and the transactions contemplated hereby are complete and correct in all material respects and fairly present the financial condition of the 12 Owner and each of its partners, if applicable, as of the dates indicated and for the periods involved and show any material liabilities, direct and contingent, of the Owner and each of its partners. As of the date of the latest of those financial statements there were no contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments which are substantial in amount in relation to the financial condition of the Owner or any of its partners obligated thereon, except as referred to or reflected or provided for in the latest of said financial statements. Since the date of the latest of said financial statements, if any, there has been no adverse change in the business, condition or operations of the Owner or any of its partners, which is material in relation to the financial condition of the Owner. (u) The Owner and each of its partners has good, sufficient and legal title to all properties and assets reflected as owned in their most recent balance sheets delivered to CRE, except for assets disposed of in the ordinary course of business since the date of such respective balance sheets. (v) There has been no material adverse change in the financial condition of the Owner or any of its partners from the date of the latest financial statements of the Owner and each of its partners, if any, which have been submitted to CRE. (w) The Owner is the sole owner of, and has good and marketable title to, the Hotel, the "Mortgaged Property" (as defined in the Fee Mortgage), the "Mortgaged Property" (as defined in the Leasehold Mortgage), the "Mortgaged Property" (as defined in the Second Fee Mortgage), and all other real and personal property owned by the Owner as described in the Additional Security Documents and the L/C Documents, free from any lien, security interest or encumbrance of any kind whatsoever, subject only to (A) liens securing, directly or indirectly, the obligations of the Owner under the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby, (B) the lien of current real property taxes and assessments not yet due and payable, (C) the lien for past due real property taxes and assessments being contested in good faith in accordance with the provisions of Section 7(uu) of the Reimbursement Agreement as assigned and amended hereby, (D) liens, covenants, conditions and restrictions, rights of way, easements and other matters of public record, specifically set forth on Exhibit D attached hereto, none of which interferes with the security intended to be provided by the Fee Mortgage, the Leasehold Mortgage, the Second Fee Mortgage and/or the Additional Security Documents or reduces the value or prohibits the current use of the Hotel or any part thereof. (x) All tax returns and reports of the Owner and each of its partners required to be filed by any of them have been timely filed (after taking into account all applicable extensions), and all taxes, assessments, fees and other governmental charges upon the Owner and each of its partners and upon their respective properties (including, but not limited to, the Hotel), assets, income and franchises which are due and payable have been paid when due and payable, other 13 than past due real property taxes and assessments being contested in good faith in accordance with the provisions of Section 7(uu) of the Reimbursement Agreement as assigned and amended hereby. The Owner knows of no proposed tax assessment against the Owner or any of its partners that would be material to the condition (financial or otherwise) of the Owner, and neither the Owner nor any of its partners has contracted with any government entity in connection with taxes. (y) The Owner is not subject to the Federal Power Act, the Public Utility Holding Company Act of 1935, the Interstate Commerce Act or any other statute or regulation restricting the execution, performance or enforcement of this Agreement, the Additional Security Documents, the Reimbursement Agreement or any of the other L/C Documents, as assigned and amended hereby. Neither the Owner nor any of its partners is an "investment company" or an "affiliated person" of, or "promotor" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. The entering into this Agreement and the Additional Security Documents and the consummation of the transactions contemplated by this Agreement, the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby, will not violate any provision of any of the foregoing acts or any rule, regulation or order promulgated or issued thereunder by the Securities and Exchange Commission. (z) The Owner has not received from any insurance company any notice of defect or inadequacy in connection with the Hotel or any portion thereof. (aa) There is no proceeding pending or, to Owner's knowledge, threatened, for the total or partial condemnation of the Hotel or any property related thereto nor has any casualty affecting any material portion of the Hotel occurred which has not been fully repaired. (bb) None of the improvements which form a part of the Hotel lie outside the boundaries and building restriction lines of the Land, and no improvements on adjoining properties encroach upon the Land; and none of the material improvements which form a part of the Hotel lie outside the boundaries of the "Mortgaged Property" (as defined in the Fee Mortgage), the "Mortgaged Property" (as defined in the Leasehold Mortgage), the "Mortgaged Property" (as defined in the Second Fee Mortgage) and no improvements on adjoining properties encroach upon any such Mortgaged Property. (cc) Telephone services, gas, electric power, storm sewers, portable water facilities, and all other utilities and services necessary for the operation and maintenance of the Hotel are available therefor, are adequate to serve the Hotel and are not subject to any conditions limiting the use of such utilities, other than normal charges to the utility supplier. All streets and easements necessary for the operation and maintenance of the Hotel are available to the boundaries of the land on which the improvements comprising the Hotel are located. 14 (dd) The Manager is in possession of all gaming licenses required by applicable law to carry on gaming operations at the Hotel as currently operated, which gaming licenses are valid and in full force and effect. The Owner is in possession of all other material certificates of occupancy, zoning and building approvals, licenses, liquor licenses, business permits and approvals and other similar licenses, permits and other authorizations necessary and required by applicable law in connection with the acquisition, construction, use and operation of the Hotel (collectively, the "Licenses",) and (B) all such Licenses are valid and in full force and effect. The operation of the Hotel in the manner presently operated and as presently contemplated and described in the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby, does not conflict with any zoning, water or air pollution or other ordinance, order, law or regulation applicable thereto. The Hotel complies in all material respects with all federal, state and local laws or ordinances (including rules and regulations) relating to the Hotel and its operation, including without limitation licensure, zoning, building, safety, and environmental quality. The Owner has all Licenses necessary to permit the ownership and continued use and operation of Hotel in accordance with its current operation and all such Licenses are in full force and effect and no material default exists thereunder. All such Licenses (other than the liquor licenses) are assignable and have been collaterally assigned to CRE or are readily obtainable, at nominal cost, by CRE. Upon request of CRE, from time to time, the Owner shall provide copies of all Licenses to CRE. (ee) All service contracts, equipment leases and other agreements relating to the use and operation of the Hotel or any portion thereof with any Affiliate of the Owner or any of its partners were entered into in the ordinary course of business. No party is in material default under any such service contract or equipment lease. All such management agreements, service contracts, equipment leases and other agreements relating to the use and operation of the Hotel or any portion thereof are assignable (without consent or, if consent is required such consents have been obtained) and have been collaterally assigned to CRE. Upon request of CRE, from time to time, the Owner shall provide copies of all such contracts, leases and other agreements to CRE. (ff) The Owner has not received from any governmental authority notice of any special assessment affecting the Hotel or any portion thereof that will result in any charge being levied or asserted against the Hotel or any portion thereof or in the creation of any Lien against the Hotel or any portion thereof. (gg) There is no moratorium or like governmental order in effect with respect to the Hotel or any portion thereof and, to the knowledge of the Owner, no such moratorium or similar ordinance is now contemplated. 15 (hh) All surveys, plot plans and other documents heretofore and hereafter furnished by the Owner to CRE with respect to the Hotel or any portion thereof are and will be, to the Owner's knowledge accurate and complete with respect to the information purported to be set forth therein as of their respective dates. (ii) The Hotel is located on land zoned in accordance with all applicable governmental rules, ordinances, regulations and laws so as to permit the use and occupancy of the Hotel in the manner presently employed by the Owner and as contemplated by this Agreement, the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby. The Hotel conforms to all applicable governmental zoning and other governmental laws and regulations, and to any covenants, agreements, conditions and restrictions contained in any deed or deeds or agreements covering or affecting all or any portion of the Hotel. (jj) The Owner has obtained and examined all Legal Requirements affecting the Owner and the Hotel. There exist no current material violations of any Legal Requirements, with respect to the Owner or the Hotel or any portion thereof. The Owner has not received notice from any governmental authority of any current violation of any Legal Requirements. (kk) No chattel mortgage, bill of sale, security agreement, financing statement or other title retention agreement (except for those assigned to or executed in favor of CRE) which remains enforceable has or will be executed by the Owner with respect to any personal property, chattel or fixture owned by the Owner and used in connection with the operation or maintenance of the Hotel, except as set forth on the June Financial Statement, and except for chattel mortgages, security agreements or financing statements securing the GBD Loan Agreement which are subordinate to the obligations of the Owner under the L/C Documents and the Additional Security Documents. (ll) No brokerage or finders fees or commissions are payable to any person engaged by the Owner, any partner of the Owner or any Affiliate thereof in connection with the transactions contemplated by this Agreement. (mm) The Owner has the creditworthiness to operate the Hotel in the manner contemplated by this Agreement, the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents, all as executed and delivered contemporaneously herewith or as assigned and amended hereby. (nn) The Owner possesses or has the right to use all necessary trademarks, trade names, copyrights, patents, patent rights and licenses to conduct its businesses as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 16 (oo) The Bond Swap Agreement has terminated in accordance with its terms, and is of no further force or effect. Neither the Owner nor BTM has any further obligations or liability under the Bond Swap Agreement. (pp) Each of the representations and warranties of the Owner contained in the Reimbursement Agreement were true and correct as of February 7, 1991 and each of the representations and warranties of the Owner set forth in subsections 8(f), (h), (i), (l), (m), (o) other than the last sentence thereof, (t), and (v) of the Reimbursement Agreement, are true and correct in all material respects as of the Effective Date and are expressly restated by the Owner in their entireties on, and as of the Effective Date. (qq) Each and all of the recitals set forth at the outset of this Agreement are true and correct and are incorporated herein by reference and made a part hereof for all purposes. All representations and warranties of the Owner set forth herein shall be true in all material respects at all times until the Reimbursement Amount and all of the other obligations of the Owner hereunder and under the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents, as assigned and amended hereby, have been performed and paid in full. 8. Representations of Parties other than BTM. Each of the parties hereto, other than BTM, severally represents, each with respect only to itself, as of the Effective Date, as follows: (a) It is duly organized and existing under the laws of the jurisdiction of its organization, with full power and authority to execute and deliver this Agreement, to enter into the transactions contemplated hereby and to perform all the duties and obligations to be performed by it hereunder; (b) It has duly authorized this Agreement and the transactions contemplated hereby and the performance of all the duties and obligations to be performed hereunder by all necessary governmental, corporate and/or partnership action; (c) It has duly executed and delivered this Agreement and this Agreement constitutes its valid, legal and binding obligation enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization or similar laws or equitable principles relating to or limiting creditors' rights generally; (d) The execution and delivery of this Agreement and the performance of the transactions contemplated hereby will not violate any material agreement by which it is bound or to which it or any of its assets are affected, or its organizational documents or any statute, regulation, rule, order or judgment applicable to it; and 17 (e) The proper officers or representatives of each of the parties hereto are hereby, or by proper proceedings therefor, authorized and empowered, and each of the parties hereto agrees, to execute such further instruments as, in the opinion of counsel to the respective parties, are reasonably necessary in order to effectuate the transfer herein authorized. 9. Modification of Reimbursement Agreement. The Reimbursement Agreement is hereby amended as follows: (a) Section 1 of the Reimbursement Agreement is hereby amended to add the following defined terms: AFFILIATE means any person, entity or group controlling, controlled by or under common control with, the specified person or entity and "control" of a person or entity (including, with correlative meaning, the terms "controlled by" and "under common control with") means (a) the beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 10% or more of the voting securities of such person or entity (b) the status of being a director, officer, executor, trustee or other fiduciary of such person or entity, or (c) the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person or entity, whether through the ownership of voting securities, by contract or otherwise. AFICA APPROVAL shall mean the Issuer's official action, on or prior to the date hereof, granting the Issuer's preliminary approval of the Company's application for the issuance of Refunding Bonds. BANK RATE shall mean (a) from August 3, 1998 until the first day of September, 1998, a rate equal to 7.91% per annum; and (b) from the first day of September, 1998 until the Maturity Date, an interest rate per annum equal to the sum of (i) the LIBOR Rate plus (ii) 225 basis points (rounded upwards, if necessary, to the nearest one-eighth percent (.125%)). The Bank Rate shall be adjusted on each LIBOR Determination Date to account for any changes in the LIBOR Rate, which adjustment shall be effective on the commencement of the next succeeding LIBOR Reference Period. BANKRUPTCY CODE shall mean Title 11 of the United States Code, Section 101 et seq., as now in effect or hereafter amended. BONA FIDE COST shall mean any commissions, costs, expenses or charges paid to any Affiliate of the Company or employee or agent of an Affiliate of the Company which (i) are actually paid by the Company for goods supplied or services rendered by the Affiliate of the Company, (ii) are not more than the costs, expenses or charges that would be paid to any unrelated, qualified independent third party, and (iii) represent a fair and appropriate allocation of such 18 cost or expense if any such Affiliate of the Company performs work or provides services for a number of properties. CRE shall mean Citicorp Real Estate, Inc., a Delaware corporation, and its successors and assigns. COMPREHENSIVE STATEMENT shall mean a description of the scope of work to be incorporated in any capital improvements or replacements including, without limitation, plans and specifications for the work, renderings, if applicable, and other material information respecting the capital improvements or replacements as may be requested by the Bank (including, without limitation, copies of construction contracts). DEFAULT RATE shall mean a per annum rate equal to the lesser of (a) 500 basis points in excess of the Bank Rate, and (b) the maximum interest rate which the Company may by law pay or the Bank may charge and collect. DEFICIENCY LOAN GUARANTY shall mean that certain Guaranty, dated as of May 5, 1992, made by WMS Industries Inc., Hugh Andrews, Burton I. Koffman and Richard E. Koffman for the benefit of Mitsubishi, as assumed in part by Patriot pursuant to that certain Assumption of Guaranty, dated as of March 31, 1998, executed by Patriot, and that certain guaranty by Patriot dated as of March 31, 1998 to assume the obligations of KGC under paragraph 4 of the First Amendment to Letter of Credit Reimbursement Agreement, as any of the foregoing may be amended or modified from time to time. EXTENDED MATURITY DATE shall mean March 15, 1999. GENERAL DISBURSEMENT CONDITIONS shall mean all of the following: (a) the Company shall have delivered to the Bank and the Bank shall have approved a Comprehensive Statement for the applicable capital improvements or replacements; (b) all work with respect to the applicable capital improvements or replacements shall have been performed in a manner reasonably satisfactory to the Bank and, if required by the Bank, an engineer selected by the Bank; (c) the Company shall have furnished the Bank with such draw request forms and other collateral documentation (including, without limitation, title endorsements, detailed cost breakdowns, payment schedules, copies of bills or statements evidencing costs and copies of paid receipts), respecting any requested disbursement as the Bank may reasonably request from time to time; (d) no Event of Default or Default shall have occurred; (e) no condemnation or adverse zoning or usage change shall have been commenced with respect to the Hotel, or any portion thereof, and the Company shall not have any knowledge of any authority taking affirmative steps to condemn, adversely zone or change the usage of the Hotel, or any portion thereof; (f) there has been no material adverse change in the ability of the Company to pay the Reimbursement Amount or any other amounts due hereunder or under any of the other L/C Documents as such amounts become due or of the Company to perform its obligations under any of the L/C 19 Documents as such obligations become due; and (g) no law, regulation, ordinance, moratorium, injunction proceeding, restriction or similar matter shall have been enacted or adopted by any federal, state or local government or any board, authority, commission, agency or department asserting jurisdiction over the Hotel if the result of such law, regulation, ordinance, moratorium, injunction proceeding, restriction or like matter would have the effect, in the Bank's reasonable judgment, of materially and adversely affecting the use of the Hotel as currently being operated. HOLDING shall mean Conquistador Holding, Inc., a Delaware corporation, its successors and assigns. HOTEL shall mean the resort hotel commonly known as the El Conquistador Resort and Country Club and consisting of the Fajardo Property, the Palominos Island Property, all other real property owned or leased by the Company (collectively, the "Land"), together with all buildings and other improvements constructed on the Land which improvements consist, in part, of a 751-room resort hotel facility, golf course and clubhouse, food and beverage facilities, meeting rooms, spa facilities, retail outlets, swimming pools, a 35-slip marina, landscaping and parking, other on-site and off-site improvements relating thereto, curbs and other infrastructure (including any underground facilities), and other amenities and facilities (collectively, the "Hotel Improvements"), and together with all furnishings and fixtures, equipment and all other personal property now or hereafter owned or leased by the Company and located on or otherwise used in connection with the Land or the Hotel Improvements (collectively, the "Hotel Personalty"). HOTEL IMPROVEMENTS shall have the meaning assigned to such term within the definition of "Hotel". HOTEL PERSONALTY shall have the meaning assigned to such term within the definition of "Hotel". INITIAL MATURITY DATE shall mean November 3, 1998. LAND shall have the meaning assigned to such term within the definition of "Hotel". LATE CHARGE shall have the meaning assigned to such term in Section 3A hereof. LEASES shall mean all leases, concessions and other agreements affecting the use, enjoyment or occupancy of all or any part of the Hotel heretofore or hereafter entered into whether before or after the filing by or against the Company of any petition for relief under the Bankruptcy Code, as the same may be amended from time to time. 20 L/C DOCUMENTS shall mean, collectively, (i) the L/C Documents (as such term is defined in the Modification Agreement), (ii) the Modification Agreement, (iii) the Additional Security Documents (as such term is defined in the Modification Agreement), (iv) the Operative Documents, (v) any and all other agreements, instruments, certificates, or documents at any time given by the Company or any other party to Mitsubishi or the Bank pursuant thereto or in connection therewith, or given to evidence, guaranty, or secure any of the Company's obligations under the foregoing documents, and (vi) all modifications, amendments and supplements to any of the foregoing. LIBOR BUSINESS DAY shall mean any Business Day on which commercial banks in the City of London, England are open for interbank or foreign exchange transactions. LIBOR DETERMINATION DATE shall mean, with respect to any LIBOR Reference Period, the date that is two (2) LIBOR Business Days prior to the first day of such LIBOR Reference Period. 21 LIBOR RATE shall mean, with respect to each LIBOR Reference Period, the rate (expressed as a percentage per annum) for deposits in U.S. dollars, for a one-month period, that appears on Telerate Page 3750 (or the successor thereto) as of 11:00 a.m., London, England time, on the related LIBOR Determination Date. If such rate does not appear on Telerate Page 3750 as of 11:00 a.m., London, England time, on such LIBOR Determination Date, the LIBOR Rate shall be the arithmetic mean of the offered rates (expressed as a percentage per annum) for deposits in U.S. dollars for a one-month period that appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London, England time, on such LIBOR Determination Date, if at least two such offered rates so appear. If fewer than two such offered rates appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London, England time, on such LIBOR Determination Date, Bank shall request the principal London, England office of any four major reference banks in the London interbank market selected by Bank to provide such bank's offered quotation (expressed as a percentage per annum) to prime banks in the London interbank for deposits in U.S. dollars for a one-month period as of 11:00 a.m., London, England time, on such LIBOR Determination Date for amounts approximately equal to the outstanding principal balance of the Reimbursement Amount. If at least two such offered quotations are so provided, the LIBOR Rate shall be the arithmetic mean of such quotations. If fewer than two such offered quotations are so provided, Bank shall request any three major banks in New York City selected by Bank to provide such bank's rate (expressed as a percentage per annum) for loans in U.S. dollars to leading European banks for a one-month period as of approximately 11:00 a.m., New York City time, on the applicable LIBOR Determination Date for amounts approximately equal to the outstanding principal balance of the Reimbursement Amount. If at least two such rates are so provided, the LIBOR Rate shall be the arithmetic mean of such rates. If fewer than two such rates are so provided, then the LIBOR Rate for the applicable LIBOR Reference Period shall be the LIBOR Rate as in effect for the next preceding LIBOR Reference Period. The LIBOR Rate shall be determined in accordance with this paragraph by Bank or its designee. LIBOR REFERENCE PERIOD shall mean (i) initially, the period commencing on the first day of September, 1998, and ending one month thereafter, and (ii) thereafter, a period commencing on the last day of the immediately preceding LIBOR Reference Period and ending one month thereafter. MATURITY DATE shall mean the earlier to occur of (a) the Initial Maturity Date or, if extended pursuant to Section 3A hereof, the Extended Maturity Date, or (b) any earlier date on which the entire Reimbursement Amount is required to be paid in full, by acceleration or otherwise, under this Agreement or any of the other L/C Documents. MITSUBISHI shall mean The Bank of Tokyo-Mitsubishi, Ltd. (formerly known as The Mitsubishi Bank, Limited), a Japanese banking corporation acting through its New York Branch. 22 MODIFICATION AGREEMENT shall mean that certain Assignment and Modification Agreement, dated as of August 3, 1998, by and among the Company, CRE, the Trustee, the Issuer and Mitsubishi. NEW ENVIRONMENTAL INDEMNITY shall mean that certain Environmental Indemnity Agreement, dated as of August 3, 1998, made by the Company and Patriot for the benefit of CRE, as amended or modified from time to time. PATRIOT shall mean Patriot American Hospitality, Inc., a Delaware corporation, its successors and assigns. PATRIOT GUARANTY shall mean that certain Guaranty, dated as of August 3, 1998, made by Patriot for the benefit of CRE, as the same may be amended or modified from time to time. PATRIOT LOAN AGREEMENT shall mean that certain Amended and Restated Credit Agreement dated as of July 18, 1997, amended and restated as of December 16, 1997 and further amended and restated as of June 2, 1998, among Patriot, Patriot American Hospitality Partnership, L.P., a Virginia limited partnership, various lenders, Paine Webber Real Estate Securities Inc., Chase Securities Inc., Paine Webber and The Chase Manhattan Bank, as the same may be amended or modified from time to time. REFUNDING BONDS shall mean revenue bonds to be issued by the Issuer in an aggregate principal amount of at least $90,000,000, the proceeds of the sale of which are to be loaned by the Issuer to the Company and applied by the Company to the repayment of the Reimbursement Amount and its other obligations under the Reimbursement Agreement. REIMBURSEMENT AMOUNT shall have the meaning assigned to such term in Section 3A hereof. RENTS shall mean all right, title and interest of the Company, its successors and assigns in and under any Leases, including, without limitation, cash or securities deposited thereunder to secure the performance by the lessees of their obligations thereunder and all rents, additional rents, revenues, issues and profits (including all oil and gas or other mineral royalties and bonuses), all receivables, rentals, receipts and payments received from the rental of guest/hotel rooms, suites, meeting rooms, beverage or food sales and facilities, the provision or sale of other goods and services, vending machines, telephone and television systems, guest laundry and all other payments received from guests or visitors of the Hotel and other items of revenue, receipts or income as identified in the Uniform System of Accounts for Hotels 9th Edition, International Association of Hospitality Accounts (1996). SECOND FEE MORTGAGE shall mean that certain first mortgage made by the Owner by Deed of Mortgage Number Thirty-Two executed in San Juan on May 4, 1992 before Notary Public Juan Antonio Aquino Barrera. 23 (b) Section 1 of the Reimbursement Agreement is hereby amended to delete the defined terms "Agreement", "Bank", "GDB Standstill Agreement", "General Partner", "Guarantor and Guarantors", "Guaranty and Guaranties", "Management Subordination Agreement", "Mortgage", "Note", "Permitted Encumbrances" and "Transfer" in their entireties and to substitute therefor, each of the following defined terms: AGREEMENT shall mean this Letter of Credit and Reimbursement Agreement dated as of February 7, 1991, as amended or affected by (i) that certain First Amendment to Letter of Credit and Reimbursement Agreement dated as of May 5, 1992, (ii) that certain Second Supplement to Letter of Credit and Reimbursement Agreement dated as of February 6, 1998, (iii) that certain Consent and Waiver Agreement dated as of April 21, 1997, (iv) that certain Supplement to Letter of Credit and Reimbursement Agreement dated as of November 5, 1997, (v) that certain Consent and Waiver Agreement dated as of March 31, 1998, (vi) that certain Assumption of Obligations Under Letter of Credit and Reimbursement Agreement dated as of March 31, 1998, and (vii) the Modification Agreement, and as may be further modified or amended subsequent to the effective date of the Modification Agreement. BANK shall mean CRE, and its successors or assigns. GDB STANDSTILL AGREEMENT shall mean the Subordination and Standstill Agreement, dated as of February 7, 1991, between GDB and Mitsubishi, as heretofore modified by amendment dated as of May 5, 1992, and as further modified and/or confirmed by that certain Confirmation and Ratification of Subordination and Standstill Agreement, dated as of August 3, 1998, executed by GDB. GENERAL PARTNER shall mean either Holding or WKA, the sole general partners of the Company (Holding and WKA together being referred to as the GENERAL PARTNERS). GUARANTOR and GUARANTORS shall mean Patriot and any other guarantor of any of the obligations of the Company under this Agreement or any of the other L/C Documents. GUARANTY and GUARANTIES shall mean individually and collectively, the Patriot Guaranty, the Deficiency Loan Guaranty and any other guaranties executed in favor of Mitsubishi and assigned to CRE, or made in favor of CRE securing or otherwise respecting any of the Company's obligations under this Agreement or any of the other L/C Documents. MANAGEMENT SUBORDINATION AGREEMENT shall mean, collectively, (i) that certain Management Agreement Subordination and Attornment Agreement, dated as of February 7, 1991, between Mitsubishi and Williams, as amended or modified from time to time, and (ii) that certain Assignment of Management Agreement and Subordination of Management Fees, 24 dated as of August 3, 1998, by and among the Company, CRE and Williams, as amended or modified from time to time. MORTGAGE shall mean, collectively, the Fee Mortgage, the Leasehold Mortgage and the Second Fee Mortgage. NOTE shall mean collectively the Mortgage Note, dated May 4, 1992, made by the Company and payable to bearer, in the principal amount of $100,000 and each of the four Mortgage Notes, dated February 7, 1991, made by the Company and payable to the Issuer, in the respective principal amounts of $120,000,000, $6,612,000, $20,000,000 and $2,000,000. PERMITTED ENCUMBRANCES shall mean, collectively, the Mortgage, the GDB Mortgage, and chattel mortgages on equipment in favor of General Electric or its affiliates existing on the date hereof, real estate taxes not yet due and payable, those items listed as exceptions to title on the Title Policy issued on the Date of Issuance, and any other Liens consented to in writing by the Bank. TRANSFER shall mean any sale, conveyance, mortgage, grant, bargain, encumbrance, pledge, hypothecation, assignment, or transfer of the Hotel, or any portion thereof, or any legal or beneficial interest in the Company or in any of its partners, which is subject to the provisions of Section 7(h) hereof. (c) The Reimbursement Agreement is hereby amended by adding the following provision as new Section 3A: "3A. Repayment of Reimbursement Amount. (a) The Company acknowledges that, on August 3, 1998, the Trustee made a Principal Drawing in the amount of $120,000,000 on the Letter of Credit, which drawing was properly honored by Mitsubishi. On August 3, 1998, the Company paid to Mitsubishi, $30,000,0000 in partial reimbursement for such Principal Drawing. Following the application of such monies paid by the Company to Mitsubishi on August 3, 1998 in reimbursement of a portion of such amounts drawn on the Letter of Credit, the aggregate principal amount of $90,000,000 remains outstanding, due and payable by the Company under the terms of this Agreement on and as of August 3, 1998 (THE REIMBURSEMENT AMOUNT). Notwithstanding anything to the contrary contained herein, the Reimbursement Amount, together with interest thereon as provided herein, shall be due and payable by the Company to the Bank as provided in this Section 3A. (b) The Reimbursement Amount, together with all accrued and unpaid interest thereon and all other amounts due and unpaid hereunder or under any of the other L/C Documents shall be due and payable in full on the Maturity Date (as the same may be extended in accordance with the provisions of Section 3A(g) hereof). 25 (c) Commencing on September 1, 1998 and on the first day of each month thereafter, the Company shall pay to the Bank interest in arrears on the Reimbursement Amount for the period from and including August 3, 1998 until the Reimbursement Amount and all other amounts due hereunder and under the other L/C Documents are paid in full. (d) The Reimbursement Amount, together with any other amounts added to principal hereunder or under any of the other L/C Documents, shall bear interest at the Bank Rate from and including August 3, 1998 through and including the date on which the Reimbursement Amount and all such other amounts have been paid in full. Interest on the Reimbursement Amount shall be computed on the basis of a fraction, the denominator of which is three hundred sixty (360) and the numerator of which is the actual number of days elapsed from August 3, 1998 or the date on which the immediately preceding payment was due. Subject to the last sentence of this Section 3A(d), if any monthly installment of principal or interest or any other scheduled payment hereunder or under any of the other L/C Documents is not paid within five (5) days of the date on which it is due, the Company shall pay to the Bank upon demand an amount (the LATE CHARGE) equal to the lesser of five percent (5%) of such unpaid portion of the outstanding monthly installment of principal or interest or other scheduled payment then due or the maximum amount permitted by applicable law, to defray the expense incurred by the Bank in handling and processing such delinquent payment and to compensate the Bank for the loss of the use of any such delinquent payment. Notwithstanding the foregoing or anything to the contrary contained herein, while any Event of Default exists, the entire Reimbursement Amount, regardless of whether or not the Reimbursement Amount shall have been accelerated, shall bear interest at the Default Rate. (e) Provided that (i) interest payable on the Reimbursement Amount shall be current and the indebtedness outstanding hereunder shall be in full force and effect, (ii) no Event of Default or Default shall exist and no "event of default" or event which, with the passage of time, the giving of notice, or both, would constitute an "event of default" under any of the L/C Documents, shall exist, (iii) the AFICA Approval has not been modified and remains in full force and effect, (iv) the Company shall provide evidence satisfactory to the Bank that the Company is proceeding with all due diligence to the satisfaction of all conditions to the issuance of the Refunding Bonds, including, without limitation, evidence that, on or prior to the Initial Maturity Date, (A) the Company has provided to the Bank the proposed organizational identity, structure and documentation for the proposed obligors on the Refunding Bonds, (B) the Bank has approved all current title and survey matters with respect to the Hotel, and (C) the Borrower and the Bank have approved substantially all of the material documentation relating to the issuance of the Refunding Bonds, (v) the Bank has a reasonable expectation that the Refunding Bonds will be issued on or prior to the Extended Maturity Date, and (vi) the Company shall have provided to the Bank evidence reasonably satisfactory to the Bank that there has been no material adverse change in the financial condition of the Company or any of the Guarantors, then the Company shall have the one time option of extending the 26 Initial Maturity Date until the Extended Maturity Date by, not less than fifteen (15) days prior to the Initial Maturity Date, notifying the Bank in writing of its desire to exercise its option to extend the Initial Maturity Date until the Extended Maturity Date. The Company shall pay all costs incurred by the Bank in connection with the extension of the Initial Maturity Date to the Extended Maturity Date including, without limitation, reasonable attorneys' fees and expenses incurred by the Bank, and all costs and expenses incurred by the Bank in verifying that the Company has satisfied each of the conditions to the extension as described in this Section 3A(g)." (f) Provided no Event of Default exists, the Reimbursement Amount may be prepaid in whole or in part at any time provided (i) written irrevocable notice of such prepayment specifying the intended date of prepayment is received by the Bank not more than sixty (60) days and not less than three (3) days prior to the date of such prepayment, and (ii) such prepayment is accompanied by all interest accrued hereunder and all other sums due hereunder or under the L/C Documents. Notwithstanding anything to the contrary in this Agreement or the L/C Documents, the outstanding balance of the Reimbursement Amount shall be absolutely and unconditionally due and payable on the date specified in any notice given pursuant to this Subsection. (g) Without limiting the foregoing, the Company shall compensate the Bank for all losses, expenses and liabilities (including any interest paid by such Bank to lenders of funds borrowed by it to make or carry the indebtedness evidenced by this Agreement and any loss, expense or liability sustained by Bank in connection with the liquidation or re-employment of such funds) Bank may sustain: (i) if any repayment of the unpaid balance of the Reimbursement Amount occurs on a date that is not the last day of a LIBOR Reference Period, (ii) if any repayment of the unpaid balance of the Reimbursement Amount is not made on any date specified in a notice of repayment given by the Company, or (iii) as a consequence of any default by the Company to repay any indebtedness evidenced by this Agreement when required by the terms hereof or any other event specified herein. Such compensation shall be paid by the Company within fifteen (15) days after demand therefor by Bank, provided that Bank shall have delivered to the Company a certificate setting forth in reasonable detail the amount of such compensation payable by the Company, and such certificate shall be conclusive and binding on the Company as to the amount thereof except in the case of manifest error or willful misconduct. Notwithstanding any provision herein, the Bank shall be entitled to fund and maintain its funding of all or any part of the indebtedness evidenced by this Agreement in any manner it sees fit, it being understood, however, that for the purposes hereof, all determinations shall be made as if Bank had actually funded and maintained the indebtedness evidenced by this Agreement during each LIBOR Reference Period through the purchase of deposits in the relevant market having a maturity corresponding to such LIBOR Reference Period and bearing an interest rate equal to the LIBOR Rate for such LIBOR Reference Period No such compensation shall be required with respect to repayment of the Reimbursement Amount made on the Maturity Date. 27 (h) The Company shall, in addition to all other amounts payable hereunder, also pay to the Bank, as additional interest, the following sums, at the time and in the manner hereinafter set forth: (i) if, due to either: (A) the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation or (B) the compliance by the Bank with any guideline or request from any governmental authority (whether or not having the force of law), there shall be any increase in the cost to the Bank of agreeing to make or making the indebtedness evidenced by this Agreement, then the Company shall from time to time, upon demand by Bank, pay to Bank additional amounts to indemnify Bank against any such increased costs. A certificate as to the amount of such increased costs submitted to the Company by an officer of the Bank shall be conclusive in the absence of manifest error. Such increased costs shall be payable at the time and in the manner that interest on the Reimbursement Amount is payable hereunder for such costs incurred since the last such interest payment due hereunder; and (ii) Company shall also pay to the Bank at the time and in the manner that interest is payable on the Reimbursement Amount under this Agreement for each LIBOR Reference Period, the cost since the last such interest payment due hereunder, as determined in good faith by the Bank, of complying, in connection with such LIBOR Reference Period during such interest period with any reserve, special deposit or similar requirement imposed or deemed applicable against any assets held by or deposits or accounts in or with or credit extended by the Bank, or the office of Bank, by any United States governmental authority charged with the administration of such requirements. Each notification as to the amount of such cost delivered to the Company by an officer of the Bank shall be conclusive as to the amount of such cost. (d) The Reimbursement Agreement is hereby amended by deleting Section 7(e) in its entirety and substituting the following therefor: "(e) Additional Indebtedness. The Company will not, directly or indirectly, create, incur, permit or suffer to exist any Debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than (i) the Reimbursement Amount and the other obligations of the Company under this Agreement and the other L/C Documents, (ii) the GDB Loan, (iii) the posting of bonds, if any, required in connection with the ownership and operation of the Hotel, (iv) other Debt as expressly disclosed on the June 30 Financial Statement, and (iv) indebtedness to Posadas de Puerto Rico Associates, Incorporated incurred on the date hereof 28 in an aggregate principal amount not to exceed $35,000,000, provided that all of the foregoing are paid when due." (e) The Reimbursement Agreement is hereby amended by deleting Section 7(g) in its entirety and substituting the following therefor: "(g) Financial Statements. (i) The Company shall keep adequate books and records of account in accordance with the methods currently employed by the Company, consistently applied and furnish to the Bank: (1) upon request of the Bank from time to time, certified rent rolls signed and dated by the Company, detailing the names of all tenants of the Hotel, the portion of Hotel occupied by each tenant, the base rent and any other charges payable under each Lease and the term of each Lease, including the expiration date, and any other information as is reasonably required by the Bank; (2) a monthly operating statement of the Hotel detailing the total revenues received, total expenses incurred, total cost of all capital improvements, total debt service and total cash flow, to be prepared and certified by the Company in the form required by the Bank, and if available, any quarterly operating statement prepared by an independent certified public accountant within thirty (30) days after the close of each calendar quarter; and (3) an annual balance sheet and profit and loss statement of the Company, in the form required by the Bank, prepared and certified by the Company, and an audited financial statement prepared by an independent certified public accountant acceptable to the Bank within ninety (90) days after the close of each calendar year; provided that Ernst & Young LLP shall be deemed an acceptable certified public accountant for such purpose. (ii) Upon reasonable request from the Bank, the Company and Williams shall furnish to the Bank a property management report for the Hotel, any lease proposals generated by the Company or Williams, deposits received from tenants and any other information reasonably requested by the Bank, in reasonable detail and certified by the Company under penalty of perjury to be true and complete; and an accounting of all security deposits held in connection with any Lease of any part of the Hotel, including the name and identification number of the accounts in which such security deposits are held, the name and address of the financial institutions in which such security deposits are held and the name of the person to contact at such financial institution, along with any authority or release necessary for the Bank to obtain information regarding such accounts directly from such financial institutions. 29 (iii) The Company and Williams shall furnish the Bank with such other additional financial or management information as may, from time to time, be reasonably required by the Bank in form and substance reasonably satisfactory to the Bank. (iv) The Company has submitted and the Bank has approved the projections and operating budget for the Hotel covering the remainder of calendar year 1998 attached hereto as Exhibit E (this and any other budget hereafter approved by the Bank for any subsequent calendar year and which is in effect during the applicable period is referred to as the "Current Budget"). The Company will operate the Hotel only in accordance with the Current Budget then in effect, and any deviation of more than ten (10%) percent in any major category of the Current Budget, any deviation of more than ten (10%) in any item for capital improvements or capital replacements, and any adverse deviation of more than ten (10%) percent in the overall Current Budget, will require the written approval of the Bank which consent may be arbitrarily withheld. The Company shall not expend any funds other than in accordance with the Current Budget as provided herein, subject to deviation as provided in the preceding sentence. In no event shall the Current Budget be changed or modified without the prior written consent of the Bank. The inclusion of the reference to the Current Budget in this Agreement is not, and shall not be deemed to be, for the benefit of any contractor or materialman and no contractor or materialman shall rely thereon or shall be deemed or considered to be a third party beneficiary of any of the provisions of this Agreement. (v) On each December 1 for so long as the Reimbursement Amount shall remain outstanding, the Company shall submit to the Bank for its prior written approval, which approval may be withheld in the Bank's sole and absolute discretion, the following items with respect to the use and operation of the Hotel during the following calendar year (collectively, the "Annual Business Plan"): (i) the Current Budget which shall include among other things, an operating budget on a monthly basis, and a budget for all capital improvements and capital replacements; (ii) a description of the marketing strategy for the Hotel; (iii) budgets, strategies, plans, and other information, if any, delivered to the Company by the Manager; and (iv) any other matters reasonably requested by the Bank with respect to the Company or the Hotel. The Company will furnish the Bank with the Annual Business Plan for approval no later than December 1 of each calendar year. The Bank's approval or disapproval (which disapproval must be accompanied by a statement of the reasons therefor) of the Annual Business Plan shall be given in the Bank's sole discretion within thirty (30) days after receipt thereof from the Company, and if the Bank neither approves or disapproves a proposed Annual Business Plan nor requests additional information in connection therewith within such thirty (30) day period, then such Annual Business Plan will be deemed approved. If the Bank rejects a proposed Annual Business Plan or requests additional information from the Company, then the Bank will provide the Company with written notice thereof and the Company will submit a revised proposed Annual Business Plan or such 30 information within twenty (20) days of receipt of such rejection or request, and the Company shall thereafter have twenty (20) days to approve or disapprove the revised proposed Annual Business Plan. If the Company's proposed Annual Business Plan for a given year has not been approved by January 1 of such year, then the Annual Business Plan in effect for the immediately preceding year will be the effective Annual Business Plan for the current year or portion thereof until a new Annual Business Plan is approved by the Company, provided that during such period prior to the approval of a new Annual Business Plan by the Bank, an interim Current Budget shall be used which shall consist of (i) for line items with respect to which there is no dispute between the Company and the Bank, the interim Current Budget shall contain the amounts of such undisputed line items, and (ii) for all disputed line items, the amounts shall be (x) in the case of revenues, the greater of the amounts for such line items set forth in the approved Current Budget for the prior year and the actual revenues received for the previous year, and (y) in the case of expenses, the expenses set forth in the approved Current Budget for the prior year if the revenues in the interim Current Budget are based on revenues in the approved Current Budget for the prior year, or the actual expenses for the prior year if the revenues in the interim Current Budget are based on the actual revenues for the previous year, except that the actual expenses for any increases in taxes and insurance premiums shall be reflected in the interim Current Budget. In the event that no new Annual Business Plan is approved by the Company on or before April 1 of any year, then an independent third-party property manager shall be selected by the Bank which shall be reasonably acceptable to the Company, and such manager shall propose and approve an Annual Business Plan for such current year. The Company will operate the Hotel only in accordance with the Annual Business Plan then in effect, and any deviation of more than ten (10%) percent in any major category of the Current Budget then in effect, any deviation of more than ten (10%) percent in any item for capital improvements or capital replacements in the Current Budget then in effect, and any adverse deviation of more than ten (10%) percent in the overall Current Budget then in effect, will require the prior written consent of the Bank which consent may be arbitrarily withheld. The Company shall not expend any funds other than in accordance with the Annual Business Plan and the Current Budget as provided herein, subject to deviation as provided in the preceding sentence. The inclusion of the reference to the Current Budget and the Annual Business Plan in this Agreement is not, and shall not be deemed to be, for the benefit of any contractor or materialman and no contractor or materialman shall rely thereon or shall be deemed or considered to be a third party beneficiary of any of the provisions of this Agreement." (f) The Reimbursement Agreement is hereby amended by deleting Section 7(h) in its entirety and substituting the following therefor: 31 "(h) Transfers. The Company (i) will not sell, convey, assign, transfer, mortgage or encumber (or contract to sell, convey, assign, transfer, mortgage or encumber) the Hotel or any part thereof (other than obsolete or worn out fixtures and equipment replaced by adequate substitutes of equal or greater value than the replaced items when new, and other than inventory and supplies in the ordinary course of business), or any interest therein (legal or beneficial) nor will the Company ever be divested of title or any interest therein (legal or beneficial) in any manner or way, whether voluntary or involuntary, by operation of law or otherwise, (ii) will not permit, and there shall not occur, any (1) transfer of the partnership interest of any general partner of Company, (2) transfer of any limited partnership interest of Company, or (3) a new general or limited partner to be admitted to the Company, (iii) if any general or limited partner of Company or the general partner of any such general or limited partner, is a corporation, (A) none of its respective voting or nonvoting securities shall be sold, conveyed, assigned, or otherwise transferred (except upon the death or incapacity of a natural person) or pledged, hypothecated (in each instance, whether voluntarily or involuntarily) or otherwise transferred as security for debt or otherwise, (B) there shall be no increase in the number of issued and/or outstanding shares of voting or nonvoting securities of any general or limited partner of Company or the general partner of any such general or limited partner of Company, and (C) there shall not be created any additional classes of voting or nonvoting securities of any general or limited partner of Company or the general partner of any such general or limited partner of Company, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, with the result that no voting or nonvoting securities of any general or limited partner of Company or the general partner of any such general or limited partner of Company shall be sold or otherwise pledged, hypothecated or transferred as security for debt or shall be held by any person who or which is not a holder of such securities as of the date hereof or held by a person who is a holder of such voting securities as of the date hereof in a percentage different from the percentage interest held by such person as of the date hereof, and (iv) if Company or any general or limited partner of Company is a partnership, joint venture, syndicate or other group, neither all nor any portion of the interest of any partner, joint venturer or member thereof shall be sold, conveyed or otherwise transferred (except upon the death or incapacity of a natural person) or pledged, hypothecated or otherwise transferred as security for debt (in each instance whether voluntary or involuntary). Further, without the prior written consent of the Bank, (i) in no event shall the organizational documents of either the Company or any general partner of the Company be amended or modified in any manner whatsoever, (ii) in no event shall any amendment, modification, transfer, assignment, conveyance or any other change result in a change in the direct or indirect beneficial interest of Wyndham International, Inc. or Patriot American Hospitality, Inc. in the Company, and (iii) in no event shall the organizational documents of Wyndham International, Inc. or Patriot American Hospitality, Inc. or of any partner in the Company be amended or modified in any manner or shall there be any other change in the ownership of direct or indirect legal or beneficial interests in the Company that would require the consent of the lenders under the terms of the Patriot Loan Agreement. Any violation of the provisions of this paragraph, shall constitute an Event of Default and the Bank shall have no obligation to allege or show any 32 impairment of its security and may pursue any remedy hereunder and/or any legal or equitable remedies for default without such allegation or showing." (g) The Reimbursement Agreement is hereby amended by deleting Section 7(x) in its entirety and substituting the following therefor: "(x) Insurance. (i) The Company shall obtain and maintain, or cause to be maintained, insurance for the Company and the Hotel providing at least the following coverages: (A) Property Insurance. Insurance with respect to the Hotel Improvements and building equipment insuring against any peril included within the classification "All Risks of Physical Loss" in amounts at all times sufficient to prevent the Bank from becoming a co-insurer within the terms of the applicable policies and under applicable law, but in any event such insurance shall be maintained in an amount equal to the full insurable value of the Hotel Improvements and building equipment, the term "full insurable value" to mean the actual replacement cost of the Hotel Improvements and building equipment (without taking into account any depreciation, and exclusive of excavations, footings and foundations, landscaping and paving) determined annually by an insurer, a recognized independent insurance broker or an independent appraiser selected and paid by the Company and acceptable to the Bank and in no event less than the coverage required pursuant to the terms of any Lease and in no event in an amount less than an amount reasonably acceptable to the Bank; (B) Liability Insurance. Comprehensive general liability insurance, including bodily injury, death and property damage liability, insurance against any and all claims, including all legal liability to the extent insurable and imposed upon the Bank and all court costs and attorneys' fees and expenses, arising out of or connected with the possession, use, leasing, operation, maintenance or condition of the Hotel in such amounts as are generally available at commercially reasonable premiums and are generally required by institutional lenders for properties comparable to the Hotel but in no event for a combined single limit of less than an amount acceptable to the Bank; (C) Workers' Compensation Insurance. Statutory workers' compensation insurance with respect to any work on or about the Hotel; (D) Business Interruption. Business interruption and/or loss of "rental income" insurance in an amount sufficient to avoid any co-insurance penalty and to provide proceeds which will cover a period of not less than one (1) year from the date of casualty or loss, the term "rental income" to mean the sum of (A) the total then ascertainable Rents from the Hotel and (B) the total ascertainable amount of all other amounts to be received by the Company from third parties, reduced to the extent such amounts would not be received because of operating expenses not incurred during a 33 period of non-occupancy of that portion of the Hotel then not being occupied or utilized; (E) Boiler and Machinery Insurance. Broad form boiler and machinery insurance (without exclusion for explosion) covering all boilers or other pressure vessels, machinery, and equipment located in, on or about the Hotel and insurance against loss of occupancy or use arising from any breakdown in such amounts as are generally available at commercially reasonable premiums and are generally required by institutional lenders for properties comparable to the Hotel; (F) Flood Insurance. Flood insurance in an amount at least equal to the lesser of (A) the Reimbursement Amount, or (B) the maximum limit of coverage available for the Hotel under the National Flood Insurance Act of 1968, The Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended; and (G) Other Insurance. Such other insurance with respect to the Hotel against loss or damage of the kinds from time to time customarily insured against and in such amounts as are generally available at commercially reasonable premiums and are generally required by institutional lenders for properties comparable to the Hotel, including, without limitation, earthquake and hurricane insurance, but in no event in an amount less than an amount reasonably acceptable to the Bank. (ii) All insurance provided for in Section 7(x)(i) above shall be obtained under valid and enforceable policies (the INSURANCE POLICIES or in the singular, the INSURANCE POLICY), and shall be issued by either the insurers who insure the Hotel Improvements on the Effective Date of the Modification Agreement or one or more other domestic primary insurer(s) having (A) a claims paying rating ability of not less than "A" as assigned by one or more credit rating agencies approved by the Bank and (B) a general policy rating of A or better and a financial class of VI or better by A.M. Best Company, Inc. (each such insurer shall be referred to below as a QUALIFIED INSURER). All insurers providing insurance required by this Agreement shall be authorized to issue insurance in the jurisdiction in which the Hotel is located. The Insurance Policy referred to in Section 7(x)(i)(B) above shall name the Bank as an additional named insured and the Insurance Policy referred to in Sections 7(x)(i)(A), (D), (E), (F) and, if applicable, (G) above shall provide that all proceeds be payable to the Bank as set forth in Section 7(aaa) hereof. The Insurance Policies referred to in Sections 7(x)(i)(A), (E), (F) and, if applicable, (G) shall also contain: (1) a standard "non-contributory mortgagee" endorsement or its equivalent relating, inter alia, to recovery by the Bank notwithstanding the negligent or willful acts or omission of the Bank; (2) to the extent available at commercially reasonable rates, a waiver of subrogation endorsement as to the Bank; and (3) an endorsement providing for a deductible per loss of an amount not more than that which is customarily maintained by prudent owners of similar properties in the general vicinity of the Hotel, but in no event in 34 excess of an amount acceptable to the Bank. All Insurance Policies described in Section 7(x)(i) above shall contain (x) a provision that such Insurance Policies shall not be cancelled or terminated, nor shall they expire, without at least thirty (30) days' prior written notice to the Bank in each instance; and (y) include effective waivers by the insurer of all claims for Insurance Premiums (defined below) against any loss payees, additional insureds and named insureds (other than the Company). Certificates of insurance with respect to all renewal and replacement Insurance Policies shall be delivered to the Bank not less than ten (10) days prior to the expiration date of any of the Insurance Policies required to be maintained hereunder which certificates shall bear notations evidencing payment of applicable premiums (the INSURANCE PREMIUMS). Originals or certificates of such replacement Insurance Policies shall be delivered to the Bank promptly after the Company's receipt thereof but in any case within thirty (30) days after the effective date thereof. If the Company fails to maintain and deliver to the Bank the original Insurance Policies or certificates of insurance required by this Agreement, upon ten (10) days' prior notice to the Company, the Bank may procure such insurance at the Company's sole cost and expense. (iii) The Company shall comply in all material respects with all insurance requirements and shall not bring or keep or permit to be brought or kept any article upon any portion of the Hotel or cause or permit any condition to exist thereon which would be prohibited by an insurance requirement, or would invalidate the insurance coverage required hereunder to be maintained by the Company on or with respect to any part of the Hotel pursuant to this Section 7(x). (iv) If the Hotel shall be damaged or destroyed, in whole or in part, by fire or other casualty, the Company shall give prompt notice of such damage to the Bank and provided that the Bank shall have received the insurance proceeds, the Company shall promptly commence and diligently prosecute the completion of the repair and restoration of the Hotel as nearly as possible to the condition the Hotel was in immediately prior to such fire or other casualty, with such alterations as may be approved by the Bank (the Restoration) and otherwise in accordance with Section 7(aaa) of this Agreement. (v) The insurance coverage required under Section 7(i)(B) may be satisfied by a layering of Comprehensive General Liability, Umbrella and Excess Liability Policies, but in no event will the Comprehensive General Liability policy be written for an amount less than an amount acceptable to the Bank's combined single limit for bodily injury and property damage liability." (h) The Reimbursement Agreement is hereby amended by deleting Section 7(gg) in its entirety and substituting the following therefor: "(gg) Leasing. Except as otherwise consented to by the Bank, all Leases shall be written on the standard form of lease which has been approved by the Bank. Upon request, the Company 35 shall furnish the Bank with executed copies of all Leases. No material changes may be made to the Bank-approved standard lease without the prior written consent of the Bank, which consent shall not be unreasonably withheld or delayed. Proposed Leases and renewals of existing Leases shall not be subject to the prior approval of the Bank if the renewal is pursuant to the terms of an existing Lease or if the proposed renewal or new Lease (i) is on the Bank- approved form, subject only to commercially reasonable variations therefrom, (ii) is negotiated in an arms'-length transaction with a third party not affiliated with the Company, (iii) provides for rental rates and terms comparable to existing local market rates and (iv) is consistent with the current ordinary course of business at the Hotel. All other proposed Leases and renewals of existing Leases shall be subject to the prior approval of the Bank. All Leases shall be subordinate to this Agreement, the Mortgage and the other L/C Documents. All new Leases shall provide that they are subordinate to all mortgages on the Hotel, and that the lessee agrees to attorn to the Bank and any other holder of such mortgage. The Company (1) shall observe and perform all the obligations imposed upon the lessor under the Leases if the failure to perform or observe the same would materially and adversely affect the value of the Hotel taken as a whole and shall not do or permit to be done anything to materially impair the value of the Leases as security for the indebtedness of the Company hereunder and under the other L/C Documents; (2) shall promptly send copies to the Bank of all notices of default which the Company shall send or receive thereunder; (3) shall enforce in a commercially reasonable manner all of the material terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed; (4) shall not collect any of the Rents more than one (1) month in advance, (except a security deposit shall not be deemed rent collected in advance); (5) shall not execute any other assignment of the lessor's interest in the Leases or the Rents; (6) shall not (A) materially alter, modify or change the terms of any of the Leases without the prior written consent of the Bank, which consent shall not be unreasonably withheld or delayed if the alteration, modification or change does not materially and adversely affect the value of the Hotel taken as a whole and provided further that such Lease, as altered, modified or changed, is otherwise in compliance with the requirements of this Agreement and the other L/C Documents; provided, however that no such consent shall be required for Leases, if after giving effect to such alteration, modification or change the Lease would not have required the Bank's consent in the first instance or (B) cancel or terminate any Lease (except for defaults thereunder), or accept a surrender thereof or convey or transfer or suffer or permit a conveyance or transfer of any portion of the Land or of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of, lessees thereunder; (7) shall not alter, modify or change the terms of any guaranty, letter of credit or other credit support with respect to the Leases (the Lease Guaranty) or cancel or terminate such Lease Guaranty without the prior written consent of the Bank; and (8) shall not consent to any assignment of or subletting under the Leases not in accordance with their terms, without the prior written consent of the Bank." (i) The Reimbursement Agreement is hereby amended by adding the following new Section 7(uu): 36 "(uu) Payment of Taxes, Etc. (a) The Company shall pay, or cause to be paid, by their due date (except as otherwise set forth in subsection (c) hereof) taking into account all applicable extensions, all taxes, assessments, water rates, sewer rents, governmental impositions, and other charges, including, without limitation, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Land, now or hereafter levied or assessed or imposed against the Hotel or any part thereof (the TAXES), all ground rents, maintenance charges and similar charges, now or hereafter levied or assessed or imposed against the Hotel or any part thereof (the OTHER CHARGES), and all charges for utility services provided to the Hotel as same become due and payable. The Company will deliver to the Bank, promptly upon the Bank's request, evidence satisfactory to the Bank that the Taxes, Other Charges and utility service charges have been so paid or are not then delinquent. The Company shall not suffer and shall promptly cause to be paid and discharged any lien or charge whatsoever which may be or become a lien or charge against the Hotel or any portion thereof. Except to the extent sums sufficient to pay all Taxes and Other Charges have been deposited with the Bank in accordance with the terms of this Agreement or any of the other L/C Documents, Borrower shall furnish to the Bank paid receipts for the payment of the Taxes and Other Charges prior to the date the same shall become delinquent. (b) After prior written notice to the Bank, the Company, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any of the Taxes or Other Charges, provided that (i) no Event of Default has occurred and is continuing under this Agreement or any of the other L/C Documents, (ii) the Company is permitted to do so under the provisions of any other mortgage, deed of trust or deed to secure debt affecting the Hotel, (iii) such proceeding shall suspend the collection of such Taxes and Other Charges from the Company and from the Hotel or the Company shall have paid all of the Taxes and Other Charges under protest (if required to do so under applicable law), (iv) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which the Company is subject and shall not constitute a default thereunder, (v) neither the Hotel nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost, (vi) the Company shall have set aside adequate reserves for the payment of the Taxes and other Charges, together with all interest and penalties thereon, unless the Company has paid all of the Taxes and Other Charges under protest, and (vii) if the Company has not paid the contested Taxes and Other Charges under protest, the Company shall have furnished the security as may be required in the proceeding, or as may be reasonably requested by the Bank to insure the payment of any contested Taxes and Other Charges, together with all interest and penalties thereon, taking into consideration the amount in any escrow fund being held by the Bank and available for the payment of Taxes and Other Charges. (c) On August 3, 1998, the Company shall deposit with the Bank the sum of $3,245,137 with respect to the Taxes accruing prior to such date. In addition to the foregoing, in the event that any contested Taxes with respect to the Hotel or any portion thereof have not been paid in full 37 on or prior to September 30, 1998, the Company shall deposit with the Bank, on October 1, 1998, an additional amount equal to the difference between $3,245,137 and the full amount of all such contested Taxes as estimated by the Bank. Further, upon request of the Bank, the Company shall deposit with the Bank, monthly, on the first Business Day of each month, one-twelfth (1/12th) of the annual Taxes relating to the Hotel or any portion thereof. On the third Business Day following such request from the Bank, the Company shall deposit with the Bank a sum of money which together with the monthly installments will be sufficient to make each of such payments thirty (30) days prior to the date any delinquency or penalty becomes due with respect to such payments. Deposits shall be made on the basis of the Bank's estimate from time to time of the Taxes for the current year (after giving effect to any reassessment or, at the Bank's election, on the basis of the Taxes for the prior year, with adjustments when the Taxes are fixed for the then current year). All funds so deposited shall be held by the Bank, in an interest bearing account. The Company hereby grants to the Bank a security interest in all funds so deposited with the Bank for the purpose of securing the obligations of the Company hereunder and under the other L/C Documents. While an Event of Default exists, the funds deposited may be applied in payment of the charges for which such funds have been deposited, or to the payment of the obligations of the Company to the Bank or any other charges affecting the security of the Bank, as the Bank may elect, but no such application shall be deemed to have been made by operation of law or otherwise until actually made by the Bank. The Company shall furnish the Bank with bills for the Taxes for which such deposits are required at least thirty (30) days prior to the date on which the Taxes first become payable, or if the Company has not received the bills for the Taxes by such date, then the Company shall furnish such Tax bills to the Bank within two Business Days of the Company's receipt of such bill. If at any time the amount on deposit with the Bank, together with amounts to be deposited by the Company before such Taxes are payable, is insufficient to pay such Taxes, the Company shall deposit any deficiency with Bank immediately upon demand. The Bank shall apply the moneys so deposited to the payment of such Taxes when the amount on deposit with the Bank is sufficient to pay such Taxes and the Bank has received a bill for such Taxes." (j) The Reimbursement Agreement is hereby amended by adding the following new Section 7(vv): "(vv) Maintenance of Property. The Company shall cause the Hotel to be maintained in a good and safe condition and repair. Neither the Hotel Improvements nor the Hotel Personalty nor any portion thereof shall be removed, demolished or materially altered (except for normal replacement of the Hotel Personalty) without the prior written consent of the Bank either on a case by case basis or in connection with the Bank's approval of the Current Budget to the extent that such Current Budget specifically and expressly describes the nature and extent of the proposed removal, demolition or alteration of a specified item. The Company shall promptly repair, replace or rebuild any part of the Hotel which may be destroyed by any casualty, or become damaged, worn or dilapidated or which may be affected by any condemnation or other similar proceeding and shall complete and pay for any structure at any 38 time in the process of construction or repair on the Land. The Company shall not initiate, join in, acquiesce in, or consent to any change in any private restrictive covenant, zoning law or other public or private restriction, limiting or defining the uses which may be made of the Hotel or any part thereof. If under applicable zoning provisions the use of all or any portion of the Hotel is or shall become a nonconforming use, the Company will not cause or permit the nonconforming use or Hotel Improvement to be discontinued or abandoned without the express written consent of the Bank." (k) The Reimbursement Agreement is hereby amended by adding the following new Section 7(ww): "(ww) Performance of Other Agreements. The Company shall observe and perform each and every material term to be observed or performed by the Company pursuant to the terms of any agreement or recorded instrument affecting or pertaining to the Hotel." (l) The Reimbursement Agreement is hereby amended by adding the following new Section 7(xx): "(xx) Partnership Distributions. The Company will make no distributions of cash or property of any type or nature to any partner in the Company." (m) The Reimbursement Agreement is hereby amended by adding the following new Section 7(yy): "(yy) Management. There shall be no change in the day-to-day control and management of the Hotel without the prior written consent of the Bank. The Company shall not terminate or replace Williams or any other manager hereafter approved by the Bank (collectively, the MANAGER) or appoint a new Manager for all or any portion of the Hotel or with respect to any operation within the Hotel or terminate or amend the Management Agreement for the Hotel without the Bank's prior written approval. Any change in ownership or control of Williams or any other Manager shall be cause to require the re-approval of such Manager and Management Agreement by the Bank. The Manager shall hold and maintain all necessary licenses, certifications and permits required by law for the use, occupancy, management and operation of the Hotel and each component thereof. The Company shall fully perform all of its material covenants, agreements and obligations under the Management Agreement. Notwithstanding the foregoing, the Bank shall deem either Wyndham International, Inc. or Wyndham International Operating Partnership, Inc. acceptable as a replacement Manager provided that the terms of any new management agreement are acceptable to Bank and such replacement Manager executes such documents and agreements in favor of the Bank as the Bank shall request in substantially the same substance as those documents executed by the prior Manager in favor of the Bank." 39 (n) The Reimbursement Agreement is hereby amended by adding the following new Section 7(zz): "(zz) Affiliate Transactions. Without the prior written consent of the Bank, the Company shall not engage in any transaction affecting the Hotel with an Affiliate of the Company, except to the extent of any payment made to any such Affiliate under the Management Agreement as approved by the Bank or which constitutes a Bona Fide Cost and is otherwise expressly permitted hereunder." (o) The Reimbursement Agreement is hereby amended by adding the following new Section 7(aaa): "(aaa) Use and Application of Insurance Proceeds. The Bank shall apply insurance proceeds to costs of restoring the Hotel or to the Reimbursement Amount as follows: (i) if the loss is less than or equal to $25,000,000, the Bank shall apply the insurance proceeds to the Company's Restoration of the Hotel provided (A) no Event of Default or Default exists, and (B) the Company promptly commences and is diligently pursuing Restoration of the Hotel; (ii) if the loss exceeds $25,000,000 but is not more than 25% of the replacement value of the Hotel Improvements (for projects containing multiple phases or stand alone structures, such calculation to be based on the damaged phase or structure, not the project as a whole), the Bank shall apply the insurance proceeds to the Company's Restoration of the Hotel provided that at all times during such Restoration (A) no Event of Default or Default exists; (B) the Bank determines that there are sufficient funds available to restore and repair the Hotel to a condition approved by the Bank; (C) the Bank determines that the net operating income of the Hotel during Restoration will be sufficient to pay debt service under this Agreement; (D) the Bank determines that Restoration and repair of the Hotel to a condition approved by the Bank will be completed within three (3) months after the date of loss or casualty and in any event at least thirty (30) days prior to the Maturity Date; and (E) the Company promptly commences and is diligently pursuing Restoration of the Hotel; (iii) if the conditions set forth above are not satisfied or the loss exceeds the amount and percentage specified in Subsection (ii) above, in the Bank's sole discretion, the Bank may apply any insurance proceeds it receives to the repayment of the Reimbursement Amount or any other amount outstanding hereunder or under any of the other L/C Documents or allow all or a portion of such proceeds to be used for the Restoration of the Hotel; and 40 (iv) if the loss exceeds $500,000 and insurance proceeds are to be applied to Restoration of the Hotel as provided herein, such insurance proceeds will be disbursed on receipt by the Bank of satisfactory plans and specifications, contracts and subcontracts, schedules, budgets, title endorsements, and architects' certificates, and otherwise in accordance with prudent commercial construction lending practices for construction loan advances, including, without limitation, the General Disbursement Conditions." (p) The Reimbursement Agreement is hereby amended by adding the following new Section 7(bbb): "(bbb) Condemnation. The Company shall promptly give the Bank notice of the actual or, threatened commencement of any condemnation or eminent domain proceeding and shall deliver to the Bank copies of any and all papers served in connection with such proceedings. The Bank may participate in any such proceedings to the extent permitted by law. Upon an Event of Default, the Company shall deliver to the Bank all instruments requested by it to permit such participation. The Company shall, at its expense, diligently prosecute any such proceedings, and shall consult with the Bank, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. Notwithstanding any taking by any public or quasi-public authority through eminent domain or otherwise (including, but not limited to any transfer made in lieu of or in anticipation of the exercise of such taking), the Company shall continue to pay the Reimbursement Amount and all other indebtedness outstanding hereunder at the time and in the manner provided for its payment hereunder and such indebtedness shall not be reduced until any award or payment therefor shall have been actually received and applied by the Bank, after the deduction of expenses of collection, to the reduction or discharge of the indebtedness outstanding hereunder. The Bank shall not be limited to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award interest at the rate or rates provided herein. If the Hotel or any portion thereof is taken by the power of eminent domain, the Company shall promptly commence and diligently prosecute the Restoration of the Hotel in accordance with the provisions respecting Restoration of the Hotel following a casualty and receipt by the Company of insurance proceeds as provided in Section 7(aaa) of hereof and the Bank shall make the proceeds available for Restoration as provided in said Section 7(aaa). If the Hotel is sold, through foreclosure or otherwise, prior to the receipt by the Bank of the award or payment, the Bank shall have the right, whether or not a deficiency judgment shall have been sought, recovered or denied, to receive the award or payment, or a portion thereof sufficient to pay the indebtedness outstanding hereunder and under the other L/C Documents." (q) The Reimbursement Agreement is hereby amended by deleting Section 8(p) in its entirety and substituting the following therefor: 41 "(p) Location of Company. The place of business or chief executive office of the Company is located at 1000 El Conquistador Avenue, Las Croabas, Fajardo, P.R. 00738, Attention: General Manager. The Company will give the Bank prior written notice of any relocation of such office." (r) The Reimbursement Agreement is hereby amended to provide that, in addition to all of the other Events of Default as defined in the Reimbursement Agreement, the occurrence of any of the following events shall constitute an Event of Default under the Reimbursement Agreement: (i) Any representation or warranty of any of the Company (A) contained in this Agreement, (B) contained in any certificate delivered in connection therewith, or (C) made to CRE concerning the financial condition or creditworthiness of the Company, shall prove to have been false or misleading in any material respect. (ii) The failure by the Company to perform or observe any of the agreements or covenants contained in this Agreement and the continuance of such failure for thirty (30) days after notice by CRE to the Company. (iii) Any default beyond any applicable period of notice or grace by the Guarantor, the Company or any affiliate of the Guarantor or the Company under that certain Patriot Loan Agreement. Notwithstanding anything contained herein to the contrary, (i) neither the notice nor applicable grace or cure periods described in subsections (i), (ii) or (iii) hereof shall have any applicability to any of the other Events of Default as defined in the Reimbursement Agreement, (ii) in no event shall any of the notice and/or grace periods provided for herein or in any of the other L/C Documents or Additional Security Documents be considered to be in addition to any other notice or grace period provided therein, and (iii) any applicable notice or grace period shall run concurrently with and not in addition to any other notice or grace period to which the Owner shall be entitled either hereunder or under any of the other L/C Documents or Additional Security Documents. (s) The Reimbursement Agreement is hereby amended by deleting Section 14(t) in its entirety and substituting the following therefor: "(t) Limitation of Liability. The Company shall be personally liable for all amounts due under this Agreement and/or any of the other L/C Documents; provided, however, that, except as provided below, none of the general partners of the Company shall be personally liable for such amounts. The general partners of the Company shall be personally liable for any deficiency, loss or damage suffered by the Bank with respect to or in connection with this Agreement, the L/C Documents or any of the indebtedness evidenced or secured hereby or thereby, because of: (a) the commission of a criminal act by the Company or any Affiliate of 42 the Company, (b) the failure to comply with provisions of the L/C Documents prohibiting the sale, transfer, encumbrance or other Transfer of the Hotel or any portion thereof, any other collateral, or any direct or indirect ownership interest in the Company or its partners; (c) the misapplication or conversion by the Company or any of its Affiliates of any revenues or other funds derived from the Hotel, including management fees, security deposits, insurance proceeds and condemnation awards; (d) any fraud or misrepresentation of a material fact by the Company or any of its Affiliates made in or in connection with the L/C Documents; (e) the Company's or its Affiliate's collection of rents more than one month in advance but only if such collection of rents is in violation of this Agreement or any of the other L/C Documents, or entering into or modifying any Leases with respect to the Hotel, or receipt of monies by the Company or any of its Affiliates in connection with the modification of any such Leases, in violation of this Agreement or any of the other L/C Documents; (f) the Company's failure to apply revenues or proceeds of rents or any other payments received by the Company or its Affiliates with respect to the Hotel and other income of the Hotel or any other collateral to the costs of maintenance and operation of the Hotel and to the payment of taxes, lien claims, insurance premiums, debt service and other amounts due under the L/C Documents; (g) the Company's failure to maintain insurance as required by this Agreement or any of the other L/C Documents or to pay any taxes or assessments affecting the Hotel, or any portion thereof; (h) the intentional interference by the Company or its Affiliates with the Bank's exercise of rights under any Assignment of Rents or under the Assignment of Accounts Receivable; (i) any damage or destruction to the Hotel caused by the acts or omissions of the Company or any of its Affiliates, or any of their respective agents, employees, or contractors to the extent not covered by insurance proceeds; (j) the Company's obligations with respect to environmental matters pursuant to the New Environmental Indemnity; (k) the Company's failure to pay for any loss, liability or expense (including reasonable attorneys' fees and expenses) incurred by the Bank arising out of any claim or allegation made by the Company, its successors or assigns, or any creditor of the Company, that this Agreement or the transactions contemplated hereby or by any of the other L/C Documents establish a joint venture, partnership or other similar arrangement between the Company and the Bank; (l) any brokerage commission or finder's fees claimed by anyone other than by virtue of a written agreement with the Bank in connection with the transactions contemplated by the L/C Documents; (m) the Company's obligations with respect to the payment of any and all real estate property taxes and personal property taxes and any other governmental lienable charges against the Hotel or any portion thereof including, without limitation, real property taxes for the all prior years which, as of August 3, 1998, remain outstanding and unpaid; (n) the avoidance, or any action seeking the avoidance, of any transfer of an interest in property of the Company to or for the benefit of Bank pursuant to Section 544, 547, 548 or 550 of the Bankruptcy Code or any similar statute under applicable law; or (o) any (i) voluntary bankruptcy or insolvency proceeding, or (ii) involuntary bankruptcy or insolvency proceeding with respect to the Company commenced by an affiliate of the Company which is not dismissed within ninety (90) days of filing. None of the foregoing limitations on liability for amounts due under the L/C Documents shall in any way impair the validity of the indebtedness evidenced thereby or the validity of the indebtedness 43 secured by the L/C Documents or the lien on or security interest in the collateral or the right of the secured party to enforce the lien or security interest or other interest in the collateral or any part thereof after default by the Company. Further, none of the foregoing limitations on the personal liability of the general partners of the Company shall modify, diminish or discharge the personal liability of any guarantor or indemnitor of the Company's obligations hereunder. Nothing herein shall be deemed to be a waiver of any right which the Bank may have under Sections 506(a), 506(b), 1111(b) or any other provision of the Bankruptcy Code, as such sections may be amended, or corresponding or superseding sections of the Bankruptcy Amendments and Federal Judgeship Act of 1984, to file a claim against the estate of the Company for the full amount due to the Bank under the L/C Documents or to require that all collateral shall continue to secure the amounts due under the L/C Documents." (t) Exhibit "D" attached to and made a part of the Reimbursement Agreement is hereby deleted and Exhibit F attached to and made a part hereof is substituted in lieu thereof. (u) The Consent and Waiver Agreement, dated as of March 31, 1998, by and between the Company and BTM ("Consent and Waiver"), is hereby amended to delete Sections 1(c), (d), (e) and (f) (collectively, the "Deleted Sections") in their entireties. As a result of such modification to the Consent and Waiver, it is hereby agreed that the Company shall not consummate any of the transactions contemplated in any of the Deleted Sections without the prior written consent of CRE, which consent, as to the transactions contemplated in Sections 1(d) and (f) only, shall not be unreasonably withheld. 10. Modification of Reimbursement Agreement and L/C Documents. (a) All references to the Reimbursement Agreement set forth in the L/C Documents shall refer to and mean the Reimbursement Agreement as assigned and modified hereby and any subsequent modifications and/or amendments thereto, such that from and after the Effective Date, the L/C Documents shall evidence and/or secure, among other things, the obligations of Owner to CRE under the Reimbursement Agreement, as assigned and modified hereby and as subsequently modified and/or amended. Notwithstanding anything to the contrary contained in any of the L/C Documents, the limitation of liability provisions of Section 14(t) of the Reimbursement Agreement, as modified hereby, shall supersede and control any and all other limitation of liability provisions contained in any of the other L/C Documents. 11. Notices. (a) All notice provisions in the Reimbursement Agreement and each of the other L/C Documents shall be modified to provide that notices to BTM, the issuer of the Letter of Credit or the "Bank" shall hereafter be addressed to CRE as follows: 44 Citicorp Real Estate, Inc. 599 Lexington Avenue 20th Floor, Zone 1 New York, New York 10043 Attention: General Counsel Reference: El Conquistador, Puerto Rico Telecopier: (212) 793-5158 With copies to: Citicorp Real Estate, Inc. 399 Park Avenue New York, New York 10043 Attention: Jeffrey A. Warner Reference: El Conquistador, Puerto Rico Telecopier: (212) 793-6314 and Weil, Gotshal & Manges 701 Brickell Avenue Suite 2100 Miami, Florida 33131 Attention: Richard A. Morrison, Esq. Telecopier: (305) 374-7159 (b) All notice provisions in the Reimbursement Agreement and each of the other L/C Documents shall be modified to provide that notices to the Owner shall hereafter be addressed to the Owner as follows: El Conquistador Partnership L.P. 1000 El Conquistador Avenue Las Croabas, Fajardo, PR 00738 Attention: General Manager Telecopier: (787) 860-3200 45 with copies to: Patriot American Hospitality, Inc. 590 Madison Avenue New York, NY 10022 Attention: William W. Evans, III Telecopier: (212) 521-1482 and Shack & Siegel, PC 530 Fifth Avenue New York, NY 10036 Attention: Pamela E. Flaherty, Esq. Telecopier: (212) 730-1964 12. Confirmation of Mortgages and Liens Upon Property. (a) The Owner acknowledges and agrees that the Fee Mortgage constitutes, and continues to be, a valid first mortgage lien and security interest upon the Mortgaged Property (as defined therein) in favor of CRE, as the assignee of BTM under the Collateral Pledge Agreement and the Second Collateral Pledge Agreement, (collectively, the "Collateral Pledge Agreements"), and as the holder of the Notes and the holder of the rights of BTM under the Reimbursement Agreement, subject only to permitted encumbrances as provided therein, that the obligations of the Owner under the Reimbursement Agreement, as modified hereby, are secured by, among other things, the Collateral Pledge Agreements, the Notes and the Fee Mortgage, as amended hereby, and that the Fee Mortgage and each of the other L/C Documents, as amended hereby, constitute valid and subsisting agreements and obligations of the Owner. Nothing herein is intended to, nor shall it, constitute a novation of the indebtedness secured by the Collateral Pledge Agreements, the Notes or the Fee Mortgage. The Mortgaged Property (as defined in the Fee Mortgage) is and shall remain subject to and encumbered by the lien, charge and encumbrance of the Fee Mortgage, and nothing herein contained shall affect or be construed to affect the lien or encumbrance of the Fee Mortgage or the priority thereof over other liens or encumbrances. (b) The Owner acknowledges and agrees that the Leasehold Mortgage constitutes, and continues to be, a valid first mortgage lien and security interest upon the Mortgaged Property (as defined therein) in favor of CRE, as assignee of BTM under the Collateral Pledge Agreements and as the holder of the Notes and the holder of the rights of BTM under the Reimbursement Agreement, subject only to permitted encumbrances as provided therein, that the obligations of the Owner under the Reimbursement Agreement, as modified hereby, are secured by, among other things, the Collateral Pledge Agreements, the Notes and Leasehold Mortgage, as amended hereby, and that the Leasehold 46 Mortgage and each of the other L/C Documents, as amended hereby, constitute valid and subsisting agreements and obligations of the Owner. Nothing herein is intended to, nor shall it, constitute a novation of the indebtedness secured by the Collateral Pledge Agreements, the Notes or the Leasehold Mortgage. The Mortgaged Property (as defined in the Leasehold Mortgage) is and shall remain subject to and encumbered by the lien, charge and encumbrance of the Leasehold Mortgage, and nothing herein contained shall affect or be construed to affect the lien or encumbrance of the Leasehold Mortgage or the priority thereof over other liens or encumbrances. 13. Ratification. Except as expressly modified and amended herein, the Owner covenants and agrees that all of the terms, covenants, promises, warranties, representations and conditions of the Reimbursement Agreement and the other L/C Documents shall remain unmodified and in full force and effect. The Owner hereby ratifies and confirms each of its obligations under the Reimbursement Agreement and the other L/C Documents, as hereby modified. 14. Effective Date. This Agreement shall be effective as of August 3, 1998 (the "Effective Date"). 15. Indemnifications. The Owner hereby agrees to indemnify and hold CRE and BTM and their respective officers, directors, shareholders, counsel, employees, agents and servants and their respective heirs, successors and assigns (collectively, the "Indemnified Parties") harmless from and against any and all claims, damages, actions, costs, expenses, liabilities or losses of any kind whatsoever (including, without limitation, court costs, reasonable attorneys' and paralegals' fees and disbursements through and including any appellate proceedings at all levels and any special proceedings) whether known or unknown, at law or in equity, irrespective of whether such claims arise out of contract, tort, violation of laws or regulations or otherwise, incurred by any Indemnified Party by reason of, under, arising out of, related to or in connection in any manner with the Bonds, this Agreement, the Additional Security Documents, the Reimbursement Agreement (as assigned and amended hereby), any of the other L/C Documents (as assigned and amended hereby) or any of the transactions contemplated hereunder or thereunder, including, without limitation, those arising from the joint, concurrent, or comparative negligence of the Indemnified Parties, except to the extent any of the foregoing is caused solely by such Indemnified Parties' gross negligence or willful misconduct. 16. No Defenses. The Owner hereby acknowledges, confirms and warrants to the Authority, Trustee, BTM and CRE that, as of the Effective Date, the Owner has absolutely no defenses, claims, rights of set-off or counterclaims against the Authority, Trustee, BTM and/or CRE under, arising out of, or in connection with, the Bonds, the Additional Security Documents, the Reimbursement Agreement or any of the other L/C Documents, as assigned and amended hereby, this Agreement or any of the transactions contemplated hereby or by any of the foregoing documents, or against any of the indebtedness evidenced or secured by any of the foregoing, any and all of which the Owner hereby expressly waives. 47 17. Release. The Owner acknowledges that it is executing this Agreement as its own voluntary act and free from duress and undue influence and upon and with the advice of counsel. The Owner hereby unconditionally and irrevocably releases, acquits and discharges the Authority, Trustee, BTM and CRE and their respective predecessors, subsidiaries, affiliates, and their respective employees, officers, directors, shareholders, agents, representatives, servants and counsel (collectively, the "Released Parties") from any and all claims, demands, actions, causes of actions, suits, debts, costs, dues, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, expenses and liabilities whatsoever, known or unknown, at law or in equity, irrespective of whether such claims arise out of contract, tort, violation of laws or regulations or otherwise, which the Owner ever had, now has or hereafter can, shall or may have against any of the Released Parties or any of them for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to and including the date hereof arising out of, in connection with, or related in any manner to the Bonds, the Hotel, the Reimbursement Agreement, the L/C Documents, the Additional Security Documents, this Agreement or any of the transactions contemplated hereby or thereby, except that each of the parties hereto shall continue to be responsible for executing such additional documents as may be necessary to carry out the intent of this Agreement as provided in Section 19 hereof. 18. Conflicts with L/C Documents. In the event of any conflict between the terms of the L/C Documents and this Agreement, the terms of the document which shall enlarge the rights or remedies of CRE, grant to CRE greater financial security, or better insure the payment and performance in full of all obligations of the Owner to CRE hereunder or under any of the L/C Documents, shall control. Whenever possible, the provisions of this Agreement shall be deemed supplemental to and not in derogation of the L/C Documents. 19. Further Assurances . The parties hereto will, whenever and as often as shall be reasonably requested to do so by any other party hereto, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, any and all conveyances, assignments and all other instruments and documents as may be reasonably necessary to complete the transactions herein contemplated and to carry out the intent and purposes of this Agreement. The Owner shall, upon request, pay for all reasonable costs and expenses incurred by any party in connection therewith. 20. Limitation of BTM Liability. The parties hereto acknowledge and agree that BTM shall have absolutely no express or implied obligation or liability hereunder to any party hereto other than the Owner, CRE, and their successors and assigns, and that BTM's obligations and liabilities hereunder shall be limited to those obligations or liabilities of BTM arising in favor of the Owner, CRE, and their successors and assigns, under the provisions of Sections 1, 2, 3(a), 6, 14, 19 and 21 hereof (the parties hereto acknowledging that BTM has no obligations or liabilities to Owner pursuant to Sections 3(a) and 6 hereof). Without limiting the foregoing, BTM shall have no obligation, express or implied, with respect to the truth and accuracy of any representations or warranties of any other party set forth in this Agreement. 48 21. Miscellaneous. (a) Modifications and Amendments. This Agreement may only be modified, altered or amended by an agreement in writing executed by all of the parties hereto. (b) Headings. The headings of the articles, sections and subsections of this Agreement are for convenience and reference only and shall not be considered a part hereof nor shall they be deemed to limit or otherwise affect any of the terms or provisions hereof. (c) Reimbursement of Expenses. The Owner hereby agrees to pay all expenses incurred by the Authority, the Trustee, BTM and CRE in connection with this Agreement and each of the Additional Security Documents and the transactions contemplated hereby and thereby, including, without limitation, the fees and expenses of the Authority's, the Trustee's, BTM's or CRE's reasonable attorneys, environmental, engineering and other consultants, and fees, charges or taxes for the recording or filing of this Agreement, any of the L/C Documents, any of the Additional Security Documents, and any other documents, instruments or agreements in connection with the transactions contemplated hereby. (d) Time; Construction; Exhibits. Time is of the essence of each provision of this Agreement. All references to the singular or plural number or masculine, feminine or neuter gender shall, as the context requires, include all others. All references to sections, paragraphs, and exhibits are to this Agreement unless otherwise specifically noted. The use of the words "hereof", "hereunder", "herein" and words of similar import shall refer to this entire Agreement and not to any particular section, paragraph or portion of this Agreement unless otherwise specifically noted. All exhibits attached hereto are by this reference made a part of this Agreement for all purposes. (e) Judicial Interpretation. Should any provision of this Agreement, the Reimbursement Agreement, the L/C Documents or any of the Additional Security Documents require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any party by reason of the rule of construction that a document is to be construed more strictly against the party who itself or through its agent prepared the same, it being agreed that all parties hereto have participated in the preparation of this Agreement. (f) Validity of Provisions. Any provision of this Agreement which may prove unenforceable under law shall not affect the validity of the other provisions hereof. (g) Counterparts . To facilitate execution, this Agreement may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature and acknowledgment of, or on behalf of, each party, or that the signature and acknowledgment of all persons required to bind any party, appear on each counterpart. All counterparts shall collectively constitute a single instrument. It shall not be necessary in making proof of this Agreement to produce 49 or account for more than a single counterpart containing the respective signatures and acknowledgments of each of the parties hereto. (h) Construction. This Agreement shall be construed in accordance with the laws of the State of New York without regard to the principles of conflicts of laws. Notwithstanding the prior sentence of this subsection (h) or anything else contained in this Agreement to the contrary, to the extent that this Agreement contains any provisions (collectively, the "Amending Provisions") which modify any L/C Document, which by its terms is governed by the laws of the Commonwealth of Puerto Rico, the Amending Provisions shall, to the extent that such provisions modify any such L/C Documents, be governed by and construed in accordance with the laws of the Commonwealth of Puerto Rico without regard to the principles of conflicts of law. (i) Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. (j) Merger. This Agreement constitutes the entire agreement among the parties with respect to the subject matter thereof and merges with and supersedes all prior and contemporaneous agreements and understandings among the parties hereto. (k) Usury Laws. This Agreement, the Additional Security Documents, the Reimbursement Agreement and the L/C Documents as assigned and amended hereby are subject to the express condition that at no time shall Owner be obligated or required to pay interest on the Reimbursement Amount or any portion thereof or any other charges or amounts at a rate which could subject CRE or any other the holder of the Additional Security Documents, the Reimbursement Agreement or any of the other L/C Documents as assigned and amended hereby to either civil or criminal liability as a result of being in excess of the maximum interest rate which Owner is permitted by applicable law to contract or agree to pay. If by the terms of the Additional Security Documents, this Agreement, the Reimbursement Agreement or any of the other L/C Documents as assigned and amended hereby, Owner is at any time required or obligated to pay interest on the indebtedness evidenced thereby, or any portion thereof or any other charges or amounts at a rate in excess of such maximum rate, the rate of interest and other charges or amounts under the terms of the Additional Security Documents, this Agreement, the Reimbursement Agreement or any of the other L/C Documents as assigned and amended hereby shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Reimbursement Amount. All sums paid or agreed to be paid to CRE for the use, forbearance, or detention of the indebtedness evidenced by this Agreement, the Additional Security Documents, the Reimbursement Agreement and the other L/C Documents as assigned and amended hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the maximum lawful rate of interest from time to time in effect and applicable to such debt for so long as such debt is outstanding. 50 (l) Waiver of Jury Trial. TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY, UNCONDITIONALLY, IRREVOCABLY AND INTENTIONALLY FOREVER WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE REIMBURSEMENT AGREEMENT, THE L/C DOCUMENTS, THE ADDITIONAL SECURITY DOCUMENTS, OR ANY OTHER DOCUMENTS REFERENCED HEREIN OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PERSON OR ANY EXERCISE BY ANY PARTY OF THEIR RESPECTIVE RIGHTS UNDER THIS AGREEMENT, THE REIMBURSEMENT AGREEMENT, THE L/C DOCUMENTS OR THE ADDITIONAL SECURITY DOCUMENTS OR IN ANY WAY RELATING TO THE HOTEL (INCLUDING, WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT OR ANY SUCH DOCUMENTS, AND ANY CLAIM OR DEFENSE ASSERTING THAT THIS AGREEMENT OR ANY OF SUCH DOCUMENTS WERE FRAUDULENTLY INDUCED OR ARE OTHERWISE VOID OR VOIDABLE); THIS WAIVER BEING A MATERIAL INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT. [THE REMAINDER OF THIS PAGE IS LEFT BLANK] 51 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives all as of the date and year first above written. EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry Vitale -------------------------------- Name: Larry Vitale Title: Vice President [Corporate Seal] STATE OF FLORIDA ) ) SS.: COUNTY OF DADE ) The foregoing instrument was acknowledged before me this 2nd day of August, 1998 by Larry Vitale, as Vice President of Conquistador Holding, Inc., a Delaware corporation, as a general partner of EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, on behalf of said corporation, on behalf of said limited partnership. He/she is personally known to me or has produced a driver's license as identification. /s/ Olga Duque ---------------------------- My Commission Expires: Name: Notary Public State of Florida [Notary Stamp/Seal] CITICORP REAL ESTATE, INC., a Delaware corporation By: /s/ Michael Chlopak --------------------------------------- Name: Michael Chlopak Title: Attorney-in-Fact STATE OF FLORIDA ) ) SS.: COUNTY OF DADE ) The foregoing instrument was acknowledged before me this 2nd day of August, 1998 by Michael Chlopak, as Attorney-in-Fact of CITICORP REAL ESTATE, INC., a Delaware corporation, on behalf of said corporation. He/she is personally known to me or has produced a driver's license as identification. /s/ Olga Duque --------------------------- My Commission Expires: Name: Notary Public State of Florida [Notary Stamp/Seal] BANCO POPULAR DE PUERTO RICO, a banking corporation organized and existing under the laws of the Commonwealth of Puerto Rico, as trustee By: /s/ Luis R. Cintron ----------------------------- Name: Luis R. Cintron Title: Senior Vice President Affidavit No. 139 (Copy) Sworn to and subscribed before me by Luis R. Cintron, of legal age, married, executive and resident of Guaynabo, Puerto Rico, in his capacity as Senior Vice President of BANCO POPULAR DE PUERTO RICO, a banking corporation organized and existing under the laws of the Commonwealth of Puerto Rico, as trustee, who is personally known to me, in San Juan, Puerto Rico, this 3rd day of August, 1998. /s/ Juan Ramon Cancio ------------------------------------ Notary Public PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY, a public corporation and government instrumentality created pursuant to the laws of the Commonwealth of Puerto Rico By: /s/ Lourdes Rovira Rizek ----------------------------- Name: Lourdes Rovira Rizek Title: Executive Director Affidavit No. 59 Sworn to and subscribed before me by Lourdes Rovira Rizek, of legal age, married, executive and resident of San Juan, Puerto Rico, in her capacity as Executive Director of PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY, a public corporation and government instrumentality created pursuant to the laws of the Commonwealth of Puerto Rico, who is personally known to me, in San Juan, Puerto Rico, this 3rd day of August, 1998. /s/ Felix R. Bello ------------------------------------ Notary Public THE BANK OF TOKYO-MITSUBISHI, LTD. (formerly known as The Mitsubishi Bank, Limited), a Japanese banking corporation acting through its New York Branch By: /s/ James T. Taylor ----------------------------- Name: James T. Taylor Title: Vice President STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me this 31st day of July, 1998 by James T. Taylor, a Vice President of THE BANK OF TOKYO-MITSUBISHI, LTD. (formerly known as The Mitsubishi Bank, Limited), a Japanese banking corporation acting through its New York Branch, on behalf of said corporation. He/she is personally known to me or has produced a driver's license as identification. /s/ Lori Swedlow --------------------------- My Commission Expires: Name: Notary Public State of New York [Notary Stamp/Seal] EX-10 9 EXHIBIT 10.6 REPLACEMENT RESERVE AGREEMENT THIS REPLACEMENT RESERVE AGREEMENT ("Agreement") is made as of the 3rd day of August, 1998, by and between EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, having an address at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico 00738 ("Borrower") and CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, New York 10043 ("Lender"). RECITALS: A. Lender is the owner and holder of certain reimbursement obligations in the principal amount of $90,000,000 (collectively, the "Reimbursement Obligations") which are outstanding pursuant to a Letter of Credit and Reimbursement Agreement, dated as of February 7, 1991, by and between The Bank of Tokyo-Mitsubishi, Ltd. (f/k/a The Mitsubishi Bank, Limited) ("Mitsubishi") and the Borrower (as heretofore amended and as amended on the date hereof by the Modification Agreement (as hereinafter defined), the "Reimbursement Agreement"). B. The Reimbursement Obligations are secured, in part, by certain Collateral Pledge Agreements more particularly described in the Reimbursement Agreement (collectively, the "Security Instruments") and by certain other notes, deeds of mortgage, assignments, guaranties and other documents and instruments executed in connection with the Reimbursement Agreement (including the Modification Agreement) or otherwise with respect to the Reimbursement Obligations (collectively, the "Other Security Documents"). C. At the request of Borrower and pursuant to the terms of that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Lender, the Borrower, Mitsubishi and certain other parties (the "Modification Agreement"), the term for payment of the Reimbursement Obligations is being extended and certain terms and provisions of the Reimbursement Agreement, the Security Instruments and the Other Security Documents, among other things, are being amended and modified at the request of the Borrower (the Reimbursement Agreement, the Security Instruments, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Reimbursement Obligations or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents"). D. Lender requires as a condition to its entering into the Modification Agreement and modifying the Reimbursement Obligations that Borrower enter into this Agreement and make certain deposits with Lender as provided in this Agreement as additional security for all of Borrower's obligations under the Reimbursement Agreement, the Security Instruments and the other Loan Documents. AGREEMENT: For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. DEPOSITS TO THE REPLACEMENT RESERVE (a) Initial Deposit. Concurrently with the execution of this Agreement, Borrower shall deposit with Lender the sum of $702,476 (the "Initial Deposit"; the Initial Deposit and the Additional Deposit (as hereinafter defined) are hereinafter sometimes collectively referred to as the "Replacement Reserve Fund"). (b) Replacement Reserve. Upon receipt of the Initial Deposit and the Additional Deposit, Lender shall deposit the same, as received, in an interest-bearing escrow account (the "Replacement Reserve"). Borrower hereby acknowledges and confirms that (i) the Replacement Reserve Fund shall not constitute a trust fund and may be commingled with other monies held by Lender; (ii) Lender or its designee shall have the sole right to make withdrawals from the Replacement Reserve; and (iii) Lender shall have no responsibility or liability for the amount of interest earned on the Replacement Reserve. All interest earned from investment of the funds deposited in the Replacement Reserve shall be credited to the Replacement Reserve. Borrower shall include and report such interest in its income for Federal, state, commonwealth and local income and franchise tax purposes. (c) Additional Deposit. In the event Borrower requests an extension of the term for payment of the Reimbursement Obligations pursuant to the provisions of the Reimbursement Agreement, as modified by the Modification Agreement, then on or prior to the Initial Maturity Date, Borrower shall cause to be deposited with Lender, for further deposit by Lender into the Replacement Reserve, an amount to be held in the Replacement Reserve pursuant to the terms of this Agreement (the "Additional Deposit") equal to the difference between (1) $1,053,714 and (2) the amount then on deposit in the Replacement Reserve, so that on the Initial Maturity Date, the balance in the Replacement Reserve is not less than $1,053,714. Section 2. PLEDGE OF REPLACEMENT RESERVE As additional security for the payment of all sums due under the Reimbursement Agreement and the other Loan Documents and the performance by Borrower of its obligations thereunder, Borrower hereby pledges, assigns and grants to Lender a continuing perfected security interest (to the extent Lender maintains possession of same), in and to and a first lien upon, the Replacement Reserve Fund and the Replacement Reserve; provided that, Lender shall make disbursements from the Replacement Reserve in accordance with the terms of this Agreement. 2 Section 3. DISBURSEMENTS FROM REPLACEMENT RESERVE (a) Disbursements for Replacements Only. Lender shall make disbursements from the Replacement Reserve only to pay for the cost of capital repairs, replacements and improvements at the Hotel which have been approved by Lender in writing or by virtue of Lender's approval of the Annual Budget for the Hotel and which are made after the date hereof in accordance with the terms and provisions of the Reimbursement Agreement and the other Loan Documents (collectively, the "Replacements") in the manner provided in this Section 3. Lender shall, upon written request from Borrower and satisfaction of the requirements set forth in this Section 3 and Section 4 of this Agreement, disburse to Borrower amounts from the Replacement Reserve necessary to pay for the actual approved costs of Replacements or to reimburse Borrower therefor, upon completion of such Replacements (or, upon partial completion in the case of Replacements made pursuant to Section 3(d) hereof) as reasonably determined by Lender. In no event shall Lender be obligated to disburse funds from the Replacement Reserve if a Default or an Event of Default exists. (b) Request for Disbursement. Each request for disbursement from the Replacement Reserve shall be in a form specified or approved by Lender and shall specify (i) the specific Replacements for which the disbursement is requested, (ii) the quantity and price of each item purchased, if the Replacement includes the purchase or replacement of specific items, (iii) the price of all materials (grouped by type or category) used in any Replacement other than the purchase or replacement of specific items, and (iv) the cost of all contracted labor or other services applicable to each Replacement for which such request for disbursement is made. With each such request, Borrower shall certify that all Replacements have been made in accordance with applicable laws. Each request for disbursement shall include copies of invoices for all items or materials purchased and all contracted labor or services provided and each request shall include evidence satisfactory to Lender of payment of all such amounts. Except as provided in Section 3(d) hereof, each request for disbursement from the Replacement Reserve shall be made only after completion of the Replacement for which disbursement is requested. Borrower shall provide Lender evidence of completion satisfactory to Lender in its reasonable judgment. (c) Disbursement Conditions. Borrower shall be entitled to request disbursements from the Replacement Reserve to pay directly or to reimburse Borrower for expenditures made in connection with the Replacements with respect to which a disbursement is requested. Lender, at its option, may disburse the amount for such invoices directly to the vendors; provided, however, that if such invoices do not exceed $10,000, Lender shall disburse the amount for such invoices directly to Borrower and Borrower covenants and agrees to promptly pay such invoices. In addition, as a condition to any disbursement, Lender may require Borrower to obtain lien waivers from each contractor, 3 supplier, materialman, mechanic or subcontractor who receives payment in an amount equal to or greater than $10,000 for completion of its work or delivery of its materials. Any lien waiver delivered hereunder shall conform to the requirements of applicable law and shall cover all work performed and materials supplied (including equipment and fixtures) for the Hotel by that contractor, supplier, subcontractor, mechanic or materialman through the date covered by the current reimbursement request. (d) Partial Completion. If (i) the time required to complete a Replacement exceeds three months, (ii) the contractor performing such Replacement requires periodic payments pursuant to the terms of a written contract, (iii) Lender has approved in writing in advance such periodic payments, and (iv) the cost of the portion of the work completed under such contract exceeds $10,000, a request for reimbursement from the Replacement Reserve may be made after completion of a portion of the work under such contract, provided (A) such contract requires payment upon completion of such portion of the work, (B) the materials for which the request is made are on site at the Hotel and are properly secured or have been installed in the Hotel, (C) all other conditions in this Agreement for disbursement have been satisfied, (D) funds remaining in the Replacement Reserve are, in Lender's reasonable judgment, sufficient to complete the portion of such Replacements to be completed during the term of this Agreement, and (E) each contractor or subcontractor receiving payments under such contract shall provide a waiver of lien with respect to amounts which have been paid to that contractor or subcontractor. (e) Number of Requests. Borrower shall not make a request for disbursement from the Replacement Reserve more frequently than once in any calendar month and, except in connection with the final disbursement, the total cost of all Replacements in any request shall not be less than $10,000. Section 4. PERFORMANCE OF REPLACEMENTS. (a) Workmanlike Completion. Borrower shall make Replacements when required in order to keep the Hotel in good order and repair and in good marketable condition, and to keep the Hotel or any portion thereof from deteriorating in any material respects. Borrower shall complete all Replacements in a good and workmanlike manner as soon as practicable following the commencement of making each such Replacement. (b) Contracts. Lender reserves the right, at its option, to approve all contracts or work orders with materialmen, mechanics, suppliers, subcontractors, contractors or other parties providing labor or materials in connection with the Replacements which requires a payment in the aggregate of greater than $75,000. Lender's consent to any such item shall not be unreasonably withheld. If Borrower shall submit a written request for approval and such request shall state on the face thereof in capital letters the Legend (defined below), then Lender's failure to respond to such request within ten (10) days following 4 Lender's actual receipt thereof shall be deemed an approval of the matter requested therein. The "Legend" shall mean the following: LENDER'S FAILURE TO RESPOND TO THIS REQUEST WITHIN TEN (10) DAYS FOLLOWING LENDER'S ACTUAL RECEIPT HEREOF SHALL BE DEEMED TO BE AN APPROVAL OF THE MATTERS SET FORTH HEREIN. Upon Lender's request, Borrower shall assign its rights under any contract or subcontract to Lender. (c) Lender's Right to Complete Replacements. In the event Lender determines in its reasonable discretion that any Replacement is not being performed in a workmanlike or timely manner or that any Replacement has not been completed in a workmanlike or timely manner, and Borrower does not cure such matter within the time periods provided in Section 5(a) below, Lender shall have the option to withhold disbursement for such unsatisfactory Replacement and to proceed under existing contracts or to contract with third parties to complete such Replacement and to apply the Replacement Reserve Fund toward the labor and materials necessary to complete such Replacement, and to exercise any and all other remedies available to Lender upon an Event of Default. (d) Entry onto Property. In order to facilitate Lender's completion or making of the Replacements pursuant to Section 4(c) above, Borrower grants Lender the right to enter onto the Hotel following an uncured default hereunder and perform any and all work and labor necessary to complete or make the Replacements and/or employ watchmen to protect the Hotel from damage. Borrower shall have the right to have Borrower's representative accompany Lender and its representatives in connection with any of the foregoing; provided, however, that the failure of Borrower's representative to accompany Lender or Lender's representatives shall not negate or diminish Lender's rights set forth in the preceding sentence. All sums so expended by Lender (other than from the Replacement Reserve) shall be deemed to have been advanced to Borrower under the Reimbursement Agreement to Borrower and secured by the Loan Documents. For this purpose, Borrower constitutes and appoints Lender its true and lawful attorney-in-fact with full power of substitution to complete or undertake the Replacements in the name of Borrower. Such power of attorney shall be deemed to be a power coupled with an interest and cannot be revoked except upon the termination of this Agreement. Borrower empowers said attorney-in-fact as follows: (i) to use any funds in the Replacement Reserve for the purpose of making or completing the Replacements; (ii) to make such additions, changes and corrections to the Replacements as shall be necessary or desirable to complete the Replacements; (iii) to employ such contractors, subcontractors, agents, architects and inspectors as shall be required for such purposes; (iv) to pay, settle or compromise all existing bills and claims which are or may become liens against the Hotel, or as may be necessary or desirable for the completion of the Replacements, or for clearance of title; (v) to execute all applications and certificates in the name of Borrower which may be required by any of the contract documents relating to the Replacements; (vi) in its reasonable discretion, to prosecute and defend all actions or proceedings in connection with the 5 Replacements or any matters related thereto and (vii) to do any and every act which Borrower might do in its own behalf to fulfill the terms of this Agreement. (e) No Obligation of Lender. Nothing in this Section 4 shall: (i) make Lender responsible for making or completing the Replacements; (ii) require Lender to expend funds in addition to the Replacement Reserve Fund to make or complete any Replacement; (iii) obligate Lender to proceed with the Replacements; or (iv) obligate Lender to demand from Borrower additional sums to make or complete any Replacement. (f) Inspections. (i) Borrower shall permit Lender and Lender's agents and representatives (including, without limitation, Lender's engineer, architect or inspector) or third parties making Replacements pursuant to this Section 4 to enter onto the Hotel during normal business hours upon reasonable notice to Borrower and (subject to the rights of any guests or tenants of the Hotel, if any, under their respective leases or concession agreements) to inspect the progress of any Replacements and all materials being used in connection therewith, to examine all plans and shop drawings relating to such Replacements which are or may be kept at the Hotel, and to complete any Replacements made pursuant to this Section 4. Borrower shall have the right to have Borrower's representative accompany Lender or its representatives in connection with any of the foregoing, provided, however, that the failure of Borrower's representative to accompany Lender or Lender's representatives shall not negate or diminish Lender's rights set forth in the preceding sentence. Borrower shall use its best efforts to cause all contractors and subcontractors to cooperate with Lender or Lender's representatives or such other persons described above in connection with inspections described in this Section 4(f) or the completion of Replacements pursuant to this Section 4. (ii) Lender may require an inspection of the Hotel at Borrower's expense prior to making a disbursement from the Replacement Reserve in order to verify completion of the Replacements for which reimbursement is sought. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and/or may require a copy of a certificate of completion by an independent qualified professional reasonably acceptable to Lender prior to the disbursement of any amounts from the Replacement Reserve. Borrower shall pay the expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional. (g) Lien-Free Completion. (i) The Replacements and all materials, equipment, fixtures, or any other item comprising a part of any Replacement shall be constructed, installed or 6 completed, as applicable, free and clear of all mechanic's, materialman's or other Liens (except for Permitted Encumbrances). (ii) Lender may require Borrower to provide Lender with a search of title to the Hotel effective to the date of the disbursement, which search shows that no mechanic's or materialmen's liens or other liens of any nature have been placed against the Hotel or any portion thereof since the date of recordation of the Mortgage and that title to the Hotel is free and clear of all Liens (other than the lien of the Mortgage and any other Permitted Encumbrances). (h) Compliance with Laws. All Replacements shall comply with all Legal Requirements and applicable insurance requirements, including, without limitation, applicable building codes, special use permits, environmental regulations and requirements of insurance underwriters. (i) Insurance Requirements. In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen's compensation insurance, builder's risk, and public liability insurance and other insurance to the extent required under applicable law in connection with a particular Replacement. All such policies shall be in form and amount reasonably satisfactory to Lender. All such policies which can be endorsed with standard mortgagee clauses making loss payable to Lender or its assigns shall be so endorsed. Certified copies of such policies shall be delivered to Lender. Section 5. DEFAULT. (a) Default Under this Agreement. Borrower shall be in default under this Agreement if (A) it fails to make any Additional Deposit or other payment required hereunder when due, or (B) it fails to comply with any provision of this Agreement and such failure is not cured within ten (10) calendar days after notice from Lender. Borrower understands that a default under this Agreement shall be deemed to be a default under the terms of the Reimbursement Agreement, the Modification Agreement and the other Loan Documents, and that in addition to the remedies specified in this Agreement, Lender shall be able to exercise all of its rights and remedies under the Reimbursement Agreement, the Modification Agreement, and the other Loan Documents upon a default. If a default occurs under the Reimbursement Agreement, the Modification Agreement, or any of the other Loan Documents, such event shall be deemed a default hereunder and Lender may at its option hold and apply the funds in the Replacement Reserve as provided in Section 5(b) hereof. (b) Application of Replacement Reserve Upon Default. The funds held in the Replacement Reserve are pledged as additional security for the Reimbursement Obligations and all other indebtedness and other obligations of Borrower under the 7 Reimbursement Agreement and each of the other Loan Documents (the "Obligations"). If Borrower defaults on any payment due under the Reimbursement Agreement or any of the other Loan Documents, or if Borrower defaults under any other provision in the Reimbursement Agreement, the Modification Agreement or under any provision in the Security Instruments, any of the other Loan Documents or this Agreement, then, upon any such default, Borrower shall not be entitled to receive any funds from the Replacement Reserve and Lender may, in its sole and absolute discretion, use the Replacement Reserve Fund (or any portion thereof) for any purpose permitted under the Loan Documents, including, but not limited to (i) completion of the Replacements as provided in Section 4 hereof, (ii) for any other repair or replacement to the Hotel, (iii) toward payment of the Obligations; provided, however, that such application of funds shall not cure or be deemed to cure any default; (iv) reimbursement of Lender for all losses and expenses (including, but not limited to, reasonable legal fees) suffered or incurred by Lender as a result of such default; (v) payment of any amount expended in exercising all rights and remedies available to Lender at law or in equity or under this Agreement or under the Reimbursement Agreement, the Security Instruments or any of the other Loan Documents, all in such order, proportion and priority as Lender may determine in its sole discretion. Lender's right to withdraw and apply the Replacement Reserve Fund shall be in addition to all other rights and remedies provided to Lender under this Agreement, the Reimbursement Agreement, the Modification Agreement, the other Loan Documents, and at law or in equity. (c) Insufficient Funds in the Replacement Reserve. The insufficiency of any balance in the Replacement Reserve shall not relieve Borrower from its obligations in the Reimbursement Agreement, the other Loan Documents and this Agreement. Section 6. WAIVERS (a) Waiver of Counterclaim. Borrower hereby waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender arising out of or in any way connected with this Agreement, the Reimbursement Agreement, the Modification Agreement, any of the other Loan Documents or the Obligations. (b) Waiver of Notice. To the extent permitted by applicable law, Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Lender is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement does not specifically and expressly provide for the giving of notice by Lender to Borrower. 8 (c) Waiver of Statute of Limitations. Borrower hereby expressly waives and releases, to the fullest extent permitted by law, the pleading of any statute of limitations as a defense to any and all of its obligations hereunder. (d) Waiver of Trial By Jury. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR IN RESPECT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF ANY PARTY OR ARISING OUT OF ANY EXERCISE BY ANY PARTY OF ITS RESPECTIVE RIGHTS UNDER THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE OBLIGATIONS OR THE HOTEL (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND WITH RESPECT TO ANY CLAIM OR DEFENSE ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS AGREEMENT. Section 7. MISCELLANEOUS PROVISIONS (a) Notices. All notices or other written communications hereunder shall be given and become effective as provided in the Reimbursement Agreement. (b) Choice of Law. This Agreement shall be governed, construed, applied and enforced in accordance with the laws of the Commonwealth of Puerto Rico and the applicable laws of the United States of America, without regard to the principles of conflicts of laws. (c) Provisions Subject to Applicable Law. All rights, powers and remedies provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Agreement invalid or unenforceable under the provisions of any applicable law. (d) Inapplicable Provisions. If any term, covenant or condition of this Agreement or any application thereof is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision. (e) Indemnification. Borrower agrees to indemnify Lender and to hold Lender harmless from and against any and all actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses (including litigation costs and 9 reasonable attorneys' fees and expenses) arising from or in any way connected with the performance of the Replacements or the holding, investing or disbursing of the Replacement Reserve or the Replacement Reserve Fund except for any actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses caused by the gross negligence of Lender. (f) Costs. Wherever it is provided for herein that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, all reasonable legal fees and disbursements of Lender (whether of retained firms, the reimbursement for the expenses of in-house staff or otherwise). Borrower hereby assigns to Lender all rights and claims in connection with the Replacements that Borrower may have against all persons or entities supplying labor or materials. (g) Headings, Etc. The headings and captions of various Sections of this Agreement are for convenience of reference only and are not to be construed as defining or limiting in any way, the scope or intent of the provisions hereof. (h) No Oral Change. This Agreement, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. (i) Liability. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. (j) Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. (k) Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. (l) Borrower's Records. Borrower shall furnish such financial statements, invoices, records, papers and documents relating to the Hotel as Lender may reasonably 10 require from time to time to make the determinations permitted or required to be made by Lender under this Agreement. (m) No Third Party Beneficiary. This Agreement is intended solely for the benefit of Borrower and Lender and their respective successors and assigns, and no third party shall have any rights or interest in the Replacement Reserve, the Replacement Reserve Fund, this Agreement, the Reimbursement Agreement or any of the other Loan Documents. Nothing contained in this Agreement shall be deemed or construed to create an obligation on the part of Lender to any third party, nor shall any third party have a right to enforce against Lender any right that Borrower may have under this Agreement. (n) No Agency or Partnership. Nothing contained in this Agreement shall constitute Lender as a joint venturer, partner, agent, tenant-in-common or joint tenant of Borrower, or render Lender liable for any debts, obligations, acts, omissions, representations, or contracts of Borrower. (o) Termination of Replacement Reserve. After payment in full of the Reimbursement Obligations and all other Obligations and the release by Lender of the lien of the Security Instruments, Lender shall disburse to Borrower all amounts remaining in the Replacement Reserve. (p) Enforcement of Agreement. This Agreement is executed by Borrower and Lender for the benefit of Lender and its successors and assigns. (q) Sole Discretion of Lender. Wherever pursuant to this Agreement (i) Lender exercises any right given to it to approve or disapprove, (ii) any arrangement or term is to be satisfactory to Lender, or (iii) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove all decisions that arrangements or terms are satisfactory or not satisfactory, and all other decisions and determinations made by Lender, shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. (r) Completion of Replacements. Lender's approval of any plans for any Replacement, release of funds from the Replacement Reserve, inspection of the Hotel by Lender or Lender's agents, or other acknowledgment of completion of any Replacement in a manner satisfactory to Lender shall not be deemed an acknowledgment or warranty to any person that the Replacement has been completed in accordance with applicable laws. (s) Borrower's Other Obligations. Nothing contained in this Agreement shall in any manner whatsoever alter, impair or affect the obligations of Borrower, or relieve Borrower of any of its obligations to make payments and perform all of its other obligations under the Reimbursement Agreement, the Modification Agreement or any of the other Loan 11 Documents, except to the extent that payments required under the Loan Documents are actually made pursuant to this Agreement. (t) Remedies Cumulative. None of the rights and remedies herein confirmed upon or reserved to Lender under this Agreement is intended to be exclusive of any other rights or remedies conferred upon or reserved to Lender under this Agreement or under the Reimbursement Agreement, the Modification Agreement or any of the other Loan Documents or available to Lender at law or in equity, and each and every right or remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary to Lender. (u) Definitions. The word "Lender" as used herein includes Lender and any and all of its agents. All capitalized words and phrases not otherwise defined herein shall have the meanings ascribed to them in the Reimbursement Agreement, as modified by the Modification Agreement. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF the undersigned have executed this Agreement as of the date and year first written above. BORROWER: -------- EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ----------------------------------- Larry M. Vitale Vice President LENDER: ------ CITICORP REAL ESTATE, INC., a Delaware corporation By: /s/ Michael Chlopak ----------------------------------- Michael Chlopak Attorney-in-Fact 13 EX-10 10 EXHIBIT 10.7 DEBT SERVICE RESERVE AGREEMENT THIS DEBT SERVICE RESERVE AGREEMENT ("Agreement") is made as of the 3rd day of August, 1998, by and between EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, having an address at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico 00738 ("Borrower") and CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, New York 10043 ("Lender"). RECITALS: A. Lender is the owner and holder of certain reimbursement obligations in the principal amount of $90,000,000 (collectively, the "Reimbursement Obligations") which are outstanding pursuant to a Letter of Credit and Reimbursement Agreement dated as of February 7, 1991, by and between The Bank of Tokyo-Mitsubishi, Ltd. (f/k/a The Mitsubishi Bank, Limited) ("Mitsubishi") and the Borrower (as heretofore amended and as amended on the date hereof by the Modification Agreement (as hereinafter defined), the "Reimbursement Agreement"). B. The Reimbursement Obligations are secured, in part, by certain Collateral Pledge Agreements more particularly described in the Reimbursement Agreement (collectively, the "Security Instruments") and by certain other notes, deeds of mortgage, assignments, guaranties and other documents and instruments executed in connection with the Reimbursement Agreement (including the Modification Agreement) or otherwise with respect to the Reimbursement Obligations (collectively, the "Other Security Documents"). C. At the request of Borrower and pursuant to the terms of that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Lender, the Borrower, Mitsubishi and certain other parties (the "Modification Agreement"), the terms for payment of the Reimbursement Obligations is being extended and certain terms and provisions of the Reimbursement Agreement, the Security Instruments and the Other Security Documents, among other things, are being amended and modified at the request of the Borrower (the Reimbursement Agreement, the Security Instruments, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Reimbursement Obligations or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents"). D. Lender requires as a condition to its entering into the Modification Agreement and modifying the Reimbursement Obligations that Borrower enter into this Agreement and make certain deposits with Lender as provided in this Agreement as additional security for all of Borrower's obligations under the Reimbursement Agreement, the Security Instruments and the other Loan Documents. AGREEMENT: For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Deposits to the Debt Service Reserve. (a) Concurrently with the execution of this Agreement, Borrower shall deposit with Lender the sum of $1,800,000 (the "Initial Deposit"; the Initial Deposit and the Additional Deposit (as hereinafter defined) are hereinafter sometimes collectively referred to as the "Debt Service Reserve Fund"). (b) Upon receipt of the Initial Deposit and the Additional Deposit, Lender shall deposit the same, as received, in an interest-bearing escrow account (the "Debt Service Reserve"). Borrower hereby acknowledges and confirms that (i) the Debt Service Reserve Fund shall not constitute a trust fund and may be commingled with other monies held by Lender; (ii) Lender or its designee shall have the sole right to make withdrawals from the Debt Service Reserve; and (iii) Lender shall have no responsibility or liability for the amount of interest earned on the Debt Service Reserve. All interest earned from investment of the funds deposited in the Debt Service Reserve shall be credited to the Debt Service Reserve. Borrower shall include and report such interest in its income for Federal, state, commonwealth and local income and franchise tax purposes. (c) In the event Borrower requests an extension of the term for payment of the Reimbursement Obligations pursuant to the provisions of the Reimbursement Agreement, as modified by the Modification Agreement, then (i) on or prior to the date on which Borrower delivers notice of such extension to Lender, Borrower shall cause to be deposited with Lender, for further deposit by Lender into the Debt Service Reserve, an amount to be held in the Debt Service Reserve pursuant to the terms of this Agreement equal to $1,800,000 (the "First Additional Deposit") and (ii) on or prior to December 1, 1998, Borrower shall cause to be deposited with Lender, for further deposit by Lender into the Debt Service Reserve, an amount to be held in the Debt Service Reserve pursuant to the terms of this Agreement equal to $600,000 (the "Second Additional Deposit"; the First Additional Deposit and the Second Additional Deposit are sometimes collectively referred to herein as the "Additional Deposit") 2 2. Pledge of Debt Service Reserve. As additional security for the payment of all sums due under the Reimbursement Agreement and the other Loan Documents and the performance by Borrower of its obligations thereunder, Borrower hereby pledges, assigns and grants to Lender a continuing perfected security interest (to the extent Lender maintains possession of same) in and to and a first lien upon, the Debt Service Reserve Fund and the Debt Service Reserve; provided that, Lender shall make disbursements from the Debt Service Reserve in accordance with the terms of this Agreement. 3. Disbursements from Debt Service Reserve. On the first day of each month during the term of the Reimbursement Agreement or on the Maturity Date, Lender shall, at Borrower's written request, apply sums then present in the Debt Service Reserve towards the payment of interest on the Reimbursement Amount (as such term is defined in the Modification Agreement) in the amount specified by Borrower in Borrower's request, provided however that Lender has no obligation to apply, and Borrower has no right to receive, any amount in excess of the balance of Debt Service Reserve on the date of such request, and provided further that Borrower may request the application of funds in the Debt Service Reserve no more than one (1) time during any calendar month; provided, that, Borrower may also request that funds in the Debt Service Reserve be applied to the outstanding Reimbursement Obligations on the Maturity Date. Notwithstanding the foregoing, in the event that the funds in the Debt Service Reserve are insufficient to make such payment, Borrower shall not be relieved of its obligations under the Reimbursement Agreement to make such payments. 4. Default. 4.1 Default Under this Agreement. Borrower shall be in default under this Agreement if (i) it fails to make the Additional Deposit or other payment required hereunder when due or (ii) it fails to comply with any provision of this Agreement and such failure is not cured within ten (10) calendar days after notice from Lender. Borrower understands that a default under this Agreement shall be deemed to be a default under the terms of the Reimbursement Agreement, the Modification Agreement and the other Loan Documents, and that in addition to the remedies specified in this Agreement, Lender shall be able to exercise all of its rights and remedies under the Reimbursement Agreement, the Modification Agreement, and the other Loan Documents upon a default. If a default occurs under the Reimbursement Agreement, the Modification Agreement, or any of the other Loan Documents, such event shall be deemed a default hereunder and Lender may at its option hold and apply the funds in the Debt Service Reserve as provided in Section 4.2 of this Agreement. 3 4.2 Application of Debt Service Reserve Upon Default. The funds held in the Debt Service Reserve are pledged as additional security for the Reimbursement Obligations and all other indebtedness and other obligations of the Borrower under the Reimbursement Agreement and each of the other Loan Documents (the "Obligations"). If Borrower defaults on any payment due under the Reimbursement Agreement or any of the other Loan Documents, or if Borrower defaults under any other provision in the Reimbursement Agreement, the Modification Agreement or under any provision in the Security Instruments, any of the other Loan Documents or this Agreement, then, upon any such default, Borrower shall not be entitled to receive any funds from the Debt Service Reserve and Lender may, in its sole and absolute discretion, use the Debt Service Reserve (or any portion thereof) for any purpose permitted under the Loan Documents, including, but not limited to (i) toward payment of the Obligations; provided, however, that such application of funds shall not cure or be deemed to cure any default; (ii) reimbursement of Lender for all losses and expenses (including, without limitation, reasonable legal fees) suffered or incurred by Lender as a result of such default; and/or (iii) payment of any amount expended in exercising all rights and remedies available to Lender at law or in equity or under this Agreement or under the Reimbursement Agreement, the Security Instruments or any of the other Loan Documents, all in such order, proportion and priority as Lender may determine in its sole discretion. Lender's right to withdraw and apply the Debt Service Reserve Fund shall be in addition to all other rights and remedies provided to Lender under this Agreement, the Reimbursement Agreement, the Modification Agreement, the other Loan Documents, and at law or in equity. 4.3 Borrower's Other Obligations. Nothing contained in this Agreement shall in any manner whatsoever alter, impair or affect the obligations of Borrower, or relieve Borrower of any of its obligations to make payments and perform all of its other obligations required under the Reimbursement Agreement or any of the other Loan Documents, except to the extent that payments required under the Reimbursement Agreement or the other Loan Documents are actually made pursuant to this Agreement. 5. Insufficient Funds in the Debt Service Reserve. The insufficiency of any balance in the Debt Service Reserve shall not relieve Borrower from its obligations under the Reimbursement Agreement, the other Loan Documents and this Agreement. 6. Remedies Cumulative. None of the rights and remedies herein conferred upon or reserved to Lender under this Agreement is intended to be exclusive of any other rights or remedies conferred upon or reserved to Lender under this Agreement or under the Reimbursement Agreement or any of the other Loan Documents or available to Lender at law or in equity, and each and every right or remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary by Lender. 7. Enforcement of Agreement. This Agreement is executed by Borrower and Lender for the benefit of Lender and its successors and assigns. 8. Indemnification. Borrower agrees to indemnify Lender and to hold Lender harmless from and against any and all actions, suits, claims, demands, liabilities, losses, 4 damages, obligations and costs and expenses (including litigation costs and reasonable attorneys' fees and expenses) arising from or in any way connected with the holding, investing or disbursing of the Debt Service Reserve or the Debt Service Reserve Fund except for actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses caused by the gross negligence of Lender. 9. No Third Party Beneficiary. This Agreement is intended solely for the benefit of Borrower and Lender and their respective successors and assigns, and no third party shall have any rights or interest in the Debt Service Reserve, the Debt Service Reserve Fund, this Agreement, the Reimbursement Agreement or any of the other Loan Documents. Nothing contained in this Agreement shall be deemed or construed to create an obligation on the part of Lender to any third party, nor shall any third party have a right to enforce against Lender any right that Borrower may have under this Agreement. 10. No Agency or Partnership. Nothing contained in this Agreement shall constitute Lender as a joint venturer, partner or agent of Borrower, or render Lender liable for any debts, obligations, acts, omissions, representations, or contracts of Borrower. 11. Waivers. (a) Borrower hereby waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender arising out of or in any way connected with this Agreement, the Reimbursement Agreement, the Modification Agreement, any of the other Loan Documents, or the Reimbursement Obligations. (b) To the extent permitted by applicable law, Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Lender is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement does not specifically and expressly provide for the giving of notice by Lender to Borrower. (c) Borrower hereby expressly waives and releases to the fullest extent permitted by law, the pleading of any statute of limitations as a defense to any and all of its obligations hereunder. (d) BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR IN RESPECT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF ANY PARTY OR ARISING OUT OF ANY EXERCISE BY ANY PARTY OF ITS RESPECTIVE RIGHTS UNDER THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE OBLIGATIONS OR THE HOTEL (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND WITH RESPECT TO ANY CLAIM OR 5 DEFENSE ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS AGREEMENT. 12. Choice of Law. This Agreement shall be governed, construed, applied and enforced in accordance with the laws of the Commonwealth of Puerto Rico and applicable laws of the United States of America, without regard to the principles of conflicts of laws. 13. Termination of Debt Service Reserve. After payment in full of the Reimbursement Obligations and release by Lender of the lien of the Security Instruments, Lender shall disburse to Borrower all amounts remaining in the Debt Service Reserve. 14. Notices. All notices or other written communications hereunder shall be given and become effective as provided in the Reimbursement Agreement. 15. No Oral Change. This Agreement, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 16. Liability. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 17. Provisions Subject to Applicable Law. All rights, powers and remedies provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Agreement invalid or enforceable under the provisions of any applicable law. 18. Inapplicable Provisions. If any term, covenant or condition of this Agreement or any application thereof is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision. 19. Headings, etc. The headings and captions of various paragraphs of this Agreement are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 20. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 6 21. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 22. Definitions. The word "Lender" as used herein includes Lender and any and all of its agents. All capitalized words and phrases not otherwise defined herein shall have the meanings ascribed to them in the Reimbursement Agreement, as modified by the Modification Agreement. 23. Sole Discretion of Lender. Wherever pursuant to this Agreement (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Lender, shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. 24. Costs. Wherever pursuant to this Agreement it is provided that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, reasonable legal fees and disbursements of Lender, whether retained firms, the reimbursement for the expenses of in-house staff or otherwise. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF the undersigned have executed this Agreement as of the date and year first written above. BORROWER: EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ---------------------------------------- Larry M. Vitale Vice President LENDER: CITICORP REAL ESTATE, INC., a Delaware corporation By: /s/ Michael Chlopak --------------------------------------- Michael Chlopak Attorney-in-Fact 8 EX-10.8 11 EXHIBIT 10.8 DEBT SERVICE RESERVE AGREEMENT THIS DEBT SERVICE RESERVE AGREEMENT ("Agreement") is made as of the 3rd day of August, 1998, by and between EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, having an address at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico 00738 ("Borrower") and CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, New York 10043 ("Lender"). RECITALS: A. Lender is the owner and holder of certain reimbursement obligations in the principal amount of $90,000,000 (collectively, the "Reimbursement Obligations") which are outstanding pursuant to a Letter of Credit and Reimbursement Agreement dated as of February 7, 1991, by and between The Bank of Tokyo-Mitsubishi, Ltd. (f/k/a The Mitsubishi Bank, Limited) ("Mitsubishi") and the Borrower (as heretofore amended and as amended on the date hereof by the Modification Agreement (as hereinafter defined), the "Reimbursement Agreement"). B. The Reimbursement Obligations are secured, in part, by certain Collateral Pledge Agreements more particularly described in the Reimbursement Agreement (collectively, the "Security Instruments") and by certain other notes, deeds of mortgage, assignments, guaranties and other documents and instruments executed in connection with the Reimbursement Agreement (including the Modification Agreement) or otherwise with respect to the Reimbursement Obligations (collectively, the "Other Security Documents"). C. At the request of Borrower and pursuant to the terms of that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Lender, the Borrower, Mitsubishi and certain other parties (the "Modification Agreement"), the terms for payment of the Reimbursement Obligations is being extended and certain terms and provisions of the Reimbursement Agreement, the Security Instruments and the Other Security Documents, among other things, are being amended and modified at the request of the Borrower (the Reimbursement Agreement, the Security Instruments, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Reimbursement Obligations or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents"). D. Lender requires as a condition to its entering into the Modification Agreement and modifying the Reimbursement Obligations that Borrower enter into this Agreement and make certain deposits with Lender as provided in this Agreement as additional security for all of Borrower's obligations under the Reimbursement Agreement, the Security Instruments and the other Loan Documents. AGREEMENT: For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Deposits to the Debt Service Reserve. (a) Concurrently with the execution of this Agreement, Borrower shall deposit with Lender the sum of $568,664 (the "Initial Deposit"; the Initial Deposit and the Additional Deposit (as hereinafter defined) are hereinafter sometimes collectively referred to as the "Debt Service Reserve Fund"). (b) Upon receipt of the Initial Deposit and the Additional Deposit, Lender shall deposit the same, as received, in an interest-bearing escrow account (the "Debt Service Reserve"). Borrower hereby acknowledges and confirms that (i) the Debt Service Reserve Fund shall not constitute a trust fund and may be commingled with other monies held by Lender; (ii) Lender or its designee shall have the sole right to make withdrawals from the Debt Service Reserve; and (iii) Lender shall have no responsibility or liability for the amount of interest earned on the Debt Service Reserve. All interest earned from investment of the funds deposited in the Debt Service Reserve shall be credited to the Debt Service Reserve. Borrower shall include and report such interest in its income for Federal, state, commonwealth and local income and franchise tax purposes. (c) In the event Borrower requests an extension of the term for payment of the Reimbursement Obligations pursuant to the provisions of the Reimbursement Agreement, as modified by the Modification Agreement, then on or prior to the date on which Borrower delivers notice of such extension to Lender, Borrower shall cause to be deposited with Lender, for further deposit by Lender into the Debt Service Reserve, an amount to be held in the Debt Service Reserve pursuant to the terms of this Agreement equal to $568,664 (the "Additional Deposit"). 2. Pledge of Debt Service Reserve. As additional security for the payment of all sums due under the Reimbursement Agreement and the other Loan Documents and the performance by Borrower of its obligations thereunder, Borrower hereby pledges, assigns and grants to Lender a continuing perfected security interest (to the extent Lender maintains possession of same) in and to and a first lien upon, the Debt Service Reserve Fund and the Debt Service Reserve; provided that, Lender shall make disbursements from the Debt Service Reserve in accordance with the terms of this Agreement. 3. Disbursements from Debt Service Reserve. Within ten (10) days prior to each date on which interest is due and payable to GDB pursuant to the terms of the GDB Loan Agreement, Lender shall, at Borrower's written request, disburse sums then present in the Debt Service Reserve to Borrower for the payment of interest due on the GDB Loan in the amount specified by Borrower in Borrower's request, provided however that Lender has no obligation to apply, and Borrower has no right to receive, any amount in excess of the balance of Debt Service Reserve on the date of such request, and provided further that Borrower may request the application of funds in the Debt Service Reserve no more than one (1) time during any calendar month. Notwithstanding the foregoing, in the event that the funds in the Debt Service Reserve are insufficient to make such payment, Borrower shall not be relieved of its obligations under the Reimbursement Agreement to make such payments. 4. Default. 4.1 Default Under this Agreement. Borrower shall be in default under this Agreement if (i) it fails to make any Additional Deposit or other payment required hereunder when due or (ii) it fails to comply with any provision of this Agreement and such failure is not cured within ten (10) calendar days after notice from Lender. Borrower understands that a default under this Agreement shall be deemed to be a default under the terms of the Reimbursement Agreement, the Modification Agreement and the other Loan Documents, and that in addition to the remedies specified in this Agreement, Lender shall be able to exercise all of its rights and remedies under the Reimbursement Agreement, the Modification Agreement, and the other Loan Documents upon a default. If a default occurs under the Reimbursement Agreement, the Modification Agreement, or any of the other Loan Documents, such event shall be deemed a default hereunder and Lender may at its option hold and apply the funds in the Debt Service Reserve as provided in Section 4.2 of this Agreement. 4.2 Application of Debt Service Reserve Upon Default. The funds held in the Debt Service Reserve are pledged as additional security for the Reimbursement Obligations and all other indebtedness and other obligations of the Borrower under the Reimbursement Agreement and each of the other Loan Documents (the "Obligations"). If Borrower defaults on any payment due under the Reimbursement Agreement or any of the other Loan Documents, or if Borrower defaults under any other provision in the Reimbursement Agreement, the Modification Agreement or under any provision in the Security Instruments, any of the other Loan Documents or this Agreement, then, upon any such default, Borrower shall not be entitled to receive any funds from the Debt Service Reserve and Lender may, in its sole and absolute discretion, use the Debt Service Reserve (or any portion thereof) for any purpose permitted under the Loan Documents, including, but not limited to (i) toward payment of the Obligations; provided, however, that such application of funds shall not cure or be deemed to cure any default; (ii) reimbursement of Lender for all losses and expenses (including, without limitation, reasonable legal fees) suffered or incurred by Lender as a result of such default; and/or (iii) payment of any amount expended in exercising all rights and remedies available to Lender at law or in equity or under this Agreement or under the Reimbursement Agreement, the Security Instruments or any of the other Loan Documents, all in such order, proportion and priority as Lender may determine in its sole discretion. Lender's right to withdraw and apply the Debt Service Reserve Fund shall be in addition to all other rights and remedies provided to Lender under this Agreement, the Reimbursement Agreement, the Modification Agreement, the other Loan Documents, and at law or in equity. 4.3 Borrower's Other Obligations. Nothing contained in this Agreement shall in any manner whatsoever alter, impair or affect the obligations of Borrower, or relieve Borrower of any of its obligations to make payments and perform all of its other obligations required under the Reimbursement Agreement or any of the other Loan Documents, except to the extent that payments required under the Reimbursement Agreement or the other Loan Documents are actually made pursuant to this Agreement. 5. Insufficient Funds in the Debt Service Reserve. The insufficiency of any balance in the Debt Service Reserve shall not relieve Borrower from its obligations under the Reimbursement Agreement, the other Loan Documents and this Agreement. 6. Remedies Cumulative. None of the rights and remedies herein conferred upon or reserved to Lender under this Agreement is intended to be exclusive of any other rights or remedies conferred upon or reserved to Lender under this Agreement or under the Reimbursement Agreement or any of the other Loan Documents or available to Lender at law or in equity, and each and every right or remedy shall be cumulative and concurrent, and may be enforced separately, successively or together, and may be exercised from time to time as often as may be deemed necessary by Lender. 7. Enforcement of Agreement. This Agreement is executed by Borrower and Lender for the benefit of Lender and its successors and assigns. 8. Indemnification. Borrower agrees to indemnify Lender and to hold Lender harmless from and against any and all actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses (including litigation costs and reasonable attorneys' fees and expenses) arising from or in any way connected with the holding, investing or disbursing of the Debt Service Reserve or the Debt Service Reserve Fund except for actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses caused by the gross negligence of Lender. 9. No Third Party Beneficiary. This Agreement is intended solely for the benefit of Borrower and Lender and their respective successors and assigns, and no third party shall have any rights or interest in the Debt Service Reserve, the Debt Service Reserve Fund, this Agreement, the Reimbursement Agreement or any of the other Loan Documents. Nothing contained in this Agreement shall be deemed or construed to create an obligation on the part of Lender to any third party, nor shall any third party have a right to enforce against Lender any right that Borrower may have under this Agreement. 10. No Agency or Partnership. Nothing contained in this Agreement shall constitute Lender as a joint venturer, partner or agent of Borrower, or render Lender liable for any debts, obligations, acts, omissions, representations, or contracts of Borrower. 11. Waivers. (a) Borrower hereby waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender arising out of or in any way connected with this Agreement, the Reimbursement Agreement, the Modification Agreement, any of the other Loan Documents, or the Reimbursement Obligations. (b) To the extent permitted by applicable law, Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Lender is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement does not specifically and expressly provide for the giving of notice by Lender to Borrower. (c) Borrower hereby expressly waives and releases to the fullest extent permitted by law, the pleading of any statute of limitations as a defense to any and all of its obligations hereunder. (d) BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR IN RESPECT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF ANY PARTY OR ARISING OUT OF ANY EXERCISE BY ANY PARTY OF ITS RESPECTIVE RIGHTS UNDER THE LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE OBLIGATIONS OR THE HOTEL (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND WITH RESPECT TO ANY CLAIM OR DEFENSE ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS AGREEMENT. 12. Choice of Law. This Agreement shall be governed, construed, applied and enforced in accordance with the laws of the Commonwealth of Puerto Rico and applicable laws of the United States of America, without regard to the principles of conflicts of laws. 13. Termination of Debt Service Reserve. After payment in full of the Reimbursement Obligations and release by Lender of the lien of the Security Instruments, Lender shall disburse to Borrower all amounts remaining in the Debt Service Reserve. 14. Notices. All notices or other written communications hereunder shall be given and become effective as provided in the Reimbursement Agreement. 15. No Oral Change. This Agreement, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 16. Liability. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 17. Provisions Subject to Applicable Law. All rights, powers and remedies provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Agreement invalid or enforceable under the provisions of any applicable law. 18. Inapplicable Provisions. If any term, covenant or condition of this Agreement or any application thereof is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision. 19. Headings, etc. The headings and captions of various paragraphs of this Agreement are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 20. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 21. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 22. Definitions. The word "Lender" as used herein includes Lender and any and all of its agents. All capitalized words and phrases not otherwise defined herein shall have the meanings ascribed to them in the Reimbursement Agreement, as modified by the Modification Agreement. 23. Sole Discretion of Lender. Wherever pursuant to this Agreement (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Lender, shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. 24. Costs. Wherever pursuant to this Agreement it is provided that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, reasonable legal fees and disbursements of Lender, whether retained firms, the reimbursement for the expenses of in-house staff or otherwise. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF the undersigned have executed this Agreement as of the date and year first written above. BORROWER: EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ---------------------------------- Larry M. Vitale Vice President LENDER: CITICORP REAL ESTATE, INC., a Delaware corporation By: /s/ Michael Chlopak ------------------------------------- Michael Chlopak Attorney-in-Fact EX-10 12 EXHIBIT 10.9 ENVIRONMENTAL INDEMNITY AGREEMENT ENVIRONMENTAL INDEMNITY AGREEMENT made as of the 3rd day of August, 1998, by EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership having its principal place of business at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico 00738 ("Borrower"), PATRIOT AMERICAN HOSPITALITY, INC. ("Patriot"), a Delaware corporation having an office at 590 Madison Avenue, New York, NY 10022 (Borrower and Patriot hereinafter referred to individually and collectively, as "Indemnitor", in favor of CITICORP REAL ESTATE, INC. a Delaware corporation, and its successors, transferees and assigns ("Indemnitee") and other Indemnified Parties (as defined below). Preliminary Statement WHEREAS, Borrower is the fee owner of that certain real property more particularly described in Exhibit "A" attached hereto (said real property, together with any real property hereafter encumbered by the lien of the Security Instruments (as hereinafter defined), being herein collectively referred to as the "Land"; the Land, together with all structures, buildings and improvements now or hereafter located on the Land, being collectively referred to as the "Owned Property") and the leased property more particularly described in Exhibit "B" attached hereto (said real property together with all structures, buildings and improvements now or hereafter located being collectively referred to as the "Leased Property;" the Owned Property and the Leased Property being collectively referred to as the "Property"); and WHEREAS, Indemnitee is the owner and holder of certain reimbursement obligations in the principal amount of $90,000,000 (collectively, the "Reimbursement Obligations") which are outstanding pursuant to a Letter of Credit and Reimbursement Agreement, dated February 7, 1991, by and between The Bank of Tokyo- Mitsubishi, Ltd. (f/k/a The Mitsubishi Bank, Limited) ("Mitsubishi") and the Borrower (as heretofore amended and as amended on the date hereof by the Modification Agreement (as hereinafter defined), the "Reimbursement Agreement"); and WHEREAS, the Reimbursement Obligations are secured, in part, by certain Collateral Pledge Agreements more particularly described in the Reimbursement Agreement (collectively, the "Security Instruments") and by certain other notes, deeds of mortgage, assignments, guaranties and other documents and instruments executed in connection with the Reimbursement Agreement (including the Modification Agreement) or otherwise with respect to the Reimbursement Obligations (collectively, the "Other Security Documents"); and WHEREAS, at the request of Borrower and pursuant to the terms of that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Assignee, the Borrower, Mitsubishi and certain other parties (the "Modification Agreement"), the term for payment of the Reimbursement Obligations is being extended and certain terms and provisions of the Reimbursement Agreement, the Security Instruments and the Other Security Documents, among other things, are being amended and modified at the request of the Assignor (the Reimbursement Agreement, the Security Instruments, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Reimbursement Obligations or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents"); and WHEREAS, as a condition to entering into the Modification Agreement and modifying the Reimbursement Obligations, Indemnitee requires Indemnitor to provide certain indemnities concerning Hazardous Substances (as hereinafter defined); and WHEREAS, to induce Indemnitee to consummate the above described transaction, Indemnitor has agreed to enter into this Agreement; NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Indemnitor hereby represents, warrants and covenants to Indemnitee as follows: 1. Indemnitor represents and warrants, based upon an environmental Phase I site assessment of the Property and information that Indemnitor knows, that: (a) there are no Hazardous Substances (defined below) or underground storage tanks in, on, or under the Property, except those that are both disclosed to Indemnitee in writing pursuant to the written reports resulting from the environmental assessments of the Property delivered to Indemnitee (the "Environmental Report") and that except as noted in the Environmental Report, such Hazardous Substances and underground storage tanks are in compliance in all material respects with Environmental Laws and with permits issued pursuant thereto; (b) there are no past or present Releases (defined below) of Hazardous Substances in violation of any Environmental Law or which would require Remediation (defined below) by a Governmental Authority in, on, under or from the Property except as described in the Environmental Report; (c) there is no past or present non-compliance with Environmental Laws, or with permits issued pursuant thereto, in connection with the Property except as described in the Environmental Report; (d) Indemnitor does not know of, and has not received, any written or oral notice or other communication from any person or entity (including, but not limited to a governmental entity) relating to Hazardous Substances or Remediation thereof, of possible liability of any person or entity pursuant to any Environmental Law, other environmental conditions 2 in connection with the Property, or any actual administrative or judicial proceedings in connection with any of the foregoing except as noted in the Environmental Report; and (e) Indemnitor has truthfully and fully provided, to Indemnitee or its agents, in writing, any and all information relating to environmental conditions in, on, under or from the Property that is known to Indemnitor and that is contained in Indemnitor's files and records, including, but not limited to any reports relating to Hazardous Substances in, on, under or from the Property and/or to the environmental condition of the Property. 2. Borrower covenants and agrees that so long as the Borrower owns, manages, is in possession of or otherwise controls the operation of the Property: (a) all uses and operations on or of the Property, whether by Indemnitor or any other person or entity, shall be in compliance in all material respects with all Environmental Laws and permits issued pursuant thereto; (b) there shall be no Releases of Hazardous Substances in, on, under or from the Property; (c) there shall be no Hazardous Substances in, on, or under the Property, except those that are in compliance with all Environmental Laws and with permits issued pursuant thereto, if and to the extent required; (d) Indemnitor shall keep the Property free and clear of all liens and other encumbrances imposed pursuant to any Environmental Law, whether due to any act or omission of Indemnitor or any other person or entity (the "Environmental Liens"); (e) Indemnitor shall, at its sole cost and expense, fully and expeditiously cooperate in all activities pursuant to Section 3 below, including, but not limited to providing all relevant information and making knowledgeable persons available for interviews; (f) Borrower shall, at its sole cost and expense, perform any environmental site assessment or other investigation of environmental conditions in connection with the Property, pursuant to any reasonable written request of Indemnitee after Indemnitee has reason to believe this Agreement has been violated (including, but not limited to sampling, testing and analysis of soil, water, air, building materials and other materials and substances whether solid, liquid or gas), and share with Indemnitee the reports and other results thereof, and Indemnitee and other Indemnified Parties (defined below) shall be entitled to rely on such reports and other results thereof; (g) Indemnitor shall, at its sole cost and expense, comply with all reasonable written requests of Indemnitee to (i) reasonably effectuate Remediation of any condition (including, but not limited to a Release of a Hazardous Substance) in, on, under or from the Property, (ii) comply with any Environmental Law, (iii) comply with any directive from any governmental authority, and (iv) take any other reasonable action necessary or appropriate for protection of human health or the environment; (h) Borrower shall not do or allow any tenant, licensee, hotel patron, guest, or other user of the Property to do any act that materially increases the dangers to human health or the environment, poses an unreasonable risk of harm to any person or entity (whether on or off the Property), impairs or may impair in any material respect the value of the Property, is contrary to any requirement of any insurer, constitutes a public or private nuisance, constitutes waste, or violates in any material respect any covenant, condition, agreement or easement applicable to the Property; and (i) Indemnitor shall immediately notify 3 Indemnitee in writing promptly after it has become aware of (A) any presence or Releases or threatened Releases of Hazardous Substances in, on, under, from or migrating towards the Property which is required to be reported to a governmental authority under any Environmental Law, (B) any actual Environmental Lien affecting the Property, (C) any required Remediation of environmental conditions relating to the Property, and (D) any written or oral notice or other communication of which Indemnitor becomes aware from any source whatsoever (including, but not limited to a governmental entity) relating in any way to Hazardous Substances or Remediation thereof, possible liability of any person or entity pursuant to any Environmental Law, other environmental conditions in connection with the Property, or any actual or threatened administrative or judicial proceedings in connection with anything referred to in this Agreement. 3. Indemnitee, its environmental consultant, and any other person or entity designated by Indemnitee, including, but not limited to any receiver and any representative of a governmental entity, shall have the right, but not the obligation, at intervals of not less than one year, or more frequently if the Indemnitee reasonably believes that a Hazardous Substance or other environmental condition violates or threatens to violate any Environmental Law, after notice to Indemnitor, to enter upon the Property at all reasonable times to assess any and all aspects of the environmental condition of the Property and its use, including, but not limited to conducting any environmental assessment or audit of the Property or portions thereof to confirm Indemnitor's compliance with this Agreement, and Indemnitor shall cooperate in all reasonable ways with Indemnitee in connection with any such audit. Such audit shall be performed in a manner so as to minimize interference with the conduct of business at the Property. If such audit discloses that a material violation of or a material liability under any Environmental Law exists which was not previously disclosed in writing to Indemnitee or if such audit was required or prescribed by law, regulation or governmental or quasi-governmental authority, Indemnitor shall pay all costs and expenses incurred in connection with such audit; otherwise, the costs and expenses of such audit shall, not withstanding anything to the contrary set forth in this Section 3 or in any other Loan Document, be paid by Indemnitee. For purposes of this Section 3, "material" shall mean a violation or liability for which the cost of the cure or remediation exceeds $25,000. 4. (a) Indemnitor shall, at its sole cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses imposed upon or incurred by or asserted against any Indemnified Parties, and arising out of or in any way relating to any one or more of the following: (i) any presence of any Hazardous Substances in, on, above or under the Property; (ii) any past, present or threatened Release of Hazardous Substances in, on, above, under or from the Property; (iii) any activity by Indemnitor, any person or entity affiliated with Indemnitor or tenant or other users of the Property in connection with any actual, proposed or threatened use, treatment, storage, holding, existence, disposition or other 4 Release, generation, production, manufacturing, processing, refining, control, management, abatement, removal, handling, transfer or transportation to or from the Property of any Hazardous Substances at any time located in, under, on or above the Property; (iv) any activity by Indemnitor, any person or entity affiliated with Indemnitor or tenant or other users of the Property in connection with any actual or proposed Remediation of any Hazardous Substances at any time located in, under, on or above the Property, whether or not such Remediation is voluntary or pursuant to court or administrative order, including, but not limited to any removal, remedial or corrective action; (v) any past, present or threatened violations of any Environmental Laws (or permits issued pursuant to any Environmental Law) in connection with the Property or operations thereon, including, but not limited to any failure by Indemnitor, any person or entity affiliated with Indemnitor or tenant or other users of the Property to comply with any order of any governmental authority in connection with Environmental Laws; (vi) the imposition, recording or filing of any Environmental Lien encumbering the Property; (vii) any administrative processes or proceedings or judicial proceedings in any way connected with any matter addressed in this Agreement; (viii) any past, present or threatened injury to, destruction of or loss of natural resources in any way connected with the Property, including, but not limited to costs to investigate and assess such injury, destruction or loss; (ix) any acts of Indemnitor or other users of the Property in arranging for disposal or treatment, or arranging with a transporter for transport for disposal or treatment, of Hazardous Substances owned or possessed by such Indemnitor or other users, at any facility or incineration vessel owned or operated by another person or entity and containing such or similar Hazardous Substance; (x) any acts of Indemnitor or other users of the Property, in accepting any Hazardous Substances for transport to disposal or treatment facilities, incineration vessels or sites selected by Indemnitor or such other users, from which there is a Release, or a threatened Release of any Hazardous Substance which causes the incurrence of costs for Remediation; (xi) any personal injury, wrongful death, or property damage caused by Hazardous Substances arising under any statutory or common law or tort law theory, including, but not limited to damages assessed for the maintenance of a private or public nuisance or for the conducting of an abnormally dangerous activity on or near the Property; and (xii) any intentional misrepresentation in any representation or warranty or material breach or failure to perform any covenants or other obligations pursuant to this Agreement. Notwithstanding anything to the contrary contained herein, Indemnitor shall not be liable for losses which result from (a) the gross negligence or willful misconduct of the Indemnified Parties or (b) any Hazardous Substances that are first used, manufactured, emitted, generated, treated, released, stored or disposed of on the Property after the date the Property is transferred to a third party which is not affiliated with any Indemnitor and Indemnitor is no longer in possession or control of, retains an interest in, or manages the Property except to the extent such manufacture, emission, release, generation, treatment, storage, disposal or violation is actually caused by any Indemnitor. 5 (b) Upon written request by any Indemnified Party, Indemnitor shall defend such Indemnified Party (if requested by any Indemnified Party, in the name of the Indemnified Party) by attorneys and other professionals approved by the Indemnified Parties, which approval shall not be unreasonably withheld. Notwithstanding the foregoing, any Indemnified Parties may, in their sole and absolute discretion, engage their own attorneys and other professionals to defend or assist them, and, at the option of Indemnified Parties, their attorneys shall control the resolution of claim or proceeding. Upon demand, Indemnitor shall pay or, in the sole and absolute discretion of the Indemnified Parties, reimburse, the Indemnified Parties for the payment of reasonable fees and disbursements of attorneys, engineers, environmental consultants, laboratories and other professionals in connection therewith. 5. The term "Hazardous Substances" includes but is not limited to, any and all substances (whether solid, liquid or gas) (i) defined, listed, or otherwise classified as pollutants, hazardous wastes, hazardous substances, hazardous materials, extremely hazardous wastes, or words of similar meaning or regulatory effect under any present or future, Environmental Laws or (ii) that may have a negative impact on human health or the environment, including, but not limited to petroleum and petroleum products, asbestos and asbestos-containing materials, polychlorinated biphenyls, lead, radon, radioactive materials, flammables and explosives. 6. The term "Environmental Law" means any present, future, federal, state, commonwealth and local laws, statutes, ordinances, rules, regulations and the like, as well as common law, relating to the protection of human health or the environment, relating to Hazardous Substances, relating to liability for costs of Remediation or prevention of Releases of Hazardous Substances or relating to liability for costs of other actual or threatened danger to human health or environment and includes, but is not limited to, the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state, commonwealth or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Hazardous Substances Transportation Act; the Resource Conservation and Recovery Act (including, but not limited to Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. "Environmental Law" also includes, but is not limited to, any present or future, federal, state, commonwealth and local laws, statutes, ordinances, rules, regulations and the like, as well as common law: conditioning transfer of property upon a negative declaration or other approval of a governmental authority of the environmental condition of the 6 property; requiring notification or disclosure of Releases of Hazardous Substances or other environmental condition of the Property to any governmental authority or other person or entity, whether or not in connection with transfer of title to or interest in property. 7. The term "Release" of any Hazardous Substance includes, but is not limited to, any release, deposit, discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Substances. 8. The term "Remediation" includes, but is not limited to, any response, remedial removal, or corrective action, any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate any Hazardous Substance, any actions to prevent, cure or mitigate any Release of any Hazardous Substance, any action to comply with any Environmental Laws or with any permits issued pursuant thereto, any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or evaluation relating to any Hazardous Substances or to anything referred to in this Agreement. 9. The term "Indemnified Parties" means Indemnitee and any person or entity who shall succeed to the interests of Indemnitee as owner and holder of the Reimbursement Obligations or any of the other Loan Documents as well as the respective directors, officers, shareholders, members, partners, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including, but not limited to any other person or entity who holds or acquires or will have held a participation or other full or partial interest in the Reimbursement Obligations or the Property and including, but not limited to any successors by merger, consolidation or acquisition of all or a substantial portion of Indemnitee's assets and business). 10. The term "Losses" includes any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, costs of Remediation (whether or not performed voluntarily), engineers' fees, environmental consultants' fees, and costs of investigation (including, but not limited to sampling, testing and analysis of soil, water, air, building materials and other materials and substances whether solid, liquid or gas) or punitive damages, of whatever kind or nature (including, but not limited to attorneys' fees and other costs of defense). 11. This Agreement, the payment of all sums due hereunder and the performance and discharge of each and every obligation, covenant and agreement of 7 Indemnitor contained herein, are, and shall be deemed to be, secured by the Security Instruments and the other Loan Documents. 12. The liability of Indemnitor under this Agreement shall in no way be limited or impaired by, and Indemnitor hereby consents to and agrees to be bound by, any amendment or modification of the provisions of the Reimbursement Agreement or any of the other Loan Documents to or with Indemnitee or Indemnitor or any person who succeeds Indemnitor or Borrower as owner of the Property. In addition, the liability of Indemnitor under this Agreement shall in no way be limited or impaired by (i) any extensions of time for performance required by the Reimbursement Agreement or any of the other Loan Documents, (ii) any sale or transfer of all or part of the Property, (iii) except as provided herein, any exculpatory provision in the Reimbursement Agreement, or any of the other Loan Documents limiting Indemnitee's recourse to property encumbered by the Reimbursement Agreement or the other Loan Documents or to any other security, or limiting Indemnitee's rights to a deficiency judgment against Indemnitor or Borrower, (iv) the accuracy or inaccuracy of the representations and warranties made by Indemnitor or Borrower under the Reimbursement Agreement, the Security Instrument or any of the other Loan Documents or herein, (v) the release of Indemnitor or Borrower or any other person from performance or observance of any of the agreements, covenants, terms or conditions contained in any of the other Loan Documents by operation of law, Indemnitee's voluntary act, or otherwise, (vi) the release or substitution in whole or in part of any security for the Reimbursement Agreement, or (vii) Indemnitee's failure to record the Security Instruments or file any UCC financing statements (or Indemnitee's improper recording or filing of any thereof) or to otherwise perfect, protect, secure or insure any security interest or lien given as security for the Reimbursement Agreement; and, in any such case, whether with or without notice to Indemnitor and with or without consideration. 13. Indemnitee may enforce the obligations of Indemnitor without first resorting to or exhausting any security or collateral or without first having recourse to the Reimbursement Agreement, the Security Instruments, or any other Loan Documents or any of the Property, through foreclosure proceedings or otherwise, provided, however, that nothing herein shall inhibit or prevent Indemnitee from suing on the Reimbursement Agreement, foreclosing, or exercising any power of sale under, the Security Instruments, or exercising any other rights and remedies thereunder. This Agreement is not collateral or security for the Reimbursement Obligations, unless Indemnitee expressly elects in writing to make this Agreement additional collateral or security for the Reimbursement Obligations, which Indemnitee is entitled to do in its sole and absolute discretion. It is not necessary for an Event of Default to have occurred pursuant to and as defined in the Reimbursement Agreement for Indemnified Parties to exercise their rights pursuant to this Agreement. Notwithstanding any provision of the Reimbursement Agreement or any other Loan Documents, the obligations pursuant to this Agreement are exceptions to any 8 non-recourse or exculpation provision of the Reimbursement Agreement; Indemnitors are fully and personally liable for such obligations, and their liability is not limited to the Reimbursement Obligations or the value of the Property. 14. The obligations and liabilities of Indemnitor under this Agreement shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure, exercise of any power of sale, or delivery of a deed in lieu of foreclosure of the Security Instruments; provided, however, all obligations and liabilities of Indemnitor hereunder shall cease and terminate on the first (1st) anniversary of the date of payment to Indemnitee in cash of the entire Reimbursement Obligations (as defined in the Reimbursement Agreement), provided that contemporaneously with or subsequent to such payment, Borrower, at its sole cost and expense, delivers to Indemnitee an environmental audit of the Property in form and substance, and prepared by a qualified environmental consultant, reasonably satisfactory in all respects to Indemnitee and indicating the Property is in full compliance with all applicable Environmental Laws. 15. Any amounts payable to Indemnitee under this Agreement shall become immediately due and payable and, if not paid within thirty (30) days of written demand therefor, shall bear interest at the rate equal to the lesser of (a) the Default Rate (as defined in the Reimbursement Agreement), or (b) the maximum interest rate which Borrower or any other Indemnitor may by law pay or Indemnified Parties may charge and collect, from the date payment was due. 16. Indemnitor hereby waives (i) any right or claim of right to cause a marshalling of Indemnitor's assets or to cause Indemnitee or other Indemnitee to proceed against any of the security for the Reimbursement Obligations before proceeding under this Agreement against Indemnitor; (ii) and relinquishes all rights and remedies accorded by applicable law to indemnitors or guarantors, except any rights of subrogation which Indemnitor may have, provided that the indemnity provided for hereunder shall neither be contingent upon the existence of any such rights of subrogation nor subject to any claims or defenses whatsoever which may be asserted in connection with the enforcement or attempted enforcement of such subrogation rights including, without limitation, any claim that such subrogation rights were abrogated by any acts of Indemnitee or other Indemnitee; (iii) the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against or by Indemnitee or other Indemnitee; (iv) trial by jury in any action or proceeding brought by Indemnitor or Indemnitee or other Indemnitee or in any counterclaim asserted by Indemnitee or other Indemnitee against Indemnitor or in any matter whatsoever arising out of or in any way connected with this Agreement; (v) notice of acceptance hereof and of any action taken or omitted in reliance hereon; (vi) presentment for payment, demand of payment, protest or notice of nonpayment or failure to perform or observe, or other proof, or notice or demand under this Agreement; and (vii) all homestead exemption rights against the 9 obligations hereunder and the benefits of any statutes of limitations or repose. Notwithstanding anything to the contrary contained herein, Indemnitor hereby agrees to postpone the exercise of any rights of subrogation with respect to any collateral securing the Reimbursement Obligations until the Reimbursement Obligations shall have been paid in full. 17. Indemnitor shall take any and all reasonable actions, including institution of legal action against third-parties, necessary or appropriate to obtain reimbursement, payment or compensation from such persons responsible for the presence of any Hazardous Substances at, in, on, under or near the Property or otherwise obligated by law to bear the cost. Indemnitee shall be and hereby is subrogated to all of Indemnitor's rights now or hereafter in such claims. 18. Borrower shall cooperate with Indemnitee, and provide access to Indemnitee and any professionals engaged by Indemnitee, upon Indemnitee's request, to conduct, contract for, evaluate or interpret any environmental assessments, audits, investigations, testing, sampling, analysis and similar procedures on the Property. 19. Indemnitor represents and warrants that: (a) Indemnitor has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder; the execution, delivery and performance of this Agreement by Indemnitor has been duly and validly authorized; and all requisite corporate action has been taken by Indemnitor to make this Agreement valid and binding upon Indemnitor, enforceable in accordance with its terms; (b) Indemnitor's execution of, and compliance with, this Agreement are in the ordinary course of business of Indemnitor and will not result in the breach of any term or provision of the charter or by-laws of Indemnitor or result in the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any agreement, indenture or loan or credit agreement or other instrument to which Indemnitor or the Property is subject, or result in the violation of any law, rule, regulation, order, judgment or decree to which Indemnitor or the Property is subject; (c) If Indemnitor is an individual, his/her execution of, and compliance with, this Agreement will not result in the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under any agreement, indenture or loan or credit agreement or other instrument to which Indemnitor or the Property is subject, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Indemnitor or the Property is subject; 10 (d) There is no action, suit, proceeding or investigation pending or threatened against Indemnitor which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of Indemnitor, or in any material impairment of the right or ability of Indemnitor to carry on its business substantially as now conducted, or in any material liability on the part of Indemnitor, or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of Indemnitor contemplated herein, or which would be likely to impair materially the ability of Indemnitor to perform under the terms of this Agreement; (e) Indemnitor does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (f) No approval, authorization, order, license or consent of, or registration or filing with, any governmental authority or other person, and no approval, authorization or consent of any other party is required in connection with this Agreement; (g) This Agreement constitutes a valid, legal and binding obligation of Indemnitor, enforceable against it in accordance with the terms hereof; 20. No delay on Indemnitee's part in exercising any right, power or privilege under this Agreement shall operate as a waiver of any such privilege, power or right. 21. Each party hereto shall, within five (5) business days of receipt thereof, give written notice to the other party hereto of (i) any notice or advice from any governmental agency or any source whatsoever with respect to Hazardous Substances on, from or affecting the Property, and (ii) any claim, suit or proceeding, whether administrative or judicial in nature ("Legal Action"), brought against such party or insti tuted with respect to the Property, with respect to which Indemnitor may have liability under this Agreement. Such notice shall comply with the provisions of paragraph 23 hereof. 22. Indemnitee shall, at all times, be free to independently establish to its satisfaction and in its absolute discretion the compliance with the terms of this Agreement, including random inspections on a reasonable basis. 23. All notices given under this Agreement shall be given and become effective as provided in the Loan Agreement, except that notices to the Borrower shall be sent to Borrower as provided in the Loan Agreement and to the other Indemnitor parties 11 at the addresses set forth in the introductory paragraph to this Agreement (subject to change as provided in the Reimbursement Agreement). 24. With respect to any claim or action arising hereunder, Indemnitor (a) irrevocably submits to the nonexclusive jurisdiction of the courts of the Commonwealth of Puerto Rico and any appellate courts thereof, and (b) irrevocably waives any objection which it may have at any time to the laying on venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any such court, irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 25. The terms of this Agreement are for the sole and exclusive protection and use of Indemnitee. No party shall be a third-party beneficiary hereunder, and no provision hereof shall operate or inure to the use and benefit of any such third party. It is agreed that those persons and entities included in the definition of "Indemnified Parties" are not such excluded third-party beneficiaries. 26. Capitalized terms used herein and not specifically defined herein shall have the respective meanings ascribed to such terms in the Reimbursement Agreement. 27. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 28. This Agreement may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Indemnitee, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 29. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or persons referred to may require. Without limiting the effect of specific references in any provision of this Agreement, the term "Indemnitor" shall be deemed to refer to Indemnitor and each person or entity comprising Indemnitor from time to time, as the sense of a particular provision may require, and to include the heirs, executors, administrators, legal representatives, successors and assigns of Indemnitor, all of whom shall be bound by the provisions of this Agreement. Each reference herein to Indemnitee 12 shall be deemed to include its successors and assigns, to whose favor the provisions of this Agreement shall also inure. 30. If Indemnitor consists of more than one person or entity, the obligations and liabilities of each such person or entity hereunder shall be joint and several. 31. Any one or more parties liable upon or in respect of this Agreement may be released without affecting the liability of any party not so released. 32. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies which Indemnitee has under the Reimbursement Agreement, or the other Loan Documents or would otherwise have at law or in equity. 33. If any term, condition or covenant of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision. 34. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Puerto Rico and the applicable laws of the United States of America without regard to the principles of conflicts of laws. 35. (a) Wherever pursuant to this Agreement (i) Indemnitee exercises any right given to it to approve or disapprove, (ii) any arrangement or term is to be satisfactory to Indemnitee, or (iii) any other decision or determination is to be made by Indemnitee, the decision of Indemnitee to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Indemnitee, shall be in the sole and absolute discretion of Indemnitee and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. (b) Wherever pursuant to this Agreement it is provided that Indemnitor pay any costs and expenses, such costs and expenses shall include, but not be limited to, reasonable legal fees and disbursements of Indemnitee, whether retained firms, the reimbursement for the expenses of the in-house staff or otherwise. (c) Any reference to attorneys' fees payable by Indemnitor shall be deemed to mean reasonable attorneys' fees actually incurred. 13 IN WITNESS WHEREOF, this Agreement has been executed by Indemnitor and Indemnitee and is effective as of the day and year first above written. INDEMNITOR: PATRIOT AMERICAN HOSPITALITY, INC. a Delaware corporation By: /s/ William W. Evans, III ---------------------------------- Name: William W. Evans, III Title: President [SIGNATURES CONTINUED ON NEXT PAGE] 14 EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ------------------------------------ Name: Larry M. Vitale Title: Vice President 15 EXHIBIT "A" Legal Description of Fee Real Estate (to be attached) 16 EXHIBIT "B" Legal Description of Leased Real Estate (to be attached) 17 EX-10 13 EXHIBIT 10.10 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Agreement") is made as of the 3rd day of August, 1998, by EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, having its principal place of business and principal offices at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico 00738 ("Debtor") in favor of CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, New York 10043 ("Secured Party"). RECITALS: A. Secured Party is the owner and holder of certain reimbursement obligations in the principal amount of $90,000,000 (collectively, the "Reimbursement Obligations") which are outstanding pursuant to a Letter of Credit and Reimbursement Agreement, dated as of February 7, 1991, by and between The Bank of Tokyo-Mitsubishi, Ltd. (f/k/a The Mitsubishi Bank, Limited) ("Mitsubishi") and the Debtor (as heretofore amended and as amended on the date hereof by the Modification Agreement (as hereinafter defined), the "Reimbursement Agreement"). B. The Reimbursement Obligations are secured, in part, by certain Collateral Pledge Agreements more particularly described in the Reimbursement Agreement (collectively, the "Security Instruments") and by certain other notes, deeds of mortgage, assignments, guaranties and other documents and instruments executed in connection with the Reimbursement Agreement (including the Modification Agreement) or otherwise with respect to the Reimbursement Obligations (collectively, the "Other Security Documents"). C. At the request of Debtor and pursuant to the terms of that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Secured Party, the Debtor, Mitsubishi and certain other parties (the "Modification Agreement"), the term for payment of the Reimbursement Obligations is being extended and certain terms and provisions of the Reimbursement Agreement, the Security Instruments and the Other Security Documents, among other things, are being amended and modified at the request of the Debtor (the Reimbursement Agreement, the Security Instruments, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Reimbursement Obligations or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents"). D. Secured Party requires as a condition to its entering into the Modification Agreement and modifying the Reimbursement Obligations that Debtor grant a security interest to the Secured Party of all of its right, title and interest in and to the Collateral (as hereinafter defined) as additional security for the Obligations (as hereinafter defined). NOW, THEREFORE, in consideration of the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees as follows: 2 ARTICLE 1 - GRANTS OF SECURITY Section 1.1 Collateral. Debtor does hereby irrevocably pledge and assign to Secured Party, and grant a security interest to Secured Party in, the following property, rights, interests and estates now owned or leased, or hereafter acquired by Debtor (collectively, the "Collateral"): (a) Fixtures and Personal Property. All machinery, equipment, fixtures (including, without limitation, all of Debtor's right, title and interest in and to (i) all office equipment, furniture and furnishings, including, without limitation, all carpeting, movable partitions, desks, chairs, sofas, filing cabinets and systems, tables, lamps and lighting fixtures, artwork and objects, computers, printers, typewriters, telexes, facsimile equipment, two-way radio and paging-music systems, stationery and office supplies, brochures, business records, (ii) all operating machinery, fixtures and equipment, including, without limitation, all electrical vaults, and conduits, heating, ventilating and air conditioning facilities and equipment (including heat pumps, oil burners, incinerators, furnaces, water heaters, heating controls, motors, boiler pressure systems and equipment and other fuel burning devices), air intake and exhaust systems, electrical generators, lighting, fire protection, security, life safety and alarm systems, electrical elevators and compressor systems, laundry and dry-cleaning facilities, all plumbing and sanitary disposal systems (including septic or leaching systems, if any), swimming pool and spa supplies, equipment and materials, if any, all water, sewer, refrigeration fixtures, equipment and systems, and landscaping equipment, all inventories of replacement and/or spare parts, all cleaning, janitorial and maintenance equipments, tools and machinery, and all manuals and instructional materials associated therewith, (iii) all telephone and telecommunication and wired cable systems and equipment including, without limitation, all telephones, television and radio receivers, loud speaker and paging systems, satellite and microwave communication equipment, movie videotape, film, slide and rear-screen projection equipment, (iv) all case goods for the rooms, suites, function and common areas of the hotel or lodging facility, all beds, bedding, tables, chairs, sofas, lamps, lighting equipment, mirrors, armoires, linens, artwork and objects, blankets, plants, all other operational and guest supplies and all inventories of replacement items, (v) all restaurant and kitchen furniture, furnishings and equipment affixed to or part of the Hotel Improvements (as defined in the Reimbursement Agreement), including without limitation, all tables, chairs, banquettes, stools, bars, lighting fixtures, bar equipment, china, glassware, linens, silverware, artwork and objects, kitchen appliances, refrigerators, freezers, stoves, grills, microwave ovens, dishwashing equipment and all kitchen and food preparation equipment and utensils, (vi) all merchandise located in the Hotel (as defined in the Reimbursement Agreement), in each case in the ordinary course of business, intended for resale to the public, including, 3 without limitation, merchandise sold through gift shops and any other retail stores located in the Hotel, and (vii) all inventories and supplies of food and alcoholic beverages (to the extent same may be encumbered under applicable law) in opened or unopened cases and bottles and all supplies and replacement items arising out or in connection with the ordinary course existence, use, ownership, occupancy, operation and/or maintenance of the Hotel, including cleaning and maintenance equipment of any kind and nature), money, room revenues, revenues generated by the renting of hotel rooms, room rental revenues, accounts, accounts receivable, contract rights, goodwill, chattel paper, documents, trademarks, trade names, service marks, logos, designs, brand names, phrases, identifications, registrations, applications, common law marks, licenses and/or franchise agreements, including, without limitation, all reservations, deposits, advance payments, security deposits and prepaid items and other amounts or credit paid to Debtor, and other property of every kind and nature whatsoever owned by Debtor (including, without limitation, all such property which under the laws of the Commonwealth of Puerto Rico may properly be classified as real or immovable property either by nature or by destination ("inmuebles por destino"), and that under the laws of the Commonwealth of Puerto Rico may be classified as fixtures under the Uniform Commercial Code (as hereinafter defined)), or in which Debtor has or shall have an interest, now or hereafter located upon the Land (as defined in the Reimbursement Agreement) or the Hotel Improvements, or appurtenant thereto, and used in connection with the present or future operation and occupancy of the Land and the Hotel Improvements and all building equipment, materials and supplies of any nature whatsoever owned by Debtor, or in which Debtor has or shall have an interest, now or hereafter located upon the Land and the Hotel Improvements, or appurtenant thereto, or used in connection with the present or future operation and occupancy of the Land and the Hotel Improvements (collectively, the "Personal Property"), and the right, title and interest of Debtor in and to any of the Personal Property which may be subject to any security interests, as defined in the Uniform Commercial Code, as adopted and enacted by the Commonwealth of Puerto Rico and known as the Commercial Transactions Act of the Commonwealth of Puerto Rico, as amended (the "Uniform Commercial Code"), superior in lien to the lien of this Agreement, the Security Instruments, the Mortgage or any of the Other Security Documents and all proceeds and products of the above; (b) Leases and Rents. All leases, concession agreements and other agreements affecting the use, enjoyment or occupancy of all or any part of the Land or the Hotel Improvements heretofore or hereafter entered into whether before or after the filing by or against Debtor of any petition for relief under 11 U.S.C. 'SS' 101 et seq. (the "Bankruptcy Code"), as the same may be amended from time to time (the "Leases") and all right, title and interest of Debtor, its successors and assigns therein and thereunder, including, without limitation, cash or 4 securities deposited thereunder to secure the performance by the lessees of their obligations thereunder and all rents, additional rents, revenues, issues and profits (including all oil and gas or other mineral royalties and bonuses), all receivables, rentals, receipts and payments received from the rental of guest/hotel rooms, suites, meeting rooms, beverage or food sales and facilities, the provision or sale of other goods and services, vending machines, telephone and television systems, guest laundry and all other payments received from guests or visitors of the Mortgaged Property and other items of revenue, receipts or income as identified in the Uniform System of Accounts for Hotels 9th Edition, International Association of Hospitality Accounts (1996)), from the Land and the Hotel Improvements whether paid or accruing before or after the filing by or against Debtor of any petition for relief under the Bankruptcy Code (the "Rents") and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Debt; (c) Condemnation Awards. All awards or payments, including interest thereon, which may heretofore and hereafter be made with respect to the Collateral, whether from the exercise of the right of eminent domain (including, but not limited to, any transfer made in lieu of or in anticipation of the exercise of the right), or for a change of grade, or for any other injury to or decrease in the value of the Collateral; (d) Insurance Proceeds. All proceeds of and any unearned premiums on any insurance policies covering the Collateral, including, without limitation, the right to receive and apply the proceeds of any insurance judgments, or settlements made in lieu thereof, for damage to the Collateral; (e) Tax Certiorari. All refunds, rebates or credits in connection with a reduction in real estate taxes and assessments charged against the Collateral as a result of tax reduction proceedings or any applications or proceedings for reduction; (f) Conversion. All proceeds of the conversion, voluntary or involuntary, of any of the foregoing including, without limitation, proceeds of insurance and condemnation awards, into cash, liquidation or other claims; (g) Rights. The right, in the name and on behalf of Debtor, to commence any action or proceeding to protect the interest of Secured Party in the Collateral and while an Event of Default (as defined in the Reimbursement Agreement) remains uncured, to appear in and defend any action or proceeding brought with respect to the Collateral; 5 (h) Agreements. To the extent permitted by law, all agreements, contracts, certificates, instruments, franchises, permits, licenses, plans, specifications and other documents, now or hereafter entered into, and all rights therein and thereto, respecting or pertaining to the use, occupation, construction, management or operation of the Land and any part thereof and any Hotel Improvements or respecting any business or activity conducted on the Land and any part thereof and all right, title and interest of Debtor therein and thereunder, including, without limitation, the right to receive and collect any sums payable to Debtor thereunder; (i) Intangibles. All accounts, trade names, trademarks, servicemarks, logos, copyrights, goodwill, books and records and all other general intangibles specific to or used in connection with the operation of any portion of the Collateral; (j) Other Rights. Any and all other rights of Debtor in and to the items set forth in Subsections (a) through (i) above, including, without limitation, all proceeds and products of any of the items set forth in Subsections (a) through (i) above. Section 1.2 Security Agreement. This Agreement constitutes a "security agreement" within the meaning of the Uniform Commercial Code. The Collateral includes personal property and all other rights and interests, whether tangible or intangible in nature, of Debtor in the Collateral. By executing and delivering this Agreement, Debtor hereby grants to Secured Party, as security for the Obligations, a security interest in the Collateral to the full extent that the Collateral may be subject to the Uniform Commercial Code. Section 1.3 Pledge of Monies Held. Debtor hereby pledges to Secured Party any and all monies now or hereafter held by Secured Party, including, without limitation, any sums deposited in escrow with Secured Party and any insurance or condemnation proceeds, as additional security for the Obligations until expended or applied as provided in the Reimbursement Agreement. 6 Section 1.4 Conditions to Grant. Secured Party shall have the right to have and to hold the above granted and described Collateral unto and to the use and benefit of Secured Party, and the successors and assigns of Secured Party, forever. If Debtor shall well and truly pay to Secured Party the Debt at the time and in the manner provided in the Reimbursement Agreement, shall well and truly perform the Other Obligations (as hereinafter defined) as set forth in the Reimbursement Agreement and shall well and truly abide by and comply with each and every covenant and condition set forth in the Reimbursement Agreement and the other L/C Documents (as defined in the Reimbursement Agreement), these presents and the estate hereby granted shall cease, terminate and be void and Secured Party shall release or assign the above described security interest in accordance with local law and practice at the cost of Debtor. ARTICLE 2 - DEBT AND OBLIGATIONS SECURED Section 2.1 Debt. This Agreement is given to secure the following (collectively, the "Debt"): (a) the payment of the Reimbursement Obligations and all other indebtedness of the Borrower under the Reimbursement Agreement in lawful money of the United States of America; (b) the payment of interest, and to the extent applicable, default interest, late charges and other sums, as provided in the Reimbursement Agreement and/or the other L/C Documents; (c) the payment of all other monies agreed or provided to be paid by Debtor in the Reimbursement Agreement and/or the other L/C Documents; (d) the payment of all sums advanced pursuant to the Reimbursement Agreement to protect and preserve the Collateral and the lien and the security interest created hereby and by the Security Instruments and the Other Security Documents; and (e) the payment of all sums advanced and costs and expenses incurred by Secured Party in connection with the Debt or any part thereof, any renewal, extension, modification, consolidation, change, substitution, replacement, restatement or increase of the Debt or any part thereof, or the acquisition or perfection of the security therefor, whether made or incurred at the request of Debtor or Secured Party. Section 2.2 Other Obligations. This Agreement and the grants, assignments and transfers made in Article 1 and in the Security Instruments and the Other Security 7 Documents are also given for the purpose of causing the Debtor to comply with and the Debtor hereby agrees to comply with the following (the "Other Obligations"): (a) the performance of all other obligations of Debtor under the Reimbursement Agreement and the other L/C Documents; (b) the performance of each obligation of Debtor contained in the Reimbursement Agreement in addition to the payment of the Debt and of Debtor or of any Guarantor (as defined in the Reimbursement Agreement) under any of the other L/C Documents; and (c) the performance of each obligation of Debtor and any Guarantor contained in any renewal, extension, modification, consolidation, change, substitution, replacement for, restatement or increase of all or any part of the Reimbursement Obligations, the Security Instruments, the Reimbursement Agreement or the Other Security Documents. Section 2.3 Debt and Other Obligations. Debtor's obligations for the payment of the Debt and the performance of the Other Obligations shall be referred to collectively herein as the "Obligations." ARTICLE 3 - Debtor REPRESENTATIONS AND WARRANTIES Debtor represents and warrants to Secured Party that: Section 3.1 Warranty of Title. Debtor is the absolute owner of the Collateral and has the right to pledge, sell, assign and transfer the same and that it owns the Collateral free and clear of all liens, encumbrances, charges and security interests whatsoever except for the Permitted Encumbrances (as defined in the Reimbursement Agreement). Debtor shall forever warrant, defend and preserve the title and the validity and priority of the lien of this Agreement and shall forever warrant and defend the same to Secured Party against the claims of all persons whomsoever. Debtor shall keep the Collateral free from all liens, encumbrances, charges and security interests except for the security interest hereby created and except for the Permitted Encumbrances. Section 3.2 Financing Statements. No financing statements covering the Collateral is or will be on file in any public office, except the financing statements relating to the security interest created hereby relating to any of the Permitted Encumbrances. 8 Section 3.3 Claims of Debtors on Collateral. All account debtors and other obligors whose debts or obligations are part of the Collateral have no right to setoffs, counterclaims or adjustments, and no defenses in connection therewith. Section 3.4 Power and Authority. Debtor has full power, authority and legal right to execute this Agreement and to pledge, assign, sell, transfer and warrant the Collateral pursuant to the terms hereof and to keep and observe all of the terms hereof and has obtained all consents required to grant to Secured Party a security interest in the Collateral. Section 3.5 Valid Obligations. Debtor has duly executed and delivered this Agreement and this Agreement constitutes a legal, valid and binding obligation of Debtor, enforceable against it in accordance with the terms of this Agreement. Section 3.6 Place of Business. Debtor's place of business is located at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico, 00738. The representations and warranties set forth in this Article 3 shall survive the execution, delivery and performance of this Agreement and shall continue until all of the Obligations have been paid and performed in full. ARTICLE 4 - Debtor COVENANTS Debtor COVENANTS AND AGREES THAT: Section 4.1 Obligations and this Security Agreement. Debtor shall perform promptly all of its agreements herein and in any other agreements between Debtor and Secured Party. Section 4.2 Collection; Secured Party's Costs. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend and enforce the security interests hereby granted, collect the Obligations, and preserve, defend, enforce and collect the Collateral. Whether Collateral is or is not in Secured Party's possession, and without any obligation to do so and without waiving Debtor's default for failure to make any such payment, Secured Party at its option may pay any such costs and expenses and/or discharge encumbrances on Collateral, and such payment shall be a part of the Obligations. Debtor agrees to reimburse Secured Party on demand for any costs so incurred. Section 4.3 Additional Documents. Debtor shall sign any papers furnished by Secured Party or do and perform such other acts and things which are necessary in the sole judgment of Secured Party to obtain, maintain and perfect the security interests created hereby and to enable Secured Party to comply with the Federal Assignment of 9 Claims Act or any other federal, state or commonwealth law necessary to obtain or perfect Secured Party's interest in Collateral or to obtain proceeds of Collateral. Section 4.4 Modification of Collateral. Without the written consent of Secured Party, Debtor shall not agree to any modification of any of the terms of any accounts, chattel paper, general intangibles or instruments in Collateral. Section 4.5 Right of Secured Party to Notify Persons Obligated on Collateral. Before or after the occurrence of an Event of Default, Secured Party shall have the right to notify any persons obligated on instruments, accounts or chattel paper comprising the Collateral to make payments directly to Secured Party, and Secured Party may take control of all proceeds of any Collateral. Until Secured Party elects to exercise such rights, Debtor, as agent of Secured Party, shall collect and enforce all such instruments, accounts or chattel paper. Section 4.6 Delivery of Receipts to Secured Party. Upon Secured Party's demand, Debtor will deposit, upon receipt, all checks, drafts, cash or other remittances in payment of any instrument comprising the Collateral, or on account of accounts or contracts received as proceeds of any Collateral in a special bank account in a bank of Secured Party's choice over which Secured Party alone shall have power of withdrawal. The funds in said account shall be held by Secured Party as security for the Obligations. Said proceeds shall be deposited in the form received, except the endorsement of Debtor where necessary to permit collection of items, which endorsements Debtor agrees to make, but which Secured Party is authorized to make on Debtor's behalf. Pending such deposits, Debtor agrees that it will not mingle any such checks, drafts, cash or remittances with any of the Debtor's other funds or property, but will hold them separate and apart therefrom and upon an express trust for Secured Party until deposit thereof is made in the special account. Secured Party may from time to time apply the whole or any part of the funds in the special account against the Obligations. Any portion of said funds on deposit which Secured Party elects not to apply to the Obligations may be paid by Secured Party to Debtor. Section 4.7 Records of Collateral. Debtor at all times will maintain accurate books and records covering the Collateral. Secured Party is hereby given the right to audit the books and records of Debtor relating to Collateral at any time and from time to time. Section 4.8 Notice of Changes. Debtor will notify Secured Party immediately of any material change in the Collateral, of a change in the location or principal place of business or of a change in any material fact or circumstance warranted or represented by Debtor in this Agreement or furnished to Secured Party, and of any Event of Default. 10 Section 4.9 Possession of Collateral. If the Collateral is a partnership interest, chattel paper, documents, instruments or investment securities or other instruments, Debtor agrees that Secured Party may deliver a copy of this Agreement to the partnership, to a broker or seller thereof, or any person in possession thereof, and that such delivery shall constitute notice to such person of Secured Party's security interest therein and shall constitute Debtor's express instruction to such person to deliver to Secured Party certificates or other evidence of the same within ten (10) days of such request. Debtor will deliver all investment securities, other instruments, documents and chattel paper which are part of the Collateral and in Debtor's possession to Secured Party immediately, or if hereafter acquired, immediately following acquisition, appropriately endorsed to Secured Party's order, with all warranties by Debtor, with recourse against Debtor, and with appropriate power. Regardless of the form of the endorsement on any such Collateral, Debtor waives presentment, demand, notice of dishonor, protest, and all other notices with respect thereto. Section 4.10 Consumer Credit. Whenever any Collateral, or proceeds of any Collateral, includes obligations of third parties to Debtor such as accounts, chattel paper or instruments, the transactions giving rise to the Collateral shall conform in all respects to the applicable requirements of any state, commonwealth or federal consumer credit law, and Debtor shall hold Secured Party harmless and indemnify Secured Party against any cost, loss or expense of Secured Party including attorney's fees, arising from Debtor's breach of this covenant. Section 4.11 Waivers by Debtor. Debtor waives notices of the creation, advance, increase, existence, extension or renewal of, and of any indulgence with respect to, the Obligations; waives presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligations outstanding at any time, notice of any change in financial condition of any person liable for the Obligations or any part thereof, notice of any Event of Default, and all other notices respecting the Obligations; and agrees that maturity of the Obligations and any part thereof may be accelerated, extended or renewed one or more times by Secured Party in its discretion, without notice to Debtor. Section 4.12 Other Parties and Other Collateral. No renewal or extension of or any other indulgence with respect to the Obligations or any part thereof, no release of any security, no release of any person (including any maker, endorser, guarantor or surety) liable on the Obligations, no delay in enforcement of payment, and no delay or omission or lack of diligence or care in exercising any right or power with respect to the Obligations or any security therefor or guaranty thereof or under this Agreement shall in any manner impair of affect the rights of Secured Party under the law, hereunder, or under any other agreement pertaining to the Collateral. Secured Party need not file suit or assert a claim for personal judgment against any person for any part of the Obligations or seek to realize upon any other security for the Obligations, before foreclosing upon the Collateral for the purpose of paying the Obligations. Debtor waives any right to the 11 benefit of or to require or control applicable of any other security or proceeds thereof, and agrees that Secured Party shall have no duty or obligation to Debtor to apply to the Obligations any such other security or proceeds thereof. Section 4.13 Performance of Other Agreements. Debtor shall observe and perform each and every term to be observed or performed by Debtor pursuant to the terms of this Agreement, the Reimbursement Agreement or any of the other L/C Documents or any other material agreement or recorded instrument affecting or pertaining to the Collateral. Section 4.14 Change of Name, Identity or Structure. Debtor will not change Debtor's name without first obtaining the prior written consent of the Secured Party. Section 4.15 Existence. Debtor will continuously maintain (a) its existence and shall not dissolve or permit its dissolution, (b) its rights to do business in the Commonwealth of Puerto Rico and (c) its franchises and trade names. ARTICLE 5 - DEBTOR/CREDITOR RELATIONSHIP Section 5.1 Relationship of Debtor and Secured Party. The relationship between Debtor and Secured Party is solely that of debtor and creditor, and Secured Party has no fiduciary or other special relationship with Debtor, and no term or condition of the Reimbursement Agreement, this Agreement and the other L/C Documents shall be construed so as to deem the relationship between Debtor and Secured Party to be other than that of debtor and creditor. 12 ARTICLE 6 - FURTHER ASSURANCES Section 6.1 Recording of Security Instrument, Etc. Debtor forthwith upon the execution and delivery of this Agreement and thereafter, from time to time, will cause this Agreement and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect and perfect the lien or security interest hereof upon, and the interest of Secured Party in, the Collateral. Debtor will pay all taxes, filing, registration or recording fees, and all expenses incident to the preparation, execution, acknowledgment and/or recording of the Reimbursement Agreement and the other L/C Documents and any note or mortgage supplemental hereto, any security instrument with respect to the Collateral and any instrument of further assurance, and any modification or amendment of the foregoing documents, and all federal, state, commonwealth, county and municipal taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Agreement, the Reimbursement Agreement or any of the other L/C Documents, any mortgage supplemental thereto, any security instrument with respect to the Collateral or any instrument of further assurance, and any modification or amendment of the foregoing documents, except where prohibited by law so to do. Section 6.2 Further Acts, Etc. Debtor will, at the cost of Debtor, and without expense to Secured Party, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Secured Party shall, from time to time, reasonably require, for the better assuring, conveying, assigning, transferring, and confirming unto Secured Party the property and rights hereby granted, confirmed, pledged, assigned, and warranted or intended now or hereafter so to be, or which Debtor may be or may hereafter become bound to convey or assign to Secured Party, or for carrying out the intention or facilitating the performance of the terms of the Agreement or for complying with all applicable laws. Debtor, on demand, will execute and deliver and hereby authorizes Secured Party to execute in the name of Debtor or without the signature of Debtor to the extent Secured Party may lawfully do so, one or more financing statements, chattel mortgages or other instruments, to evidence or perfect more effectively the security interest of Secured Party in the Collateral. Debtor grants to Secured Party an irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to Secured Party hereunder. 13 Section 6.3 Amended Financing Statements. Debtor will execute and deliver to the Secured Party, prior to or contemporaneously with the effective date of any such change, any financing statement or change thereof required by the Secured Party to establish or maintain the validity, perfection and priority of the security interest granted herein. At the request of the Secured Party, Debtor shall execute a certificate in form satisfactory to the Secured Party listing the trade names under which Debtor intends to operate the Collateral, and representing and warranting that Debtor does business under no other trade name with respect to the Collateral. ARTICLE 7 - DEFAULT Section 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an event of default hereunder ("Event of Default"): (a) an Event of Default (as defined in the Reimbursement Agreement), under the Reimbursement Agreement or any of the other L/C Documents; (b) a default in the timely performance or observance of any covenant, obligation or liability contained herein and the continuance of such default beyond any applicable grace period; (c) any warranty, representation or statement made or furnished to Secured Party by or on behalf of Debtor, proves to have been false in any material respect when made or furnished; (d) sale, transfer, other disposition, pledge, hypothecation or encumbrance by Debtor of all or any portion of the Collateral in violation hereof or in violation of the terms of the Reimbursement Agreement, the Security Instruments, the Mortgage or any of the other L/C Documents; and (e) filing of any financing statement with regard to the Collateral, other than in favor of the Secured Party or in respect of Permitted Encumbrances; or attachment of any lien or security interest, except the security interest created hereby or in respect of Permitted Encumbrances, to any portion of the Collateral. 14 ARTICLE 8 - RIGHTS AND REMEDIES Section 8.1 Remedies. (a) Upon the occurrence of any Event of Default and at any time thereafter, Debtor agrees that Secured Party may declare the Obligations in whole or in part immediately due and payable and may enforce payment of the same and take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Debtor and in and to the Collateral, including, but not limited to the following, each of which may be pursued concurrently or otherwise, at such time and in such order as Secured Party may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Secured Party: (i) exercise any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, as amended from time to time, or any other applicable uniform commercial code, or any other statute or rule of law or equity or under the provisions of any third party agreement in favor of the Secured Party, all of which may be exercised successively or concurrently, including, without limiting the generality of the foregoing: (i) the right to take possession of the Collateral or any part thereof, and to take such other measures as Secured Party may deem necessary for the care, protection and preservation of the Collateral, and (ii) request Borrower at its expense to assemble the Collateral and make it available to Secured Party at a convenient place in San Juan (and which may be at the Hotel) acceptable to Secured Party; further, Secured Party may sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver the Collateral, or any part thereof, in one or more lots at public or private sale or sales, at any exchange, broker's board or at any of the Secured Party's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, with the right to the Secured Party upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Debtor, which right or equity is, to the extent permitted by law, hereby expressly waived or released. Any notice of sale, disposition or other intended action by Secured Party with respect to the Collateral sent to Borrower in accordance with the provisions hereof at least five (5) days prior to such action, shall constitute commercially reasonable notice to Borrower; and (ii) exercise all other rights and remedies of Secured Party under this Agreement and all other rights and remedies available to the Secured Party under applicable law. (b) Secured Party will give Debtor reasonable notice of the time and place of any public sale of the Collateral or of the time after which any private sale or other 15 intended disposition thereof is to be made. Expenses of retaking, holding, preparing for sale, selling, leasing or the like shall include Secured Party's reasonable attorney's fees and legal expenses. Secured Party shall be entitled to immediate possession of all books and records pertaining to any accounts or chattel paper covered by this Agreement and shall have the authority to enter upon any premises upon which any of the same may be situated and remove the same therefrom without liability. If, in the opinion of Secured Party, there is any question that a public sale or distribution of any Collateral will violate any state, commonwealth or federal securities law, Secured Party in its discretion (i) may offer and sell securities privately to purchasers who will agree to take them for investment purposes and not with a view to distribution and who will agree to the imposition of restrictive legends on the certificates representing the security, or (b) may sell such securities in an intrusted offering under Section 3(a)(11) of the Securities Act of 1933, and no sale so made in good faith by Secured Party shall be deemed to be not "commercially reasonable" because so made. The Debtor acknowledges and agrees that any private sale of the Collateral may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees, to the extent permitted by applicable law, that any such private sale shall be deemed to have been made in a commercially reasonable manner. To the extent permitted by the laws of the Commonwealth of Puerto Rico, in the event of a sale, by foreclosure, power of sale, or otherwise, of less than all of the Collateral, this Agreement shall continue as a lien and security interest on the remaining portion of the Collateral unimpaired and without loss of priority. Section 8.2 Application of Proceeds. After deducting all reasonable costs and expenses of every kind incurred by Secured Party or incidental to the care, safekeeping or otherwise of any and all of the Collateral, the purchase money, proceeds and avails of any disposition of the Collateral, or any part thereof, or any other sums collected by Secured Party pursuant to this Agreement or the Security Instruments, may be applied by Secured Party to the payment of the Debt in such priority and proportions as Secured Party in its discretion shall deem proper. Only after credit against the Obligations and after the payment by the Secured Party of any other amount required by any provision of law, including, without limitation, the Uniform Commercial Code, need the Secured Party account for the surplus, if any, to the Debtor. Section 8.3 Waiver of Rights Under Uniform Commercial Code; Deficiency. The Debtor hereby waives and agrees not to assert any rights or privileges that it may acquire under the Uniform Commercial Code, and the Debtor shall be liable for the deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay all amounts to which the Secured Party is entitled and the reasonable costs, fees and expenses of any attorney employed by the Secured Party to collect such deficiency. Section 8.4 Actions and Proceedings. After the occurrence and during the continuance of an Event of Default, Secured Party has the right to appear in and defend 16 any action or proceeding brought with respect to the Collateral and to bring any action or proceeding, in the name and on behalf of Debtor, which Secured Party, in its discretion, decides should be brought to protect its interest in the Collateral. Section 8.5 Other Rights, Etc. (a) No delay or failure of the Secured Party in the exercise of any right or remedy hereunder shall operate as a waiver thereof, and no single or partial exercise of any right or remedy hereunder shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action or forbearance by the Pledgee contrary to the provisions of this Agreement shall be construed to constitute a waiver of any of the express provisions hereof. The Secured Party may specifically waive any of the Secured Party's rights under this Agreement without invalidating the entire Agreement. Nothing herein contained, nor anything done or omitted to be done by the Secured Party pursuant hereto, shall be deemed a waiver by the Secured Party of any of its rights or remedies hereunder or under the Reimbursement Agreement or any of the other L/C Documents or under applicable law. (b) The rights of Secured Party under this Agreement shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Secured Party shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. Secured Party shall not be limited exclusively to the rights and remedies herein stated but shall be entitled to every right and remedy now or hereafter afforded at law or in equity. Section 8.6 Right to Release any Portion of the Collateral. Secured Party may release any portion of the Collateral for such consideration as Secured Party may require without, as to the remainder of the Collateral, in any way impairing or affecting the lien or priority of this Agreement, the Security Instruments, the Mortgage or any of the Other Security Documents, or improving the position of any subordinate lienholder with respect thereto, except to the extent that the obligations hereunder shall have been reduced by the actual monetary consideration, if any, received by Secured Party for such release, and may accept by assignment, pledge or otherwise any other property in place thereof as Secured Party may require without being accountable for so doing to any other lienholder. This Agreement shall continue as a lien and security interest in the remaining portion of the Collateral. Section 8.7 Violation of Laws. If the Collateral is not in compliance with applicable laws, Secured Party may impose additional reasonable requirements upon Debtor in connection herewith including, without limitation, monetary reserves or financial equivalents. Section 8.8 Right of Entry. Secured Party and its agents shall have the right upon prior written notice to enter and inspect the Collateral at all reasonable times upon notice to Debtor. 17 ARTICLE 9 - WAIVERS Section 9.1 Waiver of Counterclaim. Debtor hereby waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Secured Party arising out of or in any way connected with this Agreement. Section 9.2 Marshalling and Other Matters. Debtor hereby waives, to the extent permitted by law, the benefit of all appraisement, valuation, stay, extension, reinstatement and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale hereunder of the Collateral or any part thereof or any interest therein. Further, Debtor hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of this Agreement on behalf of Debtor, and on behalf of each and every person acquiring any interest in or title to the Collateral subsequent to the date of this Agreement and on behalf of all persons to the extent permitted by applicable law. Section 9.3 Waiver of Notice. To the extent permitted by applicable law, Debtor shall not be entitled to any notices of any nature whatsoever from Secured Party except with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Secured Party to Debtor and except with respect to matters for which Secured Party is required by applicable law to give notice, and Debtor hereby expressly waives the right to receive any notice from Secured Party with respect to any matter for which this Agreement does not specifically and expressly provide for the giving of notice by Secured Party to Debtor. Section 9.4 Sole Discretion of Secured Party; Wherever pursuant to this Agreement (a) Secured Party exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Secured Party, or (c) any other decision or determination is to be made by Secured Party, the decision of Secured Party to approve or disapprove all decisions that arrangements or terms are satisfactory or not satisfactory, and all other decisions and determinations made by Secured Party, shall be in the sole and absolute discretion of Secured Party and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. Section 9.5 Waiver of Trial By Jury. DEBTOR AND SECURED PARTY HEREBY KNOWINGLY, VOLUNTARILY, UNCONDITIONALLY, IRREVOCABLY AND INTENTIONALLY WAIVE ANY RESPECTIVE RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT AND ANY OF THE L/C DOCUMENTS, OR ANY 18 COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PERSON OR ANY EXERCISE BY ANY PARTY OF THEIR RESPECTIVE RIGHTS HEREUNDER OR UNDER THE L/C DOCUMENTS OR IN ANY WAY RELATING TO THE TRANSACTIONS CONTEMPLATED THEREBY (INCLUDING, WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT, AND ANY CLAIMS AND DEFENSES ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE); THIS WAIVER BEING A MATERIAL INDUCEMENT FOR THE SECURED PARTY TO ACCEPT THIS AGREEMENT AND TO ENTER INTO THE TRANSACTIONS CONTEMPLATED BY THE MODIFICATION AGREEMENT. ARTICLE 10 - NOTICES Section 10.1 Notices. All notices or other written communications hereunder shall be deemed to have been properly given (a) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof, (b) one (1) Business Day (defined below) after having been deposited for overnight delivery with any reputable overnight courier service, or (c) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Secured Party: Citicorp Real Estate, Inc. 399 Park Avenue New York, New York 10043 Attention: Jeffrey A. Warner Re: El Conquistador, Puerto Rico Facsimile No. (212) 793-6314 With a copy to: Citicorp/Citibank REILD 599 Lexington Avenue 20th Floor/Zone 1 New York, NY 10043 Attention: General Counsel Re: El Conquistador, Puerto Rico Facsimile No. (212) 793-6766 19 and with a copy to: Weil, Gotshal & Manges LLP 701 Brickell Avenue Suite 2100 Miami, Florida 33131 Re: El Conquistador, Puerto Rico Attention: Richard Morrison, Esq. Facsimile No. (305) 374-7159 If to Debtor: El Conquistador Partnership L.P. c/o Patriot American Hospitality, Inc. 590 Madison Avenue New York, NY 10022 Attention: William W. Evans, III Facsimile No. (212) 521-1482 With a copy to: Shack & Siegel, P.C. 530 Fifth Avenue New York, NY 10036 Attention: Pamela E. Flaherty, Esq. Facsimile No. (212) 730-1964 and with a copy to: El Conquistador Partnership L.P. 1000 El Conquistador Avenue Las Croabas, Fajardo, Puerto Rico 00738 Attention: General Manager Facsimile No. (787) 860-3200 or addressed as such party may from time to time designate by written notice to the other parties. Any party by notice to the other parties may designate additional or different addresses for subsequent notices or communications. For purposes of this Subsection, "Business Day" shall mean a day on which commercial banks are not authorized or required by law to close in the Commonwealth of Puerto Rico. 20 ARTICLE 11 - MISCELLANEOUS PROVISIONS Section 11.1 Choice of Law. THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PUERTO RICO AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS. Section 11.2 Provisions Subject to Applicable Law. All rights, powers and remedies provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Agreement invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. Section 11.3 Inapplicable Provision. If any term of this Agreement or any application thereof shall be invalid or unenforceable, the remainder of this Agreement and any other application of the term shall not be affected thereby. Section 11.4 Attorney's Fees for Enforcement. Debtor shall pay, on demand, any and all expenses, including legal expenses and reasonable attorneys' fees, incurred or paid by Secured Party in protecting its interest in the Collateral or in collecting any amount payable hereunder or in enforcing its rights hereunder with respect to the Collateral, whether or not any legal proceeding is commenced hereunder or thereunder and whether or not any default or Event of Default shall have occurred and is continuing, together with interest thereon at the Default Rate from the date paid or incurred by Secured Party until such expenses are paid by Debtor. Section 11.5 General Definitions. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided herein, words used in this Agreement may be used interchangeably in singular or plural form and the word "Debtor" shall mean "each Debtor and any subsequent owner or owners of the Collateral or any part thereof or any interest therein," the word "Secured Party" shall mean "Secured Party and any subsequent holder of the Obligations," the word "person" shall include an individual, corporation, limited liability company, partnership, trust, unincorporated association, government, governmental authority, and any other entity, the word "Collateral" shall include any portion of the Collateral and any interest therein, and the phrases "attorneys' fees" and "counsel fees" shall include any and all reasonable attorneys', paralegal and law clerk fees and disbursements, including, but not limited to fees and disbursements at the pre-trial, trial and appellate levels incurred or paid by Secured Party in protecting its interest in the Collateral and enforcing its rights under the this Agreement and the Other Security Documents. 21 Section 11.6 Headings, Etc. The headings and captions of various Sections of this Agreement are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. Section 11.7 No Oral Change. This Agreement and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Debtor or Secured Party, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. Section 11.8 Liability. If Debtor consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Agreement shall be binding upon the Debtor and its successors and assigns and shall inure to the benefit of the Secured Party and its successors and assigns. Section 11.9 Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. Section 11.10 Preference. To the extent that Secured Party receives any payment or proceeds of the Collateral for the Obligations, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Obligations or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by the Secured Party. Section 11.11 Cumulative Remedies. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently and are not exclusive of any right or remedy provided by law. Section 11.12 No Partial Release. The satisfaction or discharge of any part of the Obligations hereby secured shall not in any way satisfy or discharge this Agreement, but this Agreement shall remain in full force and effect so long as any of the Obligations remain outstanding. Section 11.13 Limitation of Liability. Neither Secured Party nor any of its officers, directors, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their gross negligence or willful misconduct. 22 Section 11.14 Indemnity. Debtor does hereby agree to indemnify Secured Party and to hold Secured Party harmless against and with respect to any and all liability, deficiency, damage, cost or expense resulting from any misrepresentation, material omission, breach of warranty or representation or non-fulfillment of any covenant or agreement on the part of Debtor under this Agreement, and any and all actions, suits, proceedings, demands, assessments, judgments, costs, legal and accounting fees and other reasonable expenses incidental to the foregoing indemnification. Section 11.15 Taxes. Should any documentary stamp or other tax now or hereafter become payable with respect to this Agreement or its execution or delivery, Debtor will promptly, following demand therefor, pay the same and hold Secured Party harmless from the cost of same. [THE REMAINDER OF THIS PAGE IS LEFT BLANK] 23 IN WITNESS WHEREOF, this Agreement has been executed by Debtor as of the day and year first above written. EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ---------------------------------- Larry M. Vitale Vice President 24 EX-10 14 EXHIBIT 10.11 ASSIGNMENT OF LEASES AND RENTS THIS ASSIGNMENT OF LEASES AND RENTS (this "Assignment") made as of the 3rd day of August, 1998, by EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, having an address at 1000 El Conquistador Avenue, Las Croabas, Fajardo, Puerto Rico 00738 ("Assignor"), to CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, New York 10043 ("Assignee"). W I T N E S S E T H : THAT Assignor for good and valuable consideration, receipt whereof is hereby acknowledged, hereby grants, transfers and assigns to Assignee the entire lessor's (or "owner's") interest in and to (i) the leases, concession agreements and other similar agreements identified in Exhibit "B" annexed hereto and made a part hereof, and (ii) all leases, concession agreements and other similar agreements affecting the use, enjoyment, or occupancy of all or any part of those certain lots or pieces of land, more particularly described in Exhibit "A" annexed hereto and made a part hereof, together with the buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter located thereon (hereinafter collectively referred to as the "Property"); TOGETHER WITH all of Assignor's interest as lessor ("owner") under all other leases, concession agreements and other agreements affecting the use, enjoyment or occupancy of the Property now or hereafter made by Assignor affecting the Property or any portion thereof, together with any extension, renewal, replacement or modification of the same; The leases, concession agreements and other agreements described above, together with all other present and future leases and present and future agreements and any extension, renewal, replacement or modification of the same are hereinafter collectively referred to as the "Leases"; TOGETHER WITH: (a) All of Assignor's interests in all deposits (whether for security or otherwise), rents, income, issues and profits arising from the Leases and renewals thereof and together with all rents, revenues, income, issues and profits (including all oil and gas or other mineral royalties and bonuses) from the use, enjoyment and occupancy of the Property whether paid or accruing before or after the filing by or against Assignor of any petition for relief under the Bankruptcy Code (hereinafter defined) (hereinafter collectively referred to as the "Rents"); (b) all of Assignor's claims and rights (the "Bankruptcy Claims") to (i) the payment of damages arising from any rejection by a lessee or concessionaire of any Lease under the Bankruptcy Code, 11 U.S.C. 'SS' 101 et seq., as the same may be amended (the "Bankruptcy Code") and (ii) any award or other payment which Assignor may hereafter become entitled to receive with respect to any Lease as a result of or pursuant to any bankruptcy, insolvency or reorganization or similar proceedings involving the lessee under such Lease; (c) all of Assignor's right, title and interest in and claims under any and all lease guaranties, letters of credit and any other credit support given by any guarantor in connection with any of the Leases (individually, a "Lease Guarantor," collectively, the "Lease Guarantors") to Assignor (individually, a "Lease Guaranty," collectively, the "Lease Guaranties"); and (d) all proceeds from the sale or other disposition of the Leases, the Rents, the Lease Guaranties and the Bankruptcy Claims. THIS ASSIGNMENT is made pursuant to the terms, conditions and provisions of that certain Letter of Credit and Reimbursement Agreement, dated as of February 7, 1991, by and between Assignor and The Bank of Tokyo-Mitsubishi, Ltd. (formerly known as the Mitsubishi Bank, Limited), acting through its New York Branch (as heretofore amended or modified and as the same is being assigned and amended, as of the date hereof, by that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Assignor, Assignee and certain other parties, the "Reimbursement Agreement"). All capitalized terms used herein, unless otherwise specifically defined herein, shall have the respective meanings assigned to such terms in the Reimbursement Agreement. The Reimbursement Amount and all other sums due and payable under the Reimbursement Agreement and each of the other L/C Documents are collectively referred to herein as the "Debt." ASSIGNOR WARRANTS that, except as disclosed in the rent roll for the Property delivered to and approved by Assignee, (a) Assignor is the sole owner of the entire lessor's interest in the Leases; (b) the Leases are valid and enforceable; (c) the terms of all alterations, modifications and amendments to the Leases are reflected in the certified rent roll delivered to and approved by Assignee; (d) none of the Rents reserved in the Leases have been assigned or otherwise pledged or hypothecated (except to Assignee and except for a second lien interest to GDB which is subordinate to the Assignee's interest); (e) none of the Rents have been collected for more than one (1) month in advance (provided that a security deposit shall not be deemed rent collected in advance); (f) the premises demised under the Leases have been completed and the tenants under the Leases have accepted the same and have taken possession of the same on a rent-paying basis except for those premises listed on Exhibit "D" attached hereto; (g) there exist no offsets or defenses to the payment of any portion of the Rents; (h) Assignor has received no notice from any tenant challenging the validity or enforceability of any Lease; (i) there are no agreements with the tenants under the Leases relating to the Property other than expressly set forth in each Lease; (j) no Lease contains an option to purchase, right of first refusal to purchase, or any other similar provision; (k) no person or entity has any possessory interest in, or right to occupy, the Property except under and pursuant to a Lease; (l) each Lease is subordinate to the Mortgage, the Reimbursement Agreement, this Assignment and the other L/C Documents, either pursuant to its terms, a recorded subordination agreement or by operation of law; and (m) no brokerage commissions or finders fees are due and payable regarding any Lease. ASSIGNOR COVENANTS with Assignee that, except as expressly permitted in the Reimbursement Agreement, Assignor (a) shall observe and perform all the obligations imposed upon the lessor under the Leases if the failure to perform or observe the same would materially and adversely affect the value of the Property taken as a whole and shall not do or permit to be done anything to impair the value of the Leases as security for the Debt; (b) shall promptly send copies to Assignee of all notices of default which Assignor shall send or receive thereunder; (c) shall enforce in a commercially reasonable manner all of the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed; (d) shall not collect any of the Rents more than one (1) month in advance (provided that a security deposit shall not be deemed rent collected in advance); (e) shall not execute any other assignment of the lessor's interest in the Leases or the Rents; (f) shall not (i) materially alter, modify or change the terms of the Leases without the prior written consent of Assignee, which consent shall not be unreasonably withheld or delayed if the alteration, modification or change does not materially and adversely affect the value of the Property taken as a whole and provided further that such Lease, as altered, modified or changed, is otherwise in compliance with the requirements of the Reimbursement Agreement, or (ii) cancel or terminate any Lease (except for defaults thereunder) or accept a surrender thereof or convey or transfer or suffer or permit a conveyance or transfer of the Land or of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of, lessees thereunder in each instance without the prior written consent of Assignee; (g) shall not alter, modify or change the terms of any Lease Guaranty or cancel or terminate such Lease Guaranty without the prior written consent of Assignee; and (h) shall not consent to any assignment of or subletting under the Leases not in accordance with their terms, without the prior written consent of Assignee. ASSIGNOR FURTHER COVENANTS with Assignee that (a) except as otherwise consented to by Assignee, all new Leases shall be written on the standard form of lease approved by Assignee; (b) Assignor shall furnish Assignee with copies of all executed Leases; (c) no material changes may be made to the Assignee-approved standard lease without the prior written consent of Assignee; (d) all proposed Leases and renewals of existing Leases shall be subject to the prior approval of Assignee except that any renewal of existing Leases in accordance with the terms of the Existing Leases and any proposed Lease or any renewal of an existing Lease which (i) is on the Assignee-approved form, subject only to commercially reasonable variations therefrom, (ii) is negotiated in an arms-length transaction with a third party not affiliated with Assignor, (iii) provides for rental rates and terms comparable to existing local market rates, (iv) is consistent with the current ordinary course of business at the Property, and (v) does not contain any terms which would materially affect Assignee's rights hereunder or under the Reimbursement Agreement or the other L/C Documents, shall not be subject to the prior approval of Assignee; and (e) all Leases executed after the date hereof shall provide that they are subordinate to the Mortgage and that the lessee agrees to attorn to Assignee. ASSIGNOR FURTHER COVENANTS with Assignee that (a) within ten (10) Business Days after entering into any new Lease, the Assignor shall (i) provide Assignee with a copy of such Lease and (ii) promptly execute and deliver to Assignee a confirmatory written assignment of such Lease together with any related bond, substantially in the form of Exhibit "C" annexed hereto and made a part hereof; (b) Assignor will execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Assignee may reasonably request in order (i) to perfect and protect the lien purported to be created hereby, (ii) to enable Assignee to exercise and enforce its rights and remedies hereunder, or (iii) to otherwise effect the purposes of this Assignment, including, without limitation, executing and delivering such other documents and taking all further action as may be necessary or desirable or that Assignee may reasonably request in order to perfect and preserve the lien purported to be created hereby or to enable Assignee to exercise and enforce its rights and remedies hereunder. THIS ASSIGNMENT is made on the following terms, covenants and conditions: GENERAL PROVISIONS 1. PRESENT ASSIGNMENT. Assignor does hereby assign to Assignee, as collateral security for the Debt, all of Assignor's right, title and interest in all current and future Leases and Rents, Lease Guaranties, and Bankruptcy Claims. Such assignment to Assignee shall not be construed to bind Assignee to the performance of any of the covenants, conditions or provisions contained in any such Lease or otherwise impose any obligation upon Assignee. Assignor agrees to execute and deliver to Assignee such additional instruments, in form and substance satisfactory to Assignee, as may hereafter be reasonably requested by Assignee to further evidence and confirm such assignment. Nevertheless, subject to the terms of this paragraph 1, until an Event of Default (as defined in the Reimbursement Agreement), Assignor shall have the right to operate and manage the Property and to collect the Rents and other sums due under the Lease Guaranties and Bankruptcy Claims and Assignor shall hold the Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims, or a portion thereof sufficient to discharge all current sums due on the Debt, in trust for the benefit of Assignee for use in the payment of such sums. Upon an Event of Default, this Assignment shall become an absolute assignment and Assignee shall immediately be entitled to possession of all Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims, whether or not Assignee enters upon or takes control of the Property. Assignee is hereby granted and assigned by Assignor the right, at its option, upon an Event of Default, to enter upon the Property in person, by agent or by court-appointed receiver to collect the Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims. Any Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims collected on or after an Event of Default may be applied toward payment of the Debt in such priority and proportions as Assignee in its discretion shall deem proper. 2. REMEDIES OF ASSIGNEE. (a) Upon or at any time after an Event of Default, Assignee may, at its option, without waiving such Event of Default, without notice and without regard to the adequacy of the security for the Debt, either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court, take possession of the Property and have, hold, manage, lease and operate the Property on such terms and for such period of time as Assignee may deem proper and either with or without taking possession of the Property in its own name, demand, sue for or otherwise collect and receive all Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims, including those past due and unpaid with full power to make from time to time all alterations, renovations, repairs or replacements thereto or thereof as may seem proper to Assignee and may apply the Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims to the payment of the following in such order and proportion as Assignee in its sole discretion may determine, any law, custom or use to the contrary notwithstanding: (a) all expenses of managing and securing the Property, including, without being limited thereto, the salaries, fees and wages of a managing agent and such other employees or agents as Assignee may deem necessary or desirable and all expenses of operating and maintaining the Property, including, without being limited thereto, all taxes, charges, claims, assessments, water charges, sewer rents and any other liens, and premiums for all insurance which Assignee may deem necessary or desirable, and the cost of all alterations, renovations, repairs or replacements, and all expenses incident to taking and retaining possession of the Property; and (b) the Debt, together with all costs and reasonable attorneys' fees and disbursements. In addition to the rights which Assignee may have herein, upon the occurrence of an Event of Default, Assignee, at its option, may require Assignor to vacate and surrender possession of the Property to Assignee or to such receiver and, in default thereof, Assignor may be evicted by summary proceedings or otherwise. For purposes of this paragraph 2, Assignor grants to Assignee its irrevocable power of attorney, coupled with an interest, to take any and all of the aforementioned actions and any or all other actions designated by Assignee for the proper management and preservation of the Property. The exercise by Assignee of the option granted it in this paragraph 2 and the collection of the Rents and all sums received pursuant to any Lease Guaranty and Bankruptcy Claims and the application thereof as herein provided shall not be considered a waiver by Assignee of any default by Assignor under the Reimbursement Agreement, this Assignment or the other L/C Documents. (b) Upon or at any time after the occurrence of an Event of Default, Assignee shall have the right in its own name or in the name of Assignor in respect of any claim, suit, action or proceeding relating to the rejection of any Lease, including, without limitation, the right to file and prosecute, to the exclusion of Assignor, any proofs of claim, complaints, motions, applications, notices and other documents, in any case in respect of the lessee under such Lease under the Bankruptcy Code. (c) If there shall be filed by or against Assignor a petition under the Bankruptcy Code, and Assignor, as lessor under any Lease, shall determine to reject such Lease pursuant to Section 365(a) of the Bankruptcy Code, then Assignor shall give Assignee not less than ten (10) days' prior notice of the date on which Assignor shall apply to the bankruptcy court for authority to reject the Lease. Assignee shall have the right, but not the obligation, to serve upon Assignor within such ten-day period a notice stating that (i) Assignee demands that Assignor assume and assign the Lease to Assignee pursuant to Section 365 of the Bankruptcy Code and (ii) Assignee covenants to cure or provide adequate assurance of future performance under the Lease. If Assignee serves upon Assignor the notice described in the preceding sentence, Assignor shall not seek to reject the Lease and shall comply with the demand provided for in clause (i) of the preceding sentence within thirty (30) days after the notice shall have been given, subject to the performance by Assignee of the covenant provided for in clause (ii) of the preceding sentence. 3. NO LIABILITY OF ASSIGNEE. Assignee shall not be liable for any loss sustained by Assignor resulting from Assignee's failure to let the Property after an Event of Default or from any other act or omission of Assignee in managing the Property after default unless such loss is caused by the willful misconduct, gross negligence or bad faith of Assignee. Assignee shall not be obligated to perform or discharge any obligation, duty or liability under the Leases or under or by reason of this Assignment and Assignor shall, and hereby agrees, to indemnify Assignee for, and to hold Assignee harmless from, any and all liability, loss or damage which may or might be incurred under the Leases or under or by reason of this Assignment and from any and all claims and demands whatsoever, including the defense of any such claims or demands which may be asserted against Assignee by reason of any alleged obligations and undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in the Leases. Should Assignee incur any such liability, the amount thereof, including costs, expenses and reasonable attorneys' fees and disbursements, together with interest thereon at the Default Rate (as defined in the Reimbursement Agreement) shall be secured hereby and by the L/C Documents and Assignor shall reimburse Assignee therefor immediately upon demand and upon the failure of Assignor so to do Assignee may, at its option, declare all sums secured hereby and the other L/C Documents immediately due and payable. This Assignment shall not operate to place any obligation or liability for the control, care, management or repair of the Property upon Assignee, nor for the carrying out of any of the terms and conditions of the Leases; nor shall it operate to make Assignee responsible or liable for any waste committed on the Property by the tenants or any other parties, or for any dangerous or defective condition of the Property, including, without limitation, the presence of any Hazardous Substances (as defined in the New Environmental Indemnity), or for any negligence in the management, upkeep, repair or control of the Property resulting in loss or injury or death to any tenant, licensee, employee or stranger. 4. NOTICE TO LESSEES. Assignor hereby authorizes and directs the lessees named in the Leases or any other or future lessees or occupants of the Property upon receipt from Assignee of written notice to the effect that Assignee is then the holder of the Reimbursement Obligations and that an Event of Default exists under the Reimbursement Agreement or under this Assignment, or the other L/C Documents, to pay over to Assignee all Rents and all sums under any Lease Guaranty and to continue so to do until otherwise notified by Assignee. Assignor hereby agrees that each such lessee and any other or future lessee and occupant may rely upon such written notice from Assignee to so pay the Rents and other sums without any inquiry into whether there exists a default hereunder or under the Reimbursement Agreement or the other L/C Documents or whether Assignee is otherwise entitled to the Rents and other sums. Assignor hereby waives any right, claim or demand which Assignor may now or hereafter have against any present or future lessee or occupant by reason of such payment of Rents and other sums to Assignee, and any such payment shall discharge such lessee's or occupant's obligation to make such payment to Assignor. Assignor hereby agrees that within thirty (30) days of execution of this Assignment and within ten (10) Business Days after entering into any future Lease, it shall provide all lessees named in the Leases or any other future lessees or occupants of the Property written notice of this Assignment in the form attached hereto as Exhibit "E" by mailing said written notice by certified mail, return receipt requested, to such Lessees or occupants and providing Assignee with evidence of receipt of said written notice. 5. OTHER SECURITY. Assignee may take or release other security for the payment of the Debt, may release any party primarily or secondarily liable therefor, may grant extensions, renewals or indulgences with respect thereto and may apply any other security held by it to the reduction or satisfaction of the Debt without prejudice to any of its rights under this Assignment. 6. OTHER REMEDIES. Nothing contained in this Assignment and no act done or omitted by Assignee pursuant to the power and rights granted to Assignee hereunder shall be deemed to be a waiver by Assignee of its rights and remedies under the Reimbursement Agreement or the other L/C Documents and this Assignment is made and accepted without prejudice to any of the rights and remedies possessed by Assignee under the terms thereof. The right of Assignee to collect the Debt and to enforce any other security therefor held by it may be exercised by Assignee either prior to, simultaneously with, or subsequent to any action taken by it hereunder. 7. NO MORTGAGEE IN POSSESSION. Nothing herein contained shall be construed as constituting Assignee a "mortgagee in possession" in the absence of the taking of actual possession of the Property by Assignee. In the exercise of the powers herein granted Assignee, no liability shall be asserted or enforced against Assignee (other than for gross negligence, bad faith or intentional misconduct), all such liability being expressly waived and released by Assignor and Assignee shall be obligated to account only for such Rents as are actually collected or received by Assignee. 8. INCORPORATION; CONFLICT OF TERMS. All terms, conditions and provisions of Exhibit D to the Reimbursement Agreement (prior to the substitution of such exhibit as provided in the Modification Agreement) are incorporated herein by reference as if fully set forth herein. In the event of a conflict between the terms of such Exhibit D and the terms of this Assignment, the terms of the document which shall enlarge the rights or remedies of Assignee, grant to Assignee greater financial security, or better insure the payment and performance in full of the Debt, shall control. Whenever possible, the provisions of this Assignment shall be deemed supplemental to and not in derogation of the other L/C Documents. 9. NO ORAL CHANGE. This Assignment and any provisions hereof may not be modified, amended, waived, extended, changed, discharged or terminated orally, or by any act or failure to act on the part of Assignor or Assignee, but only by an agreement in writing signed by the party against whom the enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 10. CERTAIN DEFINITIONS. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided herein, words used in this Assignment may be used interchangeably in singular or plural form and the word "Assignor" shall mean "each Assignor and any subsequent owner or owners of the Property or any part thereof or interest therein," the word "Assignee" shall mean "Assignee and any subsequent holder of the Reimbursement Obligations," the word "person" shall include an individual, corporation, partnership, trust, unincorporated association, government, governmental authority, and any other entity, the words "Property" shall include any portion of the Property and any interest therein; whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 11. NON-WAIVER. The failure of Assignee to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Assignment. Assignor shall not be relieved of Assignor's obligations hereunder by reason of (i) failure of Assignee to comply with any request of Assignor or any other party to take any action to enforce any of the provisions hereof, or of the Reimbursement Agreement, or the other L/C Documents, (ii) the release regardless of consideration, of the whole or any part of the Property, or (iii) any agreement or stipulation by Assignee extending the time of payment or otherwise modifying or supplementing the terms of this Assignment, the Reimbursement Agreement, or the other L/C Documents. Assignee may resort for the payment of the Debt to any other security held by Assignee in such order and manner as Assignee, in its discretion, may elect. Assignee may take any action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Assignee thereafter to enforce its rights under this Assignment. The rights of Assignee under this Assignment shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Assignee shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. 12. INAPPLICABLE PROVISIONS. If any term, covenant or condition of this Assignment is held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 13. DUPLICATE ORIGINALS. This Assignment may be executed in any number of duplicate originals and each such duplicate original shall be deemed to be an original. 14. GOVERNING LAW. This Assignment shall be governed and construed in accordance with the laws of the Commonwealth of Puerto Rico without regard to the principles of conflicts of laws. 15. TERMINATION OF ASSIGNMENT. Upon payment in full of the Debt and the delivery of the Note to Assignor, this Assignment shall become and be void and of no effect. 16. TRANSFER BY ASSIGNEE. No consent by Assignor shall be required for any assignment or reassignment of the rights of Assignee under this Assignment. All references to "Assignee" hereunder shall be deemed to include the assigns of Assignee. 17. EXCULPATION. Notwithstanding anything to the contrary contained in this Assignment, the liability of any general partner of Assignor to pay the Debt and for the performance of the other agreements, covenants and obligations contained herein and in the Reimbursement Agreement, and the other L/C Documents shall be limited as set forth in Section 14(t) of the Reimbursement Agreement. 18. NOTICES. All notices or other written communications hereunder shall be given and become effective as provided in the Reimbursement Agreement. THIS ASSIGNMENT, together with the covenants and warranties therein contained, shall inure to the benefit of Assignee and any subsequent holder of the Reimbursement Obligations and shall be binding upon Assignor, its successors and assigns and any subsequent owner of the Property. [THE REMAINDER OF THIS PAGE IS LEFT BLANK] IN WITNESS WHEREOF, Assignor has executed this instrument the day and year first above written. EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ----------------------------------- Larry M. Vitale Vice President STATE OF FLORIDA ) ) ss. COUNTY OF MIAMI-DADE ) The foregoing instrument was acknowledged before me this 2nd day of August, 1998, by Larry M. Vitale, as Vice President of Conquistador Holding, Inc., a Delaware corporation, a general partner of El CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, on behalf of said corporation, on behalf of said limited partnership. He is personally known to me or has produced a driver's license as identification. /s/ Olga L. Duque -------------------------------- Notary Public My commission expires: - ---------------------- EXHIBIT "A" [Property Description] EXHIBIT "B" [Leases and Other Agreements] EXHIBIT "C" [Letterhead of Assignor] [DATE] [Assignee's Name and Address] Gentlemen: The Leases listed in Annex A attached to this letter, copies of which Leases, bonds and guarantees and any related bond or guarantee are also attached hereto, are hereby assigned to you pursuant to the Assignment of Leases and Rents dated as of August 3, 1998 by the undersigned in favor of Citicorp Real Estate, Inc., its successors and assigns (the "Assignment Agreement"). All of the terms and conditions of the Assignment Agreement are incorporated herein by reference as if fully set forth herein. I hereby certify that the attached copies of the Leases are true and complete copies thereof and that such Leases are not subject to any prior lien other than the lien created by the Assignment Agreement. Very truly yours, EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By:___________________________ Name: Title: EXHIBIT "D" [List of Incomplete Premises] NONE EXHIBIT "E" [Form of Notice to Lessee] [DATE] [NAME AND ADDRESS OF CONCESSIONAL OR LESSEE] Attention: Re: [CONCESSION OR LEASE INFORMATION] Dear Sirs: Please take notice that all right, title and interest of EL CONQUISTADOR PARTNERSHIP L.P., as lessor under the [CONCESSION/LEASE] Agreement described above, have been assigned as collateral security to CITICORP REAL ESTATE, INC., as assignee, pursuant to an Assignment of Leases and Rents dated as of August 3, 1998. You may continue to make all payments under the Lease Agreement to EL CONQUISTADOR PARTNERSHIP L.P. until you otherwise receive notice from CITICORP REAL ESTATE, INC. that payment should thereafter be made as set forth in said notice. By executing in the spaces provided below in this document you hereby acknowledge the assignment hereby notified. EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By:___________________________ Name: Title: EX-10 15 EXHIBIT 10.12 ASSIGNMENT OF LICENSES, PERMITS AND CONTRACTS THIS ASSIGNMENT OF LICENSES, PERMITS AND CONTRACTS ("Assignment") is made as of the 3rd day of August, 1998, by EL CONQUISTADOR PARTNERSHIP, L.P., a Delaware limited partnership, having its principal place of business at 1000 El Conquistador Avenue, Las Croabas, Puerto Rico 00738 ("Assignor"), to CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, NY 10043 ("Assignee"). RECITALS: A. Assignee is the owner and holder of certain reimbursement obligations in the principal amount of $90,000,000 (collectively, the "Reimbursement Obligations") which are outstanding pursuant to a Letter of Credit and Reimbursement Agreement, dated as of February 7, 1991, by and between The Bank of Tokyo-Mitsubishi, Ltd. (f/k/a The Mitsubishi Bank, Limited) ("Mitsubishi") and the Assignor (as heretofore amended and as amended on the date hereof by the Modification Agreement (as hereinafter defined), the "Reimbursement Agreement"). B. The Reimbursement Obligations are secured, in part, by certain Collateral Pledge Agreements more particularly described in the Reimbursement Agreement (collectively, the "Security Instruments") and by certain other notes, deeds of mortgage, assignments, guaranties and other documents and instruments executed in connection with the Reimbursement Agreement (including the Modification Agreement) or otherwise with respect to the Reimbursement Obligations (collectively, the "Other Security Documents"). C. At the request of Assignor and pursuant to the terms of that certain Assignment and Modification Agreement, dated as of even date herewith, by and among the Assignee, the Assignor, Mitsubishi and certain other parties (the "Modification Agreement"), the term for payment of the Reimbursement Obligations is being extended and certain terms and provisions of the Reimbursement Agreement, the Security Instruments and the Other Security Documents, among other things, are being amended and modified at the request of the Assignor (the Reimbursement Agreement, the Security Instruments, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Reimbursement Obligations or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents"). D. Assignee requires as a condition to its entering into the Modification Agreement and modifying the Reimbursement Obligations that Assignor enter into this Agreement as additional security for all of Assignor's obligations under the Reimbursement Agreement, the Security Instruments and the other Loan Documents. AGREEMENT: For good and valuable consideration the parties hereto agree as follows: 1. Assignment of the Agreements. As additional collateral security for the Loan and the observance and performance by Assignor of the terms, covenants and conditions of the Reimbursement Agreement, the Security Instrument and the Other Security Documents on the part of Assignor to be observed or performed, Assignor hereby transfers, sets over and assigns to Assignee all of Assignor's right, title and interest in and to the Agreements. 2. Assignor's Covenants. Assignor hereby covenants with Assignee that during the term of this Assignment: (a) Assignor shall fulfill and perform each and every material term, covenant and provision of the Agreements to be fulfilled or performed by Assignor thereunder, if any, (b) Assignor shall, in the manner provided for in this Assignment, give prompt notice to Assignee of any notice of default received by Assignor under any of the material Agreements, together with a complete copy of any such notice, (c) Assignor shall enforce, short of termination thereof, the performance and observance of each and every material term, covenant and provision of the Agreements to be performed or observed, if any and (d) Assignor shall not terminate or amend any of the terms or provisions of any of the Agreements, except as may be permitted pursuant to the terms of the Agreements and done in the ordinary course of business, without the prior written consent of Assignee, which consent may be withheld by Assignee in Assignee's sole discretion. In the event Assignor has terminated an Agreement, Assignor may elect to enter into another Agreement containing terms and conditions no less favorable to Assignor than the terminated Agreement or elect not to enter into another Agreement, provided, however, that Assignor agrees to assume all obligations under the Agreement being terminated to the extent that such obligations are required to be performed in connection with the operations of the Property as presently being conducted. 3. Governing Law. This Assignment shall be deemed to be governed, construed, applied and enforced in accordance with the laws of the Commonwealth of Puerto Rico and the applicable laws of the United States of America. 4. Notices. All notices or other written communications hereunder shall be deemed to have been properly given and become effective as provided in the Reimbursement Agreement. 5. No Oral Change. This Assignment, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Assignor or Assignee, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 6. Liability. If Assignor consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Assignment shall be binding upon and inure to the benefit of Assignor and Assignee and their respective successors and assigns forever. 7. Inapplicable Provisions. If any term, covenant or condition of this Assignment is held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 8. Headings, etc. The headings and captions of various paragraphs of this Assignment are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 9. Duplicate Originals; Counterparts. This Assignment may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Assignment may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Assignment. The failure of any party hereto to execute this Assignment, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 10. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 11. Miscellaneous. (a) Wherever pursuant to this Assignment (i) Assignee exercises any right given to it to approve or disapprove, (ii) any arrangement or term is to be satis factory to Assignee, or (iii) any other decision or determination is to be made by Assignee, the decision of Assignee to approve or disapprove, all decisions that arrangements or terms are satis factory or not satisfactory and all other decisions and determinations made by Assignee, shall be in the sole and absolute discretion of Assignee and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. (b) Wherever pursuant to this Assignment it is provided that Assignor pay any costs and expenses, such costs and expenses shall include, but not be limited to, reasonable legal fees and disbursements of Assignee, whether retained firms, the reimbursement for the expenses of in-house staff or otherwise. IN WITNESS WHEREOF Assignor has executed this Assignment as of the date and year first written above. ASSIGNOR: EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership By: Conquistador Holding, Inc., a Delaware corporation, its general partner By: /s/ Larry M. Vitale ---------------------------------- Name: Larry M. Vitale Title: Vice President STATE OF FLORIDA ) ) ss. COUNTY OF MIAMI-DADE ) The foregoing instrument was acknowledged before me this 2nd day of August, 1998, by Larry M. Vitale, as Vice President of EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership, on behalf of the limited partnership. He is personally known to me or has produced a driver's license as identification. /s/ Olga L. Duque -------------------------------------------------- Notary Public My commission expires: - ---------------------- SCHEDULE A Description of Certain Agreements, Permits and Contracts EX-10 16 EXHIBIT 10.13 ASSIGNMENT OF MANAGEMENT AGREEMENT AND SUBORDINATION OF MANAGEMENT FEES THIS ASSIGNMENT OF MANAGEMENT AGREEMENT AND SUBORDINATION OF MANAGEMENT FEES ("Assignment") is made as of the 3rd day of August, 1998, by POSADAS DE PUERTO RICO ASSOCIATES, INCORPORATED, a Delaware corporation, having its principal place of business at 999 Ashford Avenue (Condado), Santurce, Puerto Rico 00902 ("Borrower"), to CITICORP REAL ESTATE, INC., a Delaware corporation, having an address at 599 Lexington Avenue, New York, NY 10043 ("Lender"), and is acknowledged and consented to by WILLIAMS HOSPITALITY GROUP INC. (formerly known as Posadas of America Central, Inc.), a Delaware corporation, having its principal place of business at 6063 East Isla Verde Avenue, Carolina, Puerto Rico 00979 ("Agent"). RECITALS: A. Borrower by its promissory note of even date herewith given to Lender (the note together with all extensions, renewals, modifications, consolidations, substitutions, replacements, restatements and increases thereof shall collectively be referred to as the "Note") is indebted to Lender in the principal sum of $55,000,000 in lawful money of the United States of America, with interest from the date thereof at the rates set forth in the Note (the indebtedness evidenced by the Note, together with such interest accrued thereon, shall collectively be referred to as the "Loan"), principal and interest to be payable in accordance with the terms and conditions provided in the Note and the Loan Agreement dated the date hereof between Borrower and Lender (the "Loan Agreement"). B. The Loan is secured by, among other things, a Mortgage Note Pledge and Security Agreement (the "Security Instrument"), with respect to certain Mortgage Notes and Mortgages (as such terms are defined in the Security Instrument), which Mortgages grant Lender a first lien on the property encumbered thereby (the "Property"). All and any of the documents other than the Note, the Security Instrument and this Assignment now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guarantee payment of the Note are referred to as the "Other Security Documents". The Note, the Loan Agreement, the Security Instrument, the Other Security Documents and each of the other documents evidencing, securing or otherwise relating to the Loan or any of the foregoing documents are hereinafter sometimes collectively referred to as the "Loan Documents". C. Pursuant to a certain Management Agreement dated as of September 23, 1983 between Borrower and Agent (the "Management Agreement") (a true and correct copy of which Management Agreement is attached hereto as Exhibit A), Borrower employed Agent exclusively to operate and manage the Property and Agent is entitled to certain management fees (the "Management Fees") thereunder, including without limitation all Incentive Management Fees and Basic Management Fees (both as defined in the Management Agreement). D. Lender requires as a condition to the making of the Loan that Borrower assign all of its rights in and to the Management Agreement as additional security for the Loan and that Agent subordinate its interest in the Management Fees in lien and payment to the Security Instrument as set forth below. AGREEMENT: For good and valuable consideration the parties hereto agree as follows: 1. Assignment of Management Agreement. (a) As additional collateral security for the Loan, Borrower hereby unconditionally transfers, sets over and assigns to Lender all of Borrower's right, title and interest in and to the Management Agreement, said transfer and assignment to automatically become a present, unconditional assignment, at Lender's option, upon the occurrence of an Event of Default (as hereinafter defined). (b) Assignment by Agent. As further additional collateral security for the Loan, Agent hereby unconditionally transfers, sets over and assigns to Lender all of Agent's right, title and interest in and to all permits, license agreements, operating contracts, licenses (including liquor, gaming and other licenses), franchise agreements and all management, service, supply and maintenance contracts and agreements, and any other agreements, permits or contracts of any nature whatsoever now or hereafter obtained or entered into by Agent on behalf of Borrower with respect to the operation, maintenance and administration of the Property (collectively, the "Agent Contracts"). 2. Subordination of Management Fees. The Management Fees and all rights and privileges of Agent to the Management Fees are hereby and shall at all times continue to be subject and unconditionally subordinate in all respects in lien and payment to the lien and payment of the Loan Documents and to any renewals, extensions, modifications, assignments, replacements, or consolidations thereof and the rights, privileges, and powers of Lender thereunder. 3. Termination. At such time as the Loan is paid in full and the Security Instrument is released or assigned of record, this Assignment and all of Lender's right, title and interest hereunder with respect to the Management Agreement shall terminate. Lender, at Borrower's expense, shall execute and deliver such instruments as Agent may reasonably request to evidence such termination. 4. Estoppel. Agent represents and warrants that (a) the Management Agreement is in full force and effect and has not been modified, amended or assigned with respect to the Property (other than the assignment to Scotiabank being terminated concurrently herewith), (b) except with respect to the payment of certain deferred Management Fees reflected in Borrower's financial statements, to the best of Agent's knowledge, neither Agent nor Borrower is in default under any of the terms, covenants or provisions of the Management Agreement with respect to the Property and Agent knows of no event which, but for the passage of time or the giving of notice or both, would constitute an event of default under the Management Agreement with respect to the Property, (c) neither Agent nor to Agent's knowledge, Borrower, has commenced any action or given or received any notice for the purpose of terminating the Management Agreement with respect to the Property and (d) the Management Fees and all other sums due and payable to the Agent under the Management Agreement have been paid in full with respect to the Property. 5. (a) Borrower's Covenants. Borrower hereby covenants with Lender that during the term of this Assignment: (i) Borrower shall not transfer the responsibility for the management of the Property from Agent to any other person or entity without prior written notification to Lender and the prior written consent of Lender, which consent may be withheld by Lender in Lender's sole discretion except that Lender shall not unreasonably withhold its consent to the transfer of the responsibility for management of the Property to an entity wholly owned by Wyndham International or Wyndham International Operating Partnership L.P. pursuant to a management agreement acceptable to Lender in its reasonable discretion and provided that Borrower and transferee shall execute and deliver to Lender any agreement in substantially the same form as this Assignment on or prior to such transfer and (ii) Borrower shall not terminate or amend any of the terms or provisions of the Management Agreement without the prior written consent of Lender, which consent may be withheld by Lender in Lender's sole discretion; and (iii) Borrower shall, in the manner provided for in this Assignment, give notice to Lender of any notice or information that Borrower receives which indicates that Agent is terminating the Management Agreement or that Agent is otherwise discontinuing its management of the Property. (b) Agent's Covenants. Agent hereby covenants with Lender that during the term of this Assignment, Agent shall not assign, pledge, sell or transfer the Agent Contracts to any party except to Borrower, which transfer to Borrower shall be subject to the assignment to Lender made by Agent herein. Further, Agent agrees as long as the Management Agreement remains in effect, to comply with the terms, covenants and provisions of all Agent Contracts and to keep all Agent Contracts in full force and effect to the extent necessary or desirable to the operation and management of the Property. 6. Agreement by Borrower and Agent. Borrower and Agent hereby agree that in the event of a default by Borrower (beyond any applicable grace period) under the Note, the Loan Agreement or any of the other Loan Documents ("Event of Default") during the term of this Assignment, at the option of Lender exercised by written notice to Borrower and Agent: (a) Agent shall not collect or be entitled to any Management Fees or other fee or commission due under the Management Agreement following termination thereof; and (b) Lender may exercise its rights under this Assignment and may immediately terminate the Management Agreement by written notice to the Agent that such Event of Default has occurred and that Lender elects to exercise its option under this Section 6 by reason thereof, and require Agent to transfer its responsibility for the management of the Property to Lender or to a management company selected by Lender in Lender's sole and absolute discretion. 7. Lender's Right to Replace Agent. In addition to the foregoing, in the event that (a) Agent becomes insolvent, or (b) an Event of Default occurs, Lender may exercise its rights under this Assignment and direct Borrower to terminate the Management Agreement and to replace Agent with a management company acceptable to Lender in Lender's sole and absolute discretion. 8. Receipt of Management Fees. Borrower and Agent hereby agree that Agent shall not be entitled to receive any Management Fees or other fee, commission or other amount payable to Agent under the Management Agreement for and during any period of time that any Event of Default has occurred and is continuing; provided, however, that Agent shall not be obligated to return or refund to Lender any Management Fees or other fee, commission or other amount already received by Agent prior to the occurrence of the Event of Default, and to which Agent was entitled under this Assignment. 9. Consent and Agreement by Agent. Agent hereby acknowledges and consents to this Assignment and agrees that Agent will act in conformity with the provisions of this Assignment and Lender's rights hereunder or otherwise related to the Management Agreement. In the event that the responsibility for the management of the Property is transferred from Agent in accordance with the provisions hereof (whether to a new management company retained by Borrower or after an Event of Default, to Lender or a new management company retained by Lender), Agent shall, and hereby agrees to, fully cooperate in transferring its responsibility and the Agent Contracts to Lender or a new management company, as applicable, and effectuate such transfer no later than thirty (30) days from the date the Management Agreement is terminated. Further, Agent hereby agrees (a) not to contest or impede the exercise by Lender of any right it has under or in connection with this Assignment; and (b) that it shall, in the manner provided for in this Assignment, give at least thirty (30) days prior written notice to Lender of its intention to terminate the Management Agreement or otherwise discontinue its management of the Property. 10. Intentionally Omitted. 11. Governing Law. This Assignment shall be deemed to be a contract entered into pursuant to the laws of the Commonwealth of Puerto Rico and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the Commonwealth of Puerto Rico, without regard to the principles of conflicts of laws. 12. Notices. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Borrower: Posadas de Puerto Rico Associates, Incorporated c/o Patriot America Hospitality, Inc. 590 Madison Avenue New York, NY 10022 Attention: William W. Evans, III Facsimile No. (212) 355-7772 With a copy to: Shack & Siegel, P.C. 530 Fifth Avenue New York, New York 10036 Attention: Pamela E. Flaherty, Esq. Facsimile No. (212) 730-1964 If to Lender: Citicorp Real Estate, Inc. 399 Park Avenue New York, New York 10043 Attention: Jeffrey A. Warner Reference: Condado Plaza, Puerto Rico Facsimile No.: (212) 793-6314 With a copy to: Citicorp/Citibank REILD 599 Lexington Avenue 20th Floor/Zone 1 New York, New York 10043 Attention: General Counsel Reference: Condado Plaza, Puerto Rico With a copy to: Weil, Gotshal & Manges LLP 701 Brickell Avenue Suite 2100 Miami, Florida 33131 Reference: Condado Plaza, Puerto Rico Attention: Richard A. Morrison, Esq. (BEO) Facsimile No.:(305) 374-7159 If to Agent: Williams Hospitality Group Inc. 6063 East Isla Verde Avenue Carolina, Puerto Rico 00979 Attention: President Facsimile No. (787) 791-7500 Wyndham International 1950 Stemmons Freeway, Suite 6001 Dallas, TX 75207 Attention: Carla Moreland, Esq. Facsimile No. (214) 863-1986 With a copy to: Shack & Siegel, P.C. 530 Fifth Avenue New York, New York 10036 Attention: Pamela E. Flaherty, Esq. Facsimile No. (212) 730-1964 or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Section 12, the term "Business Day" shall mean a day on which commercial banks are not authorized or required by law to close in the Commonwealth of Puerto Rico. Any party by notice to the others may designate additional or different addresses for subsequent notices or communications. 13. No Oral Change. This Assignment, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 14. Liability. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Assignment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 15. Inapplicable Provisions. If any term, covenant or condition of this Assignment is held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 16. Headings, etc. The headings and captions of various paragraphs of this Assignment are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 17. Duplicate Originals; Counterparts. This Assignment may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Assignment may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Assignment. The failure of any party hereto to execute this Assignment, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 18. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 19. Miscellaneous. (a) Wherever pursuant to this Assignment (i) Lender exercises any right given to it to approve or disapprove, (ii) any arrangement or term is to be satisfactory to Lender, or (iii) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Lender, shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. (b) Wherever pursuant to this Assignment it is provided that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, reasonable legal fees and disbursements of Lender, whether retained firms, the reimbursement for the expenses of in-house staff or otherwise. (c) Waiver of Trial by Jury. BORROWER AND AGENT HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS ASSIGNMENT OR ANY OTHER LOAN DOCUMENTS, OR IN RESPECT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTION OF ANY PARTY OR ARISING OUT OF ANY EXERCISE BY ANY PARTY OF ITS RESPECTIVE RIGHTS UNDER ANY SUCH LOAN DOCUMENTS OR IN ANY WAY RELATING TO THE PROPERTY (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO ANY ACTION TO RESCIND OR CANCEL THIS ASSIGNMENT, AND WITH RESPECT TO ANY CLAIM OR DEFENSE ASSERTING THAT THIS ASSIGNMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS ASSIGNMENT. (d) Borrower and Lender agree to cooperate in good faith to bifurcate any of the Agent Contracts that relate to a property other than the Property. [REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] IN WITNESS WHEREOF Borrower and Agent have executed this Assignment as of the date and year first written above. BORROWER: POSADAS DE PUERTO RICO ASSOCIATES, INCORPORATED, a Delaware corporation By: /s/ Larry M. Vitale ------------------------------------------- Larry M. Vitale Vice President AGENT: WILLIAMS HOSPITALITY GROUP INC., a Delaware corporation By: /s/ Larry M. Vitale ------------------------------------------ Name: Larry M. Vitale Title: Vice President STATE OF FLORIDA ) ) ss. COUNTY OF MIAMI-DADE ) The foregoing instrument was acknowledged before me this 2nd day of August, 1998, by Larry M. Vitale, as Vice President of POSADAS DE PUERTO RICO ASSOCIATES, INCORPORATED, a Delaware corporation, on behalf of the corporation. He is personally known to me or has produced a driver's license as identification. /s/ Olga L. Duque ------------------------------- Notary Public My commission expires: - ---------------------- STATE OF FLORIDA ) ) ss. COUNTY OF MIAMI-DADE ) The foregoing instrument was acknowledged before me this 2nd day of August, 1998, by Larry M. Vitale, as Vice President of WILLIAMS HOSPITALITY GROUP, INC., a Delaware corporation, on behalf of the corporation. He is personally known to me or has produced a driver's license as identification. /s/ Olga L. Duque -------------------------------- Notary Public My commission expires: - ---------------------- EXHIBIT A MANAGEMENT AGREEMENT EX-10 17 EXHIBIT 10.14 PROMISSORY NOTE $32,021,172.00 San Juan, Puerto Rico August 3, 1998 ON DEMAND for value received, the undersigned (the "Borrower") promises to pay to Posadas de Puerto Rico Associates, Inc., a Delaware corporation (the "Lender"), the aggregate sum of THIRTY TWO MILLION TWENTY ONE THOUSAND ONE HUNDRED AND SEVENTY TWO DOLLARS ($32,021,172.00), or such lesser amount as shall then remain unpaid, under this Note, with interest. The principal amount of this Note represents funds to be used by the Borrower to satisfy a portion of its payment obligation to The Bank of Tokyo-Mitsubishi, Ltd. and to pay costs and expenses associated therewith and to the refinancing thereof. This Note shall bear interest on the unpaid principal amount of this Note from time to time from the date hereof to the date of its repayment at the prime rate announced in New York City by The Chase Manhattan Bank, N.A., from time to time (the "Prime Rate"). Except as otherwise provided herein, such interest accrued during any quarter shall be payable on the first day of the following quarter and shall be computed on the outstanding principal amount on the basis of a year of three hundred sixty (360) days and for the number of actual days elapsed. The principal and interest payable by the Borrower to the Lender hereunder shall be paid only in accordance with Section 6.4 of the El Conquistador Partnership L.P. Joint Venture Agreement dated January 12, 1990, as amended, and shall be deemed an Additional Loan (as such term is defined in such agreement). The Borrower's obligations under this Note shall be junior, subject and subordinate in all respects to the Borrower's obligations owed to Citicorp Real Estate, Inc. ("CRE") under the Assignment and Modification Agreement dated as of August 3, 1998 among Borrower, CRE, and certain other parties and the Lender shall not, without the prior written consent of CRE in each instance until the Borrower's obligations under the Assignment and Modification Agreement have been satisfied in full, exercise any rights or remedies as a result of a default hereunder of the Borrower. This Note may be prepaid in whole or in part at any time and from time to time prior to the maturity hereof without premium or penalty, but with accrued interest on the principal amount prepaid to the date of prepayment. All payments received in respect of this Note shall be applied first to interest and then to principal. Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts in excess thereof shall be charged, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the Lender shall promptly refund such excess to the Borrower; provided, however, that, if lawful, any such excess shall be paid by the Borrower on behalf of the Lender as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. If this Note is not paid in full when due, the undersigned Borrower hereby agrees to pay all costs and expenses of collection including reasonable attorneys' fees and thereafter the unpaid balance hereunder shall bear interest at the Prime Rate plus 2%. This Note shall become immediately due and payable at the option of the Lender, without notice or demand, in the event that the Borrower is the subject of a voluntary or involuntary application for the appointment of a receiver or a petition filed under the Federal or local Bankruptcy Laws or the Borrower fails to make a payment when due and such failure shall continue for a period of ten (10) days. The undersigned Borrower and all endorsers hereof, jointly and severally waive presentment, demand for payment, notice of dishonor, notice of protest, and all other notices or demands in connection herewith and assent to any extension or postponement of the time of payment or other indulgence or release of any party, whether by operation of law or otherwise. No delay by the holder of this Note in exercising any power or right hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise; and no waiver whatever or modification of the terms hereof shall be valid unless set forth in writing and signed by the holder of this Note. No waiver shall be deemed a continuing waiver or waiver of any subsequent breach or default, whether of the same or similar or different nature, unless expressly so stated writing. This Note shall be governed by and construed in accordance with the substantive law of the Commonwealth of Puerto Rico. EL CONQUISTADOR PARTNERSHIP L.P. By: CONQUISTADOR HOLDING, INC., A General Partner By: /s/ Larry Vitale ----------------------------------- Name: Larry Vitale Title: Vice President 2 EX-10 18 EXHIBIT 10.15 LOAN AGREEMENT BY AND BETWEEN THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO AND EL CONQUISTADOR PARTNERSHIP, L.P. I N D E X
Article Page - ------- ---- I. INCORPORATION OF RECITALS............................................................ x II. DEFINITIONS.......................................................................II - 1 III. REPRESENTATIONS AND WARRANTIES...................................................III - 1 3.1 Partnership Existence; Compliance with Law.................... 1 3.2 Executive Offices............................................. 1 3.3 Subsidiaries.................................................. 2 3.4 Partnership Power; Authorization; Enforceable Obligations..... 2 3.5 Omitted....................................................... 2 3.6 Financial Information to Lender............................... 2 3.7 No Litigation................................................. 3 3.8 No Default.................................................... 3 3.9 Investment Company Act........................................ 4 3.10 Margin Regulations............................................ 4 3.11 Taxes......................................................... 5 3.12 Use of Loan Proceeds.......................................... 5 3.13 Omitted....................................................... 5 3.14 Reportable Event.............................................. 5 3.15 Environmental Matters......................................... 6 3.16 Condemnation.................................................. 6 3.17 Labor Matters................................................. 7 3.18 Other Ventures................................................ 7 3.19 No Contract Cancellations..................................... 7 3.20 Liens......................................................... 7 3.21 Omitted....................................................... 7 3.22 Sufficiency of Funds.......................................... 8 3.23 Title to Property............................................. 8 3.24 Possession of Premises........................................ 8 3.25 Utilities and Streets......................................... 8 3.26 General....................................................... 8 3.27 Survival of Warranties; Representations....................... 9 - i - IV. AMOUNT AND TERMS OF LOANS................................................IV - 1 4.1 Of the Interim Loans.......................................... 1 4.2 Of the Term Loan.............................................. 3 4.3 GDB Escrow.................................................... 5 4.4 Maximum Interest Rate......................................... 7 4.5 Release Provisions............................................ 8 4.6 Subordination and Standstill Agreement........................ 8 V. SECURITY..................................................................V - 1 5.1 The Security.................................................. 1 5.2 Preservation of Security...................................... 3 5.3 Non Recourse Obligations...................................... 3 VI. CONDITIONS PRECEDENT FOR INITIAL DISBURSEMENT........................... VI - 1 6.1 Conditions.................................................... 1 (a) Title to Premises.............................. 1 (b) Payment of Fee................................. 1 (c) Collateral..................................... 1 (d) Equity Contribution............................ 1 (e) Financial Information.......................... 1 (f) Appraisal...................................... 1 (g) Survey......................................... 1 (h) Environmental Report........................... 2 (i) Budget......................................... 2 (j) Special Report................................. 2 (k) Insurance...................................... 2 (l) Title Insurance................................ 3 (m) Contractor's Insurance......................... 3 (n) Utility Facilities............................. 3 (o) Construction Documents......................... 3 (p) Bonds.......................................... 4 (q) Construction Schedule.......................... 4 (r) Construction Permit............................ 4 (s) Plans and Specifications....................... 4 (t) Taxes.......................................... 4 (u) Federal Taxes.................................. 5 (v) Labor Contributions............................ 5 (w) Partnership Agreement.......................... 5 (x) Counsel Opinion................................ 5 VII. CONDITIONS PRECEDENT FOR ALL LOANS AND DISBURSEMENT REQUIREMENTS AND PROCEDURES..........................................................VII - 1 7.1 .............................................................. 1 - ii - VIII. AFFIRMATIVE COVENANTS .................................................VIII - 1 8.1 Application of Loan Proceeds.................................. 1 8.2 Books and Records............................................. 1 8.3 Financial Information......................................... 1 8.4 Construction Development of the Project....................... 2 8.5 Effectiveness of Permits; Approvals........................... 2 8.6 Access by Lender.............................................. 2 8.7 Maintain Rights; Franchises................................... 3 8.8 Filing of Tax Returns......................................... 3 8.9 Estoppel Certificates......................................... 3 8.10 Correctness of Representations; Warranties.................... 3 8.11 Maintenance of Existence and Conduct of Business.............. 4 8.12 Payment of Obligations........................................ 4 8.13 Agreements.................................................... 5 8.14 Litigation.................................................... 5 8.15 Insurance..................................................... 5 8.16 Compliance with Law........................................... 12 8.17 Supplemental Disclosure....................................... 12 8.18 Recording; Transfer Taxes and Fees............................ 13 8.19 Preservation of the Properties................................ 13 8.20 Environmental Matters......................................... 14 8.21 Notice........................................................ 15 8.22 Deficiency Loans.............................................. 16 8.23 Certification of Substantial Completion....................... 18 8.24 Permits and Licenses.......................................... 18 8.25 Of the Project................................................ 18 8.26 Deposit of Escrow Requirement................................. 20 8.27 Interest Rate Swap............................................ 20 8.28 Expropriation................................................. 20 IX. NEGATIVE COVENANTS........................................................IX- 1 9.1 Consent of Lender............................................. 1 X. EVENTS OF DEFAULT; RIGHTS AND REMEDIES....................................X - 1 10.1 Events of Default............................................. 1 10.2 Remedies...................................................... 4 10.3 Waiver of Defaults............................................ 6 10.4 Waivers by Borrower........................................... 6 10.5 Right of Set-Off.............................................. 6 10.6 Control....................................................... 7 XI. MISCELLANEOUS............................................................XI - 1 11.1 No Agency Relationship........................................ 1 11.2 Liability..................................................... 1 - iii - 11.3 Indemnity of Lender........................................... 2 11.4 Damage or Destruction......................................... 4 11.5 Taking of the Mortgaged Property.............................. 8 11.6 Application of Proceeds Upon Casualty or Substantial Taking .. 10 11.7 Complete Agreement; Modification of Agreement................. 11 11.8 Fees and Expenses............................................. 12 11.9 No Waiver by Lender........................................... 13 11.10 Remedies...................................................... 13 11.11 Parties....................................................... 13 11.12 Conflict of Terms............................................. 14 11.13 Authorized Signatories........................................ 14 11.14 Notices....................................................... 14 11.15 Captions...................................................... 16 11.16 Exhibits and Schedules........................................ 16 11.17 Omitted....................................................... 16 11.18 Governing Law and Venue....................................... 16 11.19 Severability.................................................. 16 11.20 Entire Agreement.............................................. 17 11.21 Survival of Representations................................... 17 11.22 GDB's Consent................................................. 18 11.23 Reliance by Lender............................................ 18 EXHIBITS A. Description of Premises B. Description of Condominium Parcels C. Secured Promissory Note D. Request for Disbursement E. Disbursement Schedule F. Escrow Agreement
- iv - LOAN AGREEMENT This AGREEMENT, entered into in the city of San Juan, Commonwealth of Puerto Rico, this 7th day of February, 1991 by and between: THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO, (hereinafter indistinctively "GDB" or "LENDER," a banking institution of the Government of the Commonwealth of Puerto Rico, created by Act 17 enacted on September 23, 1948, with principal offices in San Juan, Puerto Rico, represented herein by its Executive Vice President, MR. GEORGE B. WILSON, of legal age, married, an executive and resident of San Juan, Puerto Rico; and EL CONQUISTADOR PARTNERSHIP, L.P., (hereinafter "THE BORROWER"), a limited partnership organized and existing under the laws of the State of Delaware, duly qualified and authorized to do business in and within the Commonwealth of Puerto Rico, herein represented by its Partners, KUMAGAI CARIBBEAN, INC., a corporation organized and existing under the laws of the State of Texas, duly qualified and authorized to do business in and within the Commonwealth of Puerto Rico, and by WKA EL CON ASSOCIATES, a general partnership organized and existing under the laws of the State of New York, such Partners in turn herein respectively represented by MR. SHUNSUKE NAKANE, who is of legal age, married, an executive and resident of San Juan, Puerto Rico, and by MR. NORMAN JULES MENELL, who is of legal age, married, and executive and resident of Sarasota, Florida. W I T N E S S E T H: WHEREAS, the Borrower is the owner and holder of the fee simple title ("PLENO DOMINIO") to that certain real estate (hereinafter referred to as "THE PREMISES", more fully described in EXHIBIT "A", which is attached hereto and made a part hereof by reference; and WHEREAS, the Borrower proposes to construct the Project (as hereafter defined) on the Premises and has requested and applied to GDB for loans ("LOANS") aggregating TWENTY FIVE MILLION DOLLARS ($25,000,000.00) to be used for financing part of the Improvements (as hereafter defined); and the parties desire to execute this Agreement to set forth the terms and conditions of their agreements in the premises; NOW, THEREFORE, in consideration of the premises and of the mutual and separate agreements, pledges, covenants and warranties of the parties hereto, and for other good and valuable considerations, it is agreed, covenanted, and warranted by the parties as follows: ARTICLE 1 INCORPORATION OF RECITALS 1.1 Incorporation of Recitals. The foregoing preambles and all other recitals set forth are made a part of this Agreement. ARTICLE 2 DEFINITIONS 2.1 The following terms as used herein shall have the following meanings: "AGREEMENT" shall mean the this Loan Agreement, including all amendments, modifications and supplements hereto and any appendices, exhibits or schedules to any of the foregoing, and shall refer to this Agreement as the same may be in effect at the time such reference becomes operative. "AFICA" shall mean the Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority. "AMK" shall mean AMK Conquistador, S.E., a Puerto Rico special partnership. "ANNUAL AGENTS FEE" shall have the meaning assigned in the Letter of Credit and Reimbursement Agreement. "ANNUAL LETTER OF CREDIT FEE" shall have the meaning assigned in the Letter of Credit and Reimbursement Agreement. "ANDREWS FAMILY" shall mean Hugh A. Andrews, his spouse and children. "ARPE" shall mean the Administration of Regulations and Permits of the Commonwealth of Puerto Rico. "APPRAISAL" shall mean an appraisal in narrative form, assuming the Improvements are completed in accordance with the Plans, prepared by Pannell, Kerr & Forster for the Bank at Borrower's sole cost and expense setting forth a fair market value of the Premises as so completed. II - 2 "ARCHITECTS" shall mean Ray, Melendez and Associates, or any successors engaged by Borrower with the prior written consent of Lender. "ARCHITECTS' AGREEMENTS" shall mean those certain agreements between Borrower and Architects, and Borrower and Consultant and Designers, relating to the design of the Improvements and providing for architectural services in connection with the construction of the Improvements, as more specifically identified in Exhibit "A" to the Assignment Agreement. "ASSIGNMENT" or "ASSIGNMENT AGREEMENTS" shall mean the assignments to be made by Borrower in favor of Lender pursuant to Article Five hereof. "BANK" shall mean The Mitsubishi Bank, Limited, acting through its New York Branch, its successors and assigns, a successor letter of credit Bank or a lender providing refinancing for the loan evidenced by the Bank Loan Documents. "BANK COVERAGE REQUIREMENT" shall mean that either (i) the Net Earnings for the 24 full calendar-month period next preceding the date of determination has been an amount not less than the Annual Debt Service for such 24 full calendar-month period multiplied by 1.30 or (ii) the Net Earnings for the 12 full calendar-month period next preceding the date of determination has been an amount not less than the Annual Debt Service for such 12 full calendar-month period multiplied by 1.50. "BANK'S CONSULTANT" shall mean Merritt & Harris, Inc. or such other Person or architectural or engineering consultant as may be designated and engaged by the Bank, at Borrower's expense, to examine the Budget and the Plans, any changes thereto, and cost breakdowns and estimates with respect to the Project (including, without limitation, all cost breakdowns and estimates set forth in any Request for Disbursement and all accompanying II - 3 certifications), to make periodic inspections of the progress of the Construction of the Improvements on behalf of the Bank and the Lender, to advise and render reports to the Bank and the Lender concerning the foregoing and to otherwise consult with the Bank and the Lender with respect to the Project. "BANK'S CONSULTANT'S REPORT" shall mean a report by the Bank's Consultant (i) to the effect that all of the work related to Construction of the Project has been completed in a good and workmanlike manner, substantially in accordance with the Plans and the Construction Schedule and in compliance with the Legal Requirements, (ii) stating whether the work which is the basis of the applicable Request for Disbursement has been completed within the applicable Line Item therefor, (iii) stating whether the undisbursed amount of the Loan and amounts available under the Bank Loan Documents allocable to the Construction of the Improvements in accordance with the Plans, (iv) stating that ownership to all material and fixtures incorporated in the Construction of the Improvements and all materials stored on-site or off-site or in fabrication which are included in any Request for Disbursement shall vest in the Borrower immediately upon delivery thereof to the Project, and (v) addressing such other matters reasonably requested by Lender to be addressed therein. "BANK LOAN DOCUMENTS" shall have the meaning assigned in the Subordination and Standstill Agreement. "BUDGET" shall mean a budget prepared by Borrower setting forth Total Project Costs in detail satisfactory to Lender (including a detailed trade breakdown of such costs and II - 4 specifying Hard Costs and Soft Costs), as such Budget may be amended, modified or supplemented from time to time pursuant to the terms of the Bank Loan Documents. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day on which banks in San Juan, Puerto Rico, New York City, or London are authorized or required by law or executive order to close. "CASUALTY" shall mean any damage to or destruction of the Mortgaged Property, or any portion thereof. "CHARGES" shall mean all federal, state, county, city, municipal, local, or other governmental charges, taxes, assessments, user fees and expenses, levies and similar charges applicable to Puerto Rico and the United States and all levies, assessments or charges including assessments, user fees and charges, utilities and those imposed by any other Person upon or relating to (i) the Security, (ii) Borrower's withholding obligations in relation to payroll, income or gross receipts, (iii) Borrower's ownership or use of the Premises, or (iv) any other aspect of Borrower's businesses. "CLOSING" shall mean the execution and delivery of this Agreement and all other Loan Documents, which Closing shall take place at the office of Lender at the address set forth in the beginning of this Agreement, or at such other places as the parties may choose. "CLOSING DATE" shall mean February 7th, 1991, by which date the Closing shall have occurred. II - 5 "COLLATERAL" shall mean all of the property, real or personal, tangible or intangible, and all rights thereto, pledged, mortgaged or hypothecated pursuant to the Security Documents. "COMMITMENT" shall have the meaning assigned to it in Article Four hereof. "COMMONWEALTH" shall mean the Commonwealth of Puerto Rico and its political subdivisions, municipalities, agencies and instrumentalities. "COMPENSATION" shall mean, with respect to any Person, all payments and accruals commonly considered to be compensation, including, without limitation, all wages, salary, deferred payment arrangements, bonus payments and accruals, profit sharing arrangements, payments in respect of stock options or phantom stock options or similar arrangements, stock appreciation rights or similar rights, incentive payments, pension or employment benefit contributions or similar payments, made to or accrued for the account of such Person or otherwise for the direct or indirect benefit of such Person. "COMPLETION DATE" shall mean the date of Substantial Completion of the Project which shall not be later than October 15, 1992, provided, however, that the Completion Date may be extended by the Borrower to April 15, 1993, for any reason whatsoever, and, in the event of Unavoidable Delay, the Completion Date may be extended by the Borrower to October 15, 1993. "CONDOMINIUM PARCELS" shall mean the approximately 20-acre portion of land shown on Exhibit "B" annexed hereto, which Condominium Parcels have or are to be released from the GDB Mortgage in one or more segments. II - 6 "CONDOMINIUM REVENUES" shall mean revenues derived by Borrower from the Condominium Units through (i) the rental of the Condominium Units, (ii) the use of the Premises by the occupants of the Condominium Units, and (iii) the right of such occupants to use the Premises. "CONDOMINIUM UNITS" shall mean up to 150 residential condominium units that may be developed and construed on the Condominium Parcels. "CONSTRUCTION or CONSTRUCT", when used with reference to the Project, shall mean construction, renovation or development of the Improvements or any portion thereof, the cost of which are included in the Budget as Hard Costs. "CONSTRUCTION DOCUMENTS" shall mean, collectively, the Construction Management Agreement, the Architect's Agreements, all Trade Contracts and all other agreements to which Borrower is party or beneficiary pertaining to the Construction of the Improvements. "CONSTRUCTION MANAGEMENT AGREEMENT" shall mean that certain agreement between Borrower and the Construction Manager dated as of January 12, 1990 and amended by First Amendment thereto dated as of September 30, 1990 or any permitted Amendments providing for the construction of the Improvements upon the terms and conditions set forth therein. "CONSTRUCTION MANAGER" shall mean KGCC or any successor engaged by Borrower with the prior written consent of the Bank. II - 7 "CONSULTANTS AND DESIGNERS" shall mean Edward D. Stone, Jr. and Associates, Inc. and Jorge Rosello Associates, and or any successors engaged by Borrower with the prior written consent of Lender. "CONVERSION DATE" shall have the meaning given in paragraph 4.1(d) of this Agreement. "COVERAGE REQUIREMENT" shall mean that the Net Earnings for the preceding 24 month period is an amount not less than 1.30 times the preceding 24 month Debt Service. "DEBT SERVICE" shall mean for any period for which Debt Service is being determined, the sum of (i) any interest paid or payable under the loan extended to Borrower by AFICA at the Bond Fixed Rate, as defined under the Bank Loan Documents, with respect to such period (or to the extent the Bond Fixed Rate is inapplicable to any portion of such loan, at the rate provided for with respect to such portion of such loan), (ii) interest paid or payable under the GDB Loan at the rate herein provided with respect to such period or, to the extent interest swap arrangements are in place with respect to the GDB Loan, at the GDB Fixed Rate with respect to such period, (iii) Annual Agents Fee and the Annual Letter of Credit Fee payable with respect to such period, and (iv) any fees arising in connection with the loan under the Bank Loan Documents and/or the GDB Loan which are payable with respect to such period. "DEBTOR RELIEF LAWS" shall mean the Bankruptcy code of the United States of America, as amended from time to time, any bankruptcy or debtor relief laws provided by the laws of Puerto Rico, and all other applicable liquidation, conservatorship, bankruptcy, II - 8 moratorium, rearrangement, receivership, insolvency, reorganization or similar debtor relief laws from time to time in effect affecting the Rights of creditors generally. "DEFAULT" or "EVENT OF DEFAULT" shall have the meaning defined in Article Ten hereof. "DISBURSEMENT" shall mean each disbursement of all or any of the proceeds of the Loan. "DOLLARS" or the sign "$" shall mean dollars in the lawful currency of the United States of America. "ENVIRONMENTAL LAWS" shall mean all present or future, federal, commonwealth and local laws, including statutes, regulations, ordinances, codes, rules and other governmental restrictions and requirements, currently or hereafter in effect, whether arising under the laws of the United States or Puerto Rico, relating to the discharge of air pollutants, water pollutants or process waste water or otherwise relating to the environment or Hazardous Materials that are or may be applicable, in any way, to the Project, including any such restrictions or requirements by the department of natural resources or environmental protection agency now or at any time hereafter in effect. "ENVIRONMENTAL REPORT" shall mean an environmental report relating to the Premises and the Improvements, addressed to GDB and the Bank, which report shall include, without limitation, geological, soil and hazardous waste evaluations, prepared at Borrower's sole cost and expense by a certified engineering and testing company, or by a firm of environmental consultants acceptable to GDB and the Bank. II - 9 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ESCROW AGREEMENT" or "GDB ESCROW" shall mean the Escrow Agreement under which Borrower will deposit funds in escrow with a banking institution mutually acceptable to Borrower and Lender, such funds to be pledged solely for the benefit of Lender as provided in Article 4.3 hereof. "FAJARDO PROPERTY" shall mean approximately 220 acres of land located in Fajardo Puerto Rico, as more particularly described in the GDB Mortgage. "FINANCIAL INFORMATION" shall mean the financial information required under the Agreement to be furnished by Borrower to Lender, all such information prepared in accordance with generally accepted accounting principles (GAAP), as appropriate. "FISCAL YEAR" shall mean the twelve month period (or shorter period with respect to the First Fiscal Year within the term hereof) that ends on March 31st of any given year. Subsequent changes of the fiscal year of Borrower shall not change the term "Fiscal Year", unless the Bank shall consent in writing to such changes, which consent shall not be unreasonably denied. "GDB" shall mean the Government Development Bank of Puerto Rico. "GDB BASE RATE" shall mean for the first eight years of the term of the GDB Loan an interest rate equal to the Libor Rate less 50 basis points, and thereafter, as negotiated between Lender and Borrower to reflect changes in Lender's cost of funds. II - 10 "GDB ESCROW AGENT" or "ESCROW AGENT" shall mean the financial institution which will serve as Escrow Agent for the GDB Escrow. "GDB LEASEHOLD MORTGAGE" shall mean a second leasehold mortgage in the principal amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) encumbering the Palominos Island Property. "GDB LOAN " shall mean a loan by GDB to Borrower in the aggregate principal amount of $25,000,000 to be used by Borrower to finance a portion of the Total Project Costs, pursuant to the terms and conditions set forth in this Agreement. "GDB MORTGAGE" shall mean the mortgage, deed of trust or similar security agreement in form reasonably satisfactory to GDB, made or to be made by Borrower upon the Premises, to be encumbered in favor of GDB to secure the payment of the GDB Loan, creating a second priority Lien on the Premises, more particularly a second mortgage in the principal amount of $25,000,000.00, encumbering the Premises, including all buildings, improvements, fixtures and personal property presently located thereon and all buildings and improvements to be erected and constructed thereon and all fixtures and personal property owned by Borrower to be placed therein. "GDB MORTGAGE NOTE" shall mean the mortgage note in the amount of $25,000,000 secured by the GDB Mortgage, and the leasehold mortgage note in the amount of $500,000 secured by the GDB Leasehold Mortgage. "GDB STANDSTILL AGREEMENT" shall mean the Subordination and Standstill Agreement, dated as of the date hereof, between GDB and the Bank. II - 11 "GENERAL PARTNER" shall mean either Kumagai Caribbean, Inc. ("KGC") or WKA El Con Associates ("WKA"), the sole general partners of Borrower (KGC and WKA together being the GENERAL PARTNERS). "GOVERNMENT AUTHORITY" shall mean any court, agency, authority, board (including, without limitation, any environmental protection, planning or zoning board), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States, the Commonwealth of Puerto Rico, any State of the United States, or the Municipality of Fajardo, whether now or hereafter in existence, having jurisdiction over Borrower and/or Project. "GROSS REVENUES" shall mean, for any period with respect to which Gross Revenues are being determined, all revenues of any kind received by Borrower from the ownership and operation of the Premises for such period, including, without limitation, room, food and beverage, and other facility revenues, Condominium Revenues, casino revenues, rentals or other payments for leases and concession agreements, annual dues for golf memberships, revenues derived from the resale of golf memberships, the proceeds of any business interruption insurance, and, except as provided below, all revenues received by Borrower from all other activities of the Premises less in each case actual refunds made to customers, guests, or patrons. Gross Revenues shall not include the proceeds of the sale of the Condominium Units, revenues derived from the initial sale of golf memberships, tips, service charges added to a customer bill or statement in lieu of gratuities which are payable to employees of the Project, value of complimentary rooms, food and beverages, except those purchased by the Casino, and any sales II - 12 or other use or excise tax required by law to be collected with respect to the operations of the Premises and remitted to taxing authorities. "HARD COSTS" shall mean, collectively, the costs and expenses and items thereof set forth in the Budget as Hard Costs with respect to the acquisition of the Project and with respect to supplying goods, services, materials and labor for the Construction of the Project. "HAZARDOUS MATERIAL" shall mean asbestos, polychlorinated biphenyls, petroleum products and any other substance or material that, whether by its nature or use, is now or hereafter defined as hazardous waste, hazardous substance, pollutant or contaminant under any Environmental Law, or which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or hereafter regulated under any Environmental Law. "HOSPITALITY" shall mean Hospitality Investor Group, S.E., a Puerto Rico special partnership. "IMPROVEMENTS" shall mean the improvements to be renovated or constructed on the Premises pursuant to the Plans, consisting of approximately 750 guest rooms, approximately 50,000 square feet of meeting space (including prefunctionary space) six restaurants, approximately 13,000 square feet of retail space, an approximately 10,000 square feet casino, a marina, approximately 100,000 square feet of swimming pools and water features, an 18-hole golf course, an approximately 40,000 square feet clubhouse and spa facility, eight tennis courts, water sports facilities on the Palominos Island Property and related amenities and facilities. II - 13 "INCHOATE LIEN" means any lien for taxes not yet due and payable, mechanic's Lien and materialmen's Lien, if any, for services or materials for which payment is not yet due or which is being contested in good faith by appropriate proceedings. "INDEBTEDNESS" shall mean all liabilities, obligations and indebtedness of any and every kind and nature, including without limitation, all liabilities and all obligations to trade creditors, whether now or hereafter owing, arising, due or payable from Borrower to any Person and howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise. Without in any way limiting the generality of the foregoing, Indebtedness shall specifically include (a) all obligations and indebtedness of Borrower for borrowed money or for notes, bonds, debentures and other debt securities; (b) indebtedness represented by the deferred purchase price of property or services acquired by such Person; (c) rental payable by such Person under any leases of real or personal property which shall have been, or should, under generally accepted accounting principles, be classified as a capital lease; (d) obligations of such Person under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise assure a creditor against loss in respect of, indebtedness or obligations of another Person of the type described in clause (a), (b) or (c) above, and (e) liabilities of such Person in respect of unfunded vested benefits under, or withdrawal liability in respect of, plans covered by Title IV of ERISA; (F) all charges; and (g) all taxes. II - 14 "INITIAL DISBURSEMENT" shall mean the first disbursement of the proceeds of the GDB Loan. "INITIAL DISBURSEMENT DATE" shall mean the date on which the Initial Disbursement is made. "INSURANCE POLICIES" shall mean the policies of insurance required to be maintained pursuant to Article 8.15 hereof. "INTEREST ADJUSTMENT DATES" shall mean the first day of January, April, July and October. "INTERNATIONAL TEXTILE" shall mean International Textile Products of Puerto Rico, Inc., a Puerto Rico corporation. "KGC" shall mean Kumagai Caribbean, Inc., a Texas corporation. "KGCC" shall mean KG (Caribbean) Corporation, a Texas corporation. "KIUSA" shall mean Kumagai International USA Corporation, a Texas corporation. "KMA" shall mean KMA Associates of Puerto Rico, Inc., a Puerto Rico corporation. "KOFFMAN FAMILY" shall mean Burton I. Koffman, Richard E. Koffman, their parents, issue (including adopted persons), wives, siblings and direct descendants, and trusts organized for the benefit of any of the foregoing. "KUMAGAI" shall mean Kumagai Gumi Co., Ltd., a Japanese Corporation. II - 15 "LEASEHOLD MORTGAGE" shall mean the mortgage in form satisfactory to GDB to be made by Borrower upon the Lease Agreement for the Palominos Island Property. "LEGAL REQUIREMENTS" shall mean, collectively, (i) all statutes, laws, rules, rulings, orders, regulations, ordinances, judgments, decrees and injunctions of any Governmental Authority (including, without limitation, fire, health, handicapped access, sanitation, ecological, historic, zoning, environmental protection, wetlands and building laws) in any way applicable to Borrower or the Project, or any portion thereof, or to the ownership, use, occupancy, possession, operation or maintenance of the Project; (ii) all requirements of the local Board of Fire Underwriters or other similar body acting in and for the locality in which the Premises are situated and all requirements of each insurance policy covering or applicable to all or any portion of the Project, or the use thereof, and all requirements of the issuer of each such policy, including any which may require repairs, modifications or alterations (structural or otherwise) in or to the Project, or any portion thereof; and (iii) all requirements of each permit, license, authorization and regulation relating to the Project, or any portion thereof, or to the ownership, use, occupancy, possession, operation or maintenance thereof. "LENDER" shall mean the Government Development Bank for Puerto Rico. "LIBOR" or "LIBOR RATE" shall mean the rate per annum quoted at approximately 11:00 a.m. London time by Telerates Systems, (currently on page 3750 of the financial information reporting services furnished electronically by Telerate Systems, Inc.) on each Interest Adjustment Date for the offering to leading banks in the London interbank market of dollar deposits immediately available funds for ninety (90) day periods. II - 16 "LIEN" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, security interest, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever including, without limitation, any mechanic's lien, materialmen's lien, conditional sale agreement, title retention agreement, any lease, which under applicable law is deemed to create a lien, security interest or the equivalent. "LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Security Documents and any and all other agreements, documents and instruments delivered by Borrower pertaining to the Loans pursuant to the terms of this Agreement, as hereafter renewed, amended or supplemented from time to time. "LOAN(S)" shall mean any draws or advances made by GDB to Borrower pursuant to the terms of this Agreement. "MAJOR CASUALTY" shall mean a Casualty, the Restoration of which is reasonably estimated to cost more than $1,000,000. "MANAGEMENT AGREEMENT" shall mean the January 12, 1990 Agreement between Williams and Borrower, as amended by the First Amendment thereto dated September 30,1990, and the second amendment thereto dated January 31st, 1991, pursuant to which the former shall operate the Project. "MARGIN" or "GDB MARGIN" shall mean: (a) 1.40% for any portion of the GDB Loan which has been disbursed until the Completion Date. II - 17 (b) 1.25% after the Completion Date until the earlier of maturity of the GDB Loan or such date as the Coverage Requirement is achieved. (c) 1.00% after the Coverage Requirement is achieved. (d) Commencing with the fiscal year for the Project beginning on April 1, 1999, and provided that the Net Earnings from the Premises for the preceding 24 month period are at least 1.50 times Debt Service for such period, then, in lieu of the GDB Margin described above, the following Margins will apply: (i) For the fiscal year beginning April 1, 1999 - 1.50%; (ii) For the fiscal year beginning April 1, 2000 - 2.00%; (iii) For the fiscal year beginning April 1, 2001, and for each fiscal year thereafter - 3.00%. In any fiscal year in respect of which the 1.50 Coverage Requirement for the preceding 24 month period described above is not achieved, then for such fiscal year, the Margins will be as described under (b) and (c). "MATERIAL ADVERSE EFFECT" shall mean any set of circumstances or event which (a) is or could reasonably be expected to have a material adverse effect upon the validity or enforceability of any Loan Document; (b) is or could reasonably be expected to become material and adverse to the financial condition or business operations of Borrower; (c) does or could reasonably be expected to materially impair Borrower's ability to fulfill its obligations under the II - 18 terms and conditions of any of the Loan Documents; or (d) causes a Default or an Event of Default. "MATURITY DATE" shall mean the Loan Maturity Date, or such earlier date as GDB shall declare the entire principal sum due and payable in the exercise of its Rights under Article Ten hereof. "MORTGAGED PROPERTY(IES)" shall mean the Premises and all rights, interest and improvements appurtenant thereto encumbered by the Lien of the GDB Mortgage, or the GDB Leasehold Mortgage. "NOTE" or "SECURED PROMISSORY NOTE" shall mean the Note of Borrower to GDB evidencing the Loan Proceeds. "NET EARNINGS" shall mean Gross Revenues minus Operating Expenses. "NET PROCEEDS" shall mean the amount of all insurance proceeds other than business interruption insurance paid pursuant to any Insurance Policy as the result of a Casualty, after deduction of Lender's costs and expenses (including, without limitation, attorneys' fees and expenses), if any, in collecting the same. "NET RESTORATION AWARD" shall mean the amount of all awards and payments received from a condemnor on account of a Taking, after deduction of the Lender's costs and expenses (including, without limitation, attorneys' fees and expenses), if any, in collecting the same. "OBLIGATION(S)" mean all present and future indebtedness, obligations and liabilities, and all renewals and extensions thereof, or any part thereof, now or hereafter owed II - 19 to GDB by Borrower arising from, by virtue of, or pursuant to any Loan Document, together with all interest accruing thereon and costs, expenses and attorneys' fees incurred in the enforcement or collection thereof, whether such Indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, determinate, undeterminate, joint, several or joint and several. "OFFICER'S CERTIFICATE" shall mean a certificate signed by a General Partner. "OPERATING EXPENSES" shall mean, with respect to any period for which Operating Expenses are being determined, all expenses paid by or on behalf of the Borrower in connection with the ownership and operation of the Premises and the Condominium Units for such period, including, without limitation, insurance, utilities, funding of reserves in amounts approved by the Bank and GDB for maintenance, capital and non-capital repairs and the repair and replacement of furniture, fixtures and equipment, but in any event commensurate with the guidelines set forth in Section 4.5 of the Management Agreement; general and special real property taxes on and assessments of the Premises; equipment rentals; maintenance and non-capital repairs to the extent not paid for from reserves established therefor; non-capital repair and replacement of furniture, fixtures and equipment to the extent not paid for from reserves established therefor; governmental and license fees; advertising and marketing; payments under the Ground Lease; Basic Management Fees and expenses arising under the Management Agreement; all other operating expenses reasonably necessary for the proper and efficient operation of the Premises as a first class destination resort hotel. Operating expenses shall not include Debt Service or any item of expense incurred in the development, construction, sale or financing of the Condominium Units. II - 20 "PALOMINOS ISLAND PROPERTY" shall mean approximately 90 acres of land located on an island approximately three (3) miles to the east of the Fajardo Property, or more particularly described in the Leasehold Mortgage. "PARTICIPATION" shall mean all shares, options, warrants, interests, participations or other equivalents (regardless of how designated) of or in a partnership or equivalent entity, whether voting or nonvoting, including, without limitation, any other "equity security" "PARTIES" shall mean Borrower and GDB. "PARTY" shall mean either Borrower or GDB. "PERMITTED LIENS OR ENCUMBRANCES" shall mean: (a) The Liens in favor of GDB set forth in the Security Documents (b) Liens arising out of judgments or awards with respect to which Borrower or the Partnership shall in good faith be prosecuting an appeal or proceedings for review and in respect to which the aforesaid shall have set aside on its books reserves which GDB deems adequate with respect to each such judgment or award. (c) Liens for taxes, assessments, governmental charges or levies, if payments of such taxes assessments, governmental charges or levies shall not at the time be required to be made under the Loan Agreement or any other Loan Document. (d) Inchoate Liens. (e) Existing easements, rights of way and servitudes on the Mortgaged Properties as of the Closing Date and such future easements, rights of way and servitudes as GDB shall approve as to the Mortgaged Properties. II - 21 (f) Liens on personal property to be acquired by Borrower subsequently to the commencement of hotel operations by the Borrower and which do not replace the originally contemplated furniture and fixture or equipment to be acquired for such operations, or to secure financing from non-GDB sources in accordance with and to the extent permitted in this Agreement. (g) Deposits and similar payments incurred in the ordinary course of Borrower's business. (h) Liens constituted under the Bank Loan Documents. (i) Third mortgage lien on the Premises in favor of KGC. (j) The necessary easements, rights of way, and servitude to provide adequate access and services to the Condominium Parcels, which shall be constituted simultaneously with the release of the Condominium Parcels from the lien of the GDB Mortgage. "PERMITS" shall mean, collectively, all applicable authorizations, consents, licenses, approvals and permits of Government Authorities for Construction of the Improvements in accordance with the Plans and all Legal Requirements, and for the performance and observance of all agreements, provisions and conditions herein contained. "PERMITTED TRANSFERS" shall mean (a) any transfer, direct or indirect, of the interests of or in KGC or KIUSA to Kumagai or to any entity wholly owned and controlled by Kumagai; (b) any transfer, direct or indirect, of the interests of or in WMS El Con to WMS Industries or any entity wholly owned and controlled by WMS Industries; (c) any transfer, direct or indirect, of the interests of or in International Textile, KMA or AMK to a member of the II - 22 Koffman Family or to any entity which is wholly owned by one or more members of the Koffman Family; (d) any transfer of the interests of Marcel Arroyo, Marcel Arroyo, Jr. or David Melin in KMA which is not prohibited by any shareholder's or similar agreement applicable to the transfer of such interests; (e) any transfer, direct or indirect, of interests in Hospitality to members of the Andrews Family or any entity wholly owned and controlled by one or more members of the Andrews Family, provided that Hospitality shall at all times be controlled by Hugh A. Andrews for so long as he shall be alive and competent; (f) any transfer of a limited partner interest in Borrower approved by GDB in writing, which approval shall not be unreasonably withheld, (g) any transfer of publicly-traded ownership interests in WMS Industries or Kumagai; and (h) collateral assignment of interests of WKA in the Borrower to secure a KG Loan, as provided in Section 6.03 Borrower's Partnership Agreement, transfer of Condominium Parcels. "PERSON" shall mean an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PLANS AND SPECIFICATIONS" OR "PLANS" shall mean the plans, drawings and specifications for the Construction of the Improvements, including, without limitation, the architectural, structural, mechanical and electrical plans and specifications therefor prepared or to be prepared by Borrower, the Architects and Borrower's engineers and contractors, as approved by GDB, together with all revisions and addenda to such plans, drawings and specifications, provided that such revisions and addenda have been approved by GDB to the II - 23 extent such approval is required pursuant to this Agreement, which Plans shall include, without limitation, a description of the materials, equipment and fixtures necessary for the Construction of the Improvements. "PLEDGE" shall mean the pledge of the GDB Mortgage Note by Borrower to GDB pursuant to the execution and delivery by the Parties of a pledge agreement in form and substance satisfactory to GDB. "PREMISES" shall mean the fee simple title to the Fajardo Property (other than the Condominium Parcel) and the leasehold estate in the Palominos Island Property. "PROJECT" shall mean, collectively, the acquisition of the Fajardo Property, the leasing as tenant of the Palominos Island Property and the renovation, development, construction, furnishing, equipping of the Premises and the Improvements. "PROJECT DOCUMENTS" shall mean (a) the Construction Management Agreement; (b) all licenses, easements or other agreements or instruments pertaining to the Project and to be entered into by Borrower with the approval of the Bank and Lender; and (c) all other documents listed as exceptions to title in the Title Policy. "REIMBURSEMENT AGREEMENT or "LETTER OF CREDIT REIMBURSEMENT AGREEMENT" shall mean the agreement dated the date of this Agreement, between the Borrower and the Bank for the issuance of the letter of credit to secure the issuance of the AFICA industrial revenue Bonds to provide financing for the Project, its amendments and/or replacements. "RELEASE CONDITIONS" shall have the meaning ascribed thereto in Article 11.4 hereof. II - 24 "REPORTABLE EVENT" shall mean an event described in Section 4043(b) of ERISA (with respect to which the 30-day notice requirement has not been waived by the PBGC). "REQUEST FOR DISBURSEMENT" shall mean a written certified statement of Borrower as more particularly set forth in Exhibit "D" hereto setting forth the amount of the Disbursement sought, which shall constitute an affirmation that the representations and warranties of Borrower with respect to the Improvements set forth in Section 7.1 hereof and in the other Loan Documents remain true and correct as of the date thereof and, except to the extent that GDB is notified in writing to the contrary prior to the Disbursement, will be true and correct on the date of such Disbursement. "RESTORATION" shall mean, in case of a Casualty or Taking, the restoration, replacement or rebuilding of the affected property such that when such restoration, replacement or rebuilding is completed, the Improvements shall have been constructed substantially in accordance with the Plans, and to the extent any alterations or additions to the Improvements made in compliance with the GDB Mortgage or this Agreement, with any such alterations or additions, or in the event that the foregoing requirement cannot be satisfied as a result of any Legal Requirements or, in the case of a Taking, as a result of the loss of the use of the portion of the Mortgaged Property which was the subject of such Taking, the Project when such restoration, replacement or rebuilding shall have been completed, shall be an integral unit similar in condition, character and scope to the Project prior to such Casualty or Taking, and the value of the Project, when so restored, replaced or rebuilt, together with the amount of the Net Proceeds or the Net Restoration Award, as the case may be, applied in repayment of the II - 25 principal indebtedness evidenced by the Note or the Bank Loan Documents, shall be equal to or greater than the value and usefulness of the Project immediately prior to such Casualty or Taking. "RIGHTS" shall mean rights, remedies, powers and privileges. "SECURITY" shall have the meaning assigned to it in Article Five hereof. "SECURITY DOCUMENTS" shall mean the Pledge, the GDB Mortgage, the GDB Mortgage Note, the Assignments, the GDB Leasehold Mortgage, the Chattel Mortgage, and the Title Policy. ""SOFT COSTS" shall mean, collectively, all costs set forth in the Budget excluding Hard Costs. "SUBORDINATION AND STANDSTILL AGREEMENT" shall mean the agreement under which Lender subordinates its rights as a creditor of Borrower to the Bank Loan Documents. "SUBSIDIARY(IES)" shall mean, with respect to any Person, any corporation, partnership or other entity of which a majority interest is owned or is effectively controlled by Borrower. "SUBSTANTIAL COMPLETION" shall mean the occurrence of all of the following events: (i) the completion of the renovation and Construction (excluding punchlist items) of the Improvements in accordance with all Legal Requirements and substantially in accordance with the Plans as to any aspect of Construction and the issuance of occupancy permits therefor satisfactory to GDB and the Bank; and (ii) the delivery to GDB and the Bank of certificates, in the form and content satisfactory to GDB and the Bank, from Borrower, the Architects and the II - 26 Bank's Consultant to the effect that all of the work required to be performed to substantially complete the Improvements in accordance with all Legal Requirements and in accordance with the Plans and Specifications has been performed. "SURVEY" shall mean a survey prepared for the Mortgaged Properties substantially in accordance with the standards adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1986, known as the "Minimum Standard Detail Requirements of Land Title Surveys" or showing equivalent detail and specifics, or otherwise acceptable to Lender. "TAKING" means any temporary or permanent taking by any public or quasi-public authority of any Mortgaged Property or any part thereof through eminent domain or other proceedings or by any settlement or compromise of such proceedings, or any voluntary conveyance of such property in lieu of the commencement of any such proceedings. "TAXES" shall mean all taxes, assessments, fees, levies, imposts, duties, deductions, withholdings, stamp taxes, mortgage taxes or charges, recording charges, interest equalization taxes, real estate taxes or other ad-valorem taxes, capital transaction taxes, foreign exchange taxes or charges or other charges of any nature whatsoever from time to time or at any time imposed by any Law or Court. "TERM" shall mean that period from and including the Closing Date through the Maturity Date. "TERM LOAN" shall have the meaning assigned to it in Section (a) hereof. II - 27 "TITLE INSURER" shall mean The American Title Insurance Company or any other issuer, approved by GDB, of the title insurance policy insuring the GDB Mortgage and GDB Leasehold Mortgage. "TITLE POLICY" shall have the meaning provided in Section (l) hereof. "TOTAL PROJECT COSTS" shall mean all items of cost and expense arising out of or necessary for the acquisition and development of the Project and the Construction of the Improvements, and which are included in the Budget, including, without limitation, such incidents thereto as organizational costs, financing costs, insurance premiums, legal and accounting fees, construction management fees, development fees, furnishings, equipment, supplies, advertising and marketing expenses and initial working capital. "TRADE CONTRACT" shall mean any general construction contract entered into by Borrower with respect to the Construction of the Improvements that satisfies the conditions set forth in the Reimbursement Agreement, and shall require the Trade Contractor to name GDB as an additional named insurer under a payment and performance bond satisfactory to GDB as to form, content and issuer with respect to such Trade Contractor's obligations under its respective Trade Contract, and shall be otherwise satisfactory to GDB in form and content. "TRADE CONTRACTOR" shall mean any contractor engaged in the Construction of the Improvements under a Trade Contract. "TRANSFER" shall mean (i) any sale or transfer by Borrower of the Premises, or any portion thereof, or (ii) any transfer of any direct or indirect equity interest in Borrower, II - 28 including, without limitation, any sale or transfer of a direct or indirect equity interest in the constituent Partners of the Borrower, of WKA, of KUSA or of Kumagai. "UNAVOIDABLE DELAY" shall mean any delay due to conditions beyond the control of Borrower, including, without limitation, strikes, labor disputes, acts of God, the elements, acts of sovereignty, enemy action, civil commotion, fire, unavoidable casualty, mechanical breakdowns or shortages of, or inability to obtain, labor, utilities or material; provided, however, that any lack of funds shall not be deemed to be a condition beyond the control of Borrower. "WILLIAMS" shall mean Williams Hospitality Management Corporation, a Delaware corporation. "WKA" shall mean WKA El Con Associates, a New York general partnership. "WMS EL CON" shall mean WMS El Con Corp., a Delaware corporation. "WMS HOTEL" shall mean WMS Hotel Corporation, a Delaware corporation. "WMS INDUSTRIES" shall mean WMS Industries Inc., a Delaware corporation. "WORK CHANGE" shall mean any change order, any other amendment or modification to any contract or subcontract and any revision, addendum, modification to or amendment of the Plans for the Improvements, including minor departures from the Plans for the Improvements pursuant to field orders. ARTICLE 3 REPRESENTATIONS AND WARRANTIES As an inducement to Lender to make Loans to Borrower, and also to make the Permanent Loan to Borrower, Borrower represents and warrants to Lender that: 3.1 Partnership Existence; Compliance with Law. The Borrower (i) is a limited partnership duly organized, existing and in good standing under the laws of the State of Delaware, duly qualified to do business in and within the Commonwealth of Puerto Rico, the latter being the only jurisdiction in which Borrower owns real property or conducts business, (ii) has the requisite partnership power and authority to own, pledge, mortgage or otherwise encumber and operate its properties, and to conduct its business as now, heretofore and proposed to be conducted; (iii) has or will have when required all licenses, permits, consents or approvals from or by, and has or will have made when required all filings with, and has or will have given all notice to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (except for such licenses, and like, the absence of which, and such filings and notices, as to which the failure to make or give, would not reasonably be expected to have a Material Adverse Effect); (iv) is in compliance with its Partnership Agreement; and (v) is in material compliance with all applicable provisions of Law, and as of the date hereof, except as disclosed in the Environmental Report, to the best knowledge of Borrower, those relating to Environmental Laws where the failure to comply would have a Material Adverse Effect. 3.2 Executive Offices. The location of Borrower's chief executive offices is temporarily at Williams offices at the El San Juan Hotel & Casino, Isla Verde Avenue, Carolina, III - 2 Puerto Rico, and will eventually be located at El Conquistador Hotel and Resort, Fajardo, Puerto Rico. 3.3 Subsidiaries. There exist no Subsidiaries of Borrower. 3.4 Partnership Power; Authorization; Enforceable Obligations. The Borrower is the sole owner of the assets encumbered by the Security free from any adverse lien, security interest or adverse claim of any kind whatsoever, except the Permitted Liens and Encumbrances; has the Partnership power and authority to execute, deliver and carry out this Agreement, the Notes, the GDB Mortgage, the GDB Mortgage Note, the Assignments, the Pledge, the Chattel Mortgage and any other Security or Loan Document to be delivered by Borrower hereunder; each of said documents and instruments has been duly authorized by all necessary partnership action of the authorized Person(s) of Borrower, and this Agreement, the Notes, the Leasehold Mortgage, the Chattel Mortgage, the GDB Mortgage, the GDB Mortgage Note, the Pledge, the Assignments, and generally, any other Security or Loan Documents to be delivered by Borrower, when issued, will be valid obligations of the Borrower enforceable in accordance with their respective terms subject to any necessary filings or registrations which may be a necessary pre-requisite to such enforcement. 3.5 Omitted 3.6 Financial Information to Lender. (a) All the financial information and representations submitted by Borrower to Lender based on which Lender approved the credit facilities herein contemplated, are true and III - 3 correct in all material aspects as the same have been amended and supplemented as of the Closing Date. 3.7 No Litigation. No action, claim or proceeding is now pending or, to the knowledge of Borrower, threatened against Borrower at Law, equity or otherwise, before any court, board, commission, agency or instrumentality of the Untied States or Puerto Rico or before any arbitrator or panel of arbitrators, which, if determined adversely, would have a Material Adverse Effect. None of the matters set forth therein questions the validity of any of the Loan Documents or any action taken or to be taken pursuant thereto, or could reasonably be expected to have either individually or in the aggregate a Material Adverse Effect. 3.8 No Default. Neither the execution and delivery of this Agreement and the Security Documents, the consummation of the transactions contemplated hereunder, and the compliance with the terms, conditions and provisions of this Loan Agreement, the Security Documents and of the other Loan Documents, will conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under, the Partnership Agreement of Borrower, or of any indenture or other agreement or instrument to which the Borrower is a party or by which it is bound, or result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever, upon any of the properties or assets of the Borrower, except as permitted by the provisions hereof; and except for the recording of the GDB Mortgage and the Chattel Mortgage, and except as noted in this Agreement, the Borrower is not required to obtain any action, approval, consent or authorization by any governmental or quasi- III - 4 governmental agency, commission, board, bureau or instrumentality in order for this Agreement to become a valid and binding obligation of Borrower enforceable in accordance with its terms. 3.9 Investment Company Act. Borrower is not an "investment company" or an "affiliated person" of, or a "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. The funding of the Loans by Lender, the application of the proceeds and repayment thereof by the Borrower and the consummation of the transactions contemplated by this Agreement and the other Loan Documents will not result in the violation by the Borrower of any provision of such act or any rule, regulation or order applicable to Borrower issued by a court of competent jurisdiction in the application of such act. 3.10 Margin Regulations. Borrower does not own any "margin security", as that term is defined in Regulations G and U of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and the proceeds of the Loan will be used only for the purposes contemplated hereunder. The Loans will not be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which would cause any of the Loans under this Agreement to be considered a "purpose credit" within the meaning of Regulations G, T, U or X of the Federal Reserve Board. Borrower will not take or permit any agent acting on its behalf to take any action which might cause this Agreement or any document or instrument delivered pursuant hereto to violate any III - 5 regulation of the Federal Reserve Board. The making of the loans will not constitute a violation of such Regulations G, T, U or X. 3.11 Taxes. All federal, state, Commonwealth and foreign tax returns, reports and statements required to be filed by Borrower and its partners, if the said partners' failure to file would have a Material Adverse Effect on the Borrower, (other than immaterial state, local and foreign filings), have been filed with or extensions obtained from the appropriate governmental agencies and all Charges and other impositions due and payable have been paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for nonpayment thereof, or any such fine, penalty, interest, late charge or loss has been paid if such failure to pay would have a Material Adverse Effect on the Borrower, except such taxes, charges and other impositions which are being diligently contested in good faith by Borrower. 3.12 Use of Loan Proceeds. The Loans to be made by Lender to the Borrower hereunder shall be applied only for the purposes set forth in Article Four hereof. 3.13 Omitted. 3.14 Reportable Event. No Reportable Event, as such term is defined in Title IV of the Federal Employee Retirement Income Security Act of 1974 ("ERISA"), has occurred and is continuing with respect to any employee benefit plan or other plan now existing or which the Borrower may institute or maintain for the employees of the Borrower or any Subsidiary of the Borrower covered by ERISA (an "Employee's Plan"). III - 6 3.15 Environmental Matters. (a) Except as set forth below, all facilities owned, leased, used or operated by Borrower have been since the date hereof and continue to be, owned, leased, used or operated in compliance in all material respects with all applicable Environmental Laws. Some work relating to substances which may be subject to Environmental Laws is presently being conducted and Borrower makes no representations as to work performed prior to its acquisition of the Premises. (b) The Environmental Report together with all previous reports submitted to Lender by Borrower identified with respect to the Premises, to the best knowledge of the Borrower, (i) all environmental audits, assessments or occupational health studies undertaken by or at the direction of governmental agencies within the past twelve (12) months; (ii) the results of the most recent analyses of water (including groundwater analyses), soil, air or asbestos samples where non-compliance or contamination is indicated; (iii) the most recent inspection of each operating facility by any environmental protection agency relating to issues of non-compliance or contamination; (iv) any claim or complaint concerning environmental matters; and (v) all permits issued under any Environmental Laws. 3.16 Condemnation. At the Closing Date, other than condemnation proceedings related to the acquisition of the Premises by the Partnership Borrower (i) no condemnation or other similar taking of any portion of the Premises, (ii) no condemnation or relocation of any roadways abutting the Premises, (iii) no denials of access to the Premises from any point of access to the Premises, and (iv) no withdrawals, challenges, contests, denials or revocations of III - 7 permits, licenses, use agreements or other operating agreements or applications, have been commenced, or taken or threatened to be taken by any Governmental Authority, quasi-governmental authority, or public or private person, which affects any portion of the Premises. 3.17 Labor Matters. The Borrowers at the Closing Date (i) is not a party to any labor dispute; (ii) there are no strikes or walkouts relating to any aspect of Borrowers' business or operations; (iii) there are no collective bargaining agreements with the Borrower and/or no collective bargaining agreements with the Borrower and/or any Subsidiary. 3.18 Other Ventures. Borrower is not, as of the Closing Date, engaged in any joint venture or partnership with any other Person. 3.19 No Contract Cancellations. To Borrower's knowledge there exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship of the Borrower under the Construction Management Agreement, the Management Agreement, the Architects' Agreements, the Trade Contracts and other Construction Documents as of Closing Date. 3.20 Liens. The Liens granted to GDB pursuant to the Security Documents will be, when filed, subject only to recording which will be effected in due course, fully perfected second priority Liens in and to the Security described therein, subject only to Permitted Liens and Encumbrances. 3.21 Omitted. III - 8 3.22 Sufficiency of Funds. The Loans, together with Borrowers' own funds and those to be borrowed under the Bank Loan Documents are sufficient for all purposes, as determined by the Borrower, to complete the Project. 3.23 Title to Property. The Borrower has, and at all times will have, good and insurable title in fee simple to the Premises subject to no liens, charges, or encumbrances other than as stated in the Title Policy referred to in Paragraph 6.1(l) hereof, and other than Permitted Liens and Encumbrances. 3.24 Possession of Premises. At Closing, to the extent represented by seller to Borrower, there are no squatters on the Premises and that Borrower is and will be at all times in complete and exclusive possession of the same, except for such portions of the Premises which have been acquired through expropriation and possession has not been surrendered to the Borrower. 3.25 Utilities and Streets. The Premises has vehicle and pedestrian access to and from publicly dedicated roads, streets and highways, and all utility services, including water, sanitary and storm sewers, electric, and telephone service are or will be provided to the Premises or are located in abutting streets and roads, and are or will be adequate to serve the Improvements constructed and those proposed to be constructed thereon. 3.26 General. Neither the Loan Documents nor any other agreement, document, certificate or statement furnished to Lender by or on behalf of the Borrower or any Person in connection with the transactions contemplated in any of the Loan Documents contains any untrue statement of material fact or omits to state a material fact necessary in order to make statements III - 9 contained herein or therein in light of the circumstances made not misleading. To the knowledge of Borrower, there are no significant material facts or conditions relating to the making of the Loans, any of the Security and/or the financial condition and business of the Borrower which, collectively or individually, cause a Material Adverse Effect, and which have not been fully disclosed, in writing, to Lender. All writings heretofore or hereafter delivered to Lender by or on behalf of the Borrower or any Person, are and will be genuine and in all respects what they purport to be. 3.27 Survival of Warranties; Representations. All representations and warranties made herein by Borrower or in any of the other Loan Documents, or in any other certificate, document or instrument delivered pursuant thereto, shall survive the making of the Loans transactions effected hereunder. It is herein acknowledged and agreed by the Borrower that the above warranties and representations are of the essence to the granting of the Loans to Borrower and to this Agreement. ARTICLE 4 AMOUNT AND TERMS OF LOANS 4.1 Of the Interim Loans: a) Interim Loans. Subject to the terms and conditions hereof, and relying on the representations, covenants, and warranties of the Borrower contained herein, Lender agrees to make Interim Loans to the Borrower and to advance to the Borrower monies so lent in a non-revolving line of credit of up to TWENTY FIVE MILLION DOLLARS ($25,000,000.00) to finance part of the Total Project Costs from time to time during the period commencing on the date of this Agreement to and including the Completion Date. b) Interest. Each Interim Loan under this Agreement shall bear interest from the respective date of each such loan to the Conversion Date or the date of payment in full at the annual rate resulting by adding One and Four Tenths (1 4/10) Percentage Points to the GDB Base Rate. Any change in the interest rate resulting from a change in the GDB Base Rate shall become effective on the next Interest Adjustment Date following the effective date of any such change in the GDB Base Rate. Such interest shall be payable quarterly in arrears on the first day of each quarter and shall be computed only on outstanding balances of each Loan on the basis of a year of three hundred sixty (360) days and for the number of actual days elapsed. Interest accrued during any quarter shall be payable on the first day of the following quarter. c) Commitment Fee. In consideration of the commitment of Lender to make to Borrower the Interim Loans, Borrower agrees to pay to the Lender a commitment fee equal to ONE HUNDRED TWENTY FIVE THOUSAND DOLLARS ($125,000.00), equivalent to IV - 2 One Half of One Percent (1/2%) of the maximum principal amount of the GDB Loan, such fee to be paid on the date of this Agreement (any prior payment by Borrower to Lender for the insurance of the commitment letter will be credited against the Commitment Fee), and which fee shall not be reimbursable to Borrower, in whole or in part, under any circumstance whatsoever. d) Conversion Date. The date when Lender has disbursed the total TWENTY FIVE MILLION DOLLARS ($25,000,000.00) shall be hereinafter referred to as the "Conversion Date". e) Evidence of Interim Loans. All Interim Loans made by Lender under this Agreement shall be evidenced by a notation on the reverse side of the Secured Promissory Note (the "Note") in the form attached hereto as Exhibit C, dated the date of the respective Interim Loan, said notation shall be signed by an authorized officer of Lender whom Borrower authorizes to make such notations, however the failure to make such notation with respect to any Interim Loan shall not limit or otherwise affect the obligations of Borrower under this Agreement or the Note. f) Proceeds of Interim Loans. The proceeds of the Interim Loans will be used solely for the payment of Total Project Costs as such costs are incurred in accordance with the Budget and the Construction Schedule. Attached as Exhibit "E" is a Disbursement Schedule which consists of an estimate of when such disbursements will be requested. g) Notice of Borrowing and Making of Interim Loans. The Borrower shall give Lender at least three (3) Business Days, prior written notice of each borrowing it proposes to make hereunder, specifying the date and amount thereof. Upon receipt of such notice and IV - 3 the other documents required to be delivered pursuant to the applicable provisions of Article Six and/or Seven of this Agreement with respect to such borrowing, Lender shall, on the date specified in such notice, make a Loan to the Borrower by the disbursing of the loan proceeds to Borrower and any other person or entity specified in the documents delivered pursuant to the applicable provisions of Article Six and/or Seven of this Agreement. 4.2 Of the Term Loan: a) Principal of the Term Loan. On Conversion Date, and provided Borrower has fully complied in all material respects with all terms and conditions of this Agreement applicable to such date, Lender agrees, upon the terms and conditions of this Agreement, to convert the Interim Loans into a term loan to Borrower in the principal amount of TWENTY FIVE MILLION DOLLARS ($25,000,000) (the "TERM LOAN"). b) Interest. The Term Loan will bear interest from the Conversion Date at the annual rate resulting from the adding of the Margin to the GDB Base Rate. The resulting rate shall be adjusted every quarter in the same manner as interest is adjusted on the Interim Loan, that is, it will continue to be computed on the basis of a year of three hundred sixty (360) days and for the number of actual days elapsed, shall be payable on the first day of each quarter in arrears, and shall be adjusted on each Interest Adjustment Date. c) Due Date of Principal. The entire principal and any accrued interest on the Term Loan shall be paid one hundred eighty (180) months after the Closing Date. IV - 4 d) Note. The Term Loan shall be evidenced by and repaid in accordance with a Secured Promissory Note of the Borrower. The notations on its reverse side evidencing that the entire principal amount of the Loan has been disbursed and received by Borrower. e) Mandatory Prepayment. Upon any refinancing of the Borrower's loan under the Bank Loan Documents, the GDB shall be repaid in whole or in part from Excess Refinancing Proceeds, if any. "Excess Refinancing Proceeds" shall mean the net amount of refinancing proceeds available after full payment of the principal amount of the Borrower's loan under the Bank Loan Documents and any other amounts required to be paid in connection therewith. f) Optional Prepayment. The GDB Loan may be prepaid in whole or in part, at any time, plus accrued interest to the date of prepayment, but only after the full payment of the loan to Borrower under the Bank Loan Documents, except from the GDB Escrow. g) Use of Proceeds. The proceeds of the Term Loan shall be used by Borrower to convert all Interim Loans hereunder into the Term Loan. h) Exit Fee: After the tenth anniversary of the Closing Date, upon any optional prepayment of the GDB Loan or upon maturity, (excluding prepayment as a result of Casualty or Condemnation) the Borrower shall pay GDB as an "Exit Fee" the following percentage of the principal amounts being prepaid or paid: YEAR AFTER CLOSING IN PERCENTAGE OF WHICH PAYMENT MADE AMOUNT PAID --------------------- ------------- After Year 10 but Before Year 11, 1.0% IV - 5 After Year 11 but Before Year 12, 1.5% After Year 12 but Before Year 13, 2.0% After Year 13 but Before Year 14, 2.5% After Year 14 but Before Year 15, 3.0% provided that no Exit Fee shall be payable in respect of an optional prepayment or at maturity if the Net Earnings from the Premises for the 24 months preceding such prepayment or maturity is an amount less than 1.5 times Debt Service for such 24 month period. 4.3 GDB Escrow. Borrower shall execute an Escrow Agreement substantially in the form annexed hereto as EXHIBIT "F" and deposit with the Escrow Agent the GDB Escrow Requirement, as defined below, for each Fiscal Year of the Borrower commencing with the Fiscal Year beginning April 1st, 1993. The GDB Escrow Requirement ("GDB ESCROW REQUIREMENT") will be determined as follows: a) In the event Available Cash Flow is Two times 1/15th of the outstanding principal amount of the GDB Loan or less in a fiscal year, then 50% of such Available Cash Flow shall be paid into the GDB Escrow. b) In the event Available Cash Flow is greater than two times 1/15th of the outstanding principal amount of the GDB Loan in a fiscal, then 1/15th of the outstanding principal amount of the GDB Loan shall be paid into the GDB Escrow and an equal amount shall be retained by the Borrower. In addition, there shall be paid into the GDB Escrow for such IV - 6 Fiscal Year the Cumulative Deferred Escrow Requirement as defined below, if any, plus 50% of Excess Available Cash Flow as defined below, if any. c) "Excess Available Cash Flow" shall mean for each Fiscal Year of the Borrower commencing with the Fiscal Year beginning April 1, 1993, the Available Cash Flow in each such year in excess of the sum of (i) 1/15th of the outstanding principal amount of the GDB Loan plus (ii) the Cumulative Deferred Escrow Requirement paid for such year plus (iii) the partners preferred return (as defined in the Partnership Agreement) for such year and cumulative deferred partners preferred returns from prior years beginning April 1, 1993, paid in such year, (iv) incentive management fees and cumulative deferred incentive management fees (as defined in the Management Agreement) from prior years beginning April 1, 1993, paid in such year. d) If in any Fiscal Year, the amount of the Available Cash Flow is less than two times 1/15th of the outstanding principal amount of the GDB Loan, then the difference between (x) 1/15th of the outstanding principal amount of the GDB Loan, and (y) the amount of the GDB Escrow Requirement for such Fiscal Year, shall be, in each fiscal year, added to a "Cumulative Deferred Escrow Requirement" and shall be paid into the GDB Escrow to the extent that Available Cash Flow in any subsequent Fiscal Year is greater than two times 1/15th of the outstanding principal amount of the GDB Loan. e) Payments into the GDB Escrow shall be made within 120 days of the end of each Fiscal Year, or thirty (30) days after the Financial Statements are delivered to the Bank. Amounts held in the GDB Escrow may be invested as the Borrower may reasonably direct and IV - 7 earnings therefrom shall be for the account of the Borrower, and if the Borrower is not in default to GDB, paid to the Borrower not more frequently than once a year. The GDB Escrow Requirement for any year shall not exceed an amount necessary to make the aggregate amount in the GDB Escrow equal the outstanding principal amount of the GDB Loan multiplied by a fraction, the numerator of which is the number of Fiscal Years elapsed since the closing of the GDB Loan and the denominator of which is 15. f) At any time after the payment or the maturity of the loan under the Bank Loan Documents, the Borrower may use amounts in the GDB Escrow to prepay the principal amount outstanding with respect to the GDB Loan. The amount held in the GDB Escrow shall be applied to the payment of the GDB Loan at maturity. g) "Available Cash Flow" means Net Earnings less: (i) payments due for Debt Service, (ii) interest only on any loan, including but not limited to operating deficiency loans and/or working capital loans, made by partners or their affiliates to the Partnership, and (iii) amounts required for capital improvements to the Project as reasonably determined by the Partnership. 4.4 Maximum Interest Rate: Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the Lender shall promptly refund such excess to the undersigned; provided, however, that, if lawful, IV - 8 any such excess shall be paid by the undersigned to the Lender as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. 4.5 Release Provisions: Upon request of the Borrower, and without any payments other than to pay GDB any expenses incurred in connection therewith, the GDB shall release the Lien of the Mortgage on the Condominium Parcels and related access rights in connection with the Borrower's transfer of title to such Parcels for the purpose of constructing all or a portion of the Condominium Units. In connection with such release, Borrower shall furnish GDB with evidence reasonably satisfactory to GDB of the existence and availability of adequate financing for the completion of the Condominium Units to be built on the parcel to be released. The GDB shall subordinate the GDB Mortgage to necessary easements reasonably approved by the GDB for access roads to and utilities serving the Condominium Parcels so released. The GDB shall execute, acknowledge and deliver any and all documents and instruments necessary to effect such release(s) and rights. 4.6 Subordination and Standstill Agreement: Lender shall enter into the Subordination and Standstill Agreement and shall comply with the terms and provisions thereof. Upon any refinancing of the indebtedness evidenced by the Bank Loan Documents or any successor Letter of Credit Bank, Lender shall execute and deliver directly to the party providing such refinancing or successor Letter of Credit a Standstill and Subordination Agreement on terms substantially IV - 9 similar but no more onerous to GDB than the GDB Standstill Agreement so as to evidence the subordination of its rights under the Loan Documents as contemplated hereby. ARTICLE 5 SECURITY 5.1 The Security. As Security for the Loans and the performance and observance of all of the Obligations, covenants and agreements of the Borrower hereunder, the Borrower shall deliver, or cause to be delivered to the Lender, in form and substance acceptable to the Lender, the following collateral (the "SECURITY"): 5.1.1 The Pledge of the GDB Mortgage Note secured by the GDB Mortgage and by the GDB Leasehold Mortgage to secure payment of the Note; 5.1.2 The valid Assignment of all intangible assets connected or associated with the Project, including, but without limitation, the right in and to the name "El Conquistador"; 5.1.3 The valid Assignment to the extent permitted by law of (i) all consulting and construction contracts, payment and performance bonds, plans and specifications, warranties, licenses, permits and approvals of, for, or related to the Premises, together with such consents by any contractors, architects, surveyors, appraisers and other entities and persons as are necessary to perfect such assignment, (ii) all operating licenses, permits accreditations, approvals and rights granted to the Premises or to the Borrower in connection or related to the Premises; (iii) the Surveys and the Preliminary Development Plan, and (iv) all other contracts and contract rights, options, agreements, deposits, leases, concessions, and any and all other rights or privileges of Borrower, tangible or intangible, in connection with, arising from or related to the Premises and/or their operation; 5.1.4 Valid and perfected personal property mortgage(s), subject only to a prior lien under the Bank Loan Documents, in all personal properties including all vehicles, furniture, V - 2 furnishings, appliances, machinery, equipment, with all replacements, accessories, parts and tools, now owned or hereafter acquired for or at the Premises and which are not covered by the GDB Mortgage (the "CHATTEL MORTGAGE[S]"); 5.1.5 The valid and perfected Assignment of all space leases, concessions, agreements and any other agreement relating to the Premises; 5.1.6 A valid Escrow Agreement; 5.1.7 The Title Policy. 5.1.8 The valid Assignment by the Borrower, as continuing collateral security of the benefit of all the insurance policies required by the Lender to be carried by the Borrower pursuant to the terms hereof, or the appropriate mortgagee endorsements for such policies as may be approved by the Lender; 5.1.9 The valid Assignment, as continuing collateral security of Borrower's interest in the Management Agreement; 5.1.10 An assignment as collateral security, if and to the extent permitted by law, of all rights of Borrower under the Casino License, and any other license or permit required for the operation of the Project, further provided that the Borrower shall commit as a binding obligation under the Loan to make best efforts as is necessary or required to secure the written consent to the assignment of the Casino License or such other license to the Lender or its subsequent transfer or issuance to the Lender in the Event of Default by the Borrower, all pursuant to, if and to the extent permitted by the Laws of Puerto Rico, as amended, and the Regulations approved pursuant thereto; V - 3 5.1.11 Such other Security documents as Borrower may hereafter be bound to execute and deliver to Lender under the terms of this Agreement. All of the above Security, except for the Escrow Agreement will be subordinated under the Subordination and Standstill Agreement to the Bank Loan Documents. 5.2 Preservation of Security. The Borrower shall take all action necessary to protect and preserve the Security given hereunder, including without limitation, (i) the proper filing and/or recording of GDB Mortgage, the GDB Leasehold Mortgage, the Chattel Mortgage(s), the Assignments executed and/or to be executed by Borrower as Security for the Loan, and at the Lender's request, (ii) the extension of the Lien of the GDB Mortgage, the GDB Leasehold Mortgage and/or the Chattel Mortgage(s) to cover future personal property of Borrower, including vehicles, equipment and machinery to be placed or used in connection with or in any way forming part of the Premises and the said GDB Mortgage, the GDB Leasehold Mortgage, and the Chattel Mortgage(s) shall be properly filed for record in the corresponding section of the Property Registry of Puerto Rico and/or the Department of Transportation and Public Works of Puerto Rico, as applicable. 5.3 Non Recourse Obligations: The obligations of the Borrower under the Loan Documents shall be non-recourse, payable solely from those assets of Borrower that secure the GDB Loan, except (i) in the case of fraud with respect to the application of the Loan Proceeds, (ii) with respect to the responsibility of Borrower under Article 8.20; (iii) with respect to the obligations of the partners of Borrower to provide the Deficiency Loans as set forth in V - 4 Article 8.22 herein, and (iv) Borrowers obligations guaranteed by its Partners to deposit the Escrow Requirement with the Escrow Agent as provided for under Article 4.3 herein. ARTICLE 6 CONDITIONS PRECEDENT FOR INITIAL DISBURSEMENT 6.1 The obligation of Lender to make the Initial Disbursement to Borrower is subject to the condition precedent that Lender shall have received on or before the date of such Initial Disbursement each of the following in form and substance satisfactory to Lender: (a) Title to Premises: Evidence satisfactory that Borrower shall have acquired a fee simple, good, valid, recordable and insurable title to the Premises. (b) Payment of Fee: Borrower shall have paid Lender the Commitment Fee. (c) Collateral: Delivery to Lender of the Security Documents. (d) Equity Contribution: Evidence that Borrower shall have invested at least $30,000,000 in form and substance satisfactory to Lender (the aggregate amount so advanced being hereinafter referred to as the "Equity Contribution") on account of Total Project Costs in the Project. (e) Financial Information: Current unaudited balance sheet of Borrower certified by the chief financial officer of Borrower. (f) Appraisal: An Appraisal of the Premises indicating that the value thereof is not less than ONE HUNDRED SEVENTY TWO MILLION SEVEN HUNDRED THOUSAND DOLLARS ($172,700,000.00) (g) Survey: A Survey of the Premises, certified and acceptable to Lender and the Title Insurer showing (i) the location of the perimeter of the Premises by courses and distances; (ii) all easements, rights of way, and utility lines referred to in the Title Policy for VI - 2 the GDB Mortgage or which actually service or cross the Premises; (iii) the lines of the streets abutting the Premises and the width thereof, and any established building lines; (iv) encroachments and the extent thereof upon the Premises; (v) the Improvements to the extent constructed, and the relationship of the Improvements as reflected by scale to the perimeter of the Premises, established building lines and street lines. (h) Environmental Report: A current Environmental Report. (i) Budget: An up to date Budget for the Project. (j) Special Report: A special written report by the Bank's Consultant, satisfactory to Lender in form and context, setting forth that (i) the Plans for the stages of the Project under construction or to be commenced have been approved by it, by ARPE and all Government Authorities with jurisdiction over the Premises and the Project; (ii) the necessary approval of the Environmental Impact Statement for the Project has been obtained from the Environmental Quality Control Board, as well as the necessary approval of the site and master development plan for the Project from the Planning Board; (iii) the Project as shown by the existing Plans will comply with applicable zoning ordinances and regulations; (iv) all existing and proposed roads and utilities necessary for the full utilization of the Project are or will be sufficient; (v) the adequacy of the Budget for the Construction; (vi) its approval of a soil report and (vii) such other reasonable matter that Lender may require. (k) Insurance: Insurance policies, as required under Article 8.15 hereof, (together with evidence of the payment of the premiums therefor) insuring Project (except for such portions that are not in existence). VI - 3 (l) Title Insurance: A paid title insurance policy (the "Title Policy"), in the full amount of the GDB Mortgage, in form approved by Lender, issued by the Title Insurer which shall insure the GDB Mortgage and the GDB Leasehold Mortgage to be a valid lien on the Premises free and clear of all defects and encumbrances except Permitted Liens and Encumbrances, and to junior liens or encumbrances previously reviewed and approved by Lender, which shall contain a reference to the Survey but no survey exceptions except those theretofore approved by Lender. (m) Contractor's Insurance: Certificates from the insurance carrier for the general contractor or contractors (and, if Borrower is not adequately insured therein, from Borrower's insurance carrier) evidencing workmen's compensation, disability and liability insurance (including contractual liability) carried during the course of construction, naming Lender as an additional insured, with liability insurance limits for death of or injury to persons, satisfactory to GDB. (n) Utility Facilities: Appropriate certifications from the Architects evidencing that the Premises on which the Project is to be constructed will have adequate water supply, storm and sanitary sewerage facilities, fire protection, means of ingress and egress to and from the Premises and public highways, and other required public utilities. (o) Construction Documents: Executed copies of all Construction Documents for the Project, including contracts, subcontracts, and purchase orders for all fixtures and equipment to be installed as required for the operation of the Project. VI - 4 (p) Bonds: Performance bonds and labor and materials payments bonds as may be required under the Construction Management Agreement or Trade Contracts, each for penal sums equal to the amount of each such contract and a Wage Payment Bond for 100% of the amount such contract, each naming Lender as co-obligee and issued by insurance company(ies) acceptable to lender. (q) Construction Schedule: A progress schedule or chart, showing the interval of time over which each item included within the Budget is projected to be incurred or paid. (r) Construction Permit: Two photocopies of the construction permit, and any special permits or licenses required, complete in all respects, which shall authorize the construction of the Project and all Improvements in accordance with the Plans and Specifications, issued by Governmental Authorities with jurisdiction over the Project. (s) Plans and Specifications: Detailed Plans and Specifications for the Project, as approved, consistent with preliminary plans, if any, satisfactory to Lender, including all changes to the date of submission thereof, together with a certificate of the Architects containing a detailed listing of said Plans and Specifications; a statement that said Plans and Specifications fully comply with all applicable Legal Requirements; a statement that said Plans and Specifications are complete in all respects, containing all detailed requisite for the Improvements when built in accordance therewith, shall be ready for occupancy. (t) Taxes: Evidence of payment of real estate taxes on the Premises for the last five (5) years and the current fiscal year. VI - 5 (u) Federal Taxes: Certificate from the Clerk of the United States District Court for the District of Puerto Rico, evidencing that there is no tax liability owing by Borrower, and that no federal tax lien is registered with the Clerk of the United States District Court for the District of Puerto Rico under the Internal Revenue Code of 1986, as amended. (v) Labor Contributions: Certificate from the Secretary of Labor of the Commonwealth of Puerto Rico evidencing that there is no liability for contributions of Puerto Rico evidencing that there is no liability for contributions owing by Borrower under the provisions of the Employment Security Act of 1956, as amended. (w) Partnership Agreement: One (1) certified copy of the partnership agreement of Borrower. (x) Counsel Opinion: Lender shall receive the favorable written opinion of counsel to Borrower, dated the date of this Agreement or thereafter, and in form and substance satisfactory to GDB and its counsel, with respect to such matters and Lender may reasonably require. Since the Project will be constructed in phases or stages, anything to the contrary notwithstanding, the documents required to be submitted to Lender prior to Initial Disbursement under Paragraphs (m), (o), (p), (r) and (s) above, shall be those relating to the stage under construction as of the Initial Disbursement and Borrower shall deliver those related to the next stage to be constructed, within a reasonable time prior to any request for disbursement and in no event later than the date on which such documents are to be delivered to the Bank. ARTICLE 7 Conditions Precedent For All Loans and Disbursement Requirements and Procedures 7.1 The obligation of Lender to make the Initial Disbursement and all additional Disbursements hereunder is subject to the further conditions precedent that: a) On the date of each Disbursement under the Loan the representations and warranties contained in this Agreement shall be true and correct in all material respects on and as of the date of each Disbursement hereunder with the same effect as though such representations and warranties had been made on and as of such date; and on each such date, no Event of Default specified in this Agreement, and no condition, event or act that with the filing of notice or the lapse of time, or both, would constitute such an Event of Default, shall have occurred and be continuing, or shall exist. b) There shall be delivered to Lender, in form and satisfactory to Lender: (i) a Request for Disbursement, in the form of Exhibit "D" hereto, with blanks appropriately filled, executed by a person properly authorized to execute the same on behalf of Borrower. (ii) a Banks' Consultant Report with respect to each Request for Disbursement for Construction Costs, dated the date of each Request for Disbursement, other than the monthly fee under the Construction Management Agreement. (iii) a Notation on the reverse side of the Secured Promissory Note, dated the date of each Disbursement, executed by a person properly authorized to execute such Notation on behalf of Borrower. VII - 2 (iv) in the case of Requests for Disbursements to pay costs which are shown as Soft Costs or the monthly fee payable under the Construction Management Agreement in the Budget, such evidence as Lender may require to the effect that such costs have been properly incurred and are due and payable. (v) evidence satisfactory to Lender that the full amount of all prior Disbursements has been paid out by the Borrower in accordance with this Agreement. c) All Requests for Disbursements hereunder shall be submitted to Lender not more often than once a month. Lender shall be allowed three (3) Business Days following the date of each Request for Disbursement and all other documents and evidence required in the preceding paragraph 7(b) in acceptable form is delivered to Lender to make the requested Disbursement. d) Borrower agrees that it will permit the Banks' Consultant to inspect the periodic progress of the Construction of the Project, the cost therefor to be borne by Borrower. In addition Lender may, at its option, from time to time, during Construction of the Project and until its completion, require, for its own information and protection, evidence from the Borrower of the current and full payment of bills for all labor rendered and materials furnished relating to the Construction of the Project, but Lender shall not be required to ascertain that any bills are paid. The authority herein conferred upon Lender, and any action taken by Lender in making inspections of the Project, will be taken by Lender on its behalf for its own protection only, and Lender shall not be deemed to have assumed any responsibility to Borrower with respect to any such action herein authorized or taken by Lender or with respect to the proper Construction of VII - 3 the Improvements, performance of any Trade Contract, or prevention of claims for mechanic's lien. ARTICLE 8 AFFIRMATIVE COVENANTS So long as Borrower shall be indebted to Lender hereunder or otherwise, Borrower agrees that it will: 8.1 Application of Loan Proceeds. Apply the proceeds of the Loans advanced hereunder as set forth in Article Four hereof. 8.2 Books and Records. Maintain proper books of record and account in accordance with sound accounting practice in which full, true and correct entries shall be made of its dealings and business affairs, and cause such books to be audited at the end of each fiscal year by independent certified public accountants satisfactory to Lender. 8.3 Financial Information. (a) Furnish to Lender within fifty (50) days after the close of each of the first three quarters of Borrower's Fiscal Year, unaudited quarterly financial statements including but not limited to balance sheets, income statements and statements of changes in financial position, together with a certificate signed by the Managing Partner of Borrower certifying that no default has occurred under this Agreement, and that no fact or circumstance exists which, with the lapse of time or the giving of notice or both, would result in an Event of Default hereunder; or if in its opinion, such Event of Default has occurred, or there is in existence such condition, event or act, such statement shall specify the nature thereof. (b) Furnish to Lender within one hundred twenty five (125) days after the end of each Fiscal Year of Borrower financial statements including but not limited to, balance sheets and statements of income, and statements of changes in financial position for such Fiscal Year, VIII - 2 accompanied by the opinion of independent certified public accountants satisfactory to Lender. The firm of Ernst & Young is acceptable to Lender. Each such opinion of independent certified public accountants shall be accompanied by a written statement from the Chief Financial Officer of Borrower certifying that, during the Fiscal Year covered by the Financial Statements there has not occurred or there is not in existence an Event of Default specified in Article Ten hereof or of any condition, event or act which, with the giving of notice or the lapse of time or both, would constitute such an Event of Default. 8.4 Construction Development of the Project. (a) Pursue the Construction of the Improvements with diligence and continuity in order that said Construction be completed in accordance with the Plans and Specifications of the Project and (b) keep the Premises free and clear at all times of claims or attachments for material supplied and for labor or services performed in connection with the Construction of the Project, except Permitted Liens or Encumbrances. 8.5 Effectiveness of Permits; Approvals. Keep in full force and effect every license, permit, consent and approval necessary or appropriate for the ownership, development and operation of the Premises and the Project, if failure to do so will result in a Material Adverse Effect. 8.6 Access by Lender. Permit all officers, qualified employees and other representatives of Lender designated by it to visit and inspect the Premises and examine their books and discuss their affairs, finances and accounts with the officers and auditors thereof, all at such reasonable times and as often as Lender may reasonably request. VIII - 3 8.7 Maintain Rights; Franchises. Maintain, preserve and renew all rights, powers, privileges and franchises possessed by Borrower required or necessary for the conduct of its business and operation of the Premises and the Project. 8.8 Filing of Tax Returns. Timely file any and all tax returns and the like and pay and discharge all lawful taxes, assessments, impositions, and governmental fees charged upon Borrower and pay and discharge all taxes, assessments and governmental charges against Borrower and any of its properties, real or personal. It will likewise pay and discharge all social security taxes, unemployment insurance, State Insurance Fund and the like imposed upon itself, its income and profits or its assets and its payrolls. Borrower shall have the right to contest such taxes in the manner and as provided in Article 8.12 hereof. 8.9 Estoppel Certificates. At any time or times, but in no event more after than twice in any calendar year, within fifteen (15) days after written demand by Lender therefor, Borrower shall deliver to Lender a certificate, duly executed and in form satisfactory to Lender, stating and acknowledging the then unpaid principal balance of the Loans and the fact that there are no defenses, offsets or counterclaims hereunder. 8.10 Correctness of Representations; Warranties. All representations and warranties contained in Article 3 of this Agreement shall, except those which by the action of third parties may otherwise be than as represented, specifically those set forth in Articles 3.7, ,3.15, 3.16 and 3.17 as specifically stated otherwise in the said Articles, remain true and correct in all material respects during the entire term of the Loan. VIII - 4 8.11 Maintenance of Existence and Conduct of Business. Borrower shall (a) do or cause to be done all things necessary to preserve and keep in full force and effect its legal existence, rights and franchises; (b) continue to conduct business substantially as now contemplated and as a going concern; and (c) at all times maintain, preserve and protect all of its trademarks, service marks and trade names. 8.12 Payment of Obligations. (a) Subject to Paragraphs (b) and (c) of this Article 8.12, Borrower shall (i) pay and discharge or cause to be paid and discharged all its debts and obligations, including, without limitation, all the Obligations, as and when due and payable; and (ii) pay and discharge or cause to be paid and discharged promptly all (A) Charges and (B) lawful claims for labor, materials, supplies and services or otherwise before any thereof shall become in default. (b) Borrower may in good faith contest, by proper legal actions or proceedings, the validity or amount of any debts or obligations, other than the Obligations or any Charges, Liens or claims provided that Borrower gives Lender advance notice of its intention to contest the validity or amount of any such Charge, Lien or claim, and that at the time of commencement of any such action or proceeding, and during the pendency thereof (i) no Default or Event of Default shall have occurred; (ii) adequate reserves exist or are established therefor; (iii) such contest operates to suspend collection of the contested Charges, Liens or claims and is maintained and prosecuted continuously with diligence; (iv) none of the Security would be subject to forfeiture or loss of any Lien in favor of Lender by reason of the institution or prosecution of such contents; (v) Borrower shall promptly pay or discharge such contested VIII - 5 Charges and all additional charges, interest, penalties and expenses, if any, and shall deliver to Lender evidence acceptable to Lender of such compliance, payment or discharge, if such contest is terminated or discontinued adversely to Borrower. 8.13 Agreements. Borrower shall perform, within any required time period (after giving effect to any applicable grace periods), all of its Obligations and enforce all of its rights under each agreement to which it is a Party including, without limitation, leases to which Borrower is a Party, where the failure to so perform and enforce would have a Material Adverse Effect. Borrower shall not terminate or modify in any manner any agreement to which it is Party which termination or modification would reasonably be expected to have a Material Adverse Effect. 8.14 Litigation. Borrower shall notify Lender in writing, promptly upon any executive officer of either general Partner of Borrower learning thereof, of any litigation commenced against Borrower, and of the institution against it of any suit or administrative proceeding that would have a Material Adverse Effect. 8.15 Insurance. (a) Prior to the Date of Substantial Completion (as defined in the Reimbursement Agreement), the Borrower, at its sole cost and expense, shall keep the existing structures insured for the benefit of Lender against loss and damage by Fire, Lightning, Collapse, Earthmovement, Flood, Tsunami, Boiler and Machinery, and such other standard Extended Coverage perils as are customarily included under standard "All Risk" policies for other property and buildings similar to the Mortgage Property in nature, use, location, height VIII - 6 and type of construction. The amount of such Insurance Policy(ies) shall be not less than the full Replacement Cost of the then existing structures, with the Agreed Amount and Replacement Cost Endorsements attached, waiving all co-insurance provisions and eliminating the Vacancy and Unoccupied Clause. In addition, prior to the Date of Substantial Completion, the Project shall be covered under an "All Risk" Builder's Risk/Contract Works Policy for the 100% Completed Value (replacement cost) of the contract(s) on a Non-Reporting Form, subject to the same coverages as are required on the presently existing structures, along with extensions of coverage for "Permission to Complete and Occupy," Offsite Storage including Inland and Ocean Transit, "Hot and Cold" Testing, Increased Cost of Construction and Contingent Liability from Building Laws. On and after the Date of Substantial Completion, the Borrower shall secure insurance to cover the Project against loss or damage by fire and such risks as are customarily included in Extended Coverage, and from such other hazards including, without limitation, Flood, Earthmovement, and Coastal Windstorm, as may be covered by the "All Risk" insurance covering other property and buildings similar to the Mortgaged Property in nature, use, location, height and type of construction, in an amount not less than the greater of (A) full insurable value, or (B) an amount sufficient to prevent the Borrower from becoming a co-insurer within the terms of the applicable policies. Said Insurance Policy shall include endorsements for Demolition, Contingent Liability and Increased Cost of Construction. The term "full insurable value" as used in this Section shall mean the cost of actual replacement, without deduction for depreciation, less the costs of excavations, foundations and footings below the lowest basement floor or, if there be no basement, below the level of the ground determined as of the Date of VIII - 7 Substantial Completion and as further determined on the date of each renewal or replacement of such Insurance Policy, as hereinafter set forth. Full insurable value shall be determined by an appraisal made at least once every three (3) years, by an appraiser, appraisal company or insurance company selected by the Borrower and approved by Lender in its sole discretion, and such determination of full insurable value shall be binding and conclusive upon the parties hereto. If any Insurance Policy covering Flood or Earthmovement shall contain annual aggregate limits, such aggregate limits shall be replenished upon the occurrence of a substantial loss, as determined by Lender in its sole discretion. The Insurance Policies described above shall provide for deductions of not more than $10,000 per occurrence for all peril except Flood, Earthmovement, and Coastal Windstorm, for which deductions of not more than $25,000 per occurrence may be made. (b) The Borrower, at its sole cost and expense, shall maintain or cause to be maintained for the benefit of Lender (i) prior to the Date of Substantial Completion, Soft Costs/Additional Expense Incurred, Loss of Gross Earnings and/or Loss of Rental Income on an Actual Loss Sustained Basis for an amount not less than $24,000,000, with an "Extended Period of Indemnity" Endorsement attached; (ii) upon and after the Date of Substantial Completion, coverage for Loss of Gross Earnings and/or Loss of Rental Income, Business Interruption and Additional Expense Incurred Insurance on an Actual Loss Sustained Basis (if available) in the amount equal to the greater of (A) an estimate reasonably satisfactory to Lender of the succeeding year's Gross Revenues (as defined in the Reimbursement Agreement), or (B) $24,000,000 with the Extended Period of Indemnity Endorsement attached; (iii) upon and after VIII - 8 the installation of any boilers and/or machinery at the Project, Boiler and Machinery Coverage for Rent Loss (including, without limitation, from both retail space and nightly room rentals), with an "Extended Period of Indemnity" and Improvements Loss in such amounts as are usually carried by Persons operating property and buildings similar to the Mortgaged Property in nature, use, location, height and type of construction. (c) The Borrower, at its sole cost and expense, shall maintain or cause to be maintained at all times (i) General Public Liability Insurance, including, without limitation, the Broad Form Comprehensive General Liability Endorsement, with the respective Primary Coverage as follows: General Aggregate $ 1,000,000 Per Location Products/Completed Operations *(2 year Completed Operation Extension $ 1,000,000 Personal & Advertising Injury $ 1,000,000 Each Occurrence (Bodily Injury and Property Damage) $ 1,000,000 Fire Damage Legal $ 50,000 Medical Expense $ 10,000 Stop Gap Liability $ 1,000,000 (ii) Umbrella Liability Coverage in an amount of not less than $40,000,000 per occurrence and in the aggregate prior to the Date of Substantial Completion and, thereafter, in an amount of not less than $50,000,000 per occurrence and in the aggregate or such greater amount as Lender shall reasonably require; (iii) Worker's Compensation and Non-Occupational Disability Insurance VIII - 9 as respect a Monopolistic State as required by applicable laws and regulations of the Commonwealth of Puerto Rico; (iv) Marina Operator's Legal Liability, Protection and Indemnity and Marina General Liability; (v) insurance covering pilings, piers, wharves and docks, and environmental impairment coverage (if available) with respect to the marina operation; and (vi) such other types and amounts of insurance with respect to the Mortgaged Property and the operation thereof which are commonly maintained in the case of other property and buildings similar to the Mortgaged Property in nature, use, location, height and type of construction, as may from time to time be required by Lender, including, without limitation, Automobile Liability Insurance in amounts reasonably required by Lender from time to time. (d) All Insurance Policies shall be issued by an insurer admitted and licensed to do business in the Commonwealth of Puerto Rico with an A.M. Best Rating of AX or better and shall be otherwise satisfactory to Lender in form and content. The Property and Business Interruption Insurance Policies shall contain the Standard Mortgagee Non-Contribution Clause Endorsement or its equivalent endorsement satisfactory to Lender, naming Lender as First Mortgagee and providing Lender (except in the case of General Liability and other Liability and Worker's Compensation) as the Person to whom all payments made by such insurance company shall be paid and with whom all claims shall be adjusted, except as otherwise provided in Article 11.4 hereof. All Liability Insurance Policies shall name Lender as Additional Insured according to its respective interest. Without Lender's prior written consent, the Borrower shall not carry separate or additional insurance coverage concurrent in form or contributing in the event of loss with that required by this Agreement or the Reimbursement Agreement. Without VIII - 10 Lender's prior written consent, the Borrower shall not name any Person as named insured or loss payee under any Insurance Policy without Lender's prior written consent. The Borrower shall pay the premiums for the Insurance Policies as the same become due and payable. The Borrower shall deliver original binders and certified copies of the Insurance Policies to Lender as further security for the Borrower's performance of the terms and conditions contained herein, provided that Lender shall not be deemed by reason of the custody of such Insurance Policies to have knowledge of the contents thereof. In the event of a foreclosure of either or both the GDB Mortgage and the GDB Leasehold Mortgage, the purchaser of the Mortgaged Property will succeed to all of the rights of the Borrower, including the rights to all unearned premiums paid, with respect to the Insurance Policies, to the extent assignable. The Borrower also shall deliver to Lender, within 10 days of such party's request, a certificate of insurance issued by the Borrower's insurance agent/broker setting forth the particulars as to all such Insurance Policies, that all premiums due thereon have been paid and that the same are in full force and effect. Not later than 30 days prior to the expiration date of each of the Insurance Policies, the Borrower shall deliver to Lender original binders and certified copies of a renewal policy or policies marked "premium paid" or accompanied by other evidence of payment of premium satisfactory to Lender. (e) Each Insurance Policy to be carried hereunder shall contain a provision whereby the insurer (i) agrees that such policy shall not be cancelled or modified, and shall not fail to be renewed, without at least 60 days' prior written notice to Lender, (ii) waives any right to claim any premiums and commissions against Lender and (iii) provides that Lender VIII - 11 is permitted to make payments to effect the confirmation of such Policy upon notice of cancellation due to nonpayment of premiums. In the event any Insurance Policy (except for general public and other liability, boiler and machinery explosion liability and worker's compensation insurance) shall contain breach of warranty provisions, such Policy shall provide that with respect to the interests of Lender, such Insurance Policy shall not be invalidated by and shall insure Lender regardless of (A) any act, failure to act or negligence of or violation of warranties, declarations or conditions contained in such Policy by any named insured, (B) the occupancy or use of the Mortgage Property for purposes more hazardous than permitted by the terms thereof, (C) any foreclosure or other action or proceeding taken by the Lender pursuant to any provision of this Agreement, or either or both of the GDB Mortgage and GDB Leasehold Mortgage, or (D) any change in title to or ownership of all or any of the Mortgaged Property. (f) Any insurance maintained pursuant to this Article 8.15 may be evidenced by blanket Insurance Policies covering the Mortgaged Property and other properties or assets of the Borrower or any Affiliated Person (as the term is defined in the Collateral Pledge Agreement of even date between Borrower, AFICA and the Bank), provided that any such policy shall specify the portion, if less than all, of the total coverage of such Policy that is allocated to the Mortgaged Property and shall in other respects comply with the requirements of this Article 8.15. Lender, in its sole discretion, shall determine whether such blanket Policies provide sufficient limits of insurance. (g) Notwithstanding anything to the contrary contained herein, if at any time Lender is not in receipt of written evidence that all insurance required hereunder is VIII - 12 maintained in full force and effect, Lender shall have the right, upon notice to the Borrower, to take such action as Lender may deem necessary to protect its interests in the Mortgaged Property, including, without limitation, the obtaining of such insurance coverage as Lender deems appropriate, and all expenses incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by the Borrower promptly after demand and be secured by this Agreement and by the GDB Mortgage and the GDB Leasehold Mortgage. 8.16 Compliance with Law. Borrower shall comply with all United States and Puerto Rican federal, state and local laws and regulations applicable to it, including, without limitation, those regarding environmental matters where the failure to comply would have a Material Adverse Effect. 8.17 Supplemental Disclosure. From time to time as may be necessary (in the event that such information is not otherwise delivered by Borrower to Lender pursuant to this Agreement), so long as there are Obligations outstanding hereunder, Borrower will, as promptly as is reasonable under the circumstances after the Borrower has knowledge with respect thereto, supplement or amend and deliver to Lender (i) any and all material contracts, permits, licenses, declarations and covenants, operating agreements, or any other agreements, documents or instruments pertaining to the Premises; and (ii) any matter with respect to any Exhibit or representation hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Exhibit or as an exception to such VIII - 13 representation or which is necessary to correct any information in such Exhibit or representation which has been rendered inaccurate thereby. 8.18 Recording; Transfer Taxes and Fees. Borrower shall pay all transfer, excise, Mortgage recording or similar taxes and fees in connection with the issuance, sale, delivery or transfer by Borrower to Lender of the GDB Mortgage Note and the execution and delivery of the Security Documents and any other Loan Documents and any other agreements and instruments contemplated hereby, and shall save Lender harmless against any and all liabilities with respect to such taxes. The obligations of Borrower under this Article 8.18 shall survive the payment, prepayment or redemption of the GDB Loan and the termination of this Agreement. 8.19 Preservation of the Properties. Borrower shall upon reaching Substantial Completion of the Project, keep and preserve the Premises in good repair, working order and condition as of the date thereof, normal wear and tear excepted, and from time to time will cause to be made all necessary and proper repair, replacements and renewals. Borrower shall not commit, nor permit any other Person or event (whether by act of God or otherwise) to commit, waste or damage upon the Premises, other than such damages which are covered under the Casualty provisions of this Agreement, without promptly restoring the same to the same or better condition than prior to such occurrence. In the event of any material loss or damage to any portion of the Premises due to fire, floods, wind, or other nature causes, whether alone or in combination, including hurricanes and the effects thereof, Lender with the Bank's approval shall have the right, at its sole discretion to call for a reappraisal of the Premises, the cost VIII - 14 thereof to be borne by Borrower. Borrower will keep the Mortgaged Property free from squatters. 8.20 Environmental Matters. (a) Borrower shall (i) in connection with the ownership and operation of the Premises, comply strictly and in all respects with all applicable Environmental Laws, (ii) promptly forward to Lender a copy of any order, notice, permit, application, or any other communication or report in connection with any release of any hazardous substance or any other matter relating to Environmental Laws as they may affect the Premises and the Project. (b) Borrower shall, pursuant to the terms set forth herein, indemnify GDB and hold GDB harmless from and against any loss, liability, damage or expense, including attorneys' fees, suffered or incurred by GDB, whether as mortgagee pursuant to any Mortgage, as Mortgagee in possession, or a successor in interest to Borrower as owner or lessee of Premises by virtue of foreclosure or acceptance of deed in lieu of foreclosure (i) under or on account of the Environmental Laws, including the assertion of any Lien thereunder; (ii) with respect to any release of any hazardous substance affecting the Premises, whether or not the same originates or emanates from such Premises or any contiguous real estate, including any loss of value of such Premises as a result of a release of any hazardous substance; and (iii) with respect to any other environmental matter affecting such Premises within the jurisdiction of any official administering the Environmental Laws. (c) The obligations of Borrower under this Article 8.20 shall not extend or apply to (i) any condition or state of facts existing in respect of the Premises or the VIII - 15 Improvements on the date the Borrower acquired title to the Fajardo Property from the Puerto Rico Lands Administration or (ii) any condition caused by or resulting from actions taken by or on behalf of the GDB or any failure by the GDB to take any action it might have a duty to take in the event it takes possession or control of the Premises. The Borrower shall make available to GDB to the fullest extent permitted by law any and all rights available to the Borrower against the Puerto Rico Lands Administration with respect to any liability under any Environmental Law, any release of any hazardous substance affecting the Premises or with respect to any other environmental matter affecting the Premises and the Borrower hereby assigns such rights to the GDB and authorizes the GDB to enforce such rights directly against the Puerto Rico Lands Administration to the same extent as if the Borrower enforced such rights. The procedure for Borrower to provide the foregoing indemnifications shall be covered by the procedures set forth in Article 11.3 hereof. 8.21 Notice. Borrower shall promptly give written notice to Lender in the manner provided in Article 11.14 hereof of (i) the occurrence of any Default or Event of Default; (ii) any legal, judicial or regulatory proceedings affecting Borrower or any of its properties or assets, in which the amount involved is material and is not covered (subject to normal deductibles) by insurance and that will have a Material Adverse Effect; (iii) any dispute between Borrower and any governmental regulatory body or other Person that will have a Material Adverse Effect; (iv) substantial damage, loss, or impairment in value, to any part of the Security and/or the Premises, specifying the nature and extent of damage, loss, or impairment in value, and whether such damage, loss, or impairment in value is being repaired VIII - 16 in due course or the total loss or destruction of any material part of the Security and/or the Premises; (v) any other action, event or condition of any nature of which it has knowledge which would result in any Material Adverse Effect; and (vi) the voluntary or involuntary bankruptcy of, or any assignment for the benefit of creditors or the seeking of any relief under any Debtor Relief Law by Borrower. 8.22 Deficiency Loans. Any funds advanced to the Borrower as Deficiency Loans (as defined in the Borrower's Partnership Agreement), whether or not at the direction of the Bank or Lender, shall be applied only to the operating costs or other fees and expenses related to the operation of the Project; provided, however that (a) up to $6,000,000 of such funds available for Deficiency Loans under Borrower's Partnership Agreement may be used by the Borrower to pay any portion of the Total Project Costs for which the Borrower has insufficient funds and (b) the foregoing restriction shall be of no effect from and after the date in which the Coverage Requirement, as such term is defined under the Bank Loan Documents, is met (the "Bank Coverage Date"). After the date of Substantial Completion and until the Bank Coverage Date, in the event (i) Borrower has failed to pay Interest to Lender as provided in Article IV hereof, and such failure shall continue uncured beyond the first (1st) day of the following calendar month in which such payment was due, and (ii) Borrower has paid all interest and other fees due under the Bank Loan Documents on a current basis through and including the 15th day of such month, then Lender shall have the right to cause the Borrower, acting through WKA, to require the General Partners to make Deficiency Loans in amounts of up to $20,000,000 in the aggregate (less the principal amount of any Deficiency Loans previously VIII - 17 made by the General Partners) and to apply such funds on account of Interest then due to the Lender. The Lender shall have no right to cause Deficiency Loans to be made to pay principal under the GDB Loan or under the Bank Loan Documents. In the event that WKA does not make the Deficiency Loan required by the Lender as aforesaid which WKA may be required to make pursuant to Section 6.02 of the Borrower's Partnership Agreement, the Lender may require KGC to make the Deficiency Loan on behalf of WKA through the making of a KG Loan (as defined in the Borrower's Partnership Agreement). In the event of a default by KGC in its obligations to make a KG Loan to fund any Deficiency Loan required by Lender as aforesaid, the Lender shall have the right to cause the Borrower or WKA, respectively, to exercise such rights and remedies with respect thereto as the Lender shall determine. The Lender's right to require Deficiency Loans to be made shall cease (x) during the pendency of any bankruptcy proceeding with respect to the Borrower or (y) in the event of the commencement of any foreclosure proceeding or the exercise of any rights in lieu of foreclosure with respect to the Borrower's interest in the Project. The Lender acknowledges that an aggregate of only $20 million in principal amount of Deficiency Loans is available to the Borrower and, that the Borrower has the right to call upon such Deficiency Loans and apply the proceeds thereof to Total Project Costs, interest and fees in respect of the Loan Documents and Bank Loan Documents and operating deficiencies and in certain circumstances the Bank has the right to call upon such Deficiency Loans and apply the proceeds thereof to operating costs or other fees or expenses related to the operation of the Project. Accordingly, the availability of Deficiency VIII - 18 Loans to pay Interest to the Lender as provided herein is subject to the prior requests for or application of the proceeds of such Deficiency Loans to pay such other permitted items. 8.23 Certification of Substantial Completion. The Borrower upon reaching Substantial Completion of the Project shall submit to Lender a certification from the Architects to that effect, and a certification of the Total Project Costs incurred up to the date of Substantial Completion, signed by the chief financial officer of the Borrower, together with the Financial Statements for the Fiscal Year during which Substantial Completion is reached. 8.24 Permits and Licenses. Borrower possess or will possess when required, all rights, accreditations, franchises patents, permits licenses and privileges necessary for the conduct of its business as now conducted, and as necessary for the ownership and management of the Premises, without known conflict with the rights of any person. 8.25 Of the Project. (a) On or prior to the date of this Agreement, the Borrower will have obtained the approval of ARPE and/or of the Planning Board of Puerto Rico to the site plan and prior to commencement of any stage of the Project, approval to the final Plans and Specifications of such stage of the Project to be commenced shortly thereafter, the approval of all other Governmental Authorities having jurisdiction in the premises, and all permits or licenses necessary to allow the Borrower to proceed with the Construction of the Project. (b) The Project will be completed substantially in accordance with the Plans and Specifications, and in accordance with the use permits and all approvals by VIII - 19 Governmental Authorities having jurisdiction with respect to the use of the whole or any part of the Project will have been obtained on or before Completion Date. (c) The Construction shall be done in a workmanlike manner and Borrower shall provide or cause to be provided all labor, material, and equipment of every kind necessary for the completion of the Construction of the Project, when once begun, and shall proceed continuously to complete the same with all reasonable speed and dispatch. No substantial changes will be made in the Plans and Specifications of any such construction or installations except with prior written notice to and reasonable consent from Lender, and such approvals as shall be necessary under the requirements of ARPE and/or of the Planning Board of Puerto Rico. The Borrower shall make full payments for all costs of all such constructions and installations, promptly as due, except as diligently contested in good faith, and shall assure that no lien arises on account of failure to pay wages of Construction workers. (d) All materials contracted or purchased for delivery to the Project, or for use in its installations or constructions, and all labor contracted or hired for or in connection with said installations or constructions shall be used and employed solely on said Project, and only in accordance with the Plans and Specifications. (e) No part of the Project shall be permitted to become occupied until the applicable use permit required by law has been granted. (f) The Borrower will manage or cause the Project to be managed in conformity with the requirement of Governmental Authorities, and in compliance with any and all rules and regulations affecting the Project. VIII - 20 8.26 Deposit of Escrow Requirement. Deposit with the Escrow Agent The Escrow Requirement when such deposit becomes due, which obligation is hereby guaranteed by the respective general partners of the Borrower by their execution of this Agreement. 8.27 Interest Rate Swap. The Borrower will, upon notice from GDB, promptly enter into an interest rate swap arrangement between counter parties satisfactory to the GDB and the Bank, for a period commencing on the date such arrangement is entered into and ending on the seventh anniversary of the date hereof, if, within a period of five years from the date hereof, quotes by the Bank for a 90 day Libor based Fixed for Floating Rate Swap for a term of seven years equal or exceed 9.5% per annum at a time when three month Libor equals or exceeds 8.5% per annum. 8.28 Expropriation. Borrower agrees to take all actions, execute and deliver all documents and pay all costs and expenses (including, without limitation, payment of the purchase prices therefor) in connection with the acquisition, including, if necessary, (i) the expropriation by the Lands Administration of Puerto Rico and the subsequent sale to Borrower of those parcels of land adjacent to the Project and presently owned by Justino Diaz Santini, and identified on the Boundary Survey Map dated February 19, 1990, prepared by David Lebron Lopez, P.L.S. as Tract and G-1c/1d, (ii) the spreading of the lien of the GDB Mortgage to cover such property, or the granting of a separate mortgage to cover such property and (iii) the endorsement of the Title Policy to include the lien of the GDB Mortgage on such new mortgage with respect to such property. ARTICLE 9 NEGATIVE COVENANTS 9.1 Consent of Lender. The Borrower covenants that it will not, without the prior written consent of Lender, until full payment of the GDB Loan and the performance of all other Obligations of the Borrower hereunder: 9.1.1 Create, assume, or suffer to exist any mortgage, pledge, encumbrance or other lien on the Premises, except for the Permitted Liens and Encumbrances; 9.1.2 Except as contemplated or permitted in this Agreement, become a party to any transaction whereby all or any substantial part of the properties, assets or undertakings of the Borrower (whether legally or beneficially owned) would become the property of any other Person, whether by ways or reorganization, amalgamation, merger, transfer, sale, lease, sale and leaseback, or otherwise; 9.1.3 Permit any change in the legal or beneficial ownership of the Premises, or permit any change in the ownership of the Borrower, except for a Permitted Transfer; 9.1.4 Make any substantial change to the operation of the Project as presently contemplated without the prior written approval of Lender; 9.1.5 Other than in relation to the Project, guaranty or otherwise in any way become or be contingently liable or responsible for obligations of any other Person, including without limitation, by agreement to purchase the Indebtedness of another Person, by agreement for the furnishing of funds to any other Person through the purchase of goods, IX- 2 supplies or services (or by way of stock purchase, capital contribution, loan or advance) for the purpose of paying or discharging the Indebtedness of any other Person, or by agreement that net assets of any other Person, consolidated or otherwise will be maintained in any amount; 9.1.6 Permit any distribution in the form of dividends or withdrawal of any of the profits, funds or assets of the Borrower during the term of this Agreement in respect of any Fiscal Year before the Financial Statements for such Fiscal Year that Borrower has to submit to Lender in the fashion and manner stated in this Agreement, are actually submitted to Lender and at any time when such Financial Statements reveal that there does not exist Distributable Cash, as the term is defined in the Borrowers' Partnership Agreement; 9.1.7 Enter into or permit the entering into of any agreement or arrangement for borrowed money, if such borrowing shall create any mortgage, pledge, lien, hypothecation, charge (fixed or floating), security interest or other encumbrance whatsoever over the Premises except Permitted Encumbrances; 9.1.8 Omitted. 9.1.9 Permit or be a party to any arrangement regarding the dissolution of Borrower; 9.1.10 Borrower shall not directly or indirectly, assign, transfer or attempt to so assign, transfer any of their Rights, duties or Obligations under this Agreement or any other Loan Document except as required under the Bank Loan Documents or as specifically permitted under this Agreement; IX- 3 9.1.11 Agree to a substantial Work Change without the prior written approval of Lender; 9.1.12 Cause any of the material licenses and permits for the Project to be revoked or modified in any manner or form; 9.1.13 Except as permitted in this Article Nine, make any loans and advances, (which terms do not include salaries, bonuses, or other customary compensation as a result of employment) to any of its officers beyond what would be considered reasonable or prudent; 9.1.14 Except Management Fees, make any loans, or advances to, or make any investments in any General or Limited Partner of Borrower; 9.1.15 Permit the aggregate compensation (including salaries, bonuses and other compensation) paid to officers, directors, and employees of Borrower to exceed an amount which is proper and reasonable in relation to the work performed and comparable to that paid by other Persons engaged in similar type of business and producing comparable results from operations; 9.1.16 Engage in any activity not related to the Project or which could not be reasonably regarded as necessary to the development and management of the Project, or invest in any Person, or engage in new ventures or business enterprises; 9.1.17 Engage in any "prohibited transaction" within the meaning of Section 4975 of the Internal Revenue Code or Section 406 of ERISA with respect to any "employee benefit plan", as defined in Section 3 of ERISA; IX- 4 9.1.18 Create any direct or indirect Subsidiary or enter into any partnership, joint venture, or similar arrangements, or make any material change in its partnership structure other than Permitted Transfer; 9.1.19 Amend or materially modify in any material respect Borrowers' Venture Agreement, in effect on the Date of Closing of this Agreement; 9.1.20 Compromise, settle or discharge any action, suit, proceeding or claim which seeks to restrain, prevent, change or otherwise affect, or questions the validity or legality of, the transactions contemplated by this Agreement, the Security Documents or any other Loan Documents, in whole or in part or which seeks damages in connection with any of such transactions; which compromise settlement or discharge affects the interest of Lender under his Agreement; 9.1.21 Enter into any contract or agreement which would materially and adversely affect Borrower or its business, property, assets, operations, condition (financial or otherwise) or enter into any transaction which would materially and adversely affect Borrowers' assets or ability to perform all of their Obligations under this Agreement, the Security Documents or any of the other Loan Documents, which could reasonably be expected to have Material Adverse Effect; 9.1.22 Borrower shall not take or omit to take any action, which act or omission would constitute (i) a Default or an Event of Default pursuant to, or noncompliance with any of, the terms of any of the Loan Documents or (ii) except as provided elsewhere in this Agreement, a material Default or an Event of Default pursuant to, or non-compliance with any IX- 5 other contract, lease, mortgage, deed of trust or instrument to which it is a party or by which it or any of its property is bound, or any document creating a Lien, unless, in either case, such Default, Event of Default or non-compliance would not have a Material Adverse Effect. ARTICLE 10 EVENTS OF DEFAULT; RIGHTS AND REMEDIES 10.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute a "Default" or an "Event of Default" hereunder: (a) Borrower shall fail to make, within ten (10) calendar days of written notice from Lender (by facsimile or otherwise), any payment of principal of, or interest on, or within thirty (30) calendar days of written notice of any other amount owing in respect of, the GDB Loan. (b) Borrower shall fail or neglect to perform, keep or observe any other provision of this Agreement or of any of the other Loan Documents, and the same shall remain unremedied for a period ending thirty (30) days after Borrower shall receive written notice of any such failure from Lender (by facsimile or otherwise) provided that no Default shall exist under this paragraph (b) so long as Borrower is proceeding diligently to cure such failure and such delay would not have a Material Adverse Effect. (c) Any representation or warranty herein or in any Loan Document or in any written statement pursuant thereto or hereto, report, financial statement or certificate made or delivered to Lender by Borrower, shall be untrue or incorrect in any material respect as to Borrower, as of the date when made or deemed made. (d) Omitted. (e) An unreasonable delay in the construction of the Project so that the same may not, in Lender's sole judgment, be completed on or before the Completion Date, provided such delay or discontinuance is not caused by an Unavoidable Delay. X - 2 (f) All or a substantial part of the assets of Borrower shall be attached, seized, levied upon or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors of Borrower and shall remain unstayed or undismissed for sixty (60) consecutive days; or any Person shall apply for the appointment of a receiver, trustee or custodian for any of the assets of Borrower and shall remained unstayed or undismissed for thirty (30) consecutive days; or Borrower shall have concealed or removed, any part of its assets with intent to hinder, delay or defraud its creditors or any of them or made or suffered an unauthorized transfer of any of its assets or incurred an obligation which may be fraudulent under any bankruptcy, fraudulent conveyance or other similar law. (g) A case or proceeding shall have been commenced against Borrower in a court of competent jurisdiction seeking a decree or order in respect of Borrower, (i) under Title 11 of the United States Code, as now constituted or hereafter amended or any other applicable federal, Commonwealth, state or foreign bankruptcy or other similar Law; (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of Borrower, or of any substantial part of its assets, or (iii) ordering the winding-up or liquidation of the affairs of Borrower, and such case or proceeding shall remain undismissed or unstayed for sixty (60) consecutive days or such court shall enter a decree or order granting the relief sought in such case or proceeding. X - 3 (h) Borrower shall (i) file a petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal, State or foreign bankruptcy or other similar Law, (ii) consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of Borrower of any substantial part of its assets; (iii) fail generally to pay its debts as such debts become due, or (iv) take any action in furtherance of any such action. (i) Final judgment or judgments (after the expiration of all times to appeal therefrom) for the payment of money in excess of $500,000.00 shall be rendered against Borrower and the same shall not (i) be fully covered by insurance in accordance with the insurance provisions of this Agreement; or (ii) within sixty (60) days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within five (5) days after the expiration of any such stay. (j) The conveyance, transfer, or other disposition of the Premises or the assignment or purported assignment of the Agreement, the Security Documents or any of its rights thereunder shall have been made by Borrower, except as required under the Bank Loan Documents or pursuant to any Permitted Transfer. (k) Any material provision of any Security Document after delivery thereof shall for any reason cease to be valid or enforceable in accordance with its terms, or any material security interest created under any Security Document shall cease to be a valid and X - 4 perfected second priority security interest or Lien (except as otherwise permitted herein or therein) in any of the Security purported to be covered thereby. (l) Omitted. (m) Any Reportable Event which Lender determines in good faith might constitute grounds for the termination of any Employees' Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Employees' Plan shall have occurred and be continuing sixty (60) days after written notice to such effect shall have been given to Borrower by Lender, or any Employees' Plan shall be involuntarily terminated, or a trustee shall be appointed by an appropriate United States District Court to administer any Employees' Plan, or proceedings to terminate any Employees' Plan or to appoint a trustee to administer any Employees' Plan are commenced. (n) Borrower shall be enjoined, restrained, or in any way prevented by court order, or if any proceeding is filed or commenced seeking to enjoin, restrain, or in any way prevent Borrower from conducting all or a substantial part of its business affairs and/or proceeding with the Premises and the Project and such action is not stayed, nullified or reversed within thirty (30) days thereafter. 10.2 REMEDIES. Upon and during the continuation of any Event of Default hereunder, the Lender shall have the absolute right, at its option and election, to: (a) Cancel this Agreement by written notice to Borrower; (b) Institute appropriate proceedings to specifically enforce performance hereof; X - 5 (c) Withhold further disbursements hereunder; (d) Apply for the appointment of a receiver, as a matter of strict right without regard to the solvency of Borrower, for the purpose of preserving the Premises, preventing waste, and to protect all rights accruing to Lender by virtue of this Agreement. All expenses incurred in connection with the appointment of said receiver, or in protecting and preserving the Premises, shall be chargeable against Borrower and shall be enforced as a lien against the Premises; (e) Accelerate maturity of the Notes and demand payment of the principal sums due thereunder, with interest and costs, and in default of said payment or any part thereof, to foreclose and enforce collection of such payment by foreclosure and/or other appropriate action in any Tribunal. The said remedies and rights of Lender shall be cumulative and not exclusive. Lender shall be privileged, and shall have the absolute right, to resort to any or all of said remedies, none to limit or exclude any other. In any Event of Default, Lender shall have the absolute right to refuse to disburse the balance of the Loan Commitment, and no Person shall have any interest in the undisbursed balance of the Loans and shall not have any right to require or compel payment thereof toward discharge or satisfaction of any claim or lien which they or any of them have or may have for work performance on, or materials supplied to, the Improvements. X - 6 10.3 WAIVER OF DEFAULTS. The waiver by Lender of any Event of Default hereof shall not be deemed, nor shall the same constitute, a waiver of any subsequent Event of Default. 10.4 WAIVERS BY BORROWER. Except as otherwise provided for in this Agreement and applicable Law, Borrower waives to the fullest extent permitted by law (i) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, comprise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard, (ii) all rights to notice and a hearing prior to Lender's taking possession or control of, or to Lender's replevy, attachment or levy upon, the Security or any bond or other collateral which might be required by any court prior to allowing Lender to exercise any of its remedies, and (iii) the benefit of all valuation, appraisal and exemption Laws. 10.5 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default and Lender's termination of this Agreement or Lender's declaring all obligations to be forthwith due and payable pursuant to the provisions of Section 10.2 hereof, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by Lender to or for the credit or the account of Borrower against any and all of the obligations of Borrower now or hereafter existing under this Agreement, irrespective of whether or not Lender shall have made any demand under this X - 7 Agreement and although such Obligations may be unmatured. Lender agrees promptly to notify Borrower after any such set-off and application may be Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off application. 10.6 CONTROL. None of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, given Lender under this Agreement the right or power to exercise control over the affairs and/or management of Borrower, the power of GDB under this Agreement being limited to the right to exercise the remedies provided in this Article 10. ARTICLE 11 MISCELLANEOUS 11.1 No Agency Relationship. The Borrower understands and agrees that Lender is not the agent, representative, or partner of, or joint-venturer with the Borrower, and this Agreement shall not be construed to make Lender liable to materialmen, contractors, craftsmen, laborers, or others for goods or services furnished by them in or into the Project, or for debts or claims accruing to the said parties against the Borrower, and it is distinctly understood and agreed that there is no contractual relation, either express or implied, between Lender and any materialmen, subcontractors, craftsmen, laborers or other person or persons supplying any work or materials in and to the Project, or of any part thereof. This Agreement shall not give rise to the application of the doctrine of third party beneficiary. 11.2 Liability. It is understood between the parties hereto that Borrower has selected or will select all architects, engineers, contractors, subcontractors, materialmen, as well as all others furnishing services or materials for the Project and Lender has, and shall have, no responsibility whatsoever for them or for the quality of their materials or workmanship, it being understood that Lender's sole function is that of lender and the only consideration passing from Lender to Borrower is the proceeds of the Loans in accordance with and subject to the terms of this Agreement. It is also agreed that Borrower shall have no right to rely on any procedures required by Lender herein, such procedures being for the protection of Lender as Lender and no one else. Borrower hereby agrees to hold and save Lender harmless and indemnify it against and from claims, of any kind, of any persons, including but without limiting the generality of the foregoing, employees of Borrower, any contractor constructing the Improvements and the XI - 2 employees of any such contractor, any tenant of Borrower, any subtenant or concessionaire of any such tenant, and the employees and business invitees of any such tenant, subtenant or concessionaire, arising from or out of the construction, use, occupancy, or possession of the Improvements by or on behalf of Borrower. 11.3 Indemnity of Lender. Borrower hereby indemnifies the Lender, and its respective directors, officers, employees, Affiliates and agents (collectively, "Indemnified Persons") against, and agrees to hold each such Indemnified Person harmless from, any and all losses, claims, damages and liabilities, and related expenses, including reasonable counsel fees and expenses, incurred by such Indemnified Person arising out of any claim, litigation, investigation or proceeding (whether or not such Indemnified Person is a party thereto) relating to any transaction, services or matters that are the subject of the Loan Documents; provided, however, that such indemnity shall not apply to any such losses, claims, damages, or liabilities or related expenses determined by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Indemnified Person and provided further that Borrower's obligations with respect to environmental matters is solely under Article 8.20 hereof and not under this Article 11.3. If any litigation or proceeding is brought against any Indemnified Person in respect of which indemnify may be sought against Borrower pursuant to this Article 11.3, such Indemnified Person shall promptly notify Borrower in writing of the commencement of such litigation or proceeding, but the omission so to notify Borrower shall not relieve Borrower from any other obligation or liability which it may have to any Indemnified Person otherwise than under this Article 11.3 or Article 8.20. Failure of the Indemnified Person XI - 3 to timely notify Borrower of the commencement of such litigation of proceeding shall not relieve Borrower of its obligation under Article 11.3 or Article 8.20, except where and to the extent such failure irrevocably prejudices any action to hold such Indemnified Person harmless therefrom. In case any such litigation or proceeding shall be bought against any Indemnified Person and such Indemnified Person shall notify Borrower of the commencement of such litigation or proceeding, Borrower shall be entitled to participate in such litigation or proceeding and, after written notice from Borrower to such Indemnified Person, to assume the defense of such litigation or proceeding with counsel of its choice at its expense, provided that such counsel is satisfactory to the Indemnified Person in the exercise of its reasonable judgment. Notwithstanding the election of Borrower to assume the defense of such litigation or proceeding, such Indemnified Person shall have the right to employ separate counsel and to participate in the defense of such litigation or proceeding if (i) the use of counsel chosen by Borrower to represent such Indemnified Person would present such counsel with a material conflict of interest; (ii) the defendants in, or targets of, any such litigation or proceeding include both and Indemnified Person and Borrower, and such Indemnified Person shall have reasonable concluded that there may be legal defenses available to it which are different from or additional to those available to Borrower in which case Borrower shall not have the right to direct the defense of such action on behalf of the Indemnified Person); (iii) Borrower shall not have employed counsel satisfactory to such Indemnified Person in the exercise of the Indemnified Person within a reasonable time after notice of the institution of such litigation or proceeding; or (iv) Borrower shall authorize in writing such Indemnified Person to employ separate counsel at the expense of Borrower, XI - 4 provided that Borrower shall not be liable for the fees, costs and expenses of more than one separate counsel at the same time for all such Indemnified Persons in connection with the same action and any separate but substantially similar or related action in the same jurisdiction. Borrower shall not consent to the entry of any judgment or enter into any settlement in any such litigation or proceeding unless such judgment or settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Person of a release from all liability in respect to such claim or litigation. The agreements of Borrower in the Article 11.3 shall be in addition to any liability that Borrower may otherwise have and shall be continuing and survive the repayment of the GDB Loan. All amounts due under this Article 11.3 shall be payable as incurred upon written demand therefor, and shall be guaranteed by the Security. 11.4 Damage or Destruction. (a) In case of a Casualty, the Borrower will immediately give notice thereof to Lender generally describing the nature and extent of such Casualty and setting forth the Borrower's best estimate of the cost of Restoration and the Borrower shall, at its sole cost and expense, promptly commence and diligently complete or cause to be commenced and diligently completed, the Restoration in a good and workmanlike manner and in compliance with all Legal Requirements. (b) Lender shall be entitled to receive all insurance proceeds payable on account of a Casualty. The Borrower hereby irrevocably assigns, transfer and sets over to Lender all rights of the Borrower to any such proceeds, award or payment and irrevocably XI - 5 authorizes and empowers Lender, in the name of the Borrower or otherwise, to file for and prosecute in its own name what would otherwise be the Borrower's claim for any such proceeds. Notwithstanding the foregoing, so long as no Default or Termination Payments (as the term is defined in the Collateral Pledge Agreements of even date between Borrower, AFICA and the Bank) Event of Default shall have occurred and shall then be continuing and provided the Borrower promptly files all claims and diligently prosecutes same, the Borrower shall have the right to file, adjust, settle and prosecute any claim for such proceeds; provided that the Borrower shall not agree to any adjustment or settlement of any such claim payable with respect to a Major Casualty without Lender's prior written consent. The Borrower shall pay promptly after demand all costs and expenses (including, without limitation, attorneys' fees and expenses) incurred by Lender in connection with a Casualty and the seeking and obtaining of any insurance proceeds, award or payment with respect thereto. (c) In the event of a Major Casualty, the Net Proceeds shall be held, at Lender's option, by Lender as additional collateral for the Note and shall be applied or dealt with by Lender as follows: (i) if the Release Conditions (as hereinafter defined) are satisfied, all Net Proceeds shall be made available to the Borrower to be applied towards the cost of the Restoration in accordance with paragraph (e) of this Article 11.4; and (ii) if the Release Conditions are not satisfied, all Net Proceeds shall be applied in accordance with Article 11.6 hereof. XI - 6 (d) In case of a Major Casualty, all Net Proceeds shall be applied as provided in clause (i) of paragraph (c) of this Article 11.4 if all of the following conditions are satisfied or otherwise waived by the Lender (collectively, the "Release Conditions"): (i) no Default or Termination Payments Event of Default shall have occurred and be continuing; (ii) the Borrower shall have delivered to Lender within thirty (30) days after the occurrence of the Major Casualty, a notice of the Borrower's desire to undertake the Restoration of the Project; (iii) the Borrower shall have demonstrated to the satisfaction of Lender that the Restoration of the Project can be completed at least six months prior to the then current due date of the Term Loan; (iv) the Borrower shall have demonstrated to the satisfaction of Lender that sufficient funds are available to the Borrower through revenues and/or business interruption insurance maintained pursuant to Article 8.15 hereof, and/or a cash deposit, letter or credit or similar cash-equivalent security (which in the case of a letter of credit or similar cash-equivalent security shall be satisfactory to Lender as to form, content, and issuer) and which shall be for the benefit of Lender, to pay all amounts estimated to be paid with respect to the GDB Loan, and all other estimated operating expenses with respect to the Project during the period estimated by the Borrower and approved by Lender as necessary for the completion of the Restoration; (v) in the event that the estimated cost of Restoration is greater than 25% of the full replacement cost of the Project (as specified in the Borrower's Casualty XI - 7 Insurance Policy), Borrower shall have provided Lender with a guaranty of completion of the Restoration satisfactory to Lender as to form, content and guarantor which, among other things, ensures that sufficient funds are and will be available to complete the Restoration; and (vi) to the extent, in Lender's judgment, that the Net Proceeds are insufficient to pay the costs of the Restoration, the Borrower shall have provided Lender with a cash deposit, letter of credit, or similar cash-equivalent security in the amount of such deficiency (which in the case of a letter of credit or similar cash-equivalent security shall be satisfactory to Lender as to form, content and issuer). (e) Provided that no Default or Termination Payments Event of Default shall have occurred and be continuing, then, upon the occurrence of a partial destruction of the Project that does not constitute a Major Casualty or upon the occurrence of a Major Casualty in connection with which the Release Conditions have been met, the Net Proceeds shall be paid over to the Borrower for the Restoration of the Project. The Net Proceeds shall be disbursed substantially in accordance with the requirements of Article 7 of this Agreement such that the Net Proceeds shall be advanced in the same manner and subject to the same conditions as the disbursements of the proceeds of the GDB Loan. Notwithstanding the foregoing, after the Date of Substantial Completion, the Net Proceeds from a Casualty that does not constitute a Major Casualty shall be paid over to the Borrower for the Restoration of the Project without any requirement that the Borrower comply with the provisions of Article 7 of this Agreement. (f) All costs and expenses incurred by Lender in connection with making the Net Proceeds or Net Restoration Awards available for the Restoration (including, without XI - 8 limitation, attorneys' fees and expenses and fees and expenses of the Bank's Consultant) shall be paid by the Borrower. Any Net Proceeds or Net Restoration Awards remaining after the Restoration and the payment in full of all costs incurred in connection with the Restoration shall be applied to the repayment of any outstanding obligations of the Borrower under the GB Loan. 11.5 Taking of the Mortgaged Property. (a) In case of a Taking or the commencement of any proceeds or negotiations that might result in a Taking, the Borrower immediately will give notice thereof to Lender generally describing the nature and extent of such Taking or the nature of such proceedings or negotiations and the nature and extent of the Taking which might result therefrom. Lender shall be entitled hereunder to all awards or compensation payable on account of a Taking. The Borrower hereby irrevocably assigns, transfers and sets over to Lender all rights of the Borrower to any such awards or compensation and irrevocably authorizes and empowers Lender in the name of the Borrower or otherwise, to collect and receive any such award or compensation and to file and prosecute any and all claims for any such awards or compensation. Notwithstanding the foregoing, so long as no Default or Termination Payments Event of Default shall have occurred and shall then be continuing and provided the Borrower promptly files and diligently prosecutes such claim or claims, the Borrower shall have the right to prosecute and file any such claim or claims and the Borrower shall cause any such award or compensation to be collected and promptly paid over to Lender; provided, that, the Borrower shall not agree to or accept any ward or compensation without Lender's prior written consent. Lender may participate in such proceeds or negotiations, and the Borrower will deliver or cause to be delivered to Lender all XI - 9 instruments requested by Lender to permit such participation, provided that Lender shall be under no obligation to question the amount of the award or compensation. Although it is hereby expressly agreed that the same shall not be necessary, in any event, the Borrower shall, upon demand of Lender, make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning any such award or compensation to Lender, free and clear of any encumbrances of any kind or nature whatsoever other than any junior encumbrances arising as a result of the KGC Mortgage (as such term is defined in the Reimbursement Agreement). The Borrower will pay promptly after demand all costs and expenses (including, without limitation, attorneys' fees and expenses and fees and expenses of the Bank's Consultant) incurred by Lender in connection with any Taking and seeking and obtaining any award or payment on account thereof. (b) In case of a Taking such that, in Lender's judgment, the Project can be restored substantially to its value and usefulness as it existed prior to such Taking, then, the Borrower shall, at its sole cost and expense, promptly commence and diligently complete the Restoration in a good and workmanlike manner, and in compliance with all Legal Requirements. (c) All Net Restoration Awards shall be held, at Lender's option, by Lender as additional collateral for the Note and shall be applied or dealt with by Lender as follows: (i) Provided that no Default or Termination Payments Event of Default shall have occurred and be continuing, then, in the case of a Taking of the nature referred to in paragraph (b) of this Article 11.5 and, to the extent necessary thereunder, if the Release Conditions are satisfied, all Net Restoration Awards shall be applied to pay the cost of XI - 10 Restoration of the portion of the Project remaining after such Taking, such application to be effected substantially in the same manner as provided in paragraph (e) of Article 11.5 hereof with respect to Net Proceeds and the balance, if any, of such Net Restoration Awards shall be applied in the manner set forth in Article 11.4(g) hereof. (ii) In the case of any Taking other than a Taking of the nature referred to in paragraph (b) of this Article 11.5, all Net Restoration Awards actually received by the Bank shall be applied in accordance with Article 11.6 hereof. (d) Notwithstanding anything to the contrary contained herein, in the case of a Taking such that, in Lender's judgment, the Project is an economically viable architectural whole notwithstanding such Taking, the Borrower shall have no obligation to commence or complete Restoration and all Net Restoration Awards shall be applied in the order specified in Article 11.6 hereof. 11.6 Application of Proceeds Upon Casualty or Substantial Taking . Upon a Casualty, if the disposition of the Net Proceeds is governed by clause (ii) of paragraph (c) of Article 11.4 hereof or upon a taking, if the disposition of the Net Restoration Awards is governed by clause (ii) of paragraph (c) or paragraph (d) of Article 11.5 hereof, Lender shall have the option, in Lender's sole discretion to (a) make available the Net Proceeds or the Net Restoration Awards, the case may be, to the Borrower for Restoration in the manner provided in paragraph (e) of Article 11.4 hereof or (b) apply such Net Proceeds or Net Restoration Awards to the payment of any outstanding obligations of the Borrower under the Note. XI - 11 If Lender shall receive and retain any Net Proceeds or Net Restoration Awards, in trust or otherwise, the indebtedness evidenced by the Note shall be reduced only by the amount thereof received and retained by Lender and actually applied by Lender in reduction of the indebtedness evidenced by the Note. Notwithstanding anything contained in this Agreement to the contrary, Lender shall release the proceeds of any business interruption insurance maintained hereunder to the Borrower provided that the Borrower satisfies the conditions set forth in Article 11.4(d)(i), (ii) and (iv) herein and provided, further, that Lender shall retain that portion of such insurance proceeds that Lender deems necessary to pay all amounts estimated to become payable with respect to the Note during the period estimated by the Borrower and approved by Lender as necessary for the completion of the Restoration, the balance of such insurance proceeds to be released in accordance with the other terms and conditions set forth herein, as applicable. 11.7 Complete Agreement; Modification of Agreement. The Loan Documents constitute the complete agreement between the Parties with respect to the subject matter hereof and may not be modified, altered or amended except by an agreement in writing signed by the Borrower and the GDB. No amendment or waiver of any provision of this Agreement, Notes or any other Loan Document, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by GDB, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. XI - 12 11.8 Fees and Expenses. The Borrower shall pay all reasonable out-of-pocket expenses of Lender in connection with the preparation of the Loan Documents (including the fees and expenses of all of its counsel and consultants retained in connection with the Loan Documents and the transactions contemplated thereby). If, at any time or times, regardless of the existence of any Event of Default (except with respect to paragraphs (iii) and (iv), which shall be subject to an Event of Default having occurred and be continuing), the Lender shall employ counsel for advice or other representation in connection with or shall incur reasonable legal or other costs and expenses in connection with: (i) any amendment, modification, termination or waiver, or consent with respect to, any of the Loan Documents; (ii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, the Borrower, or any other Person) in any way relating to the Security, any of the Loan Documents or any other agreements to be executed or delivered in connection herewith; (iii) any attempt to enforce any rights of GDB against the Borrower, or any other Person, that may be obligated to the Lender by virtue of any of the Loan Documents; (iv) any attempt to verify, protect, collect, sell, liquidate or otherwise dispose of the Security; then, and in any such event, the reasonable attorneys' fees arising from such services, including those of any appellate proceedings, and all reasonable expenses, costs, charges and other fees incurred by such counsel in any way or respect arising in XI - 13 connection with or relating to any of the events or actions described in this Section shall be payable, on demand, by the Borrower to Lender and shall be additional Obligations secured under this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: paralegal fees, accountants' fees, court costs and expenses; court reporter fees, and expenses for travel, paid or incurred in connection with the performance of such legal services. 11.9 No Waiver by Lender. Lender's failure, at any time or times, to require strict performance by the Borrower of any provisions of this Agreement and any of the other Loan Documents shall not waive, affect or diminish any right of the Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Lender of an Event of Default by the Borrower under the Loan Documents shall not suspend, waive or affect any other Event of Default by the Borrower under this Agreement and any of the other Loan Documents whether the same is prior or subsequent thereto and whether the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of the Borrower contained in this Agreement or any of the other Loan Documents shall be deemed to have been suspended or waived by the Lender, unless such suspension or waiver is by an instrument in writing signed by an officer of the Lender and directed to the Borrower specifying such suspension or waiver. 11.10 Remedies. Lender's rights and remedies under this Agreement shall be cumulative and non-exclusive of any other rights and remedies which Lender may have under XI - 14 any other agreement, including without limitation, the Loan Documents, by operation of law or otherwise. Recourse to the Security shall not be required. 11.11 Parties. This Agreement and the other Loan Documents shall be binding upon, and inure to the benefit of, Lender's approved successors of the Borrower, the Lender and the assigns, transferees and endorsees of the Lender. Nothing in this Agreement or the other Loan Documents, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy or claim under this Agreement. 11.12 Conflict of Terms. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.13 Authorized Signatories. Until Lender shall be notified by the Borrower to the contrary, the signature upon any document or instrument delivered pursuant hereto of an authorized representative of the Borrower shall bind the Borrower and be deemed to be the act of the Borrower affixed pursuant to and in accordance with resolutions duly adopted by the Borrowers' authorized representatives. 11.14 Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the Parties by another, or whenever any of the Parties desires XI - 15 to give or serve upon another any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered in person with receipt acknowledged, or telecopied and confirmed immediately in writing by a copy mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as hereafter set forth, or mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Lender: Governmental Development Bank for Puerto Rico Box 42001 San Juan, Puerto Rico 00940-2001 Attention: President and Director of Private Sector - Banking Services With a copy to: Melendez-Perez, Moran & Santiago Box 19328 Santurce, Puerto Rico 00919 Attention: Ramon-Loubriel, Esq. (b) If to Borrower: El Conquistador Partnership L.P. c/o Williams Hospitality Management Corp. 187 East Isla Verde Road San Juan, Puerto Rico 00913 Attention: Mr. Hugh A. Andrews Authorized Representative With copy to: Whitman & Ransom 200 Park Avenue New York, New York 10166 Attention: Jeffrey N. Siegel, Esq. XI - 16 and Kumagai Caribbean, Inc. c/o Williams Hospitality Management Corp. 187 East Isla Verde Road San Juan, Puerto Rico 00913 Attention: Mr. Shunsuke Nakane and WMS Industries, Inc. 3401 North California Avenue Chicago, Illinois 60618 Attention: Neil D. Nicastro and Messrs. Burton and Richard Koffman c/o Richford American 950 Third Avenue New York, New York 10022 11.15 Captions. The headings, captions and arrangements used herein and in any of the Loan Documents are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of the Loan Documents, nor affect the meaning thereof. 11.16 Exhibits and Schedules. The Preamble and all exhibits and schedules attached hereto shall be and are hereby incorporated herein, and made a part of this Agreement for all purposes. 11.17 Omitted. 11.18 Governing Law and Venue: XI - 17 (a) The Loan Documents are being executed and delivered by Borrower and Lender, and are intended to be performed, in the Commonwealth of Puerto Rico, and (except as specifically provided otherwise in any Loan Document or to the extent that the Laws of any other jurisdiction otherwise require) the Laws of the Commonwealth of Puerto Rico shall govern the rights and duties of the Parties and the validity, construction, enforcement, and interpretation of the Loan Documents. (b) Borrower hereby submits itself to the venue of the Superior Court of Puerto Rico, Humacao Part, or any other court GDB may elect in any litigation or dispute arising out of, connected with, related to or incidental to the relationship established between Borrower and Lender in connection with this Agreement, and whether arising in contract, tort, equity or otherwise. 11.19 Severability. If any provision of any of the Loan Documents is held to be illegal, invalid or unenforceable under present or future Laws effective during the term thereof, such provision shall be dully severable; the appropriate Loan Document shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof; and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. 11.20 Entire Agreement. This Agreement embodies the entire agreement among the Parties with respect to the subject matter hereof, supersedes all prior agreements and understandings, if any, relating to the subject matter hereof, and may be amended only by an instrument in writing executed jointly by authorized Persons on behalf of each of the Borrower XI - 18 and GDB, and supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. 11.21 Survival of Representations. All indemnities, representations and warranties herein contained or made in writing in connection with this Agreement shall survive the execution and delivery of this Agreement and the making of the Loans hereunder and shall continue in full force and effect until the Obligations shall have been paid in full. Further, as specifically provided herein, certain indemnities, representations and warranties shall survive the repayment of the loan, cancellation of the Notes and release of the Lender's Lien. 11.22 GDB's Consent. Whenever under this Agreement the consent or approval of GDB is required or necessary, GDB will diligently respond to any request for such action, consent or approval and shall execute and deliver such documents, instruments and agreements or give such instruction as may be necessary to effect the terms and spirit of this agreement and the other Loan Documents. 11.23 Reliance by Lender. The Lender may but shall be under no obligation to rely upon the advice of its legal counsel and of the Bank's Consultant, as well as of all other parties whose advice it obtains in connection with all decisions made by the Lender in connection with any matters discussed herein. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date and year first above written. XI - 19 EL CONQUISTADOR PARTNERSHIP, L.P. GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO By: WKA EL CON ASSOCIATES By: /s/ -------------------------- Its General Partner George Barr Wilson Executive Vice President Itself By: /s/ -------------------------- Norman Jules Menell BY: KUMAGAI CARIBBEAN, INC. Its General Partner Itself By: /s/ -------------------------- Shunsuke Nakane President Affidavit Number: ------------------- Sworn and subscribed to before me in San Juan, Puerto Rico, this 7th day of February, 1991, by the above signed persons, of the personal circumstances above mentioned and in their stated capacity and representation, personally known to me. /s/ --------------------------- Notary Public EX-10 19 EXHIBIT 10.16 FIRST AMENDMENT TO GDB LOAN AGREEMENT This Amendment Agreement ("the Amendment Agreement"), entered into this 5th day of May, 1992, by and between: THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO, (hereinafter the "GDB"), a banking institution of the Government of the Commonwealth of Puerto Rico, created by Act 17, enacted on September 23, 1948, with principal offices in San Juan, Puerto Rico, represented herein by its Executive Vice President, Mr. Hiram Melendez Carrucini, of legal age, married, bank executive and resident of San Juan, Puerto Rico; and EL CONQUISTADOR PARTNERSHIP L.P. (hereinafter the "BORROWER"), a limited partnership organized and existing under the laws of the state of Delaware, duly qualified and authorized to do business in and within the Commonwealth of Puerto Rico, herein represented by its partners, WKA EL CON ASSOCIATES, a partnership organized and existing under the laws of the State of New York, duly qualified and authorized to do business in and within the Commonwealth of Puerto Rico, herein represented by its General Partner, Mr. Hugh Andrews, of legal age, business executive and resident of San Juan, Puerto Rico; and KUMAGAI CARIBBEAN, INC., a corporation organized and existing under the laws of the State of Texas, duly qualified and authorized to do business in and within the Commonwealth of Puerto Rico, represented herein by its President, Mr. Shunsuke Nakane, of legal age and resident of San Juan, Puerto Rico (hereinafter collectively the "PARTNERS"). WITNESSETH WHEREAS, GDB and Borrower on the 7th day of February, 1991 executed a Loan Agreement (the "GDB Loan Agreement") in the principal amount of TWENTY FIVE MILLION DOLLARS (U.S. $25,000,000) to be used for financing part of the Improvements; and WHEREAS, under Paragraph 4.3 of the GDB Loan Agreement, Borrower is required to deposit certain funds in an escrow fund for the benefit of GDB; and WHEREAS, GDB and Borrower have agreed to amend the GDB Loan Agreement to provide that the amount deposited under the GDB Escrow Agreement may be applied to satisfy accrued but unpaid interest under the GDB Loan Agreement; NOW, THEREFORE, in consideration of the premises and mutual agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The GDB Loan Agreement is, in accordance with Paragraph 11.7 thereof, hereby amended by revising paragraph 4.3(f) to read as follows: "(f) Amounts in the GDB Escrow may be paid out as follows: (i) The Borrower may, at any time after the payment or the maturity of the loan under the Bank Loan Documents, use amounts in the GDB Escrow to prepay the outstanding principal amount of the GDB Loan; (ii) On the Maturity Date, any amounts in the GDB Escrow shall be applied to the payment of all amounts due under the GDB Loan; and (iii) If, in any calendar month, Borrower has paid all interest and other fees due under the Bank Loan Documents on a current basis through and including the 2 15th day of such month, any amount in the GDB Escrow shall be applied, on the last day of such calendar month, to the payment interest that has accrued and is due but unpaid under the GDB Loan." 2. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the GDB Loan Agreement. 3. GDB acknowledges that the amount of Deficiency Loans available to the Borrowers has been reduced to $14,000,000 pursuant to the First Amendment, of even date herewith, to the Letter of Credit and Reimbursement Agreement dated February 7, 1991, between the Partnership and the Bank. All references in Paragraph 8.22 of the GDB Loan Agreement to $20,000,000 are hereby revised to $14,000,000, and the provision containing clauses (a) and (b) in the first sentence of Paragraph 8.22 is hereby deleted. 3 IN WITNESS WHEREOF, the parties have caused this Amendment Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. EL CONQUISTADOR PARTNERSHIP L.P. GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO By: WKA EL CON ASSOCIATES By:/s/ Its General Partner -------------------------------------- Hiram Melendez Carrucini Itself by: /s/ ------------------------ Hugh A. Andrews Authorized Signatory By: KUMAGAI CARIBBEAN, INC. Its General Partner Itself by: /s/ ------------------------- Shunsuke Nakane President 4 EX-10 20 EXHIBIT 10.17 SECOND AMENDMENT TO LOAN AGREEMENT This Second Amendment to Loan Agreement (this "Second Amendment") is entered into as of the 4th day of October, 1996 between the Government Development Bank for Puerto Rico, as lender ("GDB") and El Conquistador Partnership, L.P., as borrower (the "Borrower"). RECITALS 1. GDB and the Borrower entered into that certain Loan Agreement dated February 7, 1991, as amended by that certain First Amendment to Loan Agreement dated May 5, 1992 (collectively, the "Loan Agreement"), with respect to the construction of the El Conquistador Resort and Country Club (unless otherwise defined herein, all capitalized terms used in this Second Amendment shall have the meanings assigned to the same in the Loan Agreement). 2. GDB has agreed to loan to Borrower an additional $6,000,000.00, as revolving credit facility, subject to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. The following definitions are hereby added to Article 2 of the Loan Agreement: (a) "Accounts Receivable" shall mean all of the Borrower's present and future rights to payment with respect to the operation of the Improvements, -2- including, without limitation: (i) goods provided or sold and services rendered, including, without limitation, merchandise or inventory sold or leased; (ii) rental of rooms, ballrooms and other areas that comprise the hotel portion of the Improvements, or other proceeds therefrom; (iii) food and beverage operations or other hotel services with respect to the Improvements; and (iv) any proceeds of the foregoing, including, without limitation, all of the Borrower's rights to receive payment from any consumer credit or charge card organization or entity and all substitutions therefor and proceeds thereof (whether cash or non-cash, movable or immovable, tangible or intangible) received upon the sale, exchange, transfer, collection or other disposition or substitution thereof. The foregoing definition shall not include rights to payments arising from Borrower's: (a) casino operations; (b) sale or rental of assets outside the ordinary course of business; or (c) rentals or concession fees arising from the lease or concession of commercial or retail space. (b) "Advance" shall mean individually and collectively the proceeds of the Revolving Loan delivered to the borrower by GDB pursuant to Section 4.7(a) hereof. (c) "Assignment of Accounts Receivable" shall mean that certain Constitution of Assignment of Accounts Receivable executed pursuant to Section 4.7 and forming part of the Security. -3- (d) "Credit Facility" shall mean that certain loan in the amount of $8,000,000 from GDB to Kumagai Caribbean, Inc. and WKA El Con Associates as evidenced by that certain Credit Facility Loan Agreement and the other Credit Facility Loan Documents. (e) "Credit Facility Loan Agreement" shall mean that certain Credit Facility Loan Agreement dated May 5, 1992 between GDB and Kumagai Caribbean, Inc. and WKA El Con Associates, evidencing, in part, the Credit Facility. (f) "Credit Facility Loan Documents" shall mean the Credit Facility Loan Agreement and all other agreements, notes, documents and instruments delivered by Borrower pertaining to the Credit Facility as hereafter renewed, amended or supplemented from time to time. (g) "Credit Facility Mortgage" shall mean that certain Mortgage in the amount of $6,000,000, from the Borrower in favor GDB as per Deed No. 6 executed in San Juan on May 5, 1992 before Eugenio Otero Silva and recorded at page 207 of volume 353 of Fajardo, property no. 15204, fourth and last inscription, which secures, in part, the Credit Facility. (h) "Mortgage Note" shall mean that certain Mortgage Note in the amount of $6,000,000 from Borrower in favor of GDB given in connection with the Revolving Loan Mortgage. For the purposes of Article 10 and -4- Article 11, the term "Note" or "Notes" shall also be deemed to refer to the Mortgage Note. (i) "Palominos Revolving Loan Mortgage" shall mean the leasehold mortgage in form reasonably satisfactory to GDB, made or to be made by Borrower upon its lease hold interest in Palominos Island Property, to be encumbered in favor of GDB to secure the payment of the Revolving Loan, creating a third priority Lien on the Palominos Island Property in the principal amount of $120,000.00. (j) "Palominos Mortgage Note" shall mean that certain Note in the amount $120,000 from Borrower in favor of GDB, secured by with the Palominos Revolving Loan Mortgage. For the purposes of Article 10 and Article 11, the terms "Note" or "Notes" shall also be deemed to refer to the Palominos Mortgage Note. For the purposes of Article 10 and Article 11, the term "Note" or "Notes" shall also be deemed to refer to the Palominos Mortgage Note. (k) "Permitted Loan Limit" shall mean the amount of $6,000,000. (l) "Revolving Loan" shall mean that certain Revolving Loan up to the Permitted Loan Limit which shall be advanced, from time to time, under Section 4.7 hereof. For the purposes of Article 3 and Sections 8.9 and 8.10 only, the term "Loan" shall also be deemed to refer to the Revolving Loan and for the purposes of Article 9 and Article 10 the term "GDB -5- Loan" shall also be deemed to refer to the Revolving Loan. (m) "Revolving Loan Closing" shall mean the execution and delivery of the Second Amendment and all other Revolving Loan Documents, which Revolving Loan Closing shall take place at the offices of GDB or at such other place as the parties may choose. (n) "Revolving Loan Closing Date" shall mean October 4, 1996 by which date the Revolving Loan Closing Date shall have occurred. For the purposes of Article 3 only, the term "Closing Date" shall be also deemed to refer to the Revolving Loan Closing Date. (o) "Revolving Loan Documents" shall mean the Revolving Note, the Mortgage Note, the Palominos Mortgage Note, the Revolving Loan Mortgage, the Assignment of Accounts Receivable, the Second Amendment, and any and all other agreements, documents and instruments delivered by or on behalf of Borrower pertaining to the Revolving Loan pursuant to the terms of the Second Amendment, as hereafter renewed, amended or supplemented from time to time. The Revolving Loan Documents shall be deemed to be included within the definition of the Loan Documents. (p) "Revolving Loan Interest Rate" shall be equal to that certain annual rate resulting by adding 100 basis points to the LIBOR Rate for a (3) month period. -6- (q) "Revolving Loan Maturity Date" shall mean October 31, 1997, or such earlier date as GDB shall declare the entire principal sum due and payable in the exercise of its Rights under Article 10 hereof. (r) "Revolving Loan Mortgage" shall mean the mortgage, deed of trust or similar security agreement in form reasonably satisfactory to GDB, made or to be made by Borrower upon the Premises (excluding the Palominos Island Property), to be encumbered in favor of GDB to secure the payment of the Revolving Loan, creating a third priority Lien on the premises in the principal amount of the Permitted Loan Limit, encumbering the Premises, including all buildings, improvements, fixtures and personal property presently located thereon and all buildings and improvements to be erected and constructed thereon, if any, and all fixtures and personal property owned by Borrower to be placed therein. (s) "Revolving Loan Obligations" shall mean Borrower's obligations under all of the Revolving Loan Documents, including, without limitation, all present and future indebtedness, obligations and liabilities, and all renewals and extensions thereof, or any part thereof, now or hereafter owed to GDB by Borrower arising from, by virtue of, or pursuant to any Revolving Loan Document, together with all interest accruing thereon and costs, expenses and attorneys' fees incurred in the enforcement or collection thereof, whether such indebtedness, obligations and liabilities are -7- direct, indirect, fixed, contingent, determinate, undeterminate, joint, several or joint and several. The Revolving Loan Obligations shall be deemed to be included within the Obligations. (t) "Revolving Loan Pledge Agreement" shall mean that certain Pledge Agreement to be executed by Borrower in favor of GDB pursuant to Section 4.7 and forming part of the Security. (u) "Revolving Loan Secondary Rate" shall mean that certain rate of interest that shall accrue ont he unpaid principal outstanding balance of the Revolving Loan, as the same may exist from time to time, from and after a Default or an Event of Default has occurred hereunder which interest rate shall be 500 basis points above the Revolving Loan Interest Rate. (v) "Revolving Loan Security" shall have the meaning described in Section 4.7(g) hereof. For the purposes of Article 3 and Section 8.12 hereof, the term "Security" shall be also deemed to refer to Revolving Loan Security. (w) "Revolving Loan Security Documents" shall mean those certain Revolving Loan Documents listed in Section 4.7(g) attached hereto. The Revolving Loan Security Documents shall be deemed to be included within the definition of Security Documents. -8- (x) "Revolving Loan Title Policy" shall mean that certain Title Policy issued by the Title Insurer pursuant to Section 4.7. (y) "Revolving Note" shall collectively mean that certain note evidencing the Revolving Loan from Borrower in favor of GDB which shall in no event exceed the aggregate amount of the Permitted Loan Limit. For the purposes of Article 10 and Article 11, the term "Note" or "Notes" shall also be deemed to refer to the Revolving Note. (z) "Revolving Period" shall mean that certain period commencing on the Revolving Loan Closing Date and ending on the Revolving Loan Maturity Date. (aa) "Second Amendment" shall mean that certain Second Amendment to Loan Agreement dated as of the Revolving Loan Closing Date between GDB, as lender, and Borrower. 2. A new Section 4.7 is hereby added to the Loan Agreement as follows: 4.7 Revolving Loan. (a) Subject to the terms and conditions hereof, and relying on the representations, covenants and warranties of the Borrower contained herein, GDB agrees, from time to time, during the Revolving Period to lend to the Borrower under the Revolving Loan upon its request up to the aggregate principal amount of the Permitted Loan Limit for the -9- Borrower's working capital needs for the operation of the Premises. During the Revolving Period, the Borrower shall be entitled to receive the entire proceeds of the Revolving Loan in one or more Advances pursuant to this Section 4.7 hereof, except as otherwise specifically set forth in this Agreement. After the expiration of the Revolving Loan Period, the Borrower shall not be entitled to receive any further Advance. The Revolving Loan may revolve during the Revolving Period; accordingly, during the Revolving Loan Period, the Borrower may borrow up to the Permitted Loan Limit, repay all or any portion of such principal amount, and re-borrow up to the Permitted Loan Limit, subject to the terms and conditions set forth herein. (b) The Revolving Loan shall be evidenced by the Revolving Note and shall be due and payable as required by Section 4.7(k). The Borrower shall not be liable under the Revolving Note except with respect to funds actually advanced to the Borrower by GDB. The Revolving Note shall bear interest from the date thereof on the unpaid principal balance thereof, from time to time outstanding, at a fluctuating interest rate equal to the Revolving Loan Interest Rate. (c) (i) From and after the Revolving Loan Maturity Date, (ii) upon the failure of Borrower to pay any interest within (10) days after such interest is due with respect to the Revolving Loan prior to the occurrence of any Default or Event of Default, or -10- (iii) upon the occurrence of any Default or Event of Default, interest shall accrue on the unpaid balance of the Revolving Loan and, to the extent permitted by law, on all accrued but unpaid interest thereon as of such date, at the Revolving Loan Secondary Rate. Such interest shall continue to accrue at the Revolving Loan Secondary Rate until (x) the date of payment in full of all principal and accrued but unpaid interest on the Revolving Loan, if accelerated, (y) if applicable, such unpaid interest shall have been paid, or (z) such Default or Event of Default has otherwise been cured as may be permitted pursuant to the terms of this Agreement. (d) On the Revolving Loan Closing Date hereof and upon satisfaction of the conditions precedent set forth in Sections 4.7(i) and (j) below, GDB shall disburse, on behalf of the Borrower, a portion of the proceeds of the Revolving Loan as may be necessary to pay off the existing credit facility in favor of Scotia bank de Puerto Rico in the amount of $5,200,000 and to cover all costs and expenses incident to the closing of the transactions contemplated hereby, including, without limitation, and any and all recording charges/taxes or fees in connection therewith, which shall all be set forth on a closing statement to be signed by the parties hereto. Notwithstanding the foregoing, the attorneys' fees and costs of GDB's legal counsel that is set forth on the closing statement described above may be paid by Borrower after the Revolving Loan Closing -11- Date, but no later than February 15, 1997. In addition to the foregoing, the Borrower shall also pay to GDB on or before February 15, 1997, the amount of $54,224.32, representing a portion of the costs and expenses incurred by GDB for various accounting audits of the Premises. After the initial Advance and upon continued satisfaction of the conditions precedent as set forth in Section 4.7(j) below, the Borrower shall be entitled to receive further Advances, provided, however, that the aggregate amount of outstanding Advances shall never exceed the amount of the Permitted Loan Limit. (e) The Borrower shall give GDB written or telephonic notice of any requested Advance hereunder, but no more than once per month. GDB shall have no duty or obligation to verify or confirm the authority of the person of the Borrower requesting any such Advances if that person identifies himself as an employee of the Borrower. GDB shall make each Advance hereunder provided that (i) the Permitted Loan Limit would not be so exceeded, (ii) there has not occurred a Default or Event of Default on the date proposed by the Borrower therefor (but not later than two (2) business days after the receipt of said request for an Advance), and (iii) Borrower has complied with the terms of this Second Amendment and the other provisions of the Loan Agreement (it being agreed that in the event Borrower is not in compliance with the terms of this Second Amendment or the other provisions of the Loan Documents, a Default or Event of Default -12- is not required to occur before GDB is not obligated to make any Advance). (f) In consideration of GDB making the Revolving Loan, the Borrower agrees to pay to GDB a commitment fee equal to $45,000, equivalent to three-quarters of one(1) percent (3/4%) of the Revolving Loan Limit, such fee to be paid on or before February 15, 1997, otherwise, GDB shall not be obligated to make any further Advances and, at GDB's election, which may be exercised in GDB's sole and absolute discretion, the failure to pay the same may be deemed to be an Event of Default. (g) As security for the Revolving Loan and the performance and observance of all of the obligations, covenants and agreements of the Borrower under the Revolving Loan, the Borrower shall deliver, or cause to be delivered, the following collateral to GDB (the "Revolving Loan Security"), all of which shall be in form and substance acceptable to GDB in GDB's sole and absolute discretion: (1) The Pledge of the Mortgage Note and Palominos Mortgage Note secured by the Revolving Loan Mortgage and Palominos Revolving Loan Mortgage, respectively, pursuant to the Revolving Loan Pledge Agreement. (2) Mortgage Note. (3) Palominos Mortgage Note. -13- (4) Revolving Loan Mortgage. (5) Palominos Revolving Loan Mortgage. (6) The Assignment of Accounts Receivable creating a first lien priority interest in favor of GDB in the Accounts Receivable. (7) Subordination by GDB of the Credit Facility Mortgage to the Revolving Loan Mortgage. (8) Unconditional Guarantees of the Revolving Loan from Kumagai Caribbean, Inc. and WKA El Con Associates in favor of GDB. (9) The Revolving Loan Title Policy, showing the Revolving Loan Mortgage as a third priority lien and the Palominos Revolving Loan Mortgage as a third (3rd) priority leasehold lien. (10) An update of the descriptions of all of the Security pledged to GDB under (and as defined in) the Loan Agreement and Facility Loan Agreement. (11) Such other Revolving Loan Security Documents as Borrower may deem necessary with respect to the Revolving Loan, in GDB's sole and absolute discretion. (h) The Borrower hereby agrees that the Security Documents (excluding the Revolving Loan Security Documents) shall be deemed to be additional -14- collateral to secure the performance of the Revolving Loan Obligations, and none of the foregoing security shall be deemed to be released from the applicable collateral unless and until all obligations under the Revolving Loan have been paid in full. In furtherance of the foregoing, (i) the failure to pay any principal or interest due under the Credit Facility Loan Documents within ten (10) days after the same is due or (ii) the occurrence of any "Event of Default" under the Credit Facility Loan Agreement and acceleration of the Credit Facility or commencement of proceedings to foreclose upon any collateral securing the Credit Facility by reason of such Event of Default, shall, at GDB's option, also be deemed to be a Default or Event of Default after the giving of notice and expiration of the applicable grace period under Section 10.1(a) of this Agreement. (i) The obligation of GDB to make the initial Advance under the Revolving Loan is subject to the following conditions precedent (it being understood that the conditions set forth in Article 7 hereof shall not be applicable to GDB's obligation to make Advances): (1) All Revolving Loan Documents in form and substance acceptable to GDB, in GDB's sole and absolute discretion, shall have been executed and delivered to GDB, including, without limitation, the following: (a) Revolving Loan Security; -15- (b) Second Amendment; (c) Consent to Loan Agreement and Assignment of Accounts Receivable and Subordination of Assignment of Accounts Receivable from The Bank of Tokyo-Mitsubishi, Ltd.; (d) Consent of GDB to the Revolving Loan and the pledge of the collateral under the Revolving Loan Documents as required by the terms of the Loan and the Credit Facility; (e) First Amendment to Subordination and Standstill Agreement between, among others, Bank of Tokyo - Mitsubishi Bank, Ltd., and GDB with respect to the Revolving Loan; (f) GDB shall receive the favorable written opinion of counsel to Borrower, dated as of the Revolving Loan Closing Date, with respect to such matters as GDB may require; (g) Such additional supporting documents as GDB may deem to be necessary, in GDB's sole and absolute discretion. (2) A Current unaudited balance sheet of Borrower certified to be true and correct by the chief financial officer of Borrower shall have been delivered to GDB. -16- (3) The conditions set forth in Sections 6.1 (t)- (w) hereof shall be satisfied. (4) [Intentionally Deleted]. (5) The conditions precedent set forth in Section 4.7(j) below shall also be satisfied. (6) GDB shall have received evidenced acceptable to GDB that the partners of the Borrower have loaned or caused to be loaned on behalf of the Partners of Borrower an amount of $800,000 to the Borrower as an unsecured loan toward working capital for the operation of the Premises for the period of August and September, 1996 (the "Borrower Loan"). (j) The obligations of GDB to lend amounts under the Revolving Loan and to make the initial Advance and all other Advances, from time to time, thereunder, are subject to the following additional conditions precedent: (1) The representations and warranties set forth in the Revolving Loan Documents (excluding Sections 4(a) through (f) of this Second Amendment) and in Article 3 of the Loan Agreement (except for Sections 3.2, 3.6, 3.8, 3.15(b), 3.17, 3.20, 3.22, 3.25 and 3.26) shall be restated and shall be true and correct as of the date of the applicable Advance, as though such representations and -17- warranties had been made on and as of such date. (2) The Borrower shall be in compliance with all the terms and provisions set froth under the Loan Documents on its part to be observed or performed (except as such non-compliance shall have been previously waived in writing or consented to in writing by GDB), no Default or Event of Default shall have occurred and be continuing at such time, and no event shall have occurred which, with notice and/or passage of time, and would cause a Default or Event of Default to occur. (3) [Intentionally Deleted]. (4) Resolutions of the Borrower and its constituent partners, in form and substance acceptable to GDB in its sole and absolute discretion, shall be delivered to GDB. (5) GDB shall have received evidence acceptable to GDB that the partners of the Borrower have made the Borrower Loan, even if the same has been previously repaid in accordance with Section 4.7(l). (6) No more than twenty percent (20%) or $500,000, whichever is greater, of the then current amount of the outstanding Accounts Receivable, shall be more than 120 days past due. -18- (k) The Borrower shall pay the Revolving Note together with interest, fees and charges, as follows: (1) Whenever the outstanding principal balance of the Revolving Loan exceeds the Permitted Loan Limit, the Borrower shall immediately pay to GDB the excess of the outstanding principal balance of the Revolving Loan over the Permitted Loan Limit. (2) Each Advance under this Agreement shall bear interest at the Revolving Loan Interest Rate from the date of each such Advance until the Revolving Loan Maturity Date or the date of prepayment thereof, whichever occurs first. Such interest shall be payable quarterly in arrears on each Interest Adjustment Date and shall be computed only on outstanding balances of Advances on the basis of the 360 day year and for the number of actual days elapsed. (3) The entire unpaid principal balance of the Revolving Loan, together with accrued and unpaid interest thereon, fees and charges shall be due and payable in full on the Revolving Loan Maturity Date, subject to the notice provisions of Section 10.1(a) hereof. (l) GDB agrees that at any time that the outstanding balance of the Revolving Loan is zero, then the Borrower may repay the Borrower Loan to its partners, regardless of any provisions to the contrary under the Loan Documents or the Credit -19- Facility Loan Documents, provided, however, that as a condition precedent for the Borrower to obtain any subsequent Advances under the Revolving Loan, then the Borrower Loan must be reloaned to the Borrower and evidence thereof delivered to GDB in accordance with Section 4.7(j)(5) hereof. (m) Borrower agrees that the violation of Section 4.7(j)(6) hereof may, at GDB's election, which may be exercised in GDB's sole and absolute discretion, be deemed to be a Default or Event of Default, subject to the notice provisions of Section 10.1(a) hereof. 3. The term "Permitted Liens and Encumbrances" as used in the Loan Agreement shall be deemed to include the Revolving Loan Mortgage and the other liens and encumbrances evidenced by the Revolving Loan and any liens and encumbrances shown on the Revolving Loan Title Policy. 4. As a material inducement to GDB to enter into the Second Amendment and to make the Revolving Loan, the Borrower hereby represents, warrants and covenants as follows: (a) The outstanding principal amount of the Loan is $25,000,000.00; and (b) All outstanding and accrued interest under the GDB Loan has been paid through September 30, 1996. (c) [Intentionally Deleted]. -20- (d) As of the date hereof, the representation contained in Section 3.17 hereof is true and correct. (e) To the knowledge of Borrower, GDB is not in default of any of its obligations under the Loan Documents or the Operative Documents (as defined in the Credit Facility Loan Agreement) and no event has occurred which with lapse of time and/or notice would cause such a default to occur; (f) No payments have been made by or behalf of the Borrower into any escrow account pursuant to the Escrow Requirement (as defined in the Credit Facility Loan Agreement); (g) The Liens granted to GDB by the Revolving Loan Documents will be, when filed, subject only to recording which will be effected in due course, fully perfected third (3rd) priority Liens in and to the Revolving Loan Security described therein, subject only to Permitted Liens and Encumbrances. (h) That certain Development Services and Management Agreement dated January 12, 1990 between Borrower and Williams Hospitality Management Corporation as amended by amendments dated September 30, 1990 and January 31, 1991 has not been further amended, modified or supplemented in any manner whatsoever since January 31, 1991 and remains in full force and effect. (i) Those certain audited financial statements prepared by Ernst & Young dated March 31, 1996 submitted by -21- Borrower to GDB and those certain monthly financial statements dated June 30, 1996 prepared by or on behalf of Borrower, based on which GDB approved the Revolving Loan herein contemplated, are true and correct in all material aspects as of the date thereof. (j) Neither the execution and delivery of the Second Amendment and the Revolving Loan Documents, the consummation of the transactions contemplated thereunder, and the compliance with the terms, conditions and provisions of the Second Amendment and the other Revolving Loan Documents, will conflict with or result in a breach of the terms, conditions or provisions or constitute a default under the Partnership Agreement of Borrower, or of any indenture or other agreement or instrument to which the Borrower is a party or by which it is bound, or result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever, upon any of the properties or assets of the Borrower, except as permitted by the provisions of the Second Amendment and the other Revolving Loan Documents; and except for the recording of the Revolving Loan Mortgage and Palominos Revolving Loan Mortgage, and except as noted in this Second Amendment, Borrower is not required to obtain any action, approval, consent or authorization by any governmental or quasi-governmental agency, commission, board, bureau or instrumentality in order for the Second Amendment to become a valid and binding obligation of Borrower in accordance with its terms. -22- 5. Section 5.3 of the Loan Agreement is hereby modified to provide for the following clause: "(v) Borrower's obligations guaranteed by its Partners under the Guarantees executed in connection with the Revolving Loan." 6. Borrower hereby agrees that Exhibit A to that certain Assignment Agreement dated December 7, 1991 shall also be deemed to include those certain agreements listed on Exhibit A attached hereto, which constitutes an updated list of all such contracts and agreements affecting the Premises (in addition to those already listed in such Assignment Agreement). 7. GDB and Borrower agree that as a condition precedent to GDB's delivery to Borrower of the Mortgage Note and Revolving Loan Mortgage in the event the Revolving Loan is paid in full and terminated, the Revolving Loan Mortgage shall be subordinated to the Credit Facility Mortgage by a document in form and substance reasonably acceptable to GDB. 8. The addresses set forth in Section 11.14 of the Agreement are hereby deleted and replaced with the following: (a) If to GDB: Government Development Bank for Puerto Rico Minillas Government Center De Diego Avenue, Stop 22 Santurce, Puerto Rico 00907 ATTN: Ana Carmen Alemany, Sr. Vice President With a copy to: -23- Gunster, Yoakley, Valdes-Fauli & Stewart, P.A. 500 East Broward Boulevard, Suite 1400 Fort Lauderdale, Florida 33394 ATTN: Andrew S. Robins, Esq. (b) If to Borrower: c/o Williams Hospitality Group, Inc. 187 East Isla Verde Road San Juan, Puerto Rico 00913 ATTN: President With a copy to: Kumagai Caribbean, Inc. 1177 Avenue of the Americas New York, New York 10019 and Shack & Siegel, P.C. 530 Fifth Avenue New York, New York 10036 ATTN: Jeffrey N. Siegel, Esq. 9. As a material inducement for GDB to accept this Second Amendment, Borrower does hereby release, waive, discharge, covenant not to sue, acquit, satisfy and forever discharge GDB and its officers, directors, employees, agents and attorneys and the affiliates and assigns of all of the foregoing of and from any and all liability, claims, counterclaims, defenses, actions, causes of actions, suits, controversies, agreements, promises and demands whatsoever, at law or in equity, which Borrower had, now has, or which any personal representative, successor, heir or assign of Borrower now or hereafter can, shall or may have against GDB or their directors, employees, attorneys and agents and the affiliates and assigns of all of the foregoing, for, upon, or by reason of any matter, cause or thing whatsoever through the date hereof relating to the Loan, -24- and the Revolving Loan and any and all documents or agreements executed in connection therewith, except that nothing herein shall be deemed to release GDB from its obligations under such documents, including, without limitation, its obligation to make Advances, subject to the terms thereof. Borrower further expressly agrees that the foregoing waiver and release is intended to be as broad and inclusive as permitted by the laws of the Commonwealth of Puerto Rico. In addition to, and without limiting the generality of the foregoing, and in consideration of the GDB's acceptance of this Second Amendment, Borrower covenants with and warrants unto GDB and its affiliates and assigns that there exists no claims, counterclaims, defenses, objections, offsets of claims, or offsets against GDB or the obligation of Borrower to pay the Loan, Credit Facility or Revolving Loan to GDB when and as the same becomes due and payable in accordance with the terms of this Second Amendment and the other Loan Documents, including, without limitation, the Revolving Loan Documents, and the Operative Document(as defined in the Credit Facility Loan Agreement). 10. Except as prohibited by law, the GDB and the Borrower hereby knowingly, voluntarily and intentionally waive the right to trial by jury with respect to any litigation based hereon or arising out of, under, or in connection with this Second Amendment or the other Revolving Loan Documents, including, without limitation, the Revolving Loan Documents, or any course of conduct, course of dealing, statements (whether verbal or written) or actions of the Borrower or GDB with respect to the Revolving Loan; this waiver being a material inducement -25- for GDB to accept this Second Amendment. If the subject matter of any litigation is one in which the waiver of jury trial is prohibited, neither GDB nor the Borrower shall present as a noncompulsory counterclaim in such litigation, any claim arising out of this Second Amendment or the Revolving Loan Documents. Furthermore, neither GDB nor the Borrower shall seek to consolidate any action in which a jury trial has been waived with any litigation in which a jury trial cannot be waived. 11. This Second Amendment shall be binding upon GDB and the Borrower and their respective successors and assigns. This Second Amendment may be executed in counterparts, all if which counterparts shall be deemed to be a single document. Signature pages received by facsimile transmission shall be deemed to be an original document. 12. This Second Amendment constitutes the complete agreement between the parties hereto with respect to the subject matter hereof and may not be modified, altered or amended except by an agreement in writing signed by GDB and the Borrower. No amendment or waiver of any provision of this Second Amendment, the Revolving Note or any other Revolving Loan Document, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by GDB, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 13. Except as otherwise modified herein, the Loan Agreement and the other Loan Documents remain unmodified and are in full force and effect. -26- IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of the date first set forth above. GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO By: /s/ -------------------------------- Name: Ana Carmen Alemana Title: Senior Vice President EL CONQUISTADOR PARTNERSHIP L.P. By: /s/ -------------------------------- Name: Brian Gamache Title: Authorized Signatory Exhibit A EL CONQUISTADOR Resort And Country Club MEMORANDUM TO: Pam Flaherty FROM: Larry M. Vitale DATE: August 23, 1996 SUBJECT: Recap of Hotel Concessionaires - --------------------------------------------------------- Restaurants ================================================================================ Store Name Owner Service provided Tax I.D. No. - -------------------------------------------------------------------------------- Blossoms John He Zing Yee Restaurant 66-0491041 - -------------------------------------------------------------------------------- Gauchos (Latinos) Valerie Marty Restaurant 66-0495837 - -------------------------------------------------------------------------------- Othello's Carlos Pichetti Restaurant 66-0452336 - -------------------------------------------------------------------------------- Rest. Associates of P.R. (Stingray) Dayn Smith Restaurant 66-0525863 - -------------------------------------------------------------------------------- Retail - -------------------------------------------------------------------------------- Abaca Pedro Moll Shoe Store 66-0500012 - -------------------------------------------------------------------------------- Avante Peter Veneciano Health Spa 66-0500451 - -------------------------------------------------------------------------------- Bared & Sons Phillip Bared Jewelry 66-0345606 - -------------------------------------------------------------------------------- Club del Sol (Paco Pepe/Chikos) Luis B. Gonzalez Clothing Store 66-0479241 - -------------------------------------------------------------------------------- Conversation Piece Ligia Wachtel Gifts 66-0421209 - -------------------------------------------------------------------------------- Exotica del Flower Shop 66-0525160 Conquistador Coffee Shop 66-0525159 Exotica Cafe Richard Roth - -------------------------------------------------------------------------------- Galeria Arrecife Maria E. Torres Art 66-0527914 - -------------------------------------------------------------------------------- Group Services Inc. Saul Tanal Tour Desk 66-0486829 - -------------------------------------------------------------------------------- Events Tropical 66-0504748 Stage Crow Audiovisual Hamid Azize Audiovisual Equipment 66-0447320 - -------------------------------------------------------------------------------- American Parking Miguel Cabral Parking Concession 66-0421500 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Jose Melendez Jose Melendez Horseback Riding ###-##-#### - -------------------------------------------------------------------------------- Water Sports Aqua Sports Wilfredo Rosado Equipment Rental 66-0499299 - -------------------------------------------------------------------------------- Palomino Divers Debra K. Black Dive Ship (Scuba) 66-0515419 - -------------------------------------------------------------------------------- M.H. Reinhold Marie Reinhold Jewelry Store 66-0440469 - -------------------------------------------------------------------------------- Mona Liza Boutique Lourdes Cortes Clothing Store 66-0515557 - -------------------------------------------------------------------------------- Gift/Logo Clothing W.H. Smith Catherine Gardner Shops/Store 66-0220116 ================================================================================ EX-10 21 EXHIBIT 10.18 - -------------------------------------------------------------------------------- MANAGEMENT AGREEMENT SUBORDINATION AND ATTORNMENT AGREEMENT Dated as of February 7, 1991 BETWEEN WILLIAMS HOSPITALITY MANAGEMENT CORPORATION, AND THE MITSUBISHI BANK, LIMITED acting through its New York Branch Relating to The El Conquistador Resort and Country Club, located in Fajardo, Puerto Rico - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- SECTION 1. Subordination; Bank's Right to Terminate; Attornment; Assignment of Licenses......................................... 3 SECTION 2. Default by Partnership under Management Agreement.............. 7 SECTION 3. Representations, Warranties, Covenants and Agreements.......... 10 SECTION 4. Liability of Bank.............................................. 12 SECTION 5. Termination of Agreement....................................... 12 SECTION 6. Notices........................................................ 12 SECTION 7. Miscellaneous.................................................. 13
i MANAGEMENT AGREEMENT SUBORDINATION AND ATTORNMENT AGREEMENT THIS MANAGEMENT AGREEMENT SUBORDINATION AND ATTORNMENT AGREEMENT (this AGREEMENT), dated as of the 7th day of February, 1991, by and between THE MITSUBISHI BANK, LIMITED, acting through its New York Branch, a banking corporation organized under the laws of Japan having an office at 225 Liberty Street, Two World Financial Center, New York, New York 10281 (the BANK), and WILLIAMS HOSPITALITY MANAGEMENT CORPORATION, a Delaware corporation having an office at 187 East Isla Verde Road, Carolina, Puerto Rico 00913 (the MANAGER). W I T N E S S E T H: WHEREAS, El Conquistador Partnership L.P., a Delaware limited partnership (the PARTNERSHIP) and the Manager have entered into that certain Development Services and Management Agreement, dated January 12, 1990, as amended by that certain First Amendment to the Development Services and Management Agreement dated as of September 30, 1991 and that certain Second Amendment dated as of January 31, 1991 (together with any additional amendment or supplements thereto from time to time as permitted hereby, the MANAGEMENT AGREEMENT), pursuant to which the Manager agreed to, among other things, provide technical assistance and development services during the renovation of and to control, supervise and direct the operation and management of the resort and related golf course and other facilities to be known as The El Conquistador Resort and Country Club (together with the tracts of real property on which the foregoing is located, the PROPERTY); WHEREAS, pursuant to that certain Letter of Credit and Reimbursement Agreement of even date herewith between the Bank and the Partnership (such agreement, as amended and supplemented from time to time, the LETTER OF CREDIT AGREEMENT), the Bank has agreed to issue a letter of credit (the LETTER OF CREDIT) to secure the repayment of the principal of, and accrued interest on, the Loan (such term and all other capitalized terms used but not defined herein having the respective meanings ascribed to them in the Letter of Credit Agreement) in accordance with their terms; WHEREAS, pursuant to that certain Assignment of Management Agreement of even date herewith between the Partnership and the Bank (the ASSIGNMENT), the Partnership assigned its rights and interests under the Management Agreement to the Bank as security for the obligations of the Partnership under the Letter of Credit Agreement; and WHEREAS, one of the conditions precedent to the obligation of the Bank to issue the Letter of Credit is the agreement of the Manager to subordinate the Management Agreement and all of its rights, interests and benefits thereunder to the liens and charges of the Mortgage, the Pledge Agreement and the other Operative Documents in the manner hereinafter provided; and WHEREAS, the financing of the Project, as contemplated by the Letter of Credit Agreement and the other Operative Documents, is in furtherance of the purposes of the Management Agreement. NOW, THEREFORE, for and in consideration of the issuance of the 2 Letter of Credit and the entering into of the Letter of Credit Agreement by the Bank, the mutual promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto further agree as follows: SECTION 1. SUBORDINATION; BANK'S RIGHT TO TERMINATE; ATTORNMENT; ASSIGNMENT OF LICENSES. (a) The Manager hereby covenants and agrees for the benefit of the Bank that the Management Agreement, the Manager's rights thereunder and the lien for the payment of any and all fees to the Manager or otherwise under the Management Agreement (the MANAGEMENT AGREEMENT FEES) are hereby made and shall unconditionally continue to be and remain at all times subject and subordinate in all respects to the liens, charges, terms, covenants and provisions of the Mortgage, the Pledge Agreement, the Letter of Credit Agreement and the other Operative Documents and any extensions, modifications, amendments and renewals thereof and the rights and benefits of the Bank thereunder. (b) At any time after the occurrence of a default or event of default under the Mortgage, the Pledge Agreement, the Letter of Credit Agreement or any of the other Operative Documents and the commencement of the exercise by the Bank of any remedies for such default the result of which would be the termination of the Partnership's ownership or operation of the Property, the Bank may, upon written notice to the Manager that such events have occurred and that it elects to exercise its option under this paragraph by reason thereof, terminate the Management Agreement. 3 (c) If the Bank becomes the owner of the Partnership's interest in the Property (whether pursuant to the Mortgage and the Pledge Agreement, by voluntary conveyance, by agreement of the parties, or otherwise, and whether in its own name, through its nominee, or otherwise), or if the interest of the Partnership in the Property is acquired by any third party as a result of any action taken by the Bank or the holder of the Mortgage relating to a default by the Partnership in its obligations to the Bank or to the holder of the Mortgage (such third party being referred to as a PURCHASER), then, provided the Management Agreement shall not previously have been terminated in accordance with its provisions or the provisions of this Agreement, the Manager shall fully and completely recognize and attorn to the Bank or the purchaser, as applicable, under the Management Agreement for the balance of the term thereof, including any extensions and renewals thereof, upon all terms and conditions therein provided (exclusive of any provisions thereof which have theretofore been fully performed or which depend upon the identity or involvement of or performance by any named individuals, insofar as the same relate to the obligations of the Partnership, or other Persons controlling, controlled by or under common control with the Partnership), so as to establish direct privity of contract between the Bank or the purchaser, as applicable, and the Manager; and the Manager shall thereafter make all payments required thereunder to be made to the Partnership directly to the Bank or the purchaser, as applicable; PROVIDED, HOWEVER, that the Bank or the purchaser, as applicable, shall not: (i) be liable for any act or omission of the Partnership or be liable for any sums due and payable to the Manager under the Management Agreement 4 prior to the Bank's or the purchaser's taking possession of the Property or otherwise acquiring or succeeding to the interest of the Partnership under the Management Agreement; (ii) be obligated to pay any deferred fees due solely by reason of the acceleration thereof (it being understood that, in such event, the provisions of the Management Agreement providing for the deferral of fees shall continue in full force and effect); (iii) be subject to any offsets or defenses which the Manager may be entitled to assert against the Partnership; or (iv) be bound by any amendment or modification of the Management Agreement made without the consent of the Bank. (d) Notwithstanding anything to the contrary in the Management Agreement, the Bank or the purchaser, as applicable, shall be obligated under the Management Agreement pursuant to this Section 1 only for the period of time during which the Bank or the purchaser, as applicable, has an interest in the Property, and shall not have any liability with respect to any obligations accruing prior to or following such period; provided, however, that any such purchaser shall continue to be liable for obligations accruing under the Management Agreement after the sale of the Property by such purchaser to another party to the extent so provided in the Management Agreement. (e) The Manager hereby covenants and agrees for the benefit of the Bank that upon its receipt of a notice of default on the part of the Partnership under the Letter of Credit Agreement or any of the Operative Documents, the Manager shall, upon 5 written notice from the Bank that the Bank invokes the provisions of this paragraph by reason thereof (without the necessity for the Bank to obtain from the Partnership any authorization or direction of the Manager to satisfy the Manager that any such default exists), hold all amounts received by the Manager in connection with the operation of the Project or otherwise received on behalf of the Partnership in trust for the Bank and/or turn same over to the Bank, as the Bank shall direct, or open new bank accounts in banks and in names designated by the Bank into which the Manager shall transfer all funds then in the bank accounts established pursuant to Section 4.8 of the Management Agreement, which new accounts shall thereafter be considered to be the operating accounts of the Project. The foregoing shall not be interpreted to prevent the Manager from paying its management fees in accordance with the provisions of the Management Agreement (provided it is not in default thereunder or hereunder) or from paying bills to third parties incurred in connection with the operations of the Property, as same become due and payable, pursuant to the terms of the Management Agreement. (f) This Agreement and the provisions of the Mortgage, the Pledge Agreement and the Letter of Credit Agreement shall supersede, to the extent inconsistent with, any provisions of the Management Agreement relating to the priority or subordination of the Management Agreement and the interests and estates created thereby to the liens or charges of the Mortgage, the Pledge Agreement and any of the other Operative Documents. Without limiting the generality of the foregoing, the Manager acknowledges that it has been furnished with copies of the Operative Documents and is familiar with the terms thereof, and the Manager hereby waives any provisions of the 6 Management Agreement relating to insurance requirements, the application of insurance proceeds and/or condemnation awards or similar payments which are inconsistent with the terms of the Mortgage, Pledge Agreement and/or the Letter of Credit Agreement. (g) At the Bank's request, the Manager shall enter into collateral assignments, in form and substance satisfactory to the Bank, of the Manager's rights, title and interest in and to any transportation permits relating to the Property. In addition, if the Bank or a purchaser becomes the owner of the Partnership's interest in the Property then, upon the written request of the Bank or such purchaser, the Manager shall directly assign its rights, title and interest in and to any transportation permits relating to the Property to the Bank or the purchaser, as the case may be, to the extent permitted by law. SECTION 2. DEFAULT BY PARTNERSHIP UNDER MANAGEMENT AGREEMENT. (a) The Manager hereby covenants and agrees for the benefit of the Bank that upon the occurrence of any event which would, under the terms of the Management Agreement, give rise to a right on the part of the Manager to terminate the Management Agreement (herein called a MANAGEMENT AGREEMENT DEFAULT), the Manager shall notify the Partnership thereof immediately upon the Manager's becoming aware of such Management Agreement Default, and shall not exercise such right to terminate until: (i) the Manager has first given the Bank written notice (the DEFAULT NOTICE) setting forth (A) the occurrence of such Management Agreement Default, describing the same in reasonable detail, (B) the provision of the Management 7 Agreement violated by such Management Agreement Default, (C) the applicable cure period, if any, and (D) the Manager's intent to terminate the Management Agreement by reason thereof; and (ii) except as otherwise provided in the following paragraph (b), the Bank has failed to cure such management Agreement Default within thirty (30) days after the later of (x) the receipt of the Default Notice or (y) the expiration of the applicable cure period specified in the Default Notice or otherwise permitted under the Management Agreement or, if a stay, order or decree of a court of competent jurisdiction enjoining the termination by the Manager of the Management Agreement shall have been obtained by the Partnership prior to the expiration of the applicable cure period specified in the Default Notice or otherwise permitted under the Management Agreement, within thirty (30) days after such stay, order or decree (including any preliminary or permanent injunction in substance continuing in effect the provisions of a temporary restraining order or stay) shall have been vacated, dissolved or terminated, whichever shall be the later (any such thirty (30) day period being hereinafter called the BANK CURE PERIOD); PROVIDED that if such Management Agreement Default cannot be cured by the payment of money and cannot with due diligence be cured prior to the expiration of the Bank Cure Period but is nevertheless reasonably curable, then the Manager shall not exercise such right to terminate if, and the Bank Cure Period shall be extended for so long as, the Bank and/or the Partnership commences to cure such Management Agreement Default within the Bank Cure Period and thereafter prosecutes to completion the curing of such Management Agreement Default with diligence and continuity. 8 (b) If a Management Agreement Default is not reasonably curable by the Bank or if the Bank requires possession of the Property or any portion thereof to effect such cure, Manager agrees that so long as the fees and other amounts thereafter arising under the Management Agreement and payable to the Manager are paid by the Bank or otherwise, Manager shall not exercise its right to terminate the Management Agreement until sixty (60) days after the Bank has secured the appointment of a receiver with respect to the Property (and the Bank hereby agrees to apply promptly for such appointment) or the Bank has gained possession thereof; PROVIDED, HOWEVER, that if such Management Agreement Default cannot with due diligence be cured prior to the expiration of such sixty (60) day period, the Manager shall not exercise such right to terminate if, and such sixty (60) day period shall be extended for as long as, the Bank and/or Partnership commences to cure such Management Agreement Default within such sixty (60) day period and thereafter prosecutes to completion the curing of such Management Agreement Default with diligence and continuity. (c) In the event of the occurrence of any default by the Partnership under the Management Agreement, the Bank may, in its sole discretion, take any and all acts and measures which may be required to cure any such default, including, without limitation, the expenditure of money; PROVIDED, HOWEVER, nothing in this Section shall be construed to require the Bank to remedy or correct any default of the Partnership or any other condition relating to or arising in respect of the Management Agreement. In addition, the Bank shall have the right, but not the obligation, to appear in and defend any action or proceeding purporting to affect the security hereof or the rights and powers 9 of the Bank hereunder. (d) For the purposes of this Agreement, any provision of the Management Agreement providing for automatic termination of such Management Agreement or for termination without notice or other action by the Manager, upon the occurrence of a particular event, shall be ineffective with respect to the rights of the Bank hereunder for so long as the Letter of Credit or the Letter of Credit Agreement shall remain in effect, and upon the happening of any such event the Manager shall promptly notify the Bank as provided in paragraph (a) above and the Bank shall have the rights provided in paragraphs (a), (b) and (c) above, and the Manager agrees, notwithstanding any termination of the Management Agreement as to the Partnership, to continue to perform under the Management Agreement for the benefit of the Bank as if the Management Agreement were still in effect. SECTION 3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. The Manager hereby represents and warrants to and covenants and agrees for the benefit of the Bank that: (i) The Management Agreement is the only agreement between the Partnership and the Manager with respect to the management of the Project, and the Management Agreement embodies the entire agreement between the Partnership and the Manager with respect to the management of the Project; (ii) the Management Agreement is valid and in full force and effect and has not been amended, modified or supplemented in any respect except by the First Amendment thereto dated as of September 30, 1990 and the Second Amendment 10 thereto dated as of January 31, 1991; (iii) neither the Manager nor, to the best knowledge of the Manager, the Partnership is in default with respect to its obligations to the other under the Management Agreement, nor is any condition now existing which, with notice or lapse of time or both, would constitute a default thereunder, and all terms and conditions have been performed as required under the Management Agreement; (iv) the Manager has the unencumbered right to enter into this Agreement; (v) the Manager has not received notice of any prior assignment or transfer of the Partnership's interest under the Management Agreement; (vi) the Manager shall not alter, modify, amend or otherwise change the terms, covenants or conditions of the Management Agreement or cancel or terminate the Management Agreement (except in accordance with the terms hereof) or accept a surrender thereof or waive, reduce or in any manner release the Partnership from any obligation thereunder, without the prior written approval of the Bank, which approval may be granted or withheld by the Bank in its sole discretion; (vii) the Manager will within ten (10) days after request therefor from the Bank deliver to the Bank a certificate, executed on behalf of the Manager by the chief financial officer of the Manager, stating that as of the date of such certificate, no default or event of default under the Management Agreement by the Partnership has occurred and is continuing, or if any such default or event of default has occurred and is continuing, describing in reasonable detail each such default or event of default and 11 the action, if any and if known, taken or being taken to cure the same; and (viii) notwithstanding anything to the contrary contained in the Management Agreement, the Manager shall not make or accept, as the case may be, any prepayments of any portion of the Manager's fees under the Management Agreement. SECTION 4. LIABILITY OF BANK. Except as expressly provided in Sections 1 and 2 of this Agreement, neither this Agreement nor any action on the part of the Bank shall constitute an assumption by the Bank of any of the obligations of the Partnership under the Management Agreement, and the Partnership shall continue to be liable to the Manager for all of its obligations thereunder. SECTION 5. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the expiration or termination of the Letter of Credit Agreement and the Letter of Credit and the satisfaction of all obligations, both monetary and otherwise, of the Partnership under the Letter of Credit Agreement and the Letter of Credit. The Bank, at the Partnership's expense, shall execute and deliver such instruments as the Manager may reasonably request to evidence such termination. SECTION 6. NOTICES. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing and mailed (registered or certified mail, return receipt requested, and postage prepaid), hand-delivered, with signed receipt, or sent by nationally-recognized overnight courier, if to the Bank, at its address 12 at 225 Liberty Street, Two World Financial Center, New York, New York 10281, Attention: Real Estate Finance Group (Mr. Akira Fujii or Mr. Russ LoPinto), with a copy similarly delivered to Kaye, Scholer, Fierman, Hays & Handler, 425 Park Avenue, New York, New York 10022, Attention: Warren J. Bernstein, Esq. and if to the Manager, at c/o Mr. Hugh A. Andrews, Williams Hospitality Management Corp., 187 East Isla Verde Road, Carolina, Puerto Rico 00913, with a copy to Whitman and Ransom, 200 Park Avenue, New York, New York 10166, Attention: Jeffrey N. Siegel, Esq., or to such other address with respect to any party as such party shall notify the other party in writing. All such notices and other communications shall be effective when received at the address specified aforesaid. SECTION 7. MISCELLANEOUS. (a) All covenants and agreements herein shall apply to, inure to the benefit of, and bind the respective successors and assigns of the Bank and the Manager. Upon any assignment or transfer by the Bank of its rights and interests under this Agreement, the Bank shall be relieved of all obligations and liabilities hereunder thereafter accruing. (b) In the event any term or provision of this Agreement or the application thereof to any person or circumstance shall, for any reason or to any extent be invalid or unenforceable, the remaining terms and provisions of this Agreement, or the application of any such provision to persons or circumstances other than those as to whom or which it has been determined to be invalid or unenforceable, shall not be affected thereby, and every provision of this Agreement shall be valid and enforceable 13 to the fullest extent permitted by law. (c) The Manager hereby covenants and agrees to execute and deliver, in recordable form if necessary, any and all further documents and instruments reasonably requested by the Bank to give effect to the terms and provisions of this Agreement and to take such further acts or actions as may be necessary to effectuate the provisions hereof or any transaction contemplated hereby. (d) Any provision of this Agreement to the contrary notwithstanding, this Agreement shall not create, or be construed as evidence of, any right, interest or estate of the Manager in or with respect to the Project not expressly set forth in or created by the Management Agreement. (e) This Agreement may be amended or modified only by an instrument in writing executed by the parties hereto. (f) This Agreement shall be governed by and construed according to the laws of the Commonwealth of Puerto Rico. (g) The captions in this Agreement are for convenience of reference only and in no way define, limit or describe the scope of this Agreement or the intent of any provision hereof. (h) By the execution hereof, the Manager hereby represents that it has received a copy of the Assignment and hereby consents to the provisions thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. 14 THE MITSUBISHI BANK, LIMITED, acting through its New York Branch By: /s/ ------------------------------------- Name: Tadaaki Hamada Title: Senior Vice President WILLIAMS HOSPITALITY MANAGEMENT CORPORATION By: /s/ ------------------------------------- Name: Hugh A. Andrews Title: President Affidavit No. 106 (Copy) Acknowledged and subscribed before me by Hugh A. Andrews, of legal age, married, business executive and resident of San Juan, Puerto Rico, in his capacity as President of Williams Hospitality Management Corporation and by Tadaaki Hamada, of legal age, married, banker and resident of Wyckoff, New Jersey, in his capacity as Senior Vice President of The Mitsubishi Bank, Limited, acting through its New York Branch identified by the means set forth in Article 17(c) of the Notarial Law of Puerto Rico in San Juan, Puerto Rico, this 7th day of February, 1991. _________________________________________ Notary Public 15 EX-10 22 EXHIBIT 10.19 COLLATERAL PLEDGE AGREEMENT This COLLATERAL PLEDGE AGREEMENT ("this Agreement") dated as of February 7, 1991, by and among EL CONQUISTADOR PARTNERSHIP L.P., a Delaware limited partnership (the "Borrower"), PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY, a public corporation and governmental instrumentality of the Commonwealth of Puerto Rico (hereinafter referred to as the "Authority"), and THE MITSUBISHI BANK, LIMITED, a Japanese banking corporation, acting through its New York Branch (hereinafter referred to as the "Bank") hereby agree as follows: WHEREAS, pursuant to the Loan Agreement (such term and all other capitalized terms used herein have the respective meanings set forth or referred to in Section 1 hereof unless otherwise stated), the Authority has undertaken, on behalf of the Borrower, to issue the Bonds, the proceeds of which will be loaned to the Borrower to finance the cost of the Project and to pay expenses incurred in connection with the issuance of the Bonds; WHEREAS, the Bonds are secured by, among other things, the obligations of the Borrower under the Loan Agreement and by the Trust Agreement; WHEREAS, the Borrower, in order to support its obligations under the Loan Agreement and to provide for the payment of the principal of and interest accrued on the Bonds in accordance with their terms, has requested the Bank to issue the Letter of Credit in favor of the Trustee pursuant to the Reimbursement Agreement; WHEREAS, under the terms of the Reimbursement Agreement the Borrower has agreed to reimburse the Bank for any payments made by the Bank under the Letter of Credit, with interest thereon from the -2- date of payment as provided therein, as well as to pay certain other fees and amounts in connection therewith; and WHEREAS, the Borrower has agreed to grant the Authority and the Bank a pledge of the Mortgage Notes, and to grant the Bank a pledge of the Termination Payments Note on a pari-passu basis with the pledge of the Mortgage Notes, and to establish certain other Collateral Security, in order to secure the obligations of the Borrower under the Loan Agreement and the Reimbursement Agreement; NOW THEREFORE, in consideration of the premises and in order to induce the Authority to issue the Bonds and the Bank to issue the letter of Credit and to enter into the Bond Swap Agreement, the parties hereto agree as follows: SECTION 1. Defined Terms. The following terms shall have the meanings specified below for all purposes of this Agreement: Affiliated Person means any Person controlling, controlled by or under common control with the Borrower. Architect shall mean Ray, Melendez & Associates or any successors engaged by the Borrower with the prior written consent of the Bank. Bank means THE MITSUBISHI BANK, LIMITED, a Japanese banking corporation, acting through its New York Branch, and its successors and assigns, or any bank issuing a Successor Letter of Credit. Bank's Consultant shall mean Merritt & Harris, Inc. or such other person or architectural or engineering consultant as may be designated and engaged by the Bank, at the Borrower's expense, to examine the Budget (as defined in the Reimbursement Agreement) and -3- the Plans, any changes thereto, and cost breakdowns and estimates with respect to the project (including, without limitation, all cost breakdowns and estimates set forth in any Request for Disbursement, as such term is defined in the Reimbursement Agreement, and all accompanying certifications), to make periodic inspections of the progress of the Construction of the Improvements on behalf of the Bank, to advise and render reports to the Bank concerning the foregoing and to otherwise consult with the Bank with respect to the Project. Bond Fixed Rate means __% per annum. Bonds means (a) the Industrial Revenue bonds, 1991 Series A (El Conquistador Resort Project) and (b) the convertible Industrial Revenue bonds, 1991 Series B (El Conquistador Resort Project), as the same may hereafter be converted to Industrial Revenue Bonds, 1991 Series C (El Conquistador Resort Project), of the Authority in the initial aggregate principal amount of $120,000,000, issued under the Trust Agreement. Bond Swap Agreement means an Interest Rate and Currency Exchange Agreement entered into by the Borrower and the Bank in accordance with Section 4(w) of the Reimbursement Agreement and pursuant to which the Borrower and the Bank enter into an interest rate swap under which the borrower agrees to pay to the Bank amounts calculated on a notional amount of $120,000,000 at the Bond Fixed Rate in exchange for the Bank's obligation to pay to the Borrower amounts calculated on a notional amount of $120,000,000 at rates equal to 88% of the Applicable LIBID Rate. Casualty means any damage to or destruction of the Mortgaged Property, or any portion thereof. -4- Company Partnership Agreement shall mean that certain Venture Agreement dated January 12, 1990 between Kumagai Caribbean, Inc. and WKA El Con Associates. Construction or Construct, when used with reference to the Project, shall mean construction, installation, renovation or development of the Improvements or any portion thereof. Default means any event which, with the giving of notice or lapse of time or both, would constitute an Event of Default or a Termination Payments Event of Default. Design Architects shall mean Edward D. Stone, Jr. and Associates, Inc., Jorge Rossello Associates, Edward Durrell Stone Associates, P.C., Cosentini Associates, Arthur Hill and Associates, and Peter George Associates, Inc., or any successors engaged by the Borrower with the prior written consent of the Bank. Disbursement shall mean each disbursement of all or any of the proceeds of the Loan. Emergency means a condition presenting, in the judgment of the Bank or the Authority, imminent danger to the health or safety of persons or imminent danger to property. Event of Default shall mean and include any of the following: (a) Any one or more of the Events of Default specified in the Reimbursement Agreement, or (b) Any one or more of the Events of Default specified in the Loan Agreement, either of the Mortgages, or the Trust Agreement, or -5- (c) Failure by the Mortgagor to perform or comply with any covenant, agreement or term binding upon it contained in this Agreement (except as elsewhere specifically set forth in this definition of Event of Default), which failure shall continue for a period of ninety (90) days after notice is given to the Mortgagor by the Bank or the Authority, unless the bank or the Authority shall agree to an extension of such time prior to its expiration; provided, however that if such failure cannot be corrected within such ninety (90) day period, it shall not constitute an Event of Default if corrective action is instituted by the Mortgagor within such period and diligently pursued until such failure is corrected; or (d) Any representation or warranty made by the Mortgagor in this Agreement or any certificate furnished in connection therewith shall prove to have been incorrect or misleading in any material respect as of the date made. To the extent that any circumstance constitutes an Event of Default under the Reimbursement Agreement but would not otherwise constitute an Event of Default hereunder or under the Loan Agreement, the Mortgages or the Trust Agreement (for example, if the grace period for curing a particular default under the Reimbursement Agreement is shorter than the grace period for the same default under the Loan Agreement), then, notwithstanding the foregoing, such circumstance shall constitute an Event of Default hereunder. Fajardo Property shall mean approximately 220 acres of land located in Fajardo, Puerto Rico, as more particularly described in the Fee Mortgage. -6- Fee Mortgage shall mean the Mortgage of the Borrower constituted on the date of this Agreement by Deed Number One before Notary Public Leonor M. Aguilar-Guerrero, as said document may be amended, modified or supplemented from time to time. GDB shall mean the Government Development Bank for Puerto Rico. GDB Loan shall mean a loan by GDB to the Borrower in the amount of up to $25,000,000 to be used to finance a portion of the Total Project Costs (as defined in the Reimbursement Agreement), substantially on the terms and conditions set forth in the GDB Loan Agreement (as defined in the Reimbursement Agreement). GDB Mortgage shall mean those certain mortgages, dated as of the date hereof, made by the Borrower in favor of GDB and securing the GDB Loan, which mortgages were constituted on the date of this Agreement (i) by Deed Number Two before Notary Public Ramon Moran Loubriel, and (ii) by Deed Number Three before Notary Public Ramon Moran Loubriel, respectively. Improvements shall mean the improvements to be renovated or constructed on the Premises pursuant to the Plans, consisting of approximately 750 guest rooms, approximately 50,000 square feet of meeting space (including prefunctionary space), six restaurants, approximately 13,000 square feet of retail space, an approximately 10,000 square foot casino, a marina, approximately 100,000 square feet of swimming pools and water features, an 18-hole golf course, an approximately 40,000 square foot clubhouse and spa facility, eight tennis courts, water sports facilities on the Palominos Island Property and related amenities and facilities. -7- Insurance Policies means the policies of insurance required to be maintained pursuant to Section 16 hereof and pursuant to the Reimbursement Agreement. Insurance Requirements means and includes all provisions of any Insurance Policy, all requirements of the issuer of any such Insurance Policy, and all orders, rules, regulations and other requirements of the Puerto Rico Fire Department, Factory Mutual System or Commercial Risk Insurors (or any other body exercising similar functions) applicable to or affecting the Project, or any part thereof or any use or condition of the Project, or any part thereof. KGC Mortgage shall mean a third priority mortgage on the Premises in favor of Kumagai Caribbean, Inc., as provided in Section 6.03 of the Company Partnership Agreement, subject to the terms set forth in Section 7(e) of the Reimbursement Agreement. Leasehold Mortgage shall mean the Leasehold Mortgage of the Borrower constituted on the date of this Agreement by Deed Number Two before Notary Public Leonor M. Auilar-Guerrero, as said document may be amended, modified or supplemented from time to time. Legal Requirements shall have the meaning ascribed to such term in the Mortgages. Letter of Credit means the irrevocable letter of credit issued by the Bank to the Trustee pursuant to the Reimbursement Agreement. Lien shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including, without -8- limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, or the filing of, or any agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction (other than informational filings in respect of equipment leased under any lease not intended as security, within the meaning of the Uniform Commercial Code) and any comparable financing statement under the laws of the Commonwealth of Puerto Rico. Loan shall mean the loan made by the Authority to the Borrower pursuant to the Loan Agreement. Loan Agreement means the Loan Agreement, of even date herewith, between the Authority and the Borrower. Loan Agreement Obligations means the obligations of the Borrower to make payments under the Loan Agreement, including, without limitation, interest accrued on such obligations. Major Casualty means a Casualty, the Restoration of which is reasonably estimated to cost more than $1,000,000. Mortgages shall mean, collectively, the Fee Mortgage and the Leasehold Mortgage. Mortgage Notes shall mean collectively (each individually, being a "Mortgage Note"), (a) the demand promissory note of the Borrower in the principal amount of $120,000,000, payable to the order of the Authority, dated February 7, 1991, under affidavit No. 98 before Notary Public Leonor M. Aguilar-Guerrero, ("Mortgage Note A"), (b) the demand promissory note of the Borrower in the principal amount of $6,612,000, payable to the order of the Authority, dated February 7, 1991 under Affidavit No. 99 before -9- Notary Public Leonor M. Aguilar-Guerrero ("Mortgage Note B") and (c) the demand promissory note of the Borrower in the principal amount of $2,000,000, payable to the order of the Authority, dated February 7, 1991, under affidavit No. 101 before Notary Public Leonor M. Aguilar-Guerrero ("Leasehold Note"). Mortgage Obligations means any and all obligations of the Borrower which may arise or accrue under and pursuant to this Agreement or the Mortgages, including, without limitation, interest accrued on such obligations. Mortgaged Property shall mean, collectively, the "Mortgaged Property," as defined in the Fee Mortgage and the "Mortgaged Property," as defined in the Leasehold Mortgage. Mortgagee shall have the meaning ascribed to such term in the Mortgages. Mortgagor means the Borrower. Net Proceeds means the amount of all insurance proceeds paid pursuant to any Insurance policy as the result of a Casualty, after deduction of the Mortgagee's and the bank's costs and expenses (including, without limitation, attorneys' fees and expenses), if any, in collecting the same. Net Restoration Award means the amount of all awards and payments received from the condemnor on account of a Taking, after deduction of the Mortgagee's and the Bank's costs and expenses (including, without limitation, attorneys' fees and expenses), if any, in collecting the same. -10- Notes means, collectively, the Mortgage Notes and the Termination Payments Note. Palominos Island Property shall mean approximately 90 acres of land located on an island approximately three miles to the east of the Fajardo Property, as more particularly described in the Leasehold Mortgage. Permitted Encumbrances shall mean, collectively, the Mortgages, the GDB Mortgage, the KGC Mortgage, if any (subject to the conditions set forth in Section 7(e) of the Reimbursement Agreement), real estate taxes not yet due and payable, those items listed as exceptions to title on the Title Policy issued on the date hereof, any other liens consented to in writing by the Bank, and any other liens defined as "Permitted Encumbrances" in the Mortgages. Person means an individual, corporation, partnership, joint venture, trust, association, or any other entity or organization, including a government or political subdivision, agency or instrumentality thereof. Plans shall mean the plans, drawings and specifications for the Construction of the Improvements, including, without limitation, the architectural, structural, mechanical and electrical plans and specifications therefor prepared or to be prepared by the Borrower, the Architects, the Design Architects and the Borrower's engineers and contractors, as approved by the Bank and the Bank's Consultant, together with all revisions and addenda to such plans, drawings and specification, provided that such revisions and addenda have been approved by the Bank to the extent such approval is required pursuant to paragraph 7(bb) of the Reimbursement Agreement, which Plans shall include, without -11- limitation, a description of the materials, equipment and fixtures necessary for the Construction of the Improvements. Pledgee(s) means (a) with respect to the Mortgage Notes, the Bank and, on the subordinated basis established in Section 2(d) hereof, the Authority, and (b) with respect to the Termination Payments Note and Mortgage Note B, the Bank. Premises shall mean the fee simple title to the Fajardo Property (other than those Condominium Parcels which have been released from the lien of the Fee Mortgage pursuant to the terms hereof and of the Reimbursement Agreement) and the leasehold estate in the Palominos Island Property. Project shall mean, collectively, the acquisition of the Fajardo Property, the leasing of the Palominos Island Property and the renovation, construction, furnishing and equipping of the Premises and the Improvements. Reimbursement Agreement shall mean that certain Letter of Credit and Reimbursement Agreement, dated as of the date hereof, between the Bank and the Borrower, relating to, inter alia, the issuance and continuance of the Letter of Credit, and all extensions, modifications, renewals, amendments and replacements thereof (including any replacement pursuant to which a Successor Letter of Credit may be issued). Release Conditions shall have the meaning ascribed thereto in Section 18(d) hereof. Restoration means, in case of a Casualty or a Taking, the restoration, replacement or rebuilding of the affected property such that when such restoration, replacement or rebuilding is -12- completed, the Improvements shall have been constructed substantially in accordance with the Plans, and to the extent any alterations or additions to the Improvements were made in compliance with the Mortgages or the Reimbursement Agreement, with any such alterations or additions, or in the event that the foregoing requirement cannot be satisfied as a result of any Legal Requirement or, in the case of a Taking, as a result of the loss of the use of the portion of the Mortgaged Property which was the subject of such Taking, the Project when such restoration, replacement or rebuilding shall have been completed, shall be an integral until similar in condition, character and scope to the Project prior to such Casualty or Taking, and the value of the Project, when so restored, replaced or rebuilt, together with the amount of the Net Proceeds or the Net Restoration Award, as the case may be, applied in repayment of the principal indebtedness evidenced by the Notes, shall be equal to or greater than the value and usefulness of the Project immediately prior to such Casualty or Taking. Secured Obligations means any and all obligations (other than Termination Payments, reimbursement for amounts advanced by the Bank in connection with construction on the Mortgaged Property other than Construction of the Improvements, any amounts owed in connection with any Annual Agent's Fees and Annual Letter of Credit Fees (as such terms are defined in the Reimbursement Agreement) and any amounts owed in connection with any Interest Drawing (as such term is defined in the Letter of Credit) under the Letter of Credit) of the Borrower which may arise or accrue under and pursuant to the Reimbursement Agreement, including, without limitation, interest accrued on such obligations. Secured Obligations B shall mean any and all obligations of the Borrower that may arise or accrue in connection with any -13- Interest Drawing (as defined in the Letter of Credit) under the Letter of Credit or in connection with the payment of up to one year's Annual Agent's Fees and Annual Letter of Credit Fees (as such terms are defined in the Reimbursement Agreement), including, without limitation, interest accrued on such obligations. Successor Letter of Credit shall have the meaning set forth in the Trust Agreement. Taking means any temporary or permanent taking by any public or quasi-public authority of the Mortgaged Property or any part thereof through eminent domain or other proceedings or by any settlement or compromise of such proceedings, or any voluntary conveyance of such property in lieu of the commencement of any such proceedings. Taxes means all real estate and other taxes, all assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof or while either of the Mortgages is in force), water, sewer, electricity, utility and other rents, rates and charges, excises, levies, license fees, permit fees, inspection fees and other authorization fees and other charges in each case whether general or specific, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all penalties or interest thereon), which at any time may be assessed, levied confirmed or imposed on or in respect of or be a lien upon: (a) The Mortgaged Property or any part thereof or any rents, issues, income, profits or earnings therefrom or any estate, right or interest therein; or -14- (b) Any occupancy, use or possession of or sales from the Mortgaged Property or any part thereof; or (c) Any or all of the Notes, either or both of the Mortgages or this Agreement, any interest thereon or any other payments due from the Mortgagor under the terms of any or all of the Notes, either or both of the Mortgages or this Agreement; excepting, however, any income taxes now or hereafter imposed by the United States under the Internal Revenue Code of 1986, as amended from time to time, and by the Commonwealth of Puerto Rico under the Income Tax Act of 1954, as amended from time to time, or under any other Act of Congress of the United States or Act of the Legislature of Puerto Rico of the same nature, modifying, amending or substituting the statutes above mentioned. Termination Payments shall mean any and all sums which may become payable by the Borrower to the Bank pursuant to Section 6 of the Bond Swap Agreement. Termination Payments Event of Default shall mean and include any of the following: (a) Any one or more of the Events of Default specified in the Bond Swap Agreement; or (b) Any one or more of the Events of Default specified in the Reimbursement Agreement; or (c) Failure by the Mortgagor to perform or comply with any covenant, agreement or term binding upon it contained in this Agreement (except as elsewhere specifically set forth in this definition of Termination Payments Event of Default), which failure -15- shall continue for a period of thirty (30) days after notice is given to the Mortgagor by the Bank, unless the Bank shall agree to an extension of such time prior to its expiration; provided, however that if such failure cannot be corrected within such thirty (30) day period, it shall not constitute a Termination Payments Event of Default if corrective action is instituted by the Mortgagor within such period and diligently pursued until such failure is corrected, but in no event shall such 30-day period or such other applicable grace period, as the case may be, be so extended to be a period in excess of 60 days. Termination Payments Note means the demand promissory note of the Borrower in the principal amount of $20,000,000, payable to the order of the Authority, dated February 7, 1991, under affidavit No. 100 before Notary Public Leonor M. Aguilar-Gerrero. Termination Payments Obligations means any and all obligations of the Borrower which may arise or accrue under and pursuant to the Band Swap Agreement in respect of Termination Payments, including, without limitation, interest accrued on such obligations. Title Policy shall mean a title policy issued by a title company satisfactory to the Bank in its sole and absolute discretion, marked paid in full, in the amount of the Loan, insuring the Authority, the Bank and the Trustee, as their respective interests may appear, that the Fee Mortgage, in connection with the Fajardo Property, and the Leasehold Mortgage, in connection with the Palominos Island Property, together with the other Security Documents (as defined in the Reimbursement Agreement) to be recorded constitute valid first liens on the Premises, and on the other property secured, free and clear of all -16- defects, restrictions, Liens and violations, except the Permitted Encumbrances, and which Title Policy shall contain: (A) no exception for mechanics' or materialmen's liens; (B) no survey exceptions other than those approved by the Bank; (C) a statement that the title company agrees to affirmatively insure the priority of each Disbursement against the existence of any other Liens, including mechanic's and materialman's liens, whether choate or inchoate; (D) reinsurance with provisions for direct access against the reinsurers, in amounts and with companies acceptable to the Bank; and (E) such other endorsements or affirmative insurance as the Bank and the Bank's counsel shall require. Trust Agreement means the Trust Agreement, of even date herewith, between the Authority and the Trustee, relating to the Bonds. Trustee means Banco Popular de Puerto Rico, as trustee under the Trust Agreement, or any successor trustee at the time serving as such under the Trust Agreement. SECTION 2. Pledge of Mortgage Notes and Subordination of Interests. -17- (a) As security for the Secured Obligations, the Loan Agreement Obligations and the Mortgage Obligations, the Mortgagor in this act delivers Mortgage Note A and the Leasehold Note to the Bank and the Authority in pledge. The parties have agreed that the Mortgage Notes so pledged shall be of equal priority (pari-passu) and that the pledge thereof in favor of the Authority and the Bank shall be subject to the subordination provisions of Section 2(d) hereof. As security for the Termination Payments Obligations, the Mortgagor in this act delivers the Termination Payments Note to the Bank in pledge and as security for Secured Obligations B, the Mortgagor in this Act delivers Mortgage Note B to the Bank in pledge. The parties have agreed that the pledge of Mortgage Note A and the Leasehold Note is of equal priority (pari-passu) with the pledge of the Termination Payments Note and Mortgage Note B in connection with all rights and remedies of the pledgees hereunder with respect to the Fee Mortgage. (b) Simultaneously with the execution of this Agreement, the Mortgagor has delivered (A) Mortgage Note A and the Leasehold Note to the Bank, to hold in accordance with the provisions of this Agreement, in its capacity as: (i) pledgee hereunder and (ii) agent of the Authority pursuant to the terms of this Agreement and (B) the Termination Payments Note and Mortgage Note B to the Bank, to hold in accordance with the provisions of this Agreement in its capacity as pledgee hereunder. The parties hereto hereby consent to the delivery of the Notes to the Bank to be held in accordance with the terms and conditions of this Agreement. (c) The Mortgage Notes and the Termination Payments Note shall have been endorsed by the Authority as follows: "Pay to the order of THE MITSUBISHI BANK, LIMITED, New York Branch under the terms and conditions of that certain collateral Pledge Agreement among El Conquistador Partnership L.P., Puerto Rico Industrial, -18- Medical, Educational and Environmental Pollution Control Facilities Financing Authority and The Mitsubishi Bank, Limited, New York Branch, dated February 7, 1991." (d) The Authority recognizes that the primary security for the payment of principal of and interest accrued on the Bonds is the availability of drawings to be made by the Trustee for the account of the Borrower under the Letter of Credit, and accordingly, the Authority agrees that notwithstanding any provision of this Agreement to the contrary, the pledge and rights of the Authority in Mortgage Note A and the Leasehold Note and in the Mortgages are hereby subordinated to the pledge and rights therein of the Bank and the rights of the Authority as the holder of the Mortgages are hereby assigned to the Bank, so long as the Bank shall not have "wrongfully dishonored" (as hereinafter defined) any drawing made by the Trustee in strict compliance with the terms of the Letter of Credit. In the event that the Bank shall wrongfully dishonor any drawing made by the Trustee in strict compliance with the terms of the Letter of Credit, then in such event the pledge of Mortgage Note A and the Leasehold Note granted to the Bank under this Agreement shall (except to the extent of any amounts owed to the Bank under the Reimbursement Agreement), without any further action, notice or the execution or delivery of any document by or to any party, be and become subordinated to the pledge granted to the Authority under this Agreement until such time as the Bank effects the cure of such wrongful dishonor and, upon effecting such cure, the pledge and rights of the Authority in Mortgage Note A and the Leasehold Note and in the Mortgages will once again be subordinate to the pledge and rights thereof of the Bank. For purposes hereof "wrongful dishonor" shall mean a failure by the Bank to honor any drawing made and presented pursuant to and in strict compliance with the Letter of Credit. The pledge of Mortgage Note A and the Leasehold Note and the pledge of the -19- Termination Payments Note and Mortgage Note B effected hereunder shall remain of equal priority (pari-passu) regardless of whether the Bank's interest as pledgee of Mortgage Note A and the Leasehold Note shall have been subordinated to the Authority's interest as pledgee therein. (e) Obligations Secured. Mortgage Note A and the Leasehold Note shall secure (i) on a senior or first priority basis the payment and performance of (A) the Secured Obligations, and (B) the Mortgage Obligations, in that order, and (ii) on a subordinated basis, as provided in Section 2(d) above, the payment and performance of the Loan Agreement Obligations. The Termination Payments Note shall secure the payment and performance of the Termination Payments Obligations exclusively. Mortgage Note B shall secure the payment and performance of Secured Obligations B exclusively. (f) This Agreement constitutes a pledge and security agreement, and the Pledgees shall have all the rights, powers and remedies of a pledgee and secured party provided by the laws of the Commonwealth of Puerto Rico in addition to the rights and remedies provided in this Agreement and under the Mortgages and Mortgage Note A and the Leasehold Mortgage and, with respect to the Bank, the Termination Payments Note and Mortgage Note B, except that the Termination Payments Note and Mortgage Note B shall secure only the Termination Payments Obligations and the Secured Obligations B, respectively. (g) Mortgagor's Consent to Assignment. The Mortgagor hereby consents to the assignment and subordination as provided in Section 2(d) above and agrees that the Bank shall hold Mortgage Note A and the Leasehold Mortgage in pledge, on behalf of the Pledgees, as security for the Secured Obligations, the Loan -20- Agreement Obligations and the Mortgage Obligations. The Pledgees shall be entitled to hold Mortgage Note A and the Leasehold Mortgage in pledge until the termination of the Reimbursement Agreement and the Loan Agreement and the payment in full of all of the Secured Obligations, the Loan Agreement Obligations and the Mortgage Obligations. The Bank shall be entitled to hold the Termination Payments Note in pledge until the termination of the Bond Swap Agreement and the payment in full of all of the Termination Payments Obligations, and shall be entitled to hold Mortgage Note B in pledge until the termination of the Reimbursement Agreement and the payment in full of all of the Secured Obligations B. (h) Further Assignment of Notes. Notwithstanding anything contained in this Agreement to the contrary, for so long as the GDB Loan shall be outstanding, the Bank shall not assign Mortgage Note B or the Termination Payments Note to any other party to secure any indebtedness other than the indebtedness secured by each such Note on the date hereof; provided, however, that the Bank may at any time assign Mortgage Note B to a Successor Letter of Credit Bank (as defined in the Trust Agreement) and/or the Termination Payments Note to any party replacing the bank as the swap counterparty in connection with the Loan. SECTION 3. Rights of the Bank and Authority. (a) Notwithstanding anything in this Agreement to the contrary, so long as the Bank shall not have wrongfully dishonored any drawing made by the Trustee in strict compliance with the terms of the Letter of Credit, or in the case of such a wrongful dishonor, if the Bank has cured same, (i) the Authority shall not be entitled to foreclose on either or both of Mortgage Note A and the Leasehold Note, either or both of the Mortgages, or any part of -21- the Mortgaged Property, or exercise any other remedy under either or both of the Mortgages, either or both of Mortgage Note A and the Leasehold Note or this Agreement without the prior written consent of the Bank, and (ii) the Bank shall be entitled to take any action permitted to be taken jointly by the Pledgees hereunder, including without limitation the foreclosure of either or both of Mortgage Note A and the Leasehold Note or either or both of the Mortgages and the making of any determination, demand or consent permitted or required to be made by the Pledgees, and any such action may be taken solely by the Bank and at the Bank's discretion as if the Bank were the sole Pledgee and holder of Mortgage Note A and the Leasehold Note without notice to, consent of or participation by the Authority; provided, however, that the Bank shall not foreclose on any or all of the Mortgage Notes or on the Termination Payments Note or either or both of the Mortgages unless it has delivered either the notice and direction to the Trustee described in Section 305 of the Trust Agreement or the notice to the Trustee described in clause (i) of Section 7.01(i) of the Loan Agreement. (b) The Bank agrees that it will not enter into any amendment, change or modification of this Agreement (except to the extent that any such amendment, change or modification would affect only the pledge of the Termination Payments Note or only the pledge of Mortgage Note B) or authorize and direct any amendment, change or modification to be made to the Mortgages or Mortgage Note A or the Leasehold Note, without the express prior written consent of the Authority, which consent shall not under any circumstances be withheld, conditioned or delayed if the interests of the holders of the Bonds are not materially adversely affected thereby. The Authority agrees to execute, acknowledge and deliver any amendment, change or modification to the Mortgages or Mortgage Note A and the Leasehold Note, at the direction of the Bank, if the interests of -22- the holders of the Bonds are not materially adversely affected thereby. (c) The Authority and the Mortgagor agree that the Bank, without notice to or any consent from the Authority and without affecting any of the Bank's rights under this Agreement, the Mortgages or the Notes, may, from time to time: (i) exercise any and all rights and remedies under the Reimbursement Agreement, including, without limitation, commencement of actions against the Mortgagor to recover sums owing thereunder and to obtain injunctive relief; (ii) supplement, modify, amend, extend, renew, accelerate or otherwise change the time for payment or the terms of the Secured Obligations, the Secured Obligations B, the Termination Payments Obligations or any part thereof; (iii) supplement, modify, amend or waive, or enter into or give any agreement, approval or consent with respect to, the obligations owing to the Bank under the Reimbursement Agreement or under any additional security agreement or guaranties or supplement, modify, amend or waive any condition, covenant, default, remedy, right, representation or term thereof or thereunder; (iv) accept new or additional instruments, documents or agreements in exchange for or relative to the Reimbursement Agreement, the Secured Obligations, the Secured Obligations B, the Termination Payments Obligations or any part thereof; -23- (v) accept partial payments on the Secured Obligations, the Secured Obligations B, or the Termination Payments Obligations; (vi) receive and hold additional security or guaranties for the Secured Obligations, the Secured Obligations B, the Termination Payments Obligations or any part thereof, owing to the Bank; (vii) release any Person from any personal liability with respect to the Secured Obligations, the Secured Obligations B, the Termination Payments Obligations or any part thereof; (viii) settle, release on terms satisfactory to the Bank or by operation of law or otherwise, compound, compromise, collect or otherwise liquidate or enforce any Secured Obligations, Secured Obligations B and/or the Termination Payments Obligations; and (ix) grant all required consents, approvals and waivers hereunder, including, without limitation, all renewals and extensions hereof and all consents, approvals and waivers which require action by the Pledgees, except as required by Section 3(b) hereof. (d) Upon the termination of the Letter of Credit and the Reimbursement Agreement and the full satisfaction of the Secured Obligations then due and owing, the Bank agrees to deliver Mortgage Note A and the Leasehold Note to the Authority or any assignee thereof; provided, however, that if at that time, there remain outstanding any Loan Agreement Obligations, the Authority or its assignee shall retain Mortgage Note A and the Leasehold Note in -24- pledge until full satisfaction and payment of such Obligations, and references herein to the "Bank" shall be deemed to be references to the Authority insofar as such references apply to the Bank as pledgee of Mortgage Note A and the Leasehold Note. If the GDB Loan is then outstanding, upon the termination of the Bond Swap Agreement and the full satisfaction of the Termination Payments Obligations, the Bank agrees to deliver the Termination Payments Note to GDB for cancellation purposes only. If the GDB Loan is not then outstanding, the Bank agrees that upon termination of the Bond Swap Agreement and the full satisfaction of the Termination Payments Obligations, the Bank shall deliver the Termination Payments Note to the Borrower for cancellation purposes only. If the GDB Loan is then outstanding, upon the termination of the Reimbursement Agreement and the full satisfaction of the Secured Obligations B, the Bank agrees to deliver Mortgage Note B to GDB for cancellation purposes only. If the GDB Loan is not then outstanding, the Bank agrees that upon termination of the Reimbursement Agreement and the full satisfaction of the Secured Obligations B, the Bank shall deliver Mortgage Note B to the Borrower for cancellation purposes only. (e) Upon the request of the Bank, the Authority hereby agrees to execute, acknowledge and deliver all instruments and documents required in connection with the release of the Condominium Parcels (as defined in the Reimbursement Agreement) from the lien of the Mortgages and the creation of any easements and/or rights of way in favor of the Condominium Parcels and the creation of any access easement in favor of the property owned by Justino Diaz Santini. -25- SECTION 4. Application of Funds. Any proceeds collected or received by the Pledgees from the foreclosure of the Notes, or any part thereof, the foreclosure of either or both of the Mortgages, or any part of the Mortgaged Property, and the proceeds from any possession, holding, operating or management of the Mortgaged Property or any part thereof by the Pledgees in accordance with the terms and conditions of the respective Mortgages, shall be applied in the following order from time to time by the Pledgees: First: To the payment of (i) all Taxes or liens with respect to the Notes or the Mortgaged Property which are prior to the lien of this Agreement or either of the Mortgages that the Pledgees may consider necessary or desirable to pay, except those taxes, assessments and liens subject to which any sale of any of the Notes or the Mortgaged Property shall have been made, if any, (ii) all costs and expenses of collection, including the cost and expenses of handling the Notes and/or the Mortgaged Property, including the taking of possession, operating and managing of the Mortgaged Property, as the case may be, and (iii) the cost and expenses of (A) any sale in foreclosure of the Notes and/or the Mortgaged Property pursuant to the provisions of this Agreement or either or both of the Mortgages, and (B) the enforcement of any remedies hereunder, including court costs and expenses, and (C) fees and expenses of Pledgees' agents, attorneys and counsel, and all expenses, liabilities and advances incurred or made by the Pledgees with respect to such foreclosure. Second: The payment of the Secured Obligations (in any order of priority that the Bank may determine in its sole discretion), Mortgage Obligations (in any order of priority that the Bank may determine in its sole discretion), and Loan Agreement Obligations, in that order, then outstanding; provided, however, that in connection with the foreclosure of the Termination Payments Note or -26- the Mortgaged Property as a result of a Termination Payments Event of Default, the proceeds shall be applied only to the payment of the Termination Payments Obligations and in connection with the foreclosure of Mortgage Note B as a result of a failure to pay any Secured Obligations B, the proceeds shall be applied only to the payment of the Secured Obligations B. Third: Any surplus then remaining shall be paid to or at the direction of the Borrower, its successors or assigns, or to whomsoever may be lawfully entitled to receive the same (including, without limitation, GDB), or as a court of competent jurisdiction may otherwise direct. SECTION 5. Documentary Stamps. If at any time the Commonwealth of Puerto Rico or any governmental subdivision thereof shall require the payment of registration fees or Internal Revenue Stamps or other stamps to be affixed to either or both of the Mortgages, any or all of the Notes or this Agreement, the Mortgagor, upon demand, will pay for the same, with interest and penalties thereon, if any, and shall hold the Authority and the Bank harmless of and from and indemnify them against all losses, liabilities, obligations, damages, penalties, claims, causes of action, charges and expenses (including, without limitation, attorneys' fees and expenses) which may be imposed upon or incurred by or asserted against them by reason thereof. SECTION 6. Headings etc. The headings and captions of the various Sections of this Agreement are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. SECTION 7. Usury Laws. This Agreement, the Mortgages and the Notes are subject to the express condition that at no time shall -27- the Mortgagor be obligated or required to pay interest on the obligations secured thereby and hereby at a rate which is in excess of the maximum interest rate which the Mortgagor is permitted by law to contract or agree to pay. If by the terms of this Agreement, the Mortgages, or any of the Notes, the Mortgagor is at any time required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest shall be deemed to be immediately reduced to such maximum rate so that no amounts shall be charged which are in excess thereof and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the holder of the Notes shall promptly refund such excess to the Mortgagor; provided, however, that, if lawful, any such excess shall be paid by the Mortgagor to the Mortgagee as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. SECTION 8. Further Assurances. The Mortgagor hereby agrees promptly to execute and deliver such additional agreements and instruments and promptly to take such additional action as the Bank or the Authority may at any time and from time to time request in writing in order for the Bank and/or the Authority to obtain the full benefits and rights granted or purported to be granted by this Agreement and fully and continually to perfect the pledge and security interests created hereby. SECTION 9. No Waiver; Cumulative Remedies. No failure or delay on the part of the Pledgees, or either of them, in exercising any right, power or remedy hereunder or under or in connection with any or all of the Notes or either or both of the Mortgages shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or -28- further exercise thereof or the exercise of any other right, power or remedy hereunder or under or in connection with any or all of the Notes or either or both of the Mortgages. The remedies herein and in the Mortgages provided are cumulative and not exclusive of any remedies provided by law or in equity. SECTION 10. Amendments, etc. No amendment, modification, termination, or waiver of any provision of this Agreement, Mortgage Note A, the Leasehold Note or the Mortgages nor consent to any departure by the Mortgagor therefrom shall in any event be effective unless the same shall be authorized and directed by the Bank in writing and signed by the Authority, subject to the provisions of Section 3(b) hereof, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Mortgagor in any case shall entitle the Mortgagor to any other or further notice or demand in similar or other circumstances. SECTION 11. Addresses for Notices, etc. All notices, requests, demands, directions and other communications hereunder or in connection with the Notes or the Mortgages shall be in writing (including telegraphic communication) and mailed (certified or registered, with signed receipt, or sent by nationally recognized overnight courier to the applicable party at the following address or to such other address with respect to any party as such party shall notify the other parties in writing: If to the Borrower: El Conquistador Partnership L.P. c/o Williams Hospitality Management Corporation 187 East Isla Verde Road Carolina, Puerto Rico 00913 Attention: Hugh A. Andrews -29- with copies similarly delivered to: (i) Whitman & Ransom 200 Park Avenue New York, New York 10166 Attention: Jeffrey N. Siegel, Esq.; (ii) Kumagai Caribbean, Inc. c/o Williams Hospitality Management Corporation 187 East Isla Verde Road Carolina, Puerto Rico Attention: Mr. Sunsuke Nakane; (iii) WMS Industries Inc. 3401 North Carolina Avenue Chicago, Illinois 60618 Attention: Corporate Secretary; and (iv) Messrs. Burton and Richard Koffman c/o Richford American 950 Third Avenue New York, New York 10022 If to the Authority: Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority c/o Government Development Bank for Puerto Rico P.O. Box 42001 San Juan, Puerto Rico 00940-2001 Attention: Executive Director If to the Bank: The Mitsubishi Bank, Limited 225 Liberty Street Two World Financial Center New York, New York 10281 Attention: Real Estate Finance Group (Mr. Akira Fujii or Mr. Russ Lopinto) with copies similarly delivered to: (i) Kaye, Scholer, Fierman, Hays & Handler 425 Park Avenue New York, New York 10022 Attention: Warren J. Berstein, Esq.; and -30- (ii) McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria Royal Bank Center 255 Ponce de Leon Avenue Hato Rey, Puerto Rico 00917 Attention: Fred Hulser, Esq. and, if notice is given by the Bank to the Borrower, a copy thereof shall be delivered to: Government Development Bank for Puerto Rico P.O. Box 42001 Minillas Station San Juan, Puerto Rico 00940 Attention: President and Director of Private Sector Banking Services and Melendez-Perez Moran & Santiago PO Box 19328 Santurce, Puerto Rico 00919 Attention: Ramon Moran-Loubriel, Esq. All such notices, requests, demands, directions and other communications shall be effective when received at the address specified as aforesaid. SECTION 12. Binding Effect. The Agreement shall be binding upon and inure to the benefit of the Mortgagor, the Bank and the Authority and their respective successors and assigns. GDB shall be a third party beneficiary of this Agreement with respect to those provisions dealing specifically with the Termination Payments Note, Mortgage Note B and for purposes of Section 2(h) only. SECTION 13. Severability of Provision. Any provision of this Agreement, the Notes or the Mortgages which is prohibited or unenforceable in the Commonwealth of Puerto Rico shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. -31- SECTION 14. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Puerto Rico. SECTION 15. Inconsistent Terms. In the event of contradictions or inconsistencies in the terms and provisions of this Agreement and the terms and provisions of the Mortgages, the terms and provisions of this Agreement shall prevail. SECTION 16. Insurance. (a) Prior to the Date of Substantial Completion (as defined in the Reimbursement Agreement), the Borrower, at its sole cost and expense, shall keep the existing structures insured for the benefit of the Authority and the Bank against loss and damage by Fire, Lightning, Collapse, Earthmovement, Flood, Tsunami, Boiler and Machinery, and such other standard Extended Coverage perils as are customarily included under standard "All Risk" policies for other property and buildings similar to the Mortgaged Property in nature, use, location, height, and type of construction. The amount of such Insurance Policy(ies) shall be not less than the full Replacement Cost of the then existing structures, with the Agreed Amount and Replacement Cost Endorsements attached, waiving all co-insurance provisions and eliminating the Vacancy and Unoccupied Clause. In addition, prior to the Date of Substantial Completion, the Improvements shall be covered under an "All Risk" Builder's Risk/Contract Works Policy for the 100% Completed Value (replacement cost) of the contract(s) on a Non-Reporting Form, subject to the same coverages as are required on the presently existing structures, along with extensions of coverage for "permission to complete and Occupy," Offsite Storage including Inland and Ocean Transit, "Hot and Cold" Testing, Increased Cost of Construction and Contingent Liability from Building Laws. On and after the Date of Substantial Completion, the Borrower shall secure -32- insurance to cover the Improvements and equipment at the Project against loss or damage by fire and such risks as are customarily included in Extended Coverage, and from such other hazards including, without limitation, Flood, Earthmovement, and Coastal Windstorm, as may be covered by the "All Risk" insurance covering other property and buildings similar to the Mortgaged Property in nature, use, location, height and type of construction, in an amount not less than the greater of (A) full insurable value, or (B) an amount sufficient to prevent the Borrower from becoming a co-insurer within the terms of the applicable policies. Said Insurance Policy shall include endorsements for Demolition, Contingent Liability and Increased Cost of Construction. The term "full insurable value" as used in this Section shall mean the cost of actual replacement, without deduction for depreciation, less the cost of excavations, foundations and footings below the lowest basement floor or, if there be no basement, below the level of the ground determined as of the Date of Substantial Completion and as further determined on the date of each renewal or replacement of such Insurance Policy, as hereinafter set forth. Full insurable value shall be determined by an appraisal made at least once every three (3) years, by an appraiser, appraisal company or insurance company selected by the Borrower and approved by the Bank in its sole discretion, and such determination of full insurable value shall be binding and conclusive upon the parties hereto. If any Insurance Policy covering Flood or Earthmovement shall contain annual aggregate limits, such aggregate limits shall be replenished upon the occurrence of a substantial loss, as determined by the Bank in its sole discretion. The Insurance Policies described in subparagraphs (a)(i) and (a)(ii) above shall provide for deductions of not more than $10,000 per occurrence for all perils except Flood, Earthmovement, and Coastal Windstorm, for which deductions of not more than $25,000 per occurrence may be made. -33- (b) The Borrower, at its sole cost and expense, shall maintain or cause to be maintained for the benefit of the Authority and the Bank (i) prior to the Date of Substantial Completion, Soft Costs/Additional Expense Incurred, Loss of Gross Earnings and/or Loss of Rental Income on an Actual Loss Sustained Basis for an amount not less than $24,000,000, with an "Extended Period of Indemnity" Endorsement attached; (ii) upon and after the Date of Substantial Completion, coverage for Loss of Gross Earnings and/or Loss of Rental Income, Business Interruption and Additional Expense Incurred Insurance on an Actual Loss Sustained Basis (if available) in the amount equal to the greater of (A) an estimate reasonably satisfactory to the Bank of the succeeding year's Gross Revenues (as defined in the Reimbursement Agreement), or (B) $24,000,000 with the Extended Period of Indemnity Enforcement attached; (iii) upon and after the installation of any boilers and/or machinery at the Project, Boiler and Machinery Coverage for Rent Loss (including, without limitation, from both retail space and nightly room rentals), with an "Extended Period of Indemnity" and Improvements Loss in such amounts as are usually carried by persons operating property and buildings similar to the Mortgaged Property in nature, use, location, height and type of construction. (c) The Borrower, at its sole cost and expense, shall maintain or cause to be maintained at all times (i) General Public Liability Insurance, including, without limitation, the Broad Form Comprehensive General Liability Endorsement, with the respective Primary Coverages as follows: General Aggregate $ 1,000,000 Per Location Products/Completed Operations $ 1,000,000* *(2 year Completed Operation Extension) Personal & Advertising Injury $ 1,000,000 Each Occurrence (Bodily Injury and Property Damage) $ 1,000,000 -34- Fire Damage Legal $ 50,000 Medical Expense $ 10,000 Stop Gap Liability $ 1,000,000 (ii) Umbrella Liability Coverage in an amount of not less than $40,000,000 per occurrence and in the aggregate prior to the Date of Substantial Completion and, thereafter, in an amount of not less than $50,000,000 per occurrence and in the aggregate or such greater amount as the Bank shall reasonably require; (iii) Worker's Compensation and Non-Occupational Disability Insurance as respect a Monopolistic State as required by applicable laws and regulations of the Commonwealth of Puerto Rico; (iv) Marina Operator's Legal Liability, Protection and Indemnity and Marina General Liability; (v) insurance covering pilings, piers, wharves and docks, and environmental impairment coverage (if available) with respect to the marina operation; and (v) such other types and amounts of insurance with respect to the Mortgaged Property and the operation thereof which are commonly maintained in the case of other property and buildings similar to the Mortgaged Property in nature, use, location, height and type of construction, as may from time to time be required by the Authority and the Bank (including, without limitation, Automobile Liability Insurance in amounts reasonably required by the Bank from time to time). (d) All Insurance Policies shall be issued by an insurer admitted and licensed to do business in the Commonwealth of Puerto Rico with an A.M. Best Rating of AX or better and shall be otherwise satisfactory to the Bank in form and content. The Property and Business Interruption Insurance Policies shall contain the Standard Mortgagee Non-Contribution Clause Endorsement or its equivalent endorsement satisfactory to the Bank, naming the Bank as First Mortgagee and providing the Bank (except in the case of General Liability and other Liability and Worker's Compensation) as the person to whom all payments made by such insurance company -35- shall be paid and with whom all claims shall be adjusted, except as otherwise provided in Section 18(b) hereof. All Liability Insurance Policies shall name the Bank, the Authority and the Trustee as Additional Insureds according to the their respective interests. Without the Bank's prior written consent, the Borrower shall not carry separate or additional insurance coverage concurrent in form or contributing in the event of loss with that required by this Agreement or the Reimbursement Agreement. Without the Bank's prior written consent, the Borrower shall not name any Person as a named insured or loss payee under any Insurance Policy without the Bank's prior written consent. The Borrower shall pay the premiums for the Insurance Policies as the same become due and payable. The Borrower shall deliver original binders and certified copies of the insurance Policies to the Bank and to the Authority as further security for the Borrower's performance of the terms and conditions contained herein, provided that the Bank and the Authority shall not be deemed by reason of the custody of such Insurance Policies to have knowledge of the contents thereof. In the event of a foreclosure of any or all of the Notes or either or both of the Mortgages, the purchaser of the Mortgaged Property will succeed to all of the rights of the Borrower, including the rights to all unearned premiums paid, with respect to the Insurance Policies, to the extent assignable. The Borrower also shall deliver to the Bank and the Authority, within 10 days of such party's request, a certificate of insurance issued by the Borrower's insurance agent/broker setting forth the particulars as to all such Insurance Policies, that all premiums due thereon have been paid and that the same are in full force and effect. Not later than 30 days prior to the expiration date of each of the Insurance Policies, the Borrower shall deliver to the Bank and the Authority original binders and certified copies of a renewal policy or policies marked "premium paid" or accompanied by other evidence of payment of premium satisfactory to the Bank and the Authority. -36- (e) Each Insurance Policy to be carried hereunder shall contain a provision whereby the insurer (i) agrees that such policy shall not be cancelled or modified, and shall not fail to be renewed, without at least 60 days' prior written notice to the Authority and the Bank, (ii) waives any right to claim any premiums and commissions against the Authority and the Bank and (iii) provides that the Authority and the Bank are permitted to make payments to effect the confirmation of such Policy upon notice of cancellation due to nonpayment of premiums. In the event any Insurance Policy (except for general public and other liability, boiler and machinery explosion liability and workers' compensation insurance) shall contain breach of warranty provisions, such Policy shall provide that with respect to the interest of the Authority and the Bank, such Insurance Policy shall not be invalidated by and shall insure the Authority and the Bank regardless of (A) any act, failure to act or negligence of or violation of warranties, declarations or conditions contained in such Policy by any named insured, (B) the occupancy or use of the Mortgaged Property for purposes more hazardous than permitted by the terms thereof, (C) any foreclosure or other action or proceeding taken by the Authority or the Bank pursuant to any provision of this Agreement, any or all of the Notes, or either or both of the Mortgages, or (D) any change in title to or ownership of all or any of the Mortgaged Property. (f) Any insurance maintained pursuant to this Section 16 may be evidenced by blanket Insurance Policies covering the Mortgaged Property and other properties or assets of the Borrower or any Affiliated Person, provided that any such policy shall specify the portion, if less than all, of the total coverage of such Policy that is allocated to the Mortgaged Property and shall in all other respects comply with the requirements of this Section -37- 16. The Bank, in its sole discretion, shall determine whether such blanket Policies provide sufficient limits of insurance. (g) Notwithstanding anything to the contrary contained herein, if at any time the Pledgees are not in receipt of written evidence that all insurance required hereunder is maintained in full force and effect, the Pledgees shall have the right, upon notice to the Borrower, to take such action as the Pledgees deem necessary to protect their interests in the Mortgaged Property, including, without limitation, the obtaining of such insurance coverage as the Pledgees deem appropriate, and all expenses incurred by the Pledgees in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by the Borrower promptly after demand and be secured by this Agreement and by the Mortgages. SECTION 17. Compliance with Insurance Requirements. The Mortgagor, at its sole cost and expense, will comply and cause compliance of the Mortgaged Property and the operation, maintenance and use thereof with all Insurance Requirements, whether or not compliance therewith shall require structural changes in or interfere with the use and enjoyment of the Mortgaged Property or any part thereof. SECTION 18. Damage or Destruction. (a) In case of a Casualty, the Borrower will immediately give notice thereof to the Authority and the Bank generally describing the nature and extent of such Casualty and setting forth the Borrower's best estimate of the cost of Restoration, and the Borrower shall, at its sole cost and expense, promptly commence and diligently complete or cause to be commenced and diligently completed, the Restoration in a good and workmanlike manner and in compliance with all legal Requirements. -38- (b) The Bank shall be entitled to receive all insurance proceeds payable on account of a Casualty. The Borrower hereby irrevocably assigns, transfers and sets over to the Bank all rights of the Borrower to any such proceeds, award or payment and irrevocably authorizes and empowers the Bank, in the name of the Borrower or otherwise, to file for and prosecute in its own name what would otherwise be the Borrower's claim for any such proceeds. Notwithstanding the foregoing, so long as no Default, Event of Default or Termination Payments Event of Default shall have occurred and shall then be continuing and provided the Borrower promptly files all claims and diligently prosecutes same, the Borrower shall have the right to file, adjust, settle and prosecute any claim for such proceeds; provided that the Borrower shall not agree to any adjustment or settlement of any such claim payable with respect to a Major Casualty without the Bank's prior written consent. The Borrower shall pay promptly after demand all costs and expenses (including, without limitation, attorneys' fees and expenses) incurred by the Bank in connection with a Casualty and the seeking and obtaining of any insurance proceeds, award or payment with respect thereto. (c) In the event of a Major Casualty, the Net Proceeds shall be held, at the bank's option, by the Bank as additional collateral for the Secured Obligations, the Loan Agreement Obligations, the Mortgage Obligations, the Termination Payments Obligations and the Secured Obligations B and shall be applied or dealt with by the Bank as follows: (i) if the Release Conditions (as hereinafter defined) are satisfied, all net Proceeds shall be made available to the Borrower to be applied towards the cost of the Restoration in accordance with paragraph (e) of this Section 18; and -39- (ii) if the Release Conditions are not satisfied, all Net Proceeds shall be applied in accordance with Section 20 hereof. (d) In case of a Major Casualty, all Net Proceeds shall be applied as provided in clause (i) of paragraph (c) of this Section 18 if all of the following conditions are satisfied or otherwise waived by the Bank (collectively, the "Release Conditions"): (i) no Default, Event of Default or Termination Payments Event of Default shall have occurred and be continuing; (ii) the Borrower shall have delivered to the Authority and the bank within thirty (30) days after the occurrence of the Major Casualty, a notice of the Borrower's desire to undertake the Restoration of the Improvements; (iii) the Borrower shall have demonstrated to the satisfaction of the bank that the Restoration of the Improvement can be completed at least six months prior to the then-current Expiration Date (as defined in the Reimbursement Agreement); (iv) the Borrower shall have demonstrated to the satisfaction of the Bank that sufficient funds are available to the Borrower through revenues and/or business interruption insurance maintained pursuant to Section 16 hereof, and/or a cash deposit, letter of credit or similar cash-equivalent security (which in the case of a letter of credit or similar cash-equivalent security shall be satisfactory to the Bank as to form, content and issuer) and which shall be for the benefit of the Bank, to pay all amounts estimated to be paid with respect to the Secured Obligations, Secured Obligations B, the Loan Agreement Obligations, any debt service with respect to the GDB Loan, and all other estimated operating expenses with respect to the Project during the period -40- estimated by the Borrower and approved by the Bank as necessary for the completion of the Restoration; (v) in the event that the estimated cost of Restoration is greater than 25% of the full replacement cost of the Improvements (as specified in the Borrower's casualty Insurance Policy), the Borrower shall have provided the Bank with a guaranty of completion of the Restoration satisfactory to the Bank as to form, content and guarantor which, among other things, ensures that sufficient funds are and will be available to complete the Restoration; and (vi) to the extent, in the Bank's judgment, that the Net Proceeds are insufficient to pay the costs of the Restoration, the Borrower shall have provided the Bank with a cash deposit, letter of credit, or similar cash-equivalent security in the amount of such deficiency (which in the case of a letter of credit or similar cash-equivalent security shall be satisfactory to the Bank as to form, content and issuer). (e) Provided that no Default, Event of Default or Termination Payments Event of Default shall have occurred and be continuing, then, upon the occurrence of a partial destruction of the Improvements that does not constitute a Major Casualty or upon the occurrence of a Major Casualty in connection with which the Release Conditions have been met, the Net Proceeds shall be paid over to the Borrower for the Restoration of the Improvements. The Net Proceeds shall be disbursed substantially in accordance with the requirements of Article 9 of the Reimbursement Agreement such that the Net Proceeds shall be advanced in the same manner and subject to the same conditions as the disbursement of the proceeds of the Loan. Notwithstanding the foregoing, after the Date of Substantial Completion, (i) the Net Proceeds from a Casualty that -41- does not constitute a Major Casualty shall be paid over to the Borrower for the Restoration of the Improvements without any requirement that the Borrower comply with disbursement procedures, and (ii) the Net Proceeds from a Major Casualty shall be disbursed in accordance with procedures to be established by the Bank appropriate to the Restoration of the Improvements. (f) All costs and expenses incurred by the Authority and the Bank in connection with making the Net Proceeds or Net Restoration Awards available for the Restoration (including, without limitation, attorneys' fees and expenses and fees and expenses of the Bank's Consultant, as defined in the Reimbursement Agreement) shall be paid by the Borrower. Any Net Proceeds or Net Restoration Awards remaining after the Restoration and the payment in full of all costs incurred in connection with the Restoration shall be applied to the repayment of any outstanding obligations of the Borrower under the Reimbursement Agreement (including without limitation, the obligation to pay any Termination Payments and any Secured Obligations B), the Loan Agreement, the Mortgages or this Agreement, in such order as the bank shall determine; provided, however, that any balance of the Net Proceeds or Net Restoration Awards remaining after such application shall be applied to the prepayment of the principal of and interest on the Loan as required pursuant to Section 8.02(e) of the Loan Agreement. SECTION 19. Taking of the Mortgaged Property. (a) In case of a Taking or the commencement of any proceedings or negotiations that might result in a Taking, the Borrower immediately will give notice thereof to the Authority and the Bank generally describing the nature and extent of such Taking or the nature of such proceedings or negotiations and the nature and extent of the Taking which might result therefrom. The Authority and the Bank shall be entitled hereunder to all awards or -42- compensation payable on account of a Taking. The Borrower hereby irrevocably assigns, transfers and sets over to the Authority and the Bank all rights of the Borrower to any such awards or compensation and irrevocably authorizes and empowers the Authority and the Bank, in the name of the Borrower or otherwise, to collect and receive any such award or compensation and to file and prosecute any and all claims for any such awards or compensation. Notwithstanding the foregoing, so long as no Default, Event of Default or Termination Payments Event of Default shall have occurred and shall then be continuing and provided the Borrower promptly files and diligently prosecutes such claim or claims, the Borrower shall have the right to prosecute and file any such claim or claims and the Borrower shall cause any such award or compensation to be collected and promptly paid over to the Bank; provided, that, the Borrower shall not agree to or accept any award or compensation without the Authority's and the Bank's prior written consent. The Authority and the Bank may participate in such proceedings or negotiations, and the Borrower will deliver or cause to be delivered to the Authority and the Bank all instruments requested by the Authority and the Bank to permit such participation, provided that the Authority and the Bank shall be under no obligation to question the amount of the award or compensation. Although it is hereby expressly agreed that the same shall not be necessary, in any event, the Borrower shall, upon demand of the Authority and the Bank, make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning any such award or compensation to the Authority and the Bank, free and clear of any encumbrances of any kind or nature whatsoever other than any junior encumbrances arising as a result of the GDB Mortgage or any KGC Mortgage(as such terms are defined in the Reimbursement Agreement). The Borrower will pay promptly after demand all costs and expenses (including, without limitation, attorneys' fees and expenses and fees and -43- expenses of the Bank's Consultant) incurred by the Authority and the Bank in connection with any Taking and seeking and obtaining any award or payment on account thereof. (b) In the case of a Taking such that, in the Bank's judgment, the Project can be restored substantially to its value and usefulness as it existed prior to such Taking, then, the Borrower shall, at its sole cost and expense, promptly commence and diligently complete the Restoration in a good and workmanlike manner, and in compliance with all Legal Requirements. (c) All Net Restoration Awards shall be held, at the Bank's option, by the Bank as additional collateral for the Secured Obligations, the Secured Obligations B, the Loan Agreement Obligations, the Mortgage Obligations and the Termination Payments Obligations, and shall be applied or dealt with by the Bank as follows: (i) Provided that no Default, Event of Default or Termination Payment Event of Default shall have occurred and be continuing, then, in the case of a Taking of the nature referred to in paragraph (b) of this Section 19, and, to the extent necessary thereunder, if the Release Conditions are satisfied, all Net Restoration Awards shall be applied to pay the cost of Restoration of the portion of the Improvements remaining after such Taking, such application to be effected substantially in the same manner as provided in paragraph (e) of Section 18 hereof with respect to Net Proceeds and the balance, if any, of such Net Restoration Awards shall be applied in the manner set forth in Section 18(g) hereof. (ii) In the case of any Taking other than a Taking of the nature referred to in paragraph (b) of this Section 19, all -44- Net Restoration Awards actually received by the Bank shall be applied in accordance with Section 20 hereof. (d) Notwithstanding anything to the contrary contained herein, in the case of a Taking such that, in the Bank's judgment, the Project is an economically viable architectural whole notwithstanding such Taking, the Borrower shall have no obligation to commence or complete Restoration and all Net Restoration Awards shall be applied in the order specified in Section 20 hereof. SECTION 20. Application of Proceeds Upon Casualty or Substantial Taking. Upon a Casualty, if the disposition of the Net Proceeds is governed by clause (ii) of paragraph (c) of Section 18 hereof or upon a Taking, if the disposition of the Net Restoration Awards is governed by clause (ii) of paragraph (c) or paragraph (d) of Section 19 hereof, the Bank shall have the option, in the Bank's sole discretion, to (a) make available the Net Proceeds or the Net Restoration Awards, as the case may be, to the Borrower for Restoration in the manner provided in paragraph (e) of Section 18 hereof or (b) apply such Net Proceeds or Net Restoration Awards to the payment of any outstanding obligations of the Borrower under the Reimbursement Agreement (including, without limitation, the obligation to pay any Termination Payments or any Secured Obligations B), the Loan Agreement, the Mortgages or this Agreement; provided, however, that any balance of the Net Proceeds or Net Restoration Awards remaining after such application shall be applied to the prepayment of the principal of and interest on the Loan as required in accordance with Section 8.02(e) of the Loan Agreement. If the Bank shall receive and retain any Net Proceeds or Net Restoration Awards, in trust or otherwise, the indebtedness secured by this Agreement shall be reduced only by the amount thereof -45- received and retained by the Bank and actually applied by the Bank in reduction of the indebtedness secured by this Agreement. Notwithstanding anything contained in this Agreement to the contrary, the bank shall release the proceeds of any business interruption insurance maintained hereunder to the Borrower provided that the Borrower satisfies the conditions set forth in Sections 18(d)(i), (ii) and (iv) herein and provided, further, that the Bank shall retain that portion of such insurance proceeds that the Bank deems necessary to pay all amounts estimated to become payable with respect to the Secured Obligations, the Secured Obligations B, and to pay any debt service with respect to the GDB Loan during the period estimated by the Borrower and approved to the Bank as necessary for the completion of the Restoration, the balance of such insurance proceeds to be released in accordance with the other terms and conditions set forth herein, as applicable. SECTION 21. Representations and Warranties. The Borrower hereby represents and warrants to the Pledgees as follows: (a) The Borrower is the holder of and has in its possession the Notes, all of which are issued by it free and clear of all mortgages, pledges, assignments, liens, encumbrances, charges or rights of others of any kind, except those liens created hereby. (b) The exercise by the Pledgees of any right and remedy in accordance with the terms of this Agreement will not contravene law or any contractual restrictions binding on or affecting the Borrower, or any of its properties, and will not as a result of any agreement to which the Borrower is a party result in or require the -46- creation of any lien, security interest or other charge of encumbrance upon or with respect to any of Borrower's properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or other regulatory body is required for (i) the grant by the Borrower, or the perfection, of the security interest purported to be created hereby in the Notes; or (ii) the exercise by the Pledgees of any right and remedy hereunder. SECTION 22. Preservation of Property. The Borrower will not alter, add to, remove or demolish any building, structure or property forming part of the Mortgaged Property without the prior written consent of the Bank, except to the extent otherwise provided in the Reimbursement Agreement. SECTION 23. Foreclosure of Mortgage Notes and/or Termination Payments Note. If an Event of Default shall have occurred and be continuing or if a Termination Payments Event of Default shall have occurred and be continuing, the Bank shall have the right to foreclose on the lien of the pledge herein with respect to the Mortgage Notes or the Termination Payments Note, respectively, granted without demand or notice (except as provided below), and full power and authority are hereby given to the Bank to alienate the Mortgage Notes or the Termination Payments Note, respectively, at such place as the Bank may deem best, before a Notary Public, at public auction, upon the giving of the notices required by, and as provided under Article 1771 of the Civil Code of Puerto Rico (31 L.P.R.A. Sec. 5030). The bank may also, at its option, bring legal action or proceedings for the collection of the Secured Obligations, the Secured Obligations B and/or the Termination Payments Obligations, and, at its option, simultaneously foreclose on either or both of the Mortgages without first alienating all or -47- any portion of the pledge. In the of a foreclosure of this collateral pledge, the proceeds thereof shall be applied in accordance with Section 4 hereof. In the event of a foreclosure of the Mortgaged Property, or any portion thereof, the proceeds thereof shall be applied in accordance with the applicable provisions of the respective Mortgages. SECTION 24. Offsets, Counterclaims and Defenses. The Bank shall take the Mortgages, the Notes and this Agreement free and clear of all offsets, counterclaims or defenses of any nature whatsoever, which Borrower may have against the Authority or the Bank, and no such offset, counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by the Bank and any such right to interpose or assert any such offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower to the fullest extent permitted by law. SECTION 25. Right of Entry. The Pledgees and their agents shall have the right to enter and inspect the Mortgaged Property, or any portion thereof, to the extent the Mortgagee is so permitted under the terms of the respective Mortgages. SECTION 26. Estoppel Certificate. Within 15 days after request therefor from the Bank or the Authority, which request may not be made more often than once every six months, the Borrower will deliver to such party a certificate executed by the Borrower, stating the amount due on Mortgage Note A, the Leasehold Mortgage, each of the Mortgages and, for the Bank only, the Termination Payments Note and Mortgage Note B, and to the effect that as of the date of such certificate no Default or Event of Default and, for the Bank only, no Termination Payments Event of Default, has occurred and is continuing thereunder or under this Agreement, or, -48- if any such Default, Event of Default or Termination Payments Event of Default has occurred and is continuing, describing in reasonable detail each such Default, Event of Default or Termination Payments Event of Default and the action, if any, taken or being taken to cure the same. Any such statement may be relied upon by the Bank, its participants, the Authority (except with respect to the Termination Payments Note), and any future mortgagee, pledgee or purchaser of all or any of the Mortgaged Property. SECTION 27. Right to Cure Defaults. If default in the performance of any of the covenants of the Borrower herein occurs or if an Emergency exists with respect to all or any of the Mortgaged Property, the Bank, may, in its sole and absolute discretion, remedy the same and for such purpose shall have the right to the extent permitted by law, and upon notice to the Borrower (except in the case of an Emergency) immediately to enter upon the Mortgaged Property or any portion thereof without thereby becoming liable to the Borrower or any Person in possession thereof holding under the Borrower. If the Bank shall remedy such default or Emergency or appear in, defend, or bring any action or proceeding to protect its interest in the Mortgaged Property or to foreclose any or all of the Notes or either or both of the Mortgages, the costs and expenses thereof (including attorneys' fees and expenses), with interest as provided in the Notes or the Termination Payments Note, as the case may be, shall be paid by the Borrower upon demand. SECTION 28. Right to Notices under Mortgages. The Borrower agrees to provide the Pledgees with copies of all and any notices that the Borrower is required, in its capacity as Mortgagor, to deliver to the Mortgagee under the Mortgages. -49- SECTION 29. Changes in Laws Regarding Taxation. In the event of the enactment of any law by the Legislature of the Commonwealth of Puerto Rico changing in any way the laws for the taxation of mortgages on real property or personal property or debts secured by mortgages or the manner of the collection of any such taxes, and imposing a tax, either directly or indirectly, on the Mortgages, the Notes, or this Agreement, Borrower shall, if permitted by law, pay any tax imposed as a result of any such law within the statutory period or within fifteen (15) days after demand by the Pledgees, whichever is less; provided the Borrower will not claim or demand or be entitled to any credit or credits against the Pledgees on account of the obligations secured hereunder for any part of the taxes assessed against the Mortgaged property or any part thereof, and no deduction shall otherwise be made or claimed from the taxable value of the Mortgaged Property, or any part thereof, by reason of the Mortgages, this Agreement or the obligations secured hereunder. SECTION 30. Officers of Authority and Bank Not Liable. All covenants, stipulations, promises, agreements and obligations of the Authority and/or the Bank contained herein shall be deemed to be covenants, stipulations, promises, agreements and obligations of the Authority and/or the Bank and not of any member of the governing body of the Authority or any officer, agent, servant or employee of the Authority or of the Bank, respectively, in his individual capacity, and no recourse shall be had for any claim based thereon or hereunder against any member of the governing body of the Authority or any officer, agent, servant or employee of the Authority or of the Bank, respectively, except, in the case of the Bank only (and not any director, other official, officer, agent, servant or employee thereof), for any claim resulting solely and directly from the gross negligence or willful misconduct of the Bank. -50- SECTION 31. No Charge Against Authority Credit. No provision hereof shall be construed to impose a charge against the general credit of the Authority or shall impose any personal or pecuniary liability upon any director, official or employee of the Authority. SECTION 32. Authority Not Liable. Notwithstanding any other provision of this Agreement, (a) the Authority shall not be liable to the Borrower, the Bank, any holder of any of the Bonds, or any other person for any failure of the Authority to take action under this Agreement unless the authority (i) is requested in writing by an appropriate person to take such action and (ii) is assured of payment of or reimbursement for any expenses in such action, and (b) except with respect to any action for specific performance or any action in the nature of a prohibitory or mandatory injunction, neither the Authority nor any director of the Authority or any other official or employee of the Authority shall be liable to the Borrower, the Bank, any holder of any of the Bonds, or any other person for any action taken by it or by its officers, servants, agents or employees, or for any failure to take any action under this Agreement. In acting under this Agreement, or in refraining from acting under this Agreement, the Authority may conclusively rely on the advice of its legal counsel. SECTION 33. Bank Not Liable. Notwithstanding any other provision of this Agreement, (a) the Bank shall not be liable to the Borrower, the Authority, any holder of any of the Bonds, or any other person for any failure of the Bank to take action under this Agreement, unless the Bank (i) is requested in writing by an appropriate person to take such action and (ii) is assured of payment of or reimbursement for any expenses in such action, and (b) except with respect to any action for specific performance or any action in the nature of a prohibitory or mandatory injunction, neither the Bank nor any director of the Bank or any other official -51- or employee of the Bank shall be liable to the Borrower, the Authority, any holder of any of the Bonds, or any other person for any action taken by it or by its officers, servants, agents or employees or for any failure to take any action under this Agreement, except that the Bank only (and not any director, other official, employee, officer, servant or agent thereof) may be liable if such action or failure to act results solely and directly from the gross negligence or willful misconduct of the Bank. In acting under this Agreement or in refraining from acting under this Agreement, the Bank may conclusively rely on the advice of its legal counsel. SECTION 34. Waivers. In view of the assignment of the Authority's rights under and interest in this Agreement to the Trustee by the provisions of the Trust Agreement, the Authority shall have no power to waive the performance by the Borrower of any provision hereunder or extend the time for the correction of any default of the Borrower without the consent of the Trustee to such waiver. The consent of the Trustee, however, shall not be required for actions permitted to be taken by the Bank without the consent or approval of the Authority in accordance with the terms hereof. SECTION 35. Indemnities. The Borrower shall protect, indemnify and save harmless the Pledgees from and against all losses, liabilities, obligations, damages, penalties, claims, causes of action, costs, charges, and expenses (including, without limitation, attorney's fees and expenses) which may be imposed upon or incurred by or asserted against the Pledgees by reason of (a) any accident, injury or damage to any person or property occurring on or about the Mortgaged Property or any part thereof, (b) any design, construction, operation, use or non-use or condition of the Mortgaged Property or any part thereof, including, without limitation, claims or penalties arising from violation of any Legal -52- Requirement, as well as any claim based on any patent or latent defect, whether or not discoverable by the Pledgee, any claim the insurance as to which is inadequate, and any claim in respect of any adverse environmental impact or effect, (c) any failure on the part of the Mortgagor to perform or comply with any of the provisions hereof or contained in either of the Mortgages, (d) any necessity, in the Bank's judgment, to defend any of the rights, title or interest conveyed or created by this Agreement, the Mortgages, or the Notes, (e) ownership by the Mortgagor of any interest in the Mortgaged Property or receipt of any rent or other sum therefrom, (f) any performance of or failure to perform any labor or services or furnishing of or failure to furnish any materials or other property in respect of the Mortgaged Property, or any part thereof, (g) any negligence or tortious act or omission on the part of the Mortgagor or any of its agents, contractors, servants, employees, tenants, lessees, sublessees, licensees, guests or invitees, (h) the Bank's or the Authority's ownership of any interest in the Mortgaged Property or any part thereof, (i) any other relationship that has arisen or may arise between the Pledgees, the Mortgagor, the Mortgaged Property, or any of the foregoing, as a result of the execution and delivery of the Notes, this Agreement, the Mortgages, or any other action contemplated hereby, thereby or by any other document executed in connection with the loan by the Authority to the Mortgagor, and (j) any claim, action or other proceeding brought by or on behalf of any other person against the Bank as the holder of, or by reason of its interest in, any sum deposited or paid hereunder or in connection herewith, including, without limitation, any fund established to hold the proceeds of the loan made by the Authority to the Mortgagor, any insurance proceeds or condemnation awards received in connection herewith, or any other amounts received in connection herewith. -53- SECTION 36. Limitation of Liability. Notwithstanding any thing to the contrary contained in this Pledge Agreement, no recourse shall be had, whether by levy or execution or otherwise, for the payment of the principal of or interest on, or other amounts owed under this Pledge Agreement, or for any claim based on this Pledge Agreement or in respect thereof, against any partner of the Mortgagor or any predecessor, successor or affiliate of any such partner or any of their assets (other than from the interest of such partner in the Mortgagor), or against any principal, partner, shareholder, officer, director, agent or employee of any such partner (other than from the interest of any such person in such partner), nor shall any such persons be personally liable for any such amount or claims, or liable for any deficiency judgment based thereon or with respect thereto. The sole remedies of the Bank and/or the Authority with respect to the hereinbefore mentioned amounts and claims shall be against the assets of the Mortgagor, including the Mortgaged Property, and all such liability of the aforesaid persons, except as expressly provided in this Section 36 is expressly waived and released as a condition of and as consideration for the execution of this Pledge Agreement. Anything in this Section to the contrary notwithstanding (A) nothing contained in this Pledge Agreement (including, without limitation, the provisions of this Section 36) shall constitute a waiver of any indebtedness of Mortgagor evidenced hereby or any of the Mortgagor's other obligations or shall be taken to prevent recourse to and the enforcement against the Mortgagor of all the liabilities, obligations and undertakings contained in this Pledge Agreement; (B) this Section 36 shall not be applicable to a breach by any person of any independent obligation to the Bank and/or the Authority; and (C) this Section 36 shall not be applicable to the responsible party to the extent and in respect of any claim the Bank would otherwise have against such party for (i) fraud by such party, (ii) misappropriation of funds or other property by such -54- party, or (iii) damage to the Project or any part thereof intentionally inflicted in bad faith by such party. For the purposes of the foregoing, the term "shareholder" shall be deemed to include the shareholders of any corporation which is a shareholder of a corporation and the term "partner" shall be deemed to include the partners of any partnership which is a partner of a partnership. SECTION 37. Authority's Covenant to Cooperate. In the event it may be necessary, for the proper performance of this Pledge Agreement that the Bank take any action, execute and deliver any other document or do any other thing in furtherance of the purposes hereof, the Authority agrees to cooperate in such matters. SECTION 38. Assignment by the Authority. The Authority will assign to the Trustee its rights under and interest in this Agreement (except for its rights to receive notices, reports and other statements), including its rights to any payments, receipts and revenues receivable by it under or pursuant to this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized on the date first above written, in San Juan, Puerto Rico. PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL EL CONQUISTADOR PARTNERSHIP L.P. POLLUTION CONTROL FACILITIES FINANCING AUTHORITY By: Kumagai Caribbean, Inc. By:________________________________ By: /s/________________________________ Name: Francisco Sierra Mendez Name: Toru Fujita Ueda Title: Assistant Executive Director Title: Vice President -55- By: WKA El Con Associates By: /s/_________________________________ Name: Hugh Alanson Andrews Title: Authorized Signatory THE MITSUBISHI BANK, LIMITED New York Branch By:_____________________________ Name: Tadaaki Hamada Title: Senior Vice President Affidavit No. 105 (copy) Acknowledged and subscribed before me by Francisco Sierra Mendez, of legal age, married, attorney-at-law and resident of Juncos, Puerto Rico, in his capacity as Assistant Executive Director of Puerto Rico Industrial, Medical, Educational and Environmental Pollution Control Facilities Financing Authority, Toru Fujita Ueda, of legal age, married, executive and resident of San Juan, Puerto Rico, in his capacity as its Vice President of Kumagai Caribbean, Inc., a general partner of El Conquistador Partnership L.P. and by Hugh Alanson Andrews, of legal age, married, executive and resident of San Juan, Puerto Rico, in his capacity as Authorized Signatory of WKA El Con Associates, a general partner of El Conquistador Partnership L.P., and by Tadaaki Hamada, in his capacity as Senior Vice President of the Mitsubishi Bank, Limited, acting through its New York Branch, identified by the means set forth in Article 17(c) of the Notarial Law of Puerto Rico, in San Juan, Puerto Rico, this 7th day of February, 1991. /s/______________________________ Notary Public EX-10 23 EXHIBIT 10.20 Comienza mi protocolo de instrumentos publicos para el ano mil novecientos noventa y uno (1991) hoy dia siete (7) de febrero de mil novecientos noventa y uno (1991). Notario Publico NUMBER ONE MORTGAGE In the City of San Juan, Commonwealth of Puerto Rico, this Seventh (7th) day of February, nineteen hundred ninety-one (1991). BEFORE ME LEONOR M. AGUILAR-GUERRERO, Notary Public in and for the Commonwealth of Puerto Rico, with residence in Guaynabo, Puerto Rico, and office on the Tenth Floor, Royal Bank Center, Two Hundred Fifty-Five (255) Ponce de Leon Avenue, Hato Rey, San Juan, Puerto Rico. APPEARS AS PARTY OF THE FIRST PART: EL CONQUISTADOR PARTNERSHIP L.P., a partnership organized and existing under the laws of Delaware with a place of business at One Hundred Eighty-Seven (187) East Isla Verde Road in the Municipality of Carolina, Puerto Rico zero zero nine one three (00913), Taxpayer Identification Number 06-12-88145 (hereinafter referred to as the "Mortgagor"), represented herein by its General Partners WKA EL CON ASSOCIATES, Taxpayer Identification Number 06-12-88143, a partnership organized and exiting under the laws 1 of the State of New York, herein represented by its Authorized Signatory, HUGH ALANSON ANDREWS, social security number ###-##-####, of legal age, married, business executive and resident of San Juan, Puerto Rico; and KUMAGAI CARIBBEAN, INC., Taxpayer Identification Number 75-2303665, a corporation organized and existing under the laws of the State of Texas, represented by its Vice President TORU FUJITA UEDA, social security number ###-##-####, of legal age, business executive, married, and resident of San Juan, Puerto Rico. AS PARTY OF THE SECOND PART: PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY, Taxpayer Identification Number 66-04-26994, with a place of business at Minillas Government Center, De Diego Avenue, Stop Twenty-Two (22), San Juan, Puerto Rico zero zero nine four zero (00940), (hereinafter referred to either as the "Mortgagee" or as the "Authority") a public corporation and a governmental instrumentality of the Commonwealth of Puerto Rico, represented by its Assistant Executive Director, Francisco Sierra Mendez, social security number ###-##-####, of legal age, married, attorney-at-law and resident of Juncos, Puerto Rico. The above parties have agreed and bind themselves to show their authorities for this act whenever and wherever properly required. I, the Notary do hereby certify that I personally know Mister 2 Francisco Sierra Mendez and that I have identified the other appearing parties by the means provided in Article Seventeen (c) of the Notarial Law of Puerto Rico, specifically by means of the following documents of identity which contain the signature and photograph of each of the appearing parties: To: Hugh Alanson Andrews, United States of America Passport Number zero four one eight seven five five eight six (041875586). To: Toru Fujita Ueda, Commonwealth of Puerto Rico Driver's License number two one seven seven seven nine eight (2177798). I, the Notary, further certify and given faith through their statements as to their age, civil status, occupation and residence. They assure me that they have, and in my judgment they do have, the legal capacity to execute this instrument, and therefore they freely and of their own will and accord STATE FIRST: The Mortgaged Property. The Mortgagor represents and warrants that: (A) It is the sole owner and holder of record, with valid, good, insurable, fee simple title (pleno dominio) to the real property (the "Land") described in the Registry of Property Fajardo Section (the "Registry") as follows: "RUSTIC: Parcel of land located at the Cabezas Ward of the Municipality of Fajardo, Puerto Rico, with a survey area of two hundred 3 fifty six cuerdas with one thousand four hundred seventy four ten thousandths of another (256.1474) equivalent to two hundred fifty acres with seven thousand one hundred seventy three ten thousandths of another (250.7173), as determined by a survey prepared by Engineer Manual Ray based on various surveys prepared by surveyors Alex Hornedo Robles and David Lebron, and an area of record of two hundred sixty-seven cuerdas with five thousand eight hundred and ninety ten thousandths of another (267.5890) bounded, on the North, by State road Nine Hundred Eighty Seven (987), by a housing lot subdivision belonging to various owners, by land property of Justino Diaz Santini and his wife Jean Robertson, by land property of Las Croabas Development Corporation, by land comprising the Marina Lanais Condominium and by the Marina access road; on the South, by land formerly owned by Fajardo Development Corporation, currently owned by Kumugai Caribbean, Inc., by land comprising the Marina Lanais Condominium, and by the Maritime Zone of the Atlantic Ocean; on the East, by land owned by Ramon Soto, by land property of Justino Diaz Santini and his wife Jean Robertson, by land comprising the Marina Lanais Condominium, and by the Maritime Zone of the Atlantic Ocean; on the West, by land owned by Justino Diaz Santini and his wife Jean Robertson, by housing lot subdivision, property of various owners, by land owned by Kumugai Caribbean, Inc., formerly Fajardo Development Corp. and by State Road Nine Hundred Eighty-Seven (987). According to the Registry, the Land contains the following structures and improvements: (a) Structure known as the Clifftop Building, consisting of a four (4) story building, which contains approximately eighty-eight (88) hotel rooms and facilities. (b) Administration Building consisting of a three (3) level concrete building which includes a casino area, kitchen facilities and meeting rooms. (c) Structure known as Sea Wing Building, consisting of an irregular shaped five (5) story concrete building with approximately two hundred thirty (230) hotel rooms and related facilities. 4 (d) Structure known as the Lanais Building consisting of spiral shaped, four (4) level concrete building with swimming pool surrounded by two (2) structures forming a semicircle which contain approximately one hundred (100) hotel rooms and related facilities. (e) Structure known as the Health SPA & GYM consisting of a three (3) level concrete building with a solarium on the uppermost level, containing two (2) swimming pools. (f) Structure known as Hotel Villas, comprising two (2) single level buildings formerly used as transient guest apartments and executive dwellings. (g) Facilities known as Marina Sea Shore comprising a concrete structure, piers, docking facilities, fueling facilities, navigational aids, breakwater and other facilities for sea vessels, with an ocean opening towards the East. (h) Sewer Treatment installations for the treatment and disposal of sanitary sewage. (i) Structure originally containing the kitchen facilities of El Conquistador Hotel. (j) Ocean Beach Pool, consisting of a salt-water artificial lagoon. The land is subject to the following liens and encumbrances of record: 5 (A) By its origin the Land is subject to: (i) Easements in favor of the Puerto Rico Water Resources Authority and the Puerto Rico Aqueduct and Sewer Authority and maritime terrestrial zone easement as per certification of the Land Administration of Puerto Rico issued on September five (5) nineteen hundred ninety (1990); (ii) Right of Way Easement resulting from Deed Number Twenty-One (21) dated February eight (8), nineteen hundred sixty-five (1965) executed before Notary Public Guillermo Baralt. (iii) Restrictive covenant of sale (the "Real Property Rights") in favor of the property known as Finca Consuelo Inc., as provided in Deed of Sale Number Forty-Eight (48) executed in San Juan, Puerto Rico, on November twenty-three (23), nineteen hundred eighty- eight (1988) before Notary Public Jose R. Jimenez del Valle; and (iv) Mortgage securing a promissory note to the order of United Federal Savings and Loan Association, for the principal amount of ONE HUNDRED FORTY-FIVE THOUSAND DOLLARS ($145,000) payable with interest at the rate of eight percent (8%) per annum, as per Deed Number Ninety-Eight (98) executed in Guaynabo, Puerto Rico on March six (6), nineteen hundred seventy-three (1973) before Notary Public Alfredo Olivero Irizarry, and recorded at page fifty (r) (50r) of volume two hundred five (205) of the Registry. 6 (B) By itself the Land is free of liens and encumbrances. The Mortgagor represents and warrants to The Mortgagee that by Deed Number Three (3) of Transfer of Real Property Rights in Liquidation of Corporation and Cancellation of Stock, Purchase and Sale and Cancellation of Restrictive Covenants executed before Notary Public Silvestre M. Miranda on January twenty-eight (28), nineteen hundred ninety-one (1991) ("Deed Three"), the Mortgagor cancelled the Real Property Rights. A certified copy of Deed Three is pending recordation at the Registry of Property of Puerto Rico, Fajardo Section. Pursuant to Deed of Consolidation of Properties Number Six (6) executed before Notary Silvestre M. Miranda on February seventh (7th), nineteen hundred ninety-one (1991), a certified copy of which is being presented for recordation concurrently with a certified copy of this Deed, the Land was formed by the grouping of the following parcels of land: Parcel One: "RUSTIC: Parcel of land located at the Cabezas Ward of the Municipality of Fajardo, Puerto Rico, with a survey area of two hundred twenty three cuerdas with nine hundred eight ten thousandths of another (223.0908 cds.), equivalent to two hundred sixteen acres with six thousand six hundred ninety seven ten thousandths of another (216.6697) as determined by a survey prepared by Engineer Manual Ray based on various surveys prepared by surveyor Alex Hornedo Robles and David Lebron, and an area of record of two hundred thirty one cuerdas with six thousand four hundred and ninety eight ten thousandths of another (231.6498) bounded, on the North, by land owned by El Conquistador Partnership L.P., formerly the estate of Rosa Mendez Abraham, by State Road Nine Hundred Eighty Seven (987), by land property of Luis Enrique Cayere Biamon, by land property of El Conquistador Partnership L.P., formerly owned by Enrique Cayere and his wife Ana Luisa Biamon, by 7 land property of Las Croabas Development Corporation, by land comprising the Marina Lanais Condominium and by the marina access road; on the South, by land formerly owned by Fajardo Development Corporation, currently owned by Kumagai Caribbean, Inc., by land owned by El Conquistador Partnership L.P., by land comprising the Marina Lanais condominium, and by the Maritime Zone of the Atlantic Ocean; on the East, by land owned by Ramon Soto, by land property of Justino Diaz Santini and his wife Jean Robertson, by land owned by El Conquistador Partnership L.P., formerly Enrique Cayere and Ana Luisa Biamon, by land comprising the Marina Lanais Condominium, and by the maritime Zone of the Atlantic Ocean; on the West, by land owned by Justino Diaz Santini and his wife Jean Robertson and by land owned by El Conquistador Partnership L.P., formerly owned by Enrique Cayere and Ana Luisa Biamon, by housing lot subdivision, property of various owners, by land formerly owned by estate of Rosa Mendez Abraham, currently owned by El Conquistador Partnership L.P., by State Road Nine Hundred Eighty-Seven (987) and by land owned by Kumagai Caribbean, Inc., formerly Fajardo Development Corp. According to the Registry, the above described Parcel A contains the following structures and improvements: (a) Structure known as the Clifftop Building, consisting of a four (4) story building, which contains approximately eighty eight (88) hotel rooms and related facilities. (b) Administration Building consisting of a three (3) level concrete building which includes a casino area, kitchen facilities and meeting rooms. (c) Structure known as Sea Wing Building, consisting of an irregular shaped five (5) story concrete building with approximately two hundred thirty (230) hotel rooms and related facilities. (d) Structure known as the Lanais Building consisting of a spiral shaped, four (4) level concrete building with swimming pool surrounded by two (2) structures forming a semicircle which contain approximately one hundred (100) hotel rooms and related facilities. (e) Structure known as the Health SPA & GYM consisting of a three (3) level concrete building with a solarium on the uppermost level, containing two (2) swimming pools. (f) Structure known as Hotel Villas, comprising two (2) single 8 level buildings formerly used as transient guest apartments and executive dwellings. (g) Facilities known as Marina Sea Shore comprising a concrete structure, piers, docking facilities, fueling facilities, navigational aids, breakwater and other facilities for sea vessels, with an ocean opening towards the East. (h) Sewer Treatment installations for the treatment and disposal of sanitary sewage. (i) Structure originally containing the kitchen facilities of El Conquistador Hotel. (j) Ocean Beach Pool, consisting of a salt water artificial lagoon. (k) Parcel One was acquired by the Mortgagor from The Puerto Rico Lands Administration pursuant to Deed of Purchase and Sale Number Five (5) executed at San Juan, Puerto Rico, on February seventh (7th), nineteen hundred ninety-one (1991) before Notary Public Silvestre M. Miranda, certified copy of which is being filed at the Registry of Property of Fajardo, contemporaneously with certified copy of this Deed. (l) Parcel One was formed by the grouping of the following Parcels of land: Tract "A", recorded at page two hundred thirty four (234) of volume two hundred thirty-three (233) of Fajardo, Property Number four thousand eight hundred thirty-one (4,831); Tract "B", recorded at page sixty-nine (69) overleaf of volume one hundred forty-five (145) of Fajardo, Property Number one thousand nine hundred thirty-five (1,935); Tract "C", recorded at page twenty-five (25), overleaf of volume two hundred ninety-one (291) of Fajardo, Property Number six thousand two hundred ninety-one (6,291); Tract "D", pending recordation at Entry two hundred ninety-three (293) of volume thirty-eight (38) of the Book of Daily Entries of the Registry of Property of Puerto Rico, Fajardo Section. Parcel Two: "RUSTICA: Radicada en el Barrio Las Cabezas del termino municipal de Farjardo, Puerto Rico, compuesta de quince cuerdas con cuatro mil cuatrocientas (cuarenta y cinco diez milesimas de una cuerda (15.4445 cds) colindando por el Norte, con terrenos de Trade Winds Corporation; por el Sur, con terrenos de la parcela de donde se segrega propiedad de Fajardo Development Corporation; por el Este, con 9 la zona maritima del Oceano Atlantico y por el Oeste, con terrenos de Farjado Development Corporation. (a) Parcel Two is recorded at page two hundred fifty-eight (258) of volume two hundred twelve (212) of Farjardo, Registry of the Property of Puerto Rico, Farjardo Section, property number seven thousand eighty hundred seventy-five (7,875). (b) The Mortgagor acquired title to the aforedescribed parcel of land from Fajardo Ocean View Development S.E., pursuant to Deed number eleven (11), executed at San Juan, Puerto Rico on November sixteen (16), nineteen hundred ninety (1990) before Notary Public Silvestre M. Miranda and was filed for recording at entry three hundred six (306) of volume thirty-eight (38) of the Book of Daily Entries of the Registry of the Property of Puerto Rico, Fajardo Section. Parcel Three: "RUSTICA: Radicada en el Barrio Las Cabezas del termino municipal de Fajardo, Puerto Rico, con un area superficial de doce cuerdas con cuatro mil novecientas cuarenta y siete diez milesimas de otra (12.4947 cds.), en lindes por el Norte, con la Trade Winds Corporation; por el Sur, con la finca principal de cual se segrega; por el Este, con la finca principal de law cual se segrega y por el Oeste, con terrenos de la Fajardo Development Corporation. (a) Parcel Three is recorded at page twenty-three (23), overleaf of volume one hundred ninety (190), Registry of the Property of Puerto Rico, Fajardo Section, Property Number six thousand five hundred twenty-eight (6,528). (b) The Mortgagor acquired title to the aforedescribed property from Fajardo Ocean View Development S.E. pursuant to deed number eleven (11) executed at San Juan, Puerto Rico, in November sixteen (16), nineteen hundred ninety (1990), before Notary Public Silvestre M. Miranda, which was filed for recordation at entry three hundred six (306) of volume thirty-eight (38) of the Book of Daily Entries of the Registry of the Property of Puerto Rico, Fajardo Section. Parcel Four: "RUSTIC: Parcel of land located in the Las Cabezas Ward of the Municipality of Fajardo with an area of record of six (6) cuerdas equivalent to twenty-three thousand five hundred eighty-two and 10 three hundred seventy-six thousandths (23,582.376) square meters, and an area, in accordance with a survey carried out by surveyor Alex Hornedo Robles, license number eleven thousand seven hundred forty-seven (11,747), of five cuerdas with one thousand sixty-two ten thousandths of another (5.1062 cds.) equivalent to twenty thousand sixty-nine square meters with two thousand two hundred and eighty ten thousandths of another (20,069.2280), currently bounded, on the North and on the West by the right of way of State road number nine hundred eighty-seven (987), on the South and on the East by land currently property of the Puerto Rico Lands Administration comprising the former El Conquistador Hotel. (a) Parcel Four was formed and title to the same was acquired by the Mortgagor from A&M Contractors, Inc. pursuant to Deed of Partial Cancellation of Mortgage, Consolidation of Parcels and Purchase and Sale Number seven (7) executed in San Juan, Puerto Rico on January twenty-two (22), nineteen hundred ninety-one (1991), before Notary Public Juan Antonio Aquino Barrera, which deed was filed for recordation at entry five hundred eighty-one (581) of volume thirty-nine (39) of the Book of Daily Entries of the Registry of the Property of Puerto Rico, Fajardo Section, and is composed of the consolidation of Property Number one thousand one hundred seventy (1,170), recorded at page two hundred twenty-eight (228) of volume twenty-eight (28) of the Registry of the Property of Fajardo and Property Number one thousand one hundred sixty-nine (1,169), recorded at page two hundred twenty (220) of volume twenty-eight (28) of the Registry of the Property of Puerto Rico. Parcel Five: "RUSTICA: Parcela de terreno sita en el Barrio Las Cabezas de Fajardo marcada con los numeros tres (3) y cuatro (4) con Cabida superficial de dos (2) cuerdas equivalentes a siete mil ochocientos sesenta metros con setenta y ocho centesimas de metros cuadrados (7,860.78 mc) y en colindancias por el Norte con parcela marcada numero dos (2); Sur, carretera pavimentada que conduce al Hotel El Conquistador; Este, con terrenos de Trade Winds Development, Inc. y por el Oeste con terrenos de Trade Winds Development Corp." "Contiene una estructura de dos plantas y media construida en hormigon." (a) Parcel Five is recorded at page fifty (50) of volume two hundred five 9205) of Farjardo, property number seven thousand four hundred twenty (7,420). 11 (b) The Mortgagor acquired title to the aforedescribed property from Ana Luis Biamon, pursuant to Deed Number Ten (10), executed at San Juan, Puerto Rico, on January twenty-nine (29), nineteen hundred ninety-one (1991), before Notary Public Juan Antonio Aquino Barrera, filed for recordation at entry five hundred seventy-nine (579) of volume thirty-nine (39) of the Book of Daily Entries for the Registry of the Property of Fajardo. The Land, the Improvements (as hereinafter defined) and the Lease Rights (as hereinafter defined) are referred to herein collectively as the "Mortgaged Property." (a) The Improvements shall consist of all presently existing or hereafter constructed buildings, structures and improvements on the Mortgaged Property and any appurtenances or additional thereto, as well as any accessions thereto in the future, including but not limited to the following: (i) all buildings or structures constructed thereon and all other buildings and improvements of every kind and description now or hereafter erected or placed on the Land and all materials intended for construction, reconstruction, maintenance, alteration and repairs of such buildings, title to which materials reside in the Mortgagor, all of which materials shall be deemed to be included within the Mortgaged Property immediately upon the delivery thereof to the Mortgagor at the Land and all other property immoveable either by nature or destination now owned or hereafter acquired by the Mortgagor and now or hereafter located on said Land or in said buildings or any such other buildings or 12 improvements used either for its adornment or for the purpose of comfort, or for the service of the industry operated on such building or structure, even though the aforesaid shall have been attached to the same after the constitution of the Mortgage; and (ii) all fixtures and articles of movable property now or hereafter owned by the Mortgagor and attached to, contained in, located on or used in connection with the Land or in connection with any improvements thereto, including, but not limited to all furniture, furnishings, motors, transformers, fittings, radiators, gas ranges, ice boxes, refrigerators, awnings, shades, screens, blinds, drapes, office equipment, word processors, computers, typewriters, telephone and communications equipment and installations, elevators, conveyors, kitchen, bar-room and restaurant equipment, plates, forks, knives, spoons, silverware, napkins, tablecloths, tables, glasses, chinaware, cups, cooking equipment and installations, electrical appliances, television sets, radios, beds, vanities, chairs, mirrors, pillows, curtains, blankets, sheets, towels, bathroom equipment, mattresses, box springs, sprinkler equipment, carpeting, and other furnishings and all plumbing, heating, laundry, ventilating, refrigerating, incinerating, lighting, air conditioning and electrical equipment, compressors and related machinery, equipment and apparatus, and all fixtures and appurtenances thereto; and all renewals or replacements thereof or articles in substitution therefor, whether or not the 13 same are or shall be attached to said buildings or structures in any manner, it being understood and agreed that all the aforesaid property and any replacement or addition thereto owned by the Mortgagor and placed by it on the Land or on or in the improvements located thereon have been specially designed for use in connection with the operation of a destination resort hotel and casino and that the Mortgagor operates or will operate a destination resort hotel and casino doing business as El Conquistador Resort and Country Club in connection with which the same will be used, and, that for such purpose, the aforesaid property and any replacement or addition thereto shall be deemed to be immovable property, by nature or destination, affixation, incorporation, or appropriation to use, and shall be deemed necessary for and integral to the operation of the Mortgaged Property as a first-class destination resort hotel and casino; and (iii) all right, title and interest of the Mortgagor, including any after-acquired title or reversion, in and to the beds of the ways, streets, avenues and alleys adjoining the Mortgaged Property, together with all singular tenements, hereditaments, easements, appurtenances, passages, waters, water rights, riparian rights and other rights, liberties and privileges thereof or in any way now or hereafter appertaining, including any claim at law or in equity. (b) In addition to the Land and the Improvements, the Mortgaged Property shall also consist of all rights of the Mortgagor (the 14 "Lease Rights") to receive payments of money under all concessions or leases of space existing or at any time hereafter made and any and all amendments, modifications, supplements, renewals and extensions thereof (all of such concessions and leases being referred to individually as an "Occupancy Lease" and collectively as the "Occupancy Leases"), including without limitation, all rents, additional rents, revenues, earnings, profits and income, payments incident to any assignment, sublease or surrender of any Occupancy Lease, claims for forfeited deposits and claims for damages which are due and unpaid with respect to any Occupancy Lease at the time payment of the secured loan is required. SECOND: The Mortgaged Notes. Simultaneously herewith Mortgagor has subscribed before me three (3) mortgage notes, which are copied literally in Paragraph FOURTEENTH hereof, as Series A ("Mortgage Note A"), Series B ("Mortgage Note B") and Series C ("Mortgage Note C") (collectively, the "Mortgaged Notes"). The Mortgagor will pay, on demand, the principal of and interest on the Mortgage Notes and all other sums due or to become due pursuant to the Mortgage Notes, this Mortgage, or any pledge agreements pursuant to which the Mortgage Notes may be pledged or assigned. THIRD: Creation of Mortgage. In order to guarantee and secure: (i) the full and complete payment of the principal of and 15 the interest on the Mortgage Notes; (ii) the performance and observance of the terms therein and herein contained; (iii) an additional credit in an amount equal to five (5) years of interest as provided in the respective Mortgage Notes to cover accrued and unpaid interest on the Mortgage Notes pursuant to the provisions of Article One Hundred Sixty-Six (166) of the Mortgage and Registry of Property Law of Puerto Rico (30 L.P.R.A. 2562) (hereinafter called the "interest credit"); (iv) an additional credit in an amount equal to fifteen percent (15%) of the principal amount of Mortgage Note A to cover any amounts that may be paid by or advanced by the Mortgagee pursuant to Article Eighth hereof (including, without limitation, for all or any environmental matters), together with interest thereon at the highest legal rate then prevailing (hereinafter called the "credit for additional advances"); (v) an additional credit in an amount up to but no greater than five percent (5%) of the principal amount of the Mortgage Notes to cover the actual costs and actual expenses (including attorneys' fees) of the holder of the Mortgage Notes, payable without necessity for approval by any court, in the event that such holder shall have recourse to the courts or to any other governmental agency in order to collect all 16 or any part of the principal thereof or any interest thereon (by foreclosure or other proceedings or action) (hereinafter called the "credit for liquidated damages"); and (vi) an additional credit in an amount equal to fifteen percent (15%) of the principal amount of Mortgage Note A to cover any additional amounts that may be paid or advanced by the Mortgagee in connection with the completion of the improvements presently contemplated to be constructed on the Mortgaged Property, which improvements shall consist of approximately 750 guest rooms, approximately 50,000 square feet of meeting space (including prefunctionary space), six restaurants, approximately 13,000 square feet of retail space, an approximately 10,000 square foot casino, a marina, approximately 100,000 square feet of swimming pools and water features, an 18-hole golf course, an approximately 40,000 square foot clubhouse and spa facility, eight tennis courts, related amenities and facilities and all related furniture, fixtures and equipment (hereinafter called the "credit for additional amounts"). Mortgagor hereby constitutes and creates a voluntary first mortgage in favor of the Mortgagee on the Mortgaged Property (references herein to Mortgagee shall be deemed to include the Authority and any future holders of the Mortgage Notes either by endorsement or assignment and in the event that any of the Mortgage Notes is delivered 17 in pledge to secure Mortgagor's obligations under any pledge agreement, the term Mortgagee shall also refer to the Pledgees of such Mortgage Note under such pledge agreement). FOURTH: Additional Representations and Warranties. The Mortgagor represents, warrants and covenants to the Mortgagee as follows: (a) The Mortgagor, by its execution and delivery hereof, is mortgaging to the Mortgagee all of its right, title and interest in and to the Mortgaged Property. (b) The Mortgagor is the sole and valid owner of the Improvements located on the Land; the Mortgagor has full right, power and authority to mortgage the Mortgaged Property to the Mortgagee pursuant hereto; the Mortgagor knows of no adverse claim to the title and/or possession of the Mortgagor in or to the Land, or the Improvements thereon; and no fire or casualty has affected the Mortgaged Property within sixty (60) days prior to the date hereof; and the Mortgagor knows of no actual or proposed condemnation or eminent domain proceeding or settlement in lieu thereof. (c) The Mortgagor, at its sole cost and expense, will warrant and defend to the Mortgagee such title to the Mortgaged Property, and the lien of the Mortgagee thereon and therein against all claims and demands and will maintain and preserve such lien and will keep this 18 Mortgage a valid and direct mortgage lien upon the Mortgaged Property, subject only to the Permitted Encumbrances and prior, at all times, to all Occupancy Leases. (d) The Mortgagor will pay, or cause to be paid, all charges for all public and private utility services at any time rendered to, or the payment of which is the obligation of, the Mortgagor in connection with the Mortgaged Property, or any part thereof, and will do all other things required for the maintenance and continuance of all such services. (e) It has taken all necessary and proper action, which has not been modified or revoked, to enter into this Mortgage and the execution and delivery of this Mortgage by the Persons who have signed this Mortgage on behalf of the Mortgagor have been duly qualified and are sufficient action to constitute this Mortgage as a valid, binding and enforceable obligation of the Mortgagor. FIFTH: Maintenance of the Mortgage Property. The Mortgagor will at all times maintain, preserve and keep, or cause to be maintained, preserved or kept, all and each part of the Land and the Improvements in good repair, working order and condition, such that the Mortgaged Property will be maintained and operated as part of a first-class destination resort. The Mortgagor will supply the Mortgaged Property, and keep the same or cause the same to be kept and supplied, with all necessary supplies and equipment and make all needful and proper 19 repairs, renewals and replacements thereto, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen. All such repairs, renewals and replacements shall be at least equal in quality, value and class to the original Improvements. Without limiting the generality of the foregoing, the Mortgagor covenants that it will not cause or permit to suffer damage, deterioration, loss or waste to the Mortgaged Property, other than that resulting from normal wear and tear. The Mortgagor will not alter, add to, remove or demolish any building, structure or property forming part of the Mortgaged Property without the prior written consent of the Mortgagee, except to the extent permitted in any pledge agreement pursuant to which any of the Mortgage Notes is pledged or assigned. SIXTH: Assignment of Leases and Rents. The Mortgagor hereby absolutely and irrevocably mortgages and assigns to the Mortgagee all rents, income and other sums due to the Mortgagor under each Occupancy Lease now existing or hereafter entered into, together with the right to collect and receive the same provided if and so long as no Event of Default (as hereinafter defined) shall have occurred and be continuing, the Mortgagor shall have the right to collect and receive such rents and other sums for its own uses and purposes. Upon the occurrence of an Event of Default, all such rents and other sums shall be collected and held by the Mortgagee to be applied as deemed appropriate in the sole 20 discretion of the Mortgagee to the obligations secured hereunder and in such other manner as is permitted pursuant to the terms hereof and of any pledge agreement pursuant to which any of the Mortgage Notes may be pledged or assigned. The Mortgagee shall notify the Mortgagor of its exercise of its right to collect rent and other sums at the same time that it notifies any tenants thereof; provided, however, that failure on the part of the Mortgagee to give such notice to the Mortgagor shall not operate as a waiver of the right of the Mortgagee to collect and receive all rents, income and other sums due to the Mortgagor under each Occupancy Lease. The assignment of rents, income and other benefits contained herein shall constitute an absolute assignment, subject, however, to the conditional permission given herein to the Mortgagor to collect and use such rents, income and other benefits. The foregoing assignment shall be fully operative without any further action on the part of either party and the Mortgagee shall be entitled, at its option, upon the occurrence of an Event of Default hereunder, to all rents, income and other benefits from the Mortgaged Property, whether or not the Mortgagee takes possession of the Mortgaged Property. The Mortgagor hereby further grants to the Mortgagee and its agent the right, at the Mortgagee's option, upon the occurrence of an Event of Default, to (i) enter upon and take possession of the Mortgaged Property for the purpose of collecting said rents, income and other benefits, (ii) dispossess by the usual summary proceedings any 21 lessee defaulting in its obligations pursuant to its Occupancy Lease beyond any applicable grace and/or notice period, (iii) let the Mortgaged Property, or any part thereof, to the extent permitted by law, and (iv) apply such rents, income and other benefits, after payment of all necessary charges and expenses, on account of the indebtedness and other sums secured hereby or by any pledge agreements pursuant to which any of the Mortgage Notes may be pledged or assigned. Such assignment and grant shall continue in effect until the indebtedness and other sums secured by this Mortgage, and by any pledge agreements pursuant to which the Mortgage Notes may be pledged or assigned, are paid in full, the execution of this Mortgage constituting and evidencing the irrevocable consent of the Mortgagor to the entry upon and taking possession of the Mortgaged Property by the Mortgagee pursuant to such grant. Neither the exercise of any rights under this Paragraph SIXTH by the Mortgagee nor the application of any such rents, income or other benefits to the indebtedness and other sums secured hereby shall cure or waive any Default, Event of Default or notice of Default hereunder or invalidate any act done pursuant hereto or to any such notice, but shall be cumulative of all other rights and remedies. SEVENTH: Insurance. As is provided in Article One Hundred Sixty (160) of the Mortgage and Property Registry Act of Puerto Rico Act Number One Hundred Ninety-Eight (198) of August ten (10), nineteen 22 hundred seventy-nine (1979), Thirty Laws of Puerto Rico Annotated Two Thousand Five Hundred Fifty-Six (30 L.P.R.A. 2556), this Mortgage shall be extensive to, and shall cover, all indemnities to which the Mortgagor may be entitled under any policy of insurance covering the Mortgaged Property or any part thereof, and the Mortgagee shall be entitled to receive directly from the insurance underwriter(s) all payments which become due under any such policy(ies) of insurance unless otherwise provided in any pledge agreements under which any of the Mortgage Notes are pledged or assigned. Such payments shall be applied in the manner provided in any pledge agreements or other instrument under which the Mortgage Notes are pledged or assigned. EIGHTH: Additional Advances. The Mortgagee, without consent of or demand upon the Mortgagor and without waiving or releasing any obligation or Default or Event of Default, may (but shall be under no obligation to) at any time advance such funds as may in the Mortgagee's judgment be needed for the purposes of (i) paying real estate taxes assessed against the Mortgaged Property which the Mortgagor has failed to pay, (ii) maintaining insurance coverage on the Mortgaged Property as required hereunder or otherwise as set forth in any pledge agreements pursuant to which any of the Mortgage Notes have been pledged or assigned, (iii) complying with any Legal Requirements relating to environmental matters with which the Mortgagor has failed to comply 23 or (iv) paying any other expenses which the Mortgagee reasonably determines to be necessary to preserve the value of the Mortgaged Property, and the Mortgagor may, in such event, enter upon the Mortgaged Property for such purpose and take all action thereon that it considers necessary or appropriate, and may take such other and further action as it may consider necessary or appropriate for such purposes. All sums so advanced or paid by the Mortgagee and all costs and expenses (including, without limitation, attorneys' fees and expenses) so incurred, together with interest thereon at the rate provided for in the Mortgage Note from the date of payment or incurring, shall constitute additional indebtedness secured by this Mortgage and shall be paid by the Mortgagor to the Mortgagee on demand, regardless of the due date of the remainder of the indebtedness secured by this Mortgage. NINTH: Further Assurances; Additional Security. The Mortgagor, at its expense, will execute, acknowledge, deliver and record all such instruments and take all such action as the Mortgagee from time to time may request better to assure the Mortgagee that the properties and rights hereby mortgaged and assigned or intended to have been mortgaged and assigned have so been. Without notice to or consent of the Mortgagor, and without impairment of the lien of and rights under this Mortgage, the Mortgagee may take from (but the Mortgagor shall not be obligated to furnish to) the Mortgagor or from any other Person or 24 Persons (as hereinafter defined) additional security for all or any of the Mortgage Notes or for the obligations of the Mortgagor secured by the assignment or pledge of any of the Mortgage Notes; and neither the giving of this Mortgage nor the acceptance of any such additional security shall prevent the Mortgagee from resorting first to such additional security, or to the security created by this Mortgage, in either case without affecting the Mortgagee's lien and rights under this Mortgage. TENTH: Foreclosure Valuation. In compliance with Article One Hundred Seventy-Nine (179) of the Mortgage and Property Registry Act of Puerto Rico [Act Number One Hundred Ninety-Eight (198) of August ten (10), nineteen hundred seventy-nine (1979) Thirty Laws of Puerto Rico Annotated Two Thousand Five Hundred Seventy-Five (30 L.P.R.A. 2575)], the Mortgagor hereby declares and agrees for the purpose of foreclosure that the value of the Mortgaged Property is the amount of ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000). ELEVENTH: Foreclosure. In the event that any of the Mortgage Notes is assigned or pledged or otherwise encumbered by the Mortgagor as collateral security for the payment of any other note or debt of the Mortgagor or of any other Person, the Mortgagor agrees that: (a) The Mortgagee may foreclose this Mortgage and may exercise all other rights, remedies, powers and privileges provided 25 herein or now or hereafter existing at law, in equity, by statute, or otherwise, without first foreclosing the pledge or other lien so constituted upon the respective Mortgage Note, to the same extent and with the same force and effect as if such Mortgage Note had been assigned or transferred directly to the Mortgagee rather than assigned or pledged as collateral security, provided that nothing contained in this paragraph ELEVENTH shall relieve the Mortgagee from the obligation to comply with thee terms of any pledge agreements or other instruments under which any Mortgage Note is assigned or pledged. (b) The Mortgagor will not exercise any right which it might have to cancel the record of the Mortgage by reason of lapse of time counted from the date of the constitution of the Mortgage either under the provisions of Article One Hundred Forty-Five (145) of the Mortgage and Property Registry Act of Puerto Rico [Act Number One Hundred Ninety-Eight (198) of August ten (10), nineteen hundred seventy- nine (1979), Thirty Laws of Puerto Rico Annotated Two Thousand Four Hundred Sixty-Nine (30 L.P.R.A. 2469)] or otherwise and further agrees, whenever requested by the Mortgagee, to execute and file in the appropriate Registry, at the Mortgagor's sole cost and expense, any and all supplemental instruments which may be necessary or convenient in the judgment of the Mortgagee for the preservation of the lien of this Mortgage until full payment of the notes or debts so secured by the liens 26 of the Mortgage Notes and full payment of any obligations secured by any pledges of the Mortgage Notes. Without limiting the generality of the foregoing, the Mortgagor agrees that, unless the Mortgagee shall consent in writing to the cancellation of the Mortgage at an earlier date, the Mortgage shall be conclusively presumed to subsist for a period of twenty-five (25) years from the date of its constitution; and the Mortgagor does hereby waive any right which it might otherwise have under said Article One Hundred Forty-Five (145) of the Mortgage and Property Registry Act to apply for an earlier cancellation of the record of the Mortgage. (c) The Mortgagee may upon the occurrence of any Event of Default hereunder or under any pledge agreement pursuant to which any of the Mortgage Notes has been pledged or assigned, petition the court having jurisdiction over the Mortgaged Property to appoint a receiver for the Mortgaged Property, including all rents, issues and profits therefrom, and said receiver shall have the broadest powers and faculties permitted to be granted to a receiver by the court and his appointment shall be made by the court as a matter of absolute right granted to the Mortgagee without taking into consideration the value of the Mortgaged Property or the solvency of the Mortgagor or of any other party to the action, and the Mortgagor hereby consents to the appointment of such a receiver and agrees not to oppose the same, and waives any requirement for such a receiver to post a bond of any kind. 27 TWELFTH: Definitions. As used in this Mortgage, the following terms shall have the following respective meanings: "Default" shall mean any event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. "Event of Default" shall have the meaning ascribed thereto in paragraph Seventeenth hereof. "Governmental Authority" shall mean any court, agency, authority, board (including, without limitation, any environmental protection, planning or zoning board), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States, the Commonwealth of Puerto Rico, or the Municipality of Fajardo, whether now or hereafter in existence, having jurisdiction over the Mortgagor or the Mortgaged Property. "Impositions" shall mean all real estate and other taxes, all assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof or while this Mortgage is in force), water, sewer, electricity, utility and other rents, rates and charges, excises, levies, license fees, permit fees, inspection fees and other authorization fees and other charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all 28 penalties or interest thereon), which at any time may be assessed, levied, confirmed or imposed on or in respect of or be a lien upon (a) the Mortgaged Property or any part thereof or any rents, issues, income, profits or earnings therefrom or any estate, right or interest therein, or (b) any occupancy, use or possession of or sales from the Mortgaged Property or any part thereof, or (c) any of the Mortgage Notes, this Mortgage, any interest hereon or any other payments due from the Mortgagor under the terms of this Mortgage; excepting, however, the income taxes now or hereafter imposed by the Untied States under the Internal Revenue Code of nineteen hundred eighty-six (1986), as amended from time to time, and by the Commonwealth of Puerto Rico under the Income Tax Act of nineteen hundred fifty-four (1954) [Act Number Ninety-One (91), approved on June twenty-nine (29), nineteen hundred fifty-four (1954)], as amended, or under any other Act of Congress or Act of the Legislature of Puerto Rico of the same nature, modifying, amending, or substituting the statutes above mentioned. "Legal Requirements" shall mean collectively (i) all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of any Governmental Authority having jurisdiction over the Mortgaged Property, the Mortgagor or any tenant of all or any of its commercial spaces, foreseen or unforeseen, ordinary or extraordinary 29 (including, without limitation, fire, health, handicapped access, sanitation, ecological, historic, zoning, environmental protection, wetlands, and building laws or regulations), which now or at any time hereafter may be applicable to the Mortgaged Property or any part thereof, or any of the streets, alleys, passageways, sidewalks, curbs, gutters, vaults or vault spaces adjoining the Mortgaged Property or any part thereof, or any use or condition of the Mortgaged Property or any part thereof, (ii) all material requirements of each permit, license, authorization and regulation relating to the Mortgaged Property, or any portion thereof, or to the ownership, leasing, use, occupancy, possession, operation or maintenance thereof and (iii) all requirements of the Puerto Rico Fire Department, the Factual Mutual System or the Industrial Risk Insurors or other similar body acting in and for the Commonwealth of Puerto Rico and all requirements of each insurance policy covering or applicable to all or any portion of the Land, or the use thereof, which are maintained or required to be maintained by the Mortgagor or of which the Mortgagor has notice, and all requirements of the issuer of each such policy, including any which may require repairs, modifications or alterations (structural or otherwise) in or to the Mortgaged Property, or any portion thereof. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including, without limitation, any conditional sale or other title retention agreement, any lease in the 30 nature thereof, or the filing of, or any agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction (other than informational filings in respect of equipment leased under any lease not intended as security, within the meaning of the Uniform Commercial Code) and any comparable financing statement under the laws of the Commonwealth of Puerto Rico. "Permitted Encumbrances" shall have the meaning ascribed hereto in paragraph Eighteenth hereof. "Person" shall mean an individual, corporation, partnership, joint venture, trust, association or any other entity or organization, including a government or political subdivision, agency or instrumentality thereof. THIRTEENTH: Miscellaneous. (a) Successors; No Oral Modification; Headings. All of the terms of this Mortgage shall apply to and be binding upon the successors and assigns of the Mortgagor and all Persons claiming under or through the Mortgagor or any such successor or assign, and shall inure to the benefit of the Mortgagee and its successors and assigns. Neither this Mortgage nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Mortgagee, notice of which is endorsed on the respective Mortgage Notes. No notice to or demand on the Mortgagor in any case shall entitle the Mortgagor to any other or 31 further notice or demand in similar or other circumstances. The headings of the clauses of this Mortgage have been inserted for convenience of reference only and shall in no way define, modify or restrict any of the provisions hereof. FOURTEENTH: The Mortgage Notes. The Mortgage Notes referred to in paragraph SECOND of this Deed are literally transcribed herein as follows: (a) Mortgage Note A is literally transcribed herein as follows: "MORTGAGE NOTE "VALUE: 120,000,000 Series A "DUE DATE: ON DEMAND "FOR VALUE RECEIVED, on demand, the undersigned promises to pay to PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY (hereinafter the "Authority") or its order, the principal sum of ONE HUNDRED TWENTY MILLION DOLLARS ($120,000,000) with interest on the unpaid balance at a fluctuating annual rate (computed on the basis of a 360-day year and the actual number of days elapsed) equal to two percent (2% ) over and above the "reference rate," as defined below, such fluctuating rate to change simultaneously with the changes in the reference rate, from the date of this Mortgage Note until full payment hereof. As used herein, the term "reference rate" shall mean at any time the lower of (i) the fluctuating rate of interest announced publicly from time to time by The Chase Manhattan Bank, N.A. in New York, New York as its "prime," "base," or "reference" rate and (ii) the fluctuating rate of interest announced publicly from time to time by Citibank, N.A. in New York, New York as its "prime," "base," or "reference" rate, it being understood that such rates shall not necessarily be the best or lowest rates of interest available to such bank's best or more preferred large commercial customers. Anything herein to 32 the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the holder hereof shall promptly refund such excess to the undersigned; provided, however, that, if lawful, any such excess shall be paid by the undersigned to the holder hereof as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. The Mortgagee shall be entitled to charge the maximum late charge permitted by law on any overdue principal under this Mortgaged Note. Interest hereunder shall be payable on demand, and payments of interest and principal shall be made at the office or domicile of the Authority within the Commonwealth of Puerto Rico, or at such other place as may be designated in writing by said Authority or any holder hereof. "The undersigned, and all others who may become liable for all or any part of this obligation whether as maker, principal, surety, guarantor or endorser, agree hereby to be jointly and severally liable and jointly and severally waive demand, presentment, protest, notice of dishonor and non-payment and any and all lack of diligence or delays in collection or enforcement hereof, and expressly agree to extend to the Authority or any holder hereof the right of set-off or compensation prior to, on or after maturity or default, and consent to any application of payment of any monies in possession of the Authority or any holder hereof belonging to the undersigned or any obligor hereunder related to this Mortgage Note and to any extension of time, modification of the terms of payment, releases of any party liable for this obligation, release substitution or exchange of any property, real or personal, tangible or intangible, guaranteeing payment of the Mortgage securing this Mortgage Note, and agree also to any other indulgence or forbearance whatsoever. Any such extension, release, modification, substitution, exchange, indulgence or forbearance may be made without notice to said party, and without in any way affecting the personal liability of any party obliged hereunder. "The holder of this Mortgage Note shall be entitled to the benefits and security afforded by Deed Number One which was executed on the date hereof before the undersigned Notary as security for this Mortgage Note and by any agreement executed by the undersigned assigning, pledging, or encumbering this Mortgage Note as security therefor, and may enforce the agreements of the undersigned contained in each of said 33 instruments, and may exercise the remedies provided thereby or otherwise in respect thereof without being required first to foreclose the pledge or other lien or encumbrance so constituted upon this Mortgage Note, all in accordance with the terms of said instruments. No reference herein to said instruments, and no provision of this Mortgage Note or of said instruments, shall alter or impair the obligation of the undersigned hereon, which is joint and several, continuing, absolute and unconditional, nor shall such reference affect the negotiability hereof under the Negotiable Instruments Law of Puerto Rico. Recourse on this Mortgage Note is limited as provided in Deed Number One. The undersigned hereby submits to the venue of the Courts in the Commonwealth of Puerto Rico selected by the holder in case of legal action brought against the undersigned for the collection of this Mortgage Note. "In San Juan, Puerto Rico, this 7th day of February, 1991. "EL CONQUISTADOR PARTNERSHIP L.P. "By: Kumagai Caribbean, Inc. "(Signed) By: Toru Fujita Ueda -------------------------------- "Toru Fujita Ueda "Vice President "By: WKA El Con Associates "(Signed) By: Hugh Alanson Andrews -------------------------------- "Hugh Alanson Andrews "Authorized Signatory "Affidavit No. 98 "Acknowledged and subscribed before me in San Juan, Puerto Rico, this 7th day of February, 1991, by Toru Fujita Ueda, of legal age, married, business executive and resident of San Juan, Puerto Rico, in his capacity as Vice President of KUMAGAI CARIBBEAN, INC., General Partner of EL CONQUISTADOR PARTNERSHIP L.P. , and by Hugh Alanson Andrew, of legal age, married, business executive and resident of San Juan, Puerto Rico in his capacity as Authorized Signatory of WKA EL CON ASSOCIATES, General Partner of EL CONQUISTADOR PARTNERSHIP L.P., identified by the means set forth in Article Seventeen "c" (17(c)) of the Notarial Law of Puerto Rico. 34 (signed) "Leonor M. Aguilar-Guerrero "Notary Public" (Notarial Seal) (b) Mortgage Note B is literally transcribed herein as follows: "MORTGAGE NOTE "VALUE: $6,612,000 Series B "DUE DATE: ON DEMAND "FOR VALUE RECEIVED, on demand, the undersigned promises to pay to PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY (hereinafter the "Authority") or its order, the principal sum of SIX MILLION SIX HUNDRED TWELVE THOUSAND DOLLARS ($6,612,000) with interest on the unpaid balance at a fluctuating annual rate (computed on the basis of a 360-day year and the actual number of days elapsed) equal to two percent (2%) over and above the "reference rate," as defined below, such fluctuating rate to change simultaneously with the changes in the reference rate, from the date of this Mortgage Note until full payment hereof. As used herein, the term "reference rate" shall mean at any time the lower of (i) the fluctuating rate of interest announced publicly from time to time by The Chase Manhattan Bank, N.A. in New York, New York as its "prime," "base," or "reference" rate and (ii) the fluctuating rate of interest announced publicly from time to time by Citibank, N.A. in New York, New York as its "prime," "base," or "reference" rate, it being understood that such rates shall not necessarily be the best or lowest rates of interest available to such bank's best or more preferred large commercial customers. Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the holder hereof shall promptly refund such excess to the undersigned; provided, however, that, if lawful, any such excess shall be paid by the undersigned to the holder hereof as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. The Mortgagee shall be entitled to charge the maximum late charge permitted by law on any overdue principal under 35 this Mortgaged Note. Interest hereunder shall be payable on demand, and payments of interest and principal shall be made at the office or domicile of the Authority within the Commonwealth of Puerto Rico, or at such other place as may be designated in writing by said Authority or any holder hereof. "The undersigned, and all others who may become liable for all or any part of this obligation whether as maker, principal, surety, guarantor or endorser, agree hereby to be jointly and severally liable and jointly and severally waive demand, presentment, protest, notice of dishonor and non-payment and any and all lack of diligence or delays in collection or enforcement hereof, and expressly agree to extend to the Authority or any holder hereof the right of set-off or compensation prior to, on or after maturity or default, and consent to any application of payment of any monies in possession of the Authority or any holder hereof belonging to the undersigned or any obligor hereunder related to this Mortgage Note and to any extension of time, modification of the terms of payment, releases of any party liable for this obligation, release substitution or exchange of any property, real or personal, tangible or intangible, guaranteeing payment of the Mortgage securing this Mortgage Note, and agree also to any other indulgence or forbearance whatsoever. Any such extension, release, modification, substitution, exchange, indulgence or forbearance may be made without notice to said party, and without in any way affecting the personal liability of any party obliged hereunder. "The holder of this Mortgage Note shall be entitled to the benefits and security afforded by Deed Number One which was executed on the date hereof before the undersigned Notary as security for this Mortgage Note and by any agreement executed by the undersigned assigning, pledging, or encumbering this Mortgage Note as security therefor, and may enforce the agreements of the undersigned contained in each of said instruments, and may exercise the remedies provided thereby or otherwise in respect thereof without being required first to foreclose the pledge or other lien or encumbrance so constituted upon this Mortgage Note, all in accordance with the terms of said instruments. No reference herein to said instruments, and no provision of this Mortgage Note or of said instruments, shall alter or impair the obligation of the undersigned hereon, which is joint and several, continuing, absolute and unconditional, nor shall such reference affect the negotiability hereof under the Negotiable Instruments Law of Puerto Rico. Recourse on this Mortgage Note is limited as provided in Deed Number One. The undersigned hereby submits to the venue of the Courts in the Commonwealth of Puerto Rico selected by the holder in case of legal 36 action brought against the undersigned for the collection of this Mortgage Note. "In San Juan, Puerto Rico, this 7th day of February, 1991. "EL CONQUISTADOR PARTNERSHIP L.P. "By: Kumagai Caribbean, Inc. "(Signed) By: Toru Fujita Ueda -------------------------------- "Toru Fujita Ueda "Vice President "By: WKA El Con Associates "(Signed) By: Hugh Alanson Andrews -------------------------------- "Hugh Alanson Andrews "Authorized Signatory" "Affidavit No. 99 "Acknowledged and subscribed before me in San Juan, Puerto Rico, this 7th day of February, 1991, by Toru Fujita Ueda, of legal age, married, business executive and resident of San Juan, Puerto Rico, in his capacity as Vice President of KUMAGAI CARIBBEAN, INC., General Partner of EL CONQUISTADOR PARTNERSHIP L.P., and by Hugh Alanson Andrew, of legal age, married, business executive and resident of San Juan, Puerto Rico in his capacity as Authorized Signatory of WKA EL CON ASSOCIATES, General Partner of EL CONQUISTADOR PARTNERSHIP L.P., identified by the means set forth in Article Seventeen "c" (17(c)) of the Notarial Law of Puerto Rico. (signed) "Leonor M. Aguilar-Guerrero "Notary Public" (Notarial Seal) (c) Mortgage Note C is literally transcribed herein as follows: "MORTGAGE NOTE "VALUE: $20,000,000 Series C "DUE DATE: ON DEMAND 37 "FOR VALUE RECEIVED, on demand, the undersigned promises to pay to PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY (hereinafter the "Authority") or its order, the principal sum of TWENTY MILLION DOLLARS ($20,000,000) with interest on the unpaid balance at a fluctuating annual rate (computed on the basis of a 360-day year and the actual number of days elapsed) equal to two percent (2%) over and above the "reference rate," as defined below, such fluctuating rate to change simultaneously with the changes in the reference rate, from the date of this Mortgage Note until full payment hereof. As used herein, the term "reference rate" shall mean at any time the lower of (i) the fluctuating rate of interest announced publicly from time to time by The Chase Manhattan Bank, N.A. in New York, New York as its "prime," "base," or "reference" rate and (ii) the fluctuating rate of interest announced publicly from time to time by Citibank, N.A. in New York, New York as its "prime," "base," or "reference" rate, it being understood that such rates shall not necessarily be the best or lowest rates of interest available to such bank's best or more preferred large commercial customers. Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the holder hereof shall promptly refund such excess to the undersigned; provided, however, that, if lawful, any such excess shall be paid by the undersigned to the holder hereof as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. The Mortgagee shall be entitled to charge the maximum late charge permitted by law on any overdue principal under this Mortgaged Note. Interest hereunder shall be payable on demand, and payments of interest and principal shall be made at the office or domicile of the Authority within the Commonwealth of Puerto Rico, or at such other place as may be designated in writing by said Authority or any holder hereof. "The undersigned, and all others who may become liable for all or any part of this obligation whether as maker, principal, surety, guarantor or endorser, agree hereby to be jointly and severally liable and jointly and severally waive demand, presentment, protest, notice of dishonor and non-payment and any and all lack of diligence or delays in collection or enforcement hereof, and expressly agree to extend to the Authority or any holder hereof the right of set-off or compensation prior to, on or after 38 maturity or default, and consent to any application of payment of any monies in possession of the Authority or any holder hereof belonging to the undersigned or any obligor hereunder related to this Mortgage Note and to any extension of time, modification of the terms and payment, releases of any party liable for this obligation, release substitution or exchange of any property, real or personal, tangible or intangible, guaranteeing payment of the Mortgage securing this Mortgage Note, and agree also to any other indulgence or forbearance whatsoever. Any such extension, release, modification, substitution, exchange, indulgence or forbearance may be made without notice to said party, and without in any way affecting the personal liability of any party obliged hereunder. "The holder of this Mortgage Note shall be entitled to the benefits and security afforded by Deed Number One which was executed on the date hereof before the undersigned Notary as security for this Mortgage Note and by any agreement executed by the undersigned assigning, pledging, or encumbering this Mortgage Note as security therefor, and may enforce the agreements of the undersigned contained in each of said instruments, and may exercise the remedies provided thereby or otherwise in respect thereof without being required first to foreclose the pledge or other lien or encumbrance so constituted upon this mortgage Note, all in accordance with the terms of said instruments. No reference herein to said instruments, and no provision of this Mortgage Note or of said instruments, shall alter or impair the obligation of the undersigned hereon, which is joint and several, continuing, absolute and unconditional, nor shall such reference affect the negotiability hereof under the Negotiable Instruments Law of Puerto Rico. Recourse on this Mortgage Note is limited as provided in Deed Number One. The undersigned hereby submits to the venue of the Courts in the Commonwealth of Puerto Rico selected by the holder in case of legal action brought against the undersigned for the collection of this Mortgage Note. "In San Juan, Puerto Rico, this 7th day of February, 1991. "EL CONQUISTADOR PARTNERSHIP L.P. "By: Kumagai Caribbean, Inc. "(Signed) By: Toru Fujita Ueda -------------------------------- "Toru Fujita Ueda "Vice President 39 "By: WKA El Con Associates "(Signed) By: Hugh Alanson Andrews -------------------------------- "Hugh Alanson Andrews "Authorized Signatory "Affidavit No. 100 "Acknowledged and subscribed before me in San Juan, Puerto Rico, this 7th day of February, 1991, by Toru Fujita Ueda, of legal age, married, business executive and resident of San Juan, Puerto Rico, in his capacity as Vice President of KUMAGAI CARIBBEAN, INC., General Partner of EL CONQUISTADOR PARTNERSHIP L.P., and by Hugh Alanson Andrew, of legal age, married, business executive and resident of San Juan, Puerto Rico in his capacity as Authorized Signatory of WKA EL CON ASSOCIATES, General Partner of EL CONQUISTADOR PARTNERSHIP L.P., identified by the means set forth in Article Seventeen "c" (17(c)) of the Notarial Law of Puerto Rico. (signed) "Leonor M. Aguilar-Guerrero "Notary Public" (Notarial Seal) FIFTEENTH: Deed in the Public Interest. (a) The Authority hereby states that its appearance in this Deed, made for its benefit, is in furtherance of the purpose for which the Authority was created and is a legitimate exercise of its powers. In approving the financing being provided to the Mortgagor and secured hereby, the Authority has determined that the Mortgage constituted by this Deed is in the public interest and serves the public purpose of promoting the economic development, health, welfare and safety of the people of the Commonwealth of Puerto Rico, and that, therefore, under the provisions of Sections One Thousand Two Hundred Fifty-One (1251) to One Thousand Two Hundred Sixty-Nine (1269) of Title Twelve (12) of the 40 Laws of Puerto Rico Annotated (L.P.R.A.) and Section One Thousand Seven Hundred Seventy Subsection [c]) (1770[c]) of Title Thirty (30) of the Laws of Puerto Rico Annotated, the constitution and recording of this Mortgage is exempt from the payment and/or cancellation of all internal revenue stamps and recording fees. (b) If such exemption is held to be invalid, of if additional costs and expenses are otherwise incurred, then all costs and expenses of this Deed, of obtaining a certified copy or copies hereof, and of the registration of this instrument in the proper public registry (including, without limitation, the cost of all recording fees payable in connection with the initial recordation or subsequent cancellation of this Mortgage or fees for the cancellation of any revenue stamps affixed hereto); all expenses of such additional documentation as may hereafter be required, including the registration thereof in the appropriate sections of the Registry of Property, if such be required; and all expenses of all documents of cancellation, including the cost of registration thereof, and all other recording, filing, notarial or other fees, taxes and charges, shall be for the account of Mortgagor. SIXTEENTH: Disposition of Mortgaged Property. The Mortgagor covenants that it shall not sell, convey, mortgage, or otherwise dispose of or encumber the Mortgaged Property, any portion thereof, or any of the Mortgagor's right, title or interest therein without first securing 41 the written consent of the Mortgagee, except to the extent otherwise permitted under any pledge agreement pursuant to which any of the Mortgage Notes has been pledged or assigned. SEVENTEENTH: (a) Events of Default. The following shall constitute "Events of Default" under this Mortgage, and the term "Event of Default" shall mean, wherever used with reference to this Mortgage, any one or more of the following occurrences: (i) any principal, interest or any other sums payable pursuant to any of the Mortgage Notes shall not be paid when due; (ii) any sums (other than those set forth in (i) above) payable pursuant to this Mortgage or any pledge agreement pursuant to which any of the Mortgage Notes has been pledged or assigned shall not be paid when due, and such failure shall continue for a period of thirty (30) days after notice is given to the Mortgagor by the Mortgagee, unless the Mortgagee shall agree to an extension of such time prior to its expiration; (iii) the Mortgagor shall fail in the due performance or observance of any covenant, agreement or term binding upon the Mortgagor obtained in this Mortgage, any of the Mortgage Notes or any pledge agreement pursuant to which any of the Mortgage Notes was pledged or assigned, other than those covenants, agreements or terms of which the Mortgagor's failure to perform would constitute another Event 42 of Default referred to in this paragraph SEVENTEENTH, and such failure shall continue unremedied for more than ninety (90) days after notice thereof shall have been given to the Mortgagor by the Mortgagee or such shorter grace period provided for in any such document; provided, however, that if such failure cannot be corrected within such ninety (90) day period, it shall not constitute an Event of Default hereunder if corrective action is instituted by the Mortgagor within such period and diligently pursued until such failure is corrected; (iv) any warranty, representation or other statement made by or on behalf of the Mortgagor in or pursuant to this Mortgage, any pledge agreement pursuant to which any of the Mortgage Notes was pledged or assigned, or any document, instrument or certificate delivered in connection herewith or therewith shall prove to have been materially incorrect or misleading when made; provided, however, that if the incorrect or misleading nature of such warranty, representation or other statement is curable, such incorrect or misleading nature shall not be an Event of Default hereunder so long as the Mortgagor diligently proceeds to cure and cures such incorrect or misleading nature within ten (10) days after notice from the Mortgagee of such incorrect or misleading nature such that the original warranty, representation or other statement made shall then not be materially incorrect or misleading; (v) the occurrence of an Event of Default under and 43 pursuant to the terms of any pledge agreement pursuant to which any of the Mortgage Notes has been pledged or otherwise encumbered; or (vi) the Mortgagor shall breach its covenant contained in Article Eighteenth hereof. To the extent that any circumstances constitute an Event of Default under any pledge agreement pursuant to which any of the Mortgage Notes may be pledged or assigned but would not otherwise constitute an Event of Default hereunder, then, notwithstanding the foregoing, such circumstances shall constitute an Event of Default hereunder. (b) Remedies. Upon the occurrence and continuance of an Event of Default hereunder or under any pledge agreement or other document pursuant to which any of the Mortgage Notes may be assigned, pledged or otherwise encumbered as collateral security, the Mortgagee, its successors and assigns, may, at its or their election: (i) declare all or any portion of the principal sum of and interest on all or any of the Mortgage Notes, along with all or any other sums payable under all or any of the Mortgage Notes, this Mortgage or any pledge agreement pursuant to which any of the Mortgage Notes has been pledged or assigned immediately due and payable; (ii) proceed to enforce the payment of all or any of the Mortgage Notes and/or to foreclose the lien of the Mortgage as against all 44 or any part of the Mortgaged Property (by summary proceedings or otherwise) and to have the same sold under the judgment or decree of a court of competent jurisdiction; and/or (iii) enter upon and take possession of the Mortgaged Property or any part thereof by summary proceedings, ejectment or other legal proceedings and remove the Mortgagor and all other persons and any and all properties therefrom (to the extent permitted by law, other than pursuant to a foreclosure proceeding), and hold, operate and manage the same and receive all earnings, income, rents, issues and proceeds accruing with respect thereto or any part thereof. The Mortgagee shall be under no liability for or by reason of any such taking of possession, entry, removal or holding, operation or management, except that any amounts so received by the Mortgagee shall be applied to pay all costs and expenses of so entering upon, taking possession of, holding, operating, maintaining, repairing, preserving and managing the Mortgaged Property or any part thereof, and any taxes, assessments or other charges prior to the Lien of this Mortgage which the Mortgagee may consider it necessary or desirable to pay, and any balance of such amounts shall be applied as determined by the Mortgagee in its sole and absolute discretion; and/or (iv) exercise any other remedy available at law or in equity. EIGHTEENTH: No Other Liens. (a) Subject to paragraph 45 Nineteenth below, relating to contests, the Mortgagor will not create or permit to be created or to remain, and will discharge, any Lien upon the Mortgaged Property or any part thereof other than the following (collectively, the "Permitted Encumbrances"): (a) the herein constituted Mortgage, (b) leases of commercial space at the Mortgaged Property, provided such leases are subordinate to the lien of this mortgage, (c) a second mortgage in favor of Government Development Bank for Puerto Rico, as per Deed Number Two (2) of Mortgage, dated February seventh (7th), nineteen hundred ninety-one (1991) before Notary Ramon Moran Loubriel, which will be filed for registration contemporaneously with this Mortgage in the Fajardo Section, Registry of Property of Puerto Rico, (d) easements or reservations with respect to the servicing of the Mortgaged Property for rights of way for electric transmission and distribution lines, telephone and telegraph lines, fuel, water, sewage and drainage pipelines and channels and all other similar purposes, provided that such easements and reservations are approved by the Mortgagee and do not, in any single case or in the aggregate, materially interfere with the occupancy or use of the Mortgaged Property, (e) statutory easement for access in favor of property owned by Justino Diaz Stantiti, provided that such easement does not materially interfere with the occupancy or use of the Mortgaged Property, and (f) any other liens or encumbrances specifically permitted by the terms of any pledge agreement pursuant to which any of the 46 Mortgage Notes has been pledged, assigned or otherwise encumbered. NINETEENTH: Payment of Impositions; Compliance with Legal Requirements and Contests. (a) Subject to subparagraph (c) below, the Mortgagor will pay or cause to be paid all Impositions before the same would become delinquent and before any fine, penalty, interest or cost may be added for non-payment of same. The Mortgagor promptly will deliver to the Mortgagee after payment of such Impositions copies of official receipts or other evidence satisfactory to the Mortgagee evidencing the payment of any Imposition as required pursuant to this subparagraph (a). (b) The Mortgagor will comply promptly with any Legal Requirement and will furnish the Mortgagee, on demand, with the results of any requested official search made by a Governmental Authority regarding such compliance. (c) The Mortgagor, at its expense, and after prior written notice to Mortgagee and provided no Event of Default shall then have occurred and be continuing may contest in good faith by appropriate proceedings promptly initiated and conducted with due diligence, the amount or validity or application, in whole or in part, of any Imposition or any Legal Requirement or any Lien upon the Mortgaged Property or the application of any instrument of record referred to in paragraph Eighteenth hereof and may defer payment thereof or compliance 47 therewith; provided that (i) in the case of any such unpaid Imposition or Lien, such proceedings shall suspend the collection thereof from the Mortgagor, the Mortgagee and the Mortgaged Property, (ii) in any case, the Mortgaged Property, any rent or other income therefrom or any part thereof or interest therein would not be in danger of being sold, forfeited, terminated, cancelled or lost, (iii) in the case of a Legal Requirement, neither the Mortgagor nor the Mortgagee would be subject to civil or criminal liability as a result of such deferral of compliance therewith, (iv) in any case, the Mortgagor shall have furnished such security if any, as may be required in the proceedings or as may be requested by the Mortgagee, (v) in any case, the payment of any sums required to be paid under any of the Mortgage Notes, this Mortgage, or any pledge agreement pursuant to which any of the Mortgage Notes may be pledged or assigned (other than any unpaid Imposition at the time being contested in accordance with this paragraph Nineteenth) shall not be interfered with or otherwise affected, and (vi) in any case, the Mortgagor shall hold the Mortgagee harmless of and from and indemnify the Mortgagee against any loss by reason of any such deferment. TWENTIETH: Additional Payments. If any action of proceeding shall be commenced or taken (including, without limitation, an action to foreclose this Mortgage, collect the indebtedness secured hereby or enforce the Mortgagee's rights under any of the Mortgage Notes) by 48 the Mortgagee, or any other Person, in which action or proceeding the Mortgage is involved or is made a party by reason of the execution and/or delivery of any of the Mortgage Notes, this Mortgage, any pledge agreement pursuant to which any of the Mortgage Notes has been pledged or assigned or any other documents or in which it becomes necessary to enforce, defend or uphold the lien on the Mortgaged Property pursuant to this Mortgage or any other documents (including, without limitation, any pledge agreement) or the Mortgagee's rights under any of the Mortgage Notes or any other documents (including, without limitation, any pledge agreement), all sums paid by the Mortgagee for the expense of any such action or litigation shall be paid by the Mortgagor to the Mortgagee promptly after demand. The Mortgagor will hold the Mortgagee harmless against any and all liability with respect to any mortgage recording or intangible personal property tax or fees or similar imposition now or hereafter in effect, to the extent that the same may be payable by the Mortgagee with respect to this Mortgage, any of the Mortgage Notes, any pledge agreement, or any other related document. Any amounts due and payable to the Mortgagee under this paragraph that are not paid within fifteen (15) days after written demand therefor by the Mortgagee shall bear interest at the rate then applicable under the terms of Mortgage Note A, from the date of such demand, and such amounts, together with such interest, shall be deemed to be indebtedness secured by this Mortgage. 49 In the event any action, suit or proceeding is brought against the Mortgagee by reason of any such occurrence, the Mortgagor upon request by the Mortgagee will, at the Mortgagor's expense, resist and defend such action, suit or proceeding or cause the same to be resisted or defended, either by counsel designated by the Mortgagor and approved by the Mortgagee, or where such occurrence is covered by liability insurance, by counsel designated by the insurer. The obligations of the Mortgagor under this paragraph Twentieth shall survive the termination or satisfaction of this Mortgage. TWENTY-FIRST: Application of Foreclosure Proceeds. The proceeds of any foreclosure sale of the Mortgaged Property or any part thereof shall be applied in accordance with the provisions of any pledge agreements pursuant to which the Mortgage Notes may be pledged or assigned, or if no such agreements exist, the proceeds of any such foreclosure shall be applied as follows: First: All taxes, assessments or liens prior to the lien of this Mortgage that the Mortgagee may consider necessary or desirable to pay, the costs and expenses (including without limitation, attorney's fees and expenses) of collection, including the costs and expenses of any foreclosure or sale of the Mortgaged Property, the costs and expenses of entering upon, taking possession of or holding, operating and managing the Mortgaged Property, as the case may be, and of the enforcement of 50 any remedies hereunder, including court costs and expenses, and reasonable compensation to the Mortgagee's agents, attorneys and counsel, and all expenses, liabilities and advances incurred or made by the Mortgagee with respect to such foreclosure; Second: All amounts disbursed for costs incurred by the Mortgagee, other than on account of principal and interest thereon due on all indebtedness of the Mortgagor secured by the Mortgage Notes, under this Mortgage, any pledge agreements pursuant to which any of the Mortgage Notes may be pledged or assigned or any documents secured thereby, plus accrued interest thereon; Third: All amounts of interest and principal due and unpaid on all indebtedness of the Mortgagor secured by any of the Mortgage Notes, any pledge agreement pursuant to which any of the Mortgage Notes may be pledged or assigned or any documents secured thereby; and Fourth: The balance, if any, to the Mortgagor, or to any other person or legal entity who may be legally entitled thereto, or as a court of competent jurisdiction may otherwise direct. TWENTY-SECOND: Remedies Cumulative. Each right, power and remedy of the Mortgagee provided for in this Deed shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Deed or in any agreement between the Mortgagor and the Mortgagee secured by the Mortgage Notes, or in 51 any pledge agreements pursuant to which the Mortgage Notes have been pledged or assigned, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Mortgagee of any one or more of the rights, powers or remedies provided for in this Deed or in any agreement between the Mortgagor and the Mortgagee secured by the Mortgage Notes, or in any pledge agreements pursuant to which the Mortgage Notes have been pledged or assigned, or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Mortgagee of any or all such other rights, powers or remedies. All rights, remedies and powers provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and are intended to be limited to the extent necessary so that they will not render this Mortgage invalid, unenforceable or not entitled to be recorded, registered or filed under the provision of any applicable law. If any provision of this Deed shall be held to be invalid, illegal or unenforceable, the validity of other provisions of this Deed shall in no way be affected thereby. TWENTY-THIRD: No Waiver of Remedies. No failure by the Mortgagee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term or of any such breach. No 52 waiver of any breach shall affect or alter this Deed or the Mortgage constituted herein, which shall continue in full force and effect with respect to any other then exiting or subsequent breach. Any action, suit or proceeding brought by the Mortgagee against the Mortgagor pursuant to any of the terms of this Mortgage or otherwise, and any claim made by the Mortgagee hereunder may be compromised, withdrawn or otherwise dealt with by the Mortgagee without any notice to or approval of the Mortgagor. Nothing contained in this Deed shall constitute any consent or request by Mortgagee, express or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Mortgaged Property or any part thereof, nor as giving Mortgagor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Mortgagee in respect thereof or any claim that any lien based on the performance of such labor or services or the furnishings of any such materials or other property is prior to the lien of this Mortgage. TWENTY-FOURTH: Notices. All notices to and demands and requests upon or from the Mortgagor under this Deed shall be made in the manner called for in any pledge agreements pursuant to which the Mortgage Notes have been pledged or assigned; otherwise, such notices shall be in writing and shall be deemed to have been properly given or 53 made if sent by United States registered or certified mail, postage prepaid, return receipt requested, addressed to the Mortgagor or the Mortgagee, as the case may be, at such place as the Mortgagor or the Mortgagee may have furnished to each other in writing. All such notices, demands and requests shall be effective when received at the address specified as aforesaid. TWENTY-FIFTH: Interim Sums. The Mortgagee will have the right from time to time to sue for any sums whether for interest, damages for failure to pay principal or any installment thereof, taxes, or any other sums required to be paid under the terms of this Mortgage, any pledge agreements pursuant to which the Mortgage Notes have been pledged or assigned or any other related documents as the same become due, without regard to whether or not the principal sum or any other sum evidenced by any of the Mortgage Note and secured by this Mortgage becomes due and without prejudice to the right of the Mortgagee thereafter to bring an action of foreclosure, or any other action, as a consequence of a Default or event of Default existing at the time such earlier action was commenced. TWENTY-SIXTH: No Credits on Account of the Debt. The Mortgagor will not claim or demand or be entitled to any credit or credits on account of the indebtedness secured by this Mortgage for any part of the Impositions assessed against the Mortgaged Property or any part 54 thereof and no deduction shall otherwise be made or claimed from the taxable value of the Mortgaged Property, or any part thereof, by reason of this Mortgage or the indebtedness secured by this Mortgage. TWENTY-SEVENTH: Inspection. The Mortgagor will permit the Mortgagee and any representatives designated by the Mortgagee to visit and inspect the Mortgaged Property, or any part thereof, (i) in an Emergency, at any time and (ii) at all other times, during normal business hours and upon reasonable notice, or as otherwise permitted pursuant to the terms of any pledge agreement pursuant to which any of the Mortgage Notes may have been pledged or assigned. The Mortgagee shall not have any duty to make any such inspection and shall not incur any liability or obligation for not making any such inspection or, once having undertaken any such inspection, for making the inspection, not making the same carefully or properly, or for not completing the same; nor shall the fact that such inspection may not have been made by the Mortgagee relieve the Mortgagor of any obligations that it may otherwise have under this Mortgage. TWENTY-EIGHTH: Actions and Proceedings. Except as otherwise provided in any pledge agreements 55 pursuant to which the Mortgage Notes may have been pledged or assigned, the Mortgagee shall have the right to appear in and defend any action or proceeding brought with respect to the Mortgaged Property, and to bring any action or proceeding, in the name and on behalf of the Mortgagor, which the Mortgagee, in its discretion, feels should be brought to protect its interest in the Mortgaged Property, provided that unless an Event of Default shall have occurred and be continuing at the time the Mortgagee first appears in or brings any such action or proceeding, prior to the Mortgagee's appearance in or bringing of any such action or proceeding, the Mortgagee shall give the Mortgagor notice of the Mortgagee's intention with respect thereto. TWENTY NINTH: Officers of Mortgagee Not Liable. All covenants, stipulations, promises, agreements and obligations of the Mortgagee contained herein shall be deemed to be covenants, stipulations, promises, agreements and obligations of the Mortgagee and not of any member of the governing body of the Mortgagee or any officer, agent, servant or employee of the Mortgagee in his individual capacity, and no recourse shall be had for any 56 claim based thereon or hereunder against any member of the governing body of the Mortgagee or any officer, agent, servant or employee of the Mortgagee. THIRTIETH: No Charge Against Mortgagee Credit. No provision hereof shall be construed to impose a charge against the general credit of the Mortgagee or shall impose any personal or pecuniary liability upon any director, official or employee of the Mortgagee. THIRTY-FIRST: Mortgagee Not Liable. Notwithstanding any other provision of this Deed, (a) the Mortgagee shall not be liable to the Mortgagor or any other person for any failure of the Mortgagee to take action under this Deed unless the Mortgagee (i) is requested in writing by an appropriate Person to take such action and (ii) is assured of payment of or reimbursement for any expenses in such action, and (b) except with respect to any action for specific performance or any action in the nature of a prohibitory or mandatory injunction, neither the Mortgagee nor any director of the Mortgagee or any other official or employee of the Mortgagee shall be liable to the Mortgagor or any other person for any action taken by it or by its officers, servants, agents or employees, or for any 57 failure to take action under this Deed. In acting under this Deed, or in refraining from acting under this Deed, the Mortgagee may conclusively rely on the advice of its legal counsel. THIRTY-SECOND. Waivers. In view of the assignment of the Mortgagee's rights under and interest in this Deed to the Trustee by the provisions of the Trust Agreement and in view of any pledge agreements pursuant to which the Mortgage Notes may be pledged or assigned, the Mortgagee shall have no power to waive the performance by the Mortgagor of any provision hereunder or extend the time for the correction of any default of the Mortgagor without the consent of the Trustee to such waiver by the Trustee and by any pledgees under any such pledge agreement. THIRTY-THIRD. Waiver of Moratorium and Redemption. The Mortgagor, to the full extent that it may lawfully do so, agrees that it will not at any time insist upon, plead or in any way take advantage of and hereby waives any redemption or moratorium law now or hereafter in force and effect which would prevent or hinder the enforcement of the provisions of this Deed or any rights or 58 remedies the Mortgagee may have hereunder or by law. THIRTY-FOURTH: Limitation of Liability. Notwithstanding anything to the contrary contained in this Mortgage, no recourse shall be had, whether by levy or execution or otherwise, for the payment of the principal of or interest on, or other amounts owed hereunder or under any of the Mortgage Notes, or for any claim based on this Mortgage or in respect thereof, against any partner of the Mortgagor or any predecessor, successor or affiliate of any such partner or any of their assets (other than from the interest of such partner in the Mortgagor), or against any principal, partner, shareholder, officer, director, agent or employee of any such partner (other than from the interest of any such person in such partner), nor shall any such persons be personally liable for any such amount or claims, or liable for any deficiency judgment based thereon or with respect thereto, it being expressly understood that the sole remedies of the Mortgagee with respect to such amounts and claims shall be against the assets of the Mortgagor, including the Mortgaged Property, and that all such liability of the aforesaid persons, except as otherwise expressly provided herein, is expressly waived and released as a 59 condition of and as consideration for the execution of the Mortgage; provided, however, that (A) nothing contained in this Mortgage (including, without limitation, the provisions of this paragraph Thirty-Fourth) shall constitute a waiver of any indebtedness of Mortgagor evidenced hereby or of any of the Mortgagor's other obligations under such other instruments executed in connection herewith or shall be taken to prevent recourse to and the enforcement against the Mortgagor, of all the liabilities, obligations and undertakings contained in this Mortgage; (B) this paragraph Thirty-Fourth shall not be applicable to a breach by any person of any independent obligation to the Mortgagee, including, but not limited to any other obligations of any Person under any other guarantee or indemnity agreement executed or delivered in connection herewith or with any pledge agreements pursuant to which any of the Mortgage Notes is pledged or assigned and (C) this paragraph Thirty-Fourth shall not be applicable to the active party in the event of (1) fraud by such party, (2) misappropriation of funds or other property by such party or (3) damage to the Mortgaged Property or any part thereof intentionally inflicted in bad faith by such party. 60 For the purposes of the foregoing, the term "shareholder" shall be deemed to include the shareholders of any corporation which is a shareholder of a corporation and the term "partner" shall be deemed to include the partners of any partnership which is a partner of a partnership. THIRTY-FIFTH: Satisfaction of Debt. Should the Mortgagor satisfy any of the Mortgage Notes or the obligations hereunder, under any of the Mortgage Notes and under any pledge agreements pursuant to which the Mortgage Notes are pledged or assigned, in the time and manner heretofore set forth, and comply with, and execute all agreements and stipulations required herein, then the Mortgagee shall execute in its favor the corresponding release and shall endorse to Mortgagor or its nominee the respective Mortgage Note so satisfied without recourse, representations and warranties, or at Mortgagor's election shall endorse the same for cancellation purposes only delivering said Mortgage Note so endorsed to the Mortgagor, except to the extent otherwise provided in any pledge agreements pursuant to which they have been assigned. ACCEPTANCE, WARNINGS AND EXECUTION The appearing parties accept this Deed as drafted 61 and fully ratify and confirm the statements contained herein as the true and exact embodiment of their stipulations, terms and conditions. I, the Notary, made to the appearing parties the necessary legal reserves and warnings concerning the execution of this Deed and they were fully advised by me thereon. Specifically, I advised the appearing parties with respect to: (a) The meaning and legal effects of the acts consummated pursuant to this Deed, having asked each of the persons appearing herein whether they had any further questions and allowing each of them ample time and opportunity to ask questions and to understand and comprehend the meaning, legal nature and effects of their acts; (b) That any liens or encumbrances or any other matter affecting the title to the Land that may be filed for recordation with the Registry of Property prior to the filing of this Deed may be legally binding and could take precedence over this Deed; (c) The advisability for the Mortgagee to obtain an insurance policy insuring its interest over the Land; (d) The advisability of the parties to have 62 someone with the appropriate expertise conduct an investigation to determine the environmental conditions of the Land; (f) that recordation at the Registry of Property of the Mortgage constituted by this Deed is conditioned upon the recordation of the documents described in Paragraph FIRST; (g) That the full effectiveness of this Deed is subordinated to the presentation of documentary evidence confirming the authority of the persons appearing herein. I, the Notary, certify that this Deed was read by the persons appearing herein; that I advised them of their right to have witnesses present at the execution hereof, which right they waived; that I advised them of the legal effect of this Deed; that they acknowledged that they understood the contents of this Deed and such legal effect; and that thereupon they signed this Deed before me and affixed their initials to each and every page hereof. 63 EX-10 24 EXHIBIT 10.21 NUMBER TWO DEED OF MORTGAGE In the Municipality of San Juan, Commonwealth of Puerto Rico, on this seventh (7th) day of February, nineteen hundred ninety one (1991). BEFORE ME RAMON MORAN LOUBRIEL, Attorney at Law and Notary Public, with residence in Guaynabo, Puerto Rico, and office in the Eleventh Floor of the First Federal Savings Bank Building, Santurce, Puerto Rico. APPEAR AS PARTY OF THE FIRST PART: EL CONQUISTADOR PARTNERSHIP L.P., (hereinafter referred to as the "MORTGAGOR"), a limited partnership organized and existing under the laws of the State of Delaware and duly authorized to do business in the Commonwealth of Puerto Rico, with taxpayer identification Number Zero Six dash One Two Eight Eight One Four Five (06-1288145), represented herein by its general partners KUMAGAI CARIBBEAN, INC., a corporation organized and existing under the laws of Texas and duly authorized to do business in the Commonwealth of Puerto Rico, taxpayer identification Number Seventy Five dash Two Three Zero Three Six Six Five (75-02303665), in turn represented by its Vice President MISTER TORU FUJITA, Social Security Number Five Hundred Seventy Five dash Forty Nine dash One Thousand Twenty One (###-##-####), of legal age, married, executive and resident of San Juan, Puerto Rico, and by WKA EL CON ASSOCIATES, a general partnership organized and existing under the laws of the State of New York and duly authorized to do business in the Commonwealth of Puerto Rico, in turn represented hereby by its Authorized Signatory 2. MISTER HUGH ALANSON ANDREWS, of legal age, married, executive and resident of San Juan, Puerto Rico, Social Security Number Zero Seventy Five dash Thirty Two dash Eight Thousand Two Hundred Eighteen (S.S. # ###-##-####), whose authorities to appear in such capacities they will evidence whenever and wherever requested to do so. AS PARTY OF THE SECOND PART: THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO, (hereinafter referred to as the "MORTGAGEE"), taxpayer identification Number Sixty Six dash Zero Three Four Eight dash Five Seven Two (66-0348-572), and instrumentality of the Commonwealth of Puerto Rico, created by Law Number Seventeen (17) of September Twenty Three (23), Nineteen Hundred Forty Eight (1948) as amended, having its principal offices at the Minillas Governmental Center in Santurce, San Juan, Puerto Rico, represented herein by its Executive Vice President, MISTER GEORGE BARR WILSON, Social Security Number Five Hundred Forty Five dash Seventy Eight dash Nine Thousand Eighty Three (S.S. ###-##-####), who is of legal age, married, bank executive and resident of San Juan, Puerto Rico, who binds himself to show evidence that he has been authorized to appear on behalf and in representation of the instrumentality, whenever and wherever so required. I, the subscribing Notary, do hereby certify and give faith that I personally know the natural person(s) who appear(s) herein and I further certify and attest, from his(her) (their) statement(s), as to his(her) (their) age(s), civil status, profession(s) and residence(s). He(they) assure me of having, and in my judgment he(she) (they) do(does) has(have), the necessary legal capacity and authority to execute this instrument and therefore, he(she) (they) do hereby freely and voluntarily SET FORTH 3. FIRST: THE MORTGAGED PREMISES. Mortgagor represents and warrants being the owner of record, with valid, good, fee simple title ("pleno dominio") of the real estate described in paragraph TWENTY SECOND of this deed. SECOND: THE MORTGAGE NOTE. Simultaneously herewith Mortgagor has subscribed and issued before the Authorizing Notary a mortgage note (hereinafter referred to as the "NOTE" or "MORTGAGE NOTE"), which is copied literally in paragraph TWENTY FIRST hereof. THIRD: CREATION OF MORTGAGE. For the purpose of securing the payment, when and as due and payable in accordance with the terms thereof and hereof, of the principal of the Mortgage Note and the interest thereon, and also to secure payment of: (a) An additional amount equal to five (5) annuities of interest as provided in the Mortgage Note to cover accrued and unpaid interest on the Mortgage Note; (b) An additional amount equal to TWENTY PERCENT (20%) of the principal sum of the Note to cover any additional sums which may be paid or advanced by the Mortgagee and the interest that may accrue on such payments or advances, and all other indebtedness of the Mortgagor secured by the terms thereof; (c) An additional amount up to, but not greater than five percent (5%) of the principal amount of the Mortgage Note to cover the Mortgagee's actual costs and expenses (including attorneys' fees and expenses) incurred by the Mortgagee in the event the Mortgagee shall have recourse to foreclosure or other judicial proceedings for the collection of the Mortgage Note. 4. (d) All other obligations of the Mortgagor to the Mortgagee herein or under any other agreement secured by the pledge of the Mortgage Note; the Mortgagor, by these presents, DOES HEREBY EXECUTE, CONSTITUTE, AND CREATE in favor of the Mortgagee, or the future owner, holder and/or bearer of the Mortgage Note, a voluntary mortgage lien on the real estate described in paragraph TWENTY SECOND hereof and which mortgage lien shall extend to the following property (hereinafter referred to collectively as the "MORTGAGED PREMISES"): (one) All right, title, and interest of the Mortgagor (including, without limitation, its fee simple pleno dominio estate) in and to the real estate described in paragraph TWENTY SECOND hereof and all other buildings and improvements of every kind and description now or hereafter erected or placed on said real estate and all materials intended for construction, reconstruction, alteration and repairs of such real estate, buildings or improvements now or hereafter erected thereon, all of which materials shall be deemed to be included within the Mortgaged Premises immediately upon the delivery thereof to the Mortgaged Premises, and all other property immovable either by nature or destination now owned or hereafter located on said real estate or in any of such other buildings or improvements used either for its adornment or for purposes of comfort, or for the service of some industries or commerce, operated, conducted or exploited by Mortgagor on the Mortgaged Premises, even though the aforesaid shall have been attached to the same after constitution of this Mortgage; (two) All right, title, and interest of Mortgagor, including any after-acquired title or reversion, in and to the beds of the ways, streets, avenues and alleys adjoining said real estate; 5. (three) All of the right, title and interest of the Mortgagor, in and to, all and singular, the tenements, hereditaments, easements, appurtenances, passages, waters, water rights, riparian rights, all participations however evidenced in such rights, and other rights, liberties, and privileges thereof or in any other claim hereafter appertaining, including any other claim at law or in equity as well as any after-acquired title, franchise or license and reversion and reversions and remainder and remainders thereof. (four) All rents, issues, proceeds and profits accruing and to accrue from the Mortgaged Premises; (five) All fixtures and articles of movable property now or hereafter owned by the Mortgagor and attached to or contained in or used in connection with the said real estate, including, but not limited to all partitions, furniture, furnishings, apparatus, machinery, motors, transformers, elevators, fittings, radiators, gas ranges, ice boxes, mechanical refrigerators, awnings, shades, screens, blinds, drapers, office equipment, work processors, computers, typewriters, telephone and communications equipment and installations, kitchen, barroom and restaurant equipment, plates, forks, knives, napkins, tablecloths, tables, glasses, chinaware, cups, cooking equipment and installations, laundry, ventilating, refrigerating, incinerating, electrical appliances, television sets, radios, beds, vanities, chairs, mirrors, pillows, curtains, blankets, sheets, towels, bathroom equipment, mattresses, box springs, sprinkler equipment, carpeting and other furnishings and all plumbing, heating, lighting, cooking, laundry, ventilating, refrigerating, incinerating, air conditioning and sprinkler equipment and fixtures and appurtenances thereto; and all renewals or replacements thereof or articles in substitution therefor, whether or not the same are or shall be attached to said buildings 6. or structures in any manner, it being agreed that all the aforesaid property owned by the Mortgagor and placed by it on said real estate or on or in such buildings or improvements located thereon have been specially designed for use in connection with the operation of a hotel, and shall, so far as permitted by law, be deemed to be immovable property, security for the said indebtedness and covered by the mortgage hereby constituted, and as to the balance of the property aforesaid, this deed shall be deemed to be as well a security interest in said property, securing the said indebtedness, for the benefit of the Mortgagee; (six) All insurance proceeds allocable to the Mortgagor in the event of any damage or destruction of the Mortgaged Premises (business interruption insurance to be excluded); and (seven) All awards and other payments allocable to Mortgagor in respect of a taking of all or any part of the Mortgaged Premises, or any leasehold or other interest therein, or right accruing thereto, as the result of or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Mortgaged Premises or any part thereof. The Mortgagor hereby warrants and agrees that all of the property comprising the Mortgaged Premises, taken together, constitutes and will constitute an integrated business unit. FOURTH: RECORDING. The Mortgagor will at all times cause this deed and the mortgage lien hereby constituted and any supplement hereto or thereto to be recorded, registered, and filed in the property Registry or Registries of Property and otherwise filed in such manner and in such other place as may be required in order to establish, create, protect and preserve the lien hereof as a mortgage lien encumbering the Mortgaged Premises, subject to no liens, 7. charges, encumbrances, encroachments, reservations, restrictions, defects or claims of any kind, with the exception of any specific liens or easements described in paragraph TWENTY SECOND, and comply with all statutes and regulations relating thereto. The parties state that since the Mortgage Note collaterally secures a loan to promote and develop the economy, the original of this deed and its certified copy shall be exempt from canceling internal revenue stamps, as otherwise required by law and also exempt from the payment of the recording rights thereof in the Registry of the Property. The Mortgagee will reimburse the authorizing notary any internal revenue stamps that it may be required to cancel in the original and/or copy of this deed. The Mortgagor will execute, protocolize, deliver and record all such other instruments and take all such other action as the Mortgagee from time to time may reasonably request for the purpose of further assuring to the Mortgagee the properties and rights now or hereafter subjected to the lien of the mortgage lien hereby constituted or intended so to be. In the event that any Registrar of Property to whom a certified copy of this deed shall be presented for recordation shall reject the same for any reason or shall record this deed against the Mortgage Premises, junior to any other, lien or encumbrance other than those specifically described in paragraph TWENTY SECOND hereof, then upon such rejection becoming final and beyond appeal, the debt evidenced by the Mortgage Note shall become totally due and the Mortgagee may proceed to its collection judicially. FIFTH: AGREED VALUE. In compliance with the pertinent and applicable provisions of the Mortgage Law of Puerto Rico, as amended, and for the purpose of foreclosure of the Mortgage, and for no other purpose, the Mortgagor hereby declares and agrees with the Mortgagee that the value of the 8. Mortgaged Premises is appraised at the sum stated under the title "FORECLOSURE VALUATION" of paragraph TWENTY THIRD hereof and the Mortgagor waives any new appraisal. SIXTH: ADDITIONAL COVENANTS. The Mortgagor further covenants and agrees with the Mortgagee as follows: A. The Mortgagor will pay promptly the principal of and interest on, and all other obligations set forth in the Mortgage Note, at the place, in the currency, at the times and in the manner herein and in the Mortgage Note provided. B. Mortgagor will pay as they become due all: Taxes, assessments, water rates, sewer rentals and other governmental or municipal or public dues, charges, fines and other impositions and premiums on fire, rental value, and other insurance. Upon prior notice to Mortgagor, the Mortgagee shall have the right to make any such payment notwithstanding that at the time any such tax, assessment, charge or imposition is then being protested or contested by Mortgagor, unless, upon not less than thirty (30) days prior to the due date thereof, the Mortgagor shall have notified the Mortgagee, in writing, of such protest or contest, in which event, as the case may be, the Mortgagee shall make such payment under protest in the manner prescribed by law or shall withhold such payment; provided, however, that such contest shall during its pendency preclude enforcement of collection and the sale of the Mortgaged Premises in satisfaction of such tax, assessment, charge or imposition. SEVENTH: TAXES. The Mortgagor will keep the Mortgaged Premises free from statutory liens of every kind; will pay, before delinquency and before any penalty for 9. nonpayment attaches thereto, all ground rents, taxes, assessments, water rates, sewer rentals and other governmental or municipal or public dues, charges, fines or impositions which are or may be levied against the Mortgaged Premises or any part thereof, except when payment for all such items has theretofore been made under paragraph Sixth B; will deliver to the Mortgagee, at least ten (10) days before delinquency, receipted bills evidencing payment therefor; and will pay in full, under protest, and in the manner provided by statute any tax, assessment, rate, rental, charge, fine or imposition aforesaid which the Mortgagor may desire to contest. In the event of the passage, after the date of this deed, of any law effective in Puerto Rico, deducting from the value of land for the purposes of taxation of any lien thereon, or changing in any way the laws for the taxation of mortgages or debts secured by mortgage for Commonwealth or local purpose, or the manner of the collection of any such taxes so as to impose a tax upon or otherwise to affect the mortgage hereby constituted, or upon the rendition by any court of competent jurisdiction of a decision that any undertaking by the Mortgagor as in this paragraph provided is legally inoperative, then in any such event, the indebtedness secured hereby, at the option of the Mortgagee and upon thirty (30) days' prior written notice, shall become immediately due, payable, and collectible; provided, however, said option and right shall be unavailing and the Mortgage Note and said mortgage shall remain in effect in any event if, notwithstanding such law, the Mortgagor lawfully may pay all such taxes, assessments, and charges, including interest and penalties thereon, to or for the Mortgagee and does in fact pay same when so payable. 10. EIGHTH: INSURANCE. The Mortgagor will keep the improvements existing or hereafter erected on the Mortgaged Premises insured as may be required from time to time by the Mortgagee against loss or damage by, or abatement of rental income resulting from fire and such other hazards, casualties, and contingencies in such amounts and for such periods as reasonably may be required by the Mortgagee, and will pay promptly when due all premiums of such insurance. All such insurance shall be carried in companies approved by the Mortgagee and the policies and renewals thereof shall be deposited with and held by the Mortgagee and have attached thereto the standard noncontributing mortgage clause (in favor of and entitling the Mortgagee to collect any and all proceeds payable under all such insurance) as well as the standard waiver of subrogation endorsement, all to be in form acceptable to the Mortgagee. The insurance proceeds shall be applied in the manner provided in the Loan Agreement between Mortgagor and Mortgagee dated on the same date of this Deed of Mortgage (the "Loan Agreement"). The Mortgagor shall not carry separate insurance, concurrent in kind or form and contributing, in the event of loss, with any insurance required hereunder. In the event of a change in ownership or of occupancy of the Mortgaged Premises, immediate notice thereof by mail shall be delivered to all insurers and in the event of loss, the Mortgagor will give immediate written notice to the Mortgagee. In the event of foreclosure of the mortgage hereby constituted, or other transfer of title to the Mortgaged Premises or any portion thereof in extinguishment of the indebtedness secured hereby, all right, title, and interest of the Mortgagor in any to any insurance policies then in force shall pass to the purchaser or grantee. 11. The Mortgagor will also carry and maintain such liability and indemnity insurance as may be required from time to time by the Mortgagee in forms, amounts and with companies satisfactory to the Mortgagee. NINTH: MAINTENANCE OF MORTGAGED PREMISES. The Mortgagor will not alter, remove or demolish any building or other improvement now existing or hereafter erected on the Mortgaged Premises or sever, remove, sell or mortgage any fixture or appliance on, in or about said buildings or improvements or any other property included in the Mortgaged Premises without the consent of the Mortgagee other than in the ordinary course of business; and in the event of the demolition or destruction in whole or in part of any of the fixtures or articles of movable property covered by the mortgage hereby constituted, the same shall be replaced promptly by similar fixtures and articles of movable property at least equal in quality and condition to those replaced, free from any security interest in or encumbrance thereon or reservation of title thereto; will not permit, commit or suffer any waste, impairment or deterioration of the Mortgaged Premises or any part thereof; will keep and maintain the Mortgaged Premises and every part thereof, including the buildings, fixtures, machinery and appurtenances and adjoining sidewalks, parking areas, roadways and means of ingress and egress in reasonably good repair and conditions; will effect such repairs as the Mortgagee may reasonably require and make all needful and proper replacements so that said buildings, fixtures, machinery, appurtenances, sidewalks, parking areas, roadways and means of ingress and egress will at all time be in good condition, fit and proper for the respective purposes for which they were originally erected or installed; will comply with all statutes, orders, requirements or decrees relating to the Mortgaged Premises by any 12. Commonwealth, municipal or other governmental authority; will observe and comply with all conditions and requirements necessary to preserve and extend any and all rights, licenses, permits (including, but not limited to, zoning variances, special exceptions and non-conforming uses), privileges, franchises, and concessions which are applicable to the Mortgaged Premises or which have been granted to or contracted for by the Mortgagor in connection with any existing or presently contemplated use of the Mortgaged Premises; and will permit the Mortgagee or its agents, at all reasonable times to enter into and inspect the Mortgaged Premises. The Mortgagee shall have the right at any time provided that there is reasonable cause to suspect that the proper maintenance of the Mortgaged Premises has not been undertaken, to engage an independent realtor to survey the adequacy of the maintenance of the Mortgaged Premises, and to require the Mortgagor, by notice in writing, to make such repairs and replacements thereof as such realtor shall determine to be necessary in order to protect and preserve the rentability and usability of the Mortgaged Premises, it being understood that the Mortgagor shall reimburse the Mortgagee for the cost of such survey unless the same determines such maintenance to be reasonably adequate, in which case the cost thereof shall be at the expense of the Mortgagee. TENTH: SUBSEQUENT LIENS. The Mortgagor will not voluntarily create or permit to be created or filed against the Mortgaged Premises, or any part thereof, any mortgage lien or other lien or liens inferior or superior to the lien of the mortgage hereby constituted, and will keep and maintain the Mortgaged Premises free from the claim of any persons supplying labor or materials for the construction of any buildings or other improvements on the Mortgaged Premises, notwithstanding by whom such labor or materials may have 13. been contracted, except for a third mortgage lien to be constituted as security for advances to be made by the Partners of Mortgagor, or except for purchase money mortgages on personal property subsequently acquired by Borrower not for the purposes of substituting or replacing previously existing personal property and to be used in the Mortgaged Premises, if such personal property, due to its nature does not become real property by having been used at or incorporated to the Mortgaged Premises and as may be provided under the Loan Agreement. ELEVENTH: PLEDGE: In the event that the Mortgage Note is assigned or pledged or otherwise encumbered as collateral security for the payment of any other note or debt of the Mortgagor or of any other person, the Mortgagor agrees that the Mortgagee shall have and may exercise all rights, remedies, powers and privileges provided herein or now or hereafter existing at law, in equity, by statute, or otherwise, in favor of Mortgagee, including, but not limited to that of foreclosing this mortgage without first foreclosing the pledge or other lien so constituted upon the Mortgage Note, to the same extent and with the same force and effect as if the Mortgage Note had been assigned or transferred directly to Mortgagee rather than assigned or pledged as collateral security, provided that nothing contained in this paragraph ELEVENTH shall relieve Mortgagor from the obligation to comply with the terms of the pledge agreement or other instrument under which the Mortgage Note is assigned or pledged. TWELFTH: INDEMNITY. The Mortgagor will hold harmless and indemnify the Mortgagee from and against all costs and expenses, including reasonable attorneys' fees and costs of a title search, continuation of abstract and preparation of survey, incurred by reason of any action, suit, proceeding, hearing, motion or 14. application before any court of administrative body (excepting an action to foreclose or to collect the debt secured hereby), in and to which the Mortgagee may be or become a party by reason hereof, including but not limited to condemnation, bankruptcy, probate and administration proceedings, as well as any other of the foregoing wherein proof of claim is by law required to be filed or in which it may be necessary to defend or uphold the terms and the lien created by the mortgage hereby constituted. THIRTEENTH: CONDEMNATION. The Mortgagor hereby assigns to the Mortgagee all rights of the Mortgagor to any awards or other compensation heretofore or hereafter to be made to the present and all subsequent owners of the Mortgaged Premises for any taking by eminent domain, either permanent or temporary, of all or any part of the Mortgaged Premises or any easement or appurtenance thereof, including severance and consequential damage and change in grade of streets, and hereby irrevocably authorizes and empowers the Mortgagee, in the name of the Mortgagor or otherwise, upon notice to Mortgagor and failure of the Mortgagor to so do, to prosecute what would be the Mortgagor's claim for any such awards or compensation, to collect and receive the proceeds of any such claim, to give proper receipts and acquittance therefor and, after deducting expenses of collection, to apply the net proceeds in accordance with the terms of the Loan Agreement. The Mortgagor will give the Mortgagee immediate notice of the actual or threatened commencement of any such proceedings under eminent domain and will deliver to the Mortgagee copies of any and all papers served in connection with such proceedings. The Mortgagor further covenants and agrees to make, execute, and deliver to the Mortgagee, at any time or times upon request, any and all further 15. assignments and/or instruments deemed necessary by the Mortgagee for the purpose of validly and sufficiently assigning all awards and other compensation heretofore and hereafter to be made to the Mortgagor (including the assignment of any award from the United States government at any time after the allowance of the claim therefor, the ascertainment of the amount thereof and the issuance of the warrant for payment thereof) for any taking, either permanent or temporary, under any such proceeding. The proceeds of any condemnation award shall be applied as provided for under the Loan Agreement. FOURTEENTH: MORTGAGOR'S CERTIFICATE. The Mortgagor will, upon ten (10) business days' prior written request by the Mortgagee, but not more often that twice in any calendar year furnish the Mortgagee a written statement duly acknowledged of the amount due upon the mortgage hereby constituted and whether any offset or defenses exist against the mortgage debt. FIFTEENTH: BOOKS AND RECORDS. The Mortgagor will keep and maintain full and correct books and records showing in detail the earnings and expenses of the Mortgaged Premises and will permit the Mortgagee or its representative to examine such books and records and all supporting vouchers and data at any time and from time to time on request at its offices, hereinbefore identified, or at such other location as may be mutually agreed upon and following the expiration of each fiscal year the Mortgagor will furnish to the Mortgagee a statement showing in detail all such earnings and expenses since the last such statement, prepared by an independent certified public accountant acceptable to the Mortgagee in accordance with generally accepted accounting principles, including also, if so requested, statements from all tenants of the Mortgaged Premises showing all sales made therein, 16. together also with a current rent roll of the Mortgaged Premises showing with respect to each tenancy: the name of the tenant, the space occupied, the date and term of such lease, the amount of annual rental and additional rental and all renewal and termination options; and in the event that the Mortgagor shall refuse or fail to furnish any statement as aforesaid, or in the event such statement shall be inaccurate or false, or in the event of the failure of the Mortgagor or any subsequent owner to permit the Mortgagee or its representative to inspect the Mortgaged Premises or the said books and records on request, the Mortgagee may consider such acts of the Mortgagor as a default hereunder and proceed in accordance with the rights and remedies afforded it at law and under the provisions of this deed. SIXTEENTH: ADVANCES AND EXPENSES. Upon the occurrence of an Event of Default by the Mortgagor, the Mortgagee may, at its option upon prior written notice to Mortgagor and whether electing to declare the whole indebtedness due and payable or not, perform the same without waiver of any other remedy, and any amount paid or advanced by the Mortgagee in connection therewith, and any other costs, charges, and expenses incurred by the Mortgagee in the protection of the Mortgaged Premises or the maintenance of the lien of the mortgage hereby constituted are hereby secured by the lien of said mortgage up to an amount equal to TWENTY PERCENT (20%) of the principal sum of the Mortgage Note, shall be repayable by the Mortgagor on demand, with interest at the rate set forth in the Mortgage Note and shall constitute a lien upon the Mortgaged Premises senior to any other lien that may arise or may be granted subsequent to the lien constituted under this deed. The Mortgagee, in making any payment herein and hereby authorized, in the place and stead of the Mortgagor, relating to taxes, 17. assessments, water rates, sewer rentals and other governmental or municipal charges, fines, impositions or liens asserted against the Mortgaged Premises may do so according to any bill, statement or estimate procured from the appropriate public office without inquiry into the accuracy of the bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof; or relating to any apparent or threatened adverse title, lien, statement of lien, encumbrance, claim or charge and shall be the sole judge of the legality or validity of same, or otherwise relating to any other purpose herein and hereby authorized but not enumerated in this paragraph, may do so whenever, in its judgment and discretion, such advance or advances shall seem necessary or desirable to protect the full security intended to be created by this deed. Mortgagee will within a reasonable time after making such payment or advance, give notice to the Mortgagor, but failure to do so shall in any manner affect the guarantee herein provided for such payments or advances. SEVENTEENTH: DEFAULTS, RIGHTS, AND REMEDIES. Upon default in the payment of any installment of principal and/or interest when due under the Mortgage Note or in the payment, when due, of any other obligation set forth in the Mortgage Note, or in any of the payments required to be made under this deed, or upon default in the performance or observance of any of the other terms, covenants, conditions or warranties herein contained, or under any other written agreement with the Mortgagee, or should any proceedings under the Bankruptcy Law of the United States or any similar law be brought by or against the Mortgagor or should a receiver be appointed for any properties of the Mortgagor by any court in a proceeding wherein the Mortgagor is alleged to be insolvent or unable to pay its debts as they mature, then in any such 18. event, at the option of the Mortgagee, the principal of and all other sums secured by the mortgage hereby constituted shall, without notice, become immediately due, demandable, and payable as fully as if it had been stipulated that all such sums would be due on that date and the Mortgagee, with or without entry, personally or by attorney, at its option, may proceed to protect and enforce its rights hereunder by suit or suits in equity or action or actions by law, whether for specific performance of any covenant or agreement contained herein or in aid of the execution of any power herein granted, or for the foreclosure of the mortgage hereby constituted and the sale of the Mortgaged Premises or for the enforcement of any other appropriate legal or equitable remedy as the Mortgagee shall deem most effectual to protect and enforce any of its rights or duties hereunder. Upon any such default by the Mortgagor and following the acceleration of maturity as aforesaid a tender of payment of the amount necessary to satisfy the entire indebtedness secured hereby made at any time prior to foreclosure sale (including sale under power of sale hereunder), by the Mortgagor, its successors or assigns, or by anyone on behalf of the Mortgagor, its successors or assigns, shall constitute an evasion of the payment terms hereunder and shall be deemed to be a voluntary prepayment hereunder, and any such payment, to the extent permitted by law, will therefore include the exit fee, if any required under the prepayment privilege contained in the Mortgage Note, or the Loan Agreement. In connection with any judicial proceedings initiated by the Mortgagee under the Mortgage Note or this deed, the Mortgagee may petition the court having jurisdiction in the premises to appoint a receiver, and said court shall appoint said receiver for the Mortgaged Premises and 19. of all the rents, issues, income, profits and yields of any nature derived from the Mortgaged Premises, which receiver shall have the broadest powers and faculties usually granted to a receiver by the court. Such appointment shall be made by the court as a matter of absolute right granted to the Mortgagee, without taking into consideration the value of the Mortgaged Premises or the solvency or insolvency of the Mortgagor or defendants, and regardless of whether the Mortgagee has an adequate remedy at law. All of said rents, income issues, profits and yield shall be employed by the receiver in conformity with the terms of the mortgage hereby constituted and the rulings of said court. The remedies provided for herein shall be cumulative and not exclusive. The failure of the Mortgagee to exercise the option for acceleration of maturity and/or foreclosure following any default as aforesaid or to exercise any other option granted to the Mortgagee in any one or more instances and the acceptance by the Mortgagee of partial payments hereunder shall not constitute a waiver of any such default nor extend or affect the grace period, if any, but such option shall remain continuously in force. Acceleration of maturity, once claimed hereunder by the Mortgagee, may, at the option of the Mortgagee, be rescinded by written acknowledgment to that effect by the Mortgagee, but the tender and acceptance of partial payments alone shall not in any way affect or rescind such acceleration of maturity, nor extend or affect the grace period, if any. EIGHTEENTH: ASSIGNMENT. As further security for the payment of the indebtedness hereby secured, the Mortgagor hereby irrevocably assigns, transfers, and sets over to the 20. Mortgagee all of the Mortgagor's right, title, and interest in and to all leases and/or subleases (hereinafter referred to collectively as "leases") affecting the Mortgaged Premises to which the Mortgagor is or hereafter shall be a party, together with any and all further leases upon all or any part of the Mortgaged Premises and together with all of the rents, income, receipts, revenues, issues and profits from or due or arising out of the Mortgaged Premises, it being understood that the Mortgagor will from time to time, promptly upon request by Mortgagee, execute and deliver to the Mortgagee a specific, present and irrevocable assignment satisfactory in substance and form to the Mortgagee, of all of the Mortgagor's right, title, and interest in, to, and under each lease affecting the Mortgaged Premises, it being understood and agreed that every such lease shall be subordinate to the lien of the mortgage hereby constituted. The Mortgagor will promptly give the Mortgagee notice in the event that the tenant under any such lease of the Mortgaged Premises shall institute any judicial or administrative proceeding under the Reasonable Rents Act of Puerto Rico or any similar statute at the time in effect for the reduction of the rent payable by such tenant, it being understood that the Mortgagee shall have the right to defend such proceeding in the name and on behalf of the Mortgagor. The Mortgagor will not sell, assign, transfer, convey or encumber the Mortgaged Premises except for Permitted Encumbrances, or upon assumption by the purchaser or transferee, in form satisfactory to the Mortgagee (for so long as title remains in said purchaser or transferee) of all of the obligations of the Mortgagor as landlord under all leases at the time affecting the Mortgaged Premises. The Mortgagor hereby further covenants and agrees that it will not, except in the ordinary course of business without prior written consent of the Mortgagee, which consent shall not be unreasonable withheld: 21. ONE: Except in the ordinary course of business, receive or collect any rents from any present or future tenant under any lease of the Mortgaged Premises or any part thereof for a period of more than one month in advance (whether in cash or by promissory note), or pledge, transfer, mortgage or otherwise encumber or assign future payments of said rents; TWO: Waive, excuse, condone, discount, set off, compromise, or in manner release or discharge any such tenant thereunder, of and from any obligations, covenants, conditions and agreements by said tenant to be kept, observed, and performed, including the obligation to apply the rents thereunder, in the manner and at the place and time specified therein; THREE: Cancel, terminate or consent to any surrender of any such lease, or commence an action of ejectment or any summary proceedings for dispossession of the tenant under any such lease, or exercise any right or recapture provided in any such lease, or modify, or in any way alter the terms thereof; FOUR: Other than in the ordinary course of business, lease any part of the Mortgaged Premises, or renew or extend the term of any lease of the Mortgaged Premises unless an option therefor was originally so reserved by the tenant under such lease and for a fixed and definite rental; FIVE: Consent to any modification of the express purposes for which the Mortgaged Premises or any part thereof may be used, or to any assignment or subletting of any such lease, without in each such instance enumerated in this paragraph, the prior written consent of the Mortgagee. NINETEENTH: RELEASES. The Mortgagee may, without notice and without regard to the consideration, if any, paid therefor, and notwithstanding the existence at that time of any inferior liens thereon, release any part of the security 22. described herein or by any person liable for any indebtedness secured hereby, without in any way affecting the priority of the lien of the mortgage hereby constituted, to the full extent of the indebtedness remaining unpaid hereunder, upon any part of the security not expressly released, and may agree with any party obligated on said indebtedness or having any interest in the security described herein to extend the time for payment of any part or all of the indebtedness secured hereby. Such agreement shall not in any way release or impair the lien of said mortgage, but shall extend such lien as against the title of all parties having any interest in said security which interest is subject to such lien. In the event the Mortgagee (i) releases, as aforesaid, any part of the security described herein or any person liable for any indebtedness secured hereby; or (ii) grants an extension of time for any payments of the indebtedness secured hereby; or (iii) takes other or additional security for the payment thereof; or (iv) waives or fails to exercise any right granted in this deed or in the Note, said act or omission shall not release the Mortgagor or any maker, endorser or surety of the mortgage hereby constituted or of the Note or under any covenant of this deed or of the Note, nor preclude the Mortgagee from exercising any right, power or privilege herein granted or intended to be granted in the event of any other default then made or any subsequent default. TWENTIETH: MISCELLANEOUS. Mortgagor will not exercise any right which he might have to cancel the record of the Mortgage by reason of lapse of time counted from the date of the constitution of the Mortgage either under the applicable provisions of the Mortgage Law or otherwise and further agrees, whenever requested by the Mortgagee, to execute and file in the appropriate Registry, at Mortgagor's cost and expense, any and all 23. supplemental instruments which may be necessary or convenient for the preservation of the lien of the mortgage until full payment of the Mortgage Note or debt so secured by the lien upon the Mortgaged Premises. Without limiting the generality of the foregoing, Mortgagor agrees that: (a) Unless the Mortgagee shall consent in writing to the cancellation of the Mortgage at an earlier date, the Mortgage shall be conclusively presumed to subsist until full payment to the Mortgagee of all amounts lent and secured hereunder, and the Mortgagor does hereby waive any right which he might otherwise have under the Mortgage Law of Puerto Rico to apply for an earlier cancellation of the record of the Mortgage. (b) The Mortgagor will give immediate notice by mail to the Mortgagee of any conveyance, transfer or change of ownership or of occupancy of the Mortgaged Premises or any part thereof. (c) Nothing herein contained nor any transaction related thereto shall be construed or shall operate, either presently or prospectively, to require the Mortgagor to make any payment or do any act contrary to law, but if any clause and provision herein contained shall otherwise so operate to invalidate the mortgage hereby constituted, in whole or in part, then such clause and provision only shall be held for naught as though not herein contained and the remainder of this deed shall remain operative and in full force and effect. (d) The Mortgagor will, within ten (10) days after written request by the Mortgagee, execute, acknowledge, and deliver to the Mortgagee a chattel mortgage, security agreement or other similar security instrument, in form satisfactory to the Mortgagee, covering all property of any kind whatsoever owned by the Mortgagor, which, in the reasonable 24. opinion of the Mortgagee, is required for the operation of the Mortgaged premises and may not be covered by the lien of the mortgage hereby constituted under the laws of the Commonwealth of Puerto Rico, and will further execute, acknowledge, and deliver any financing statement, affidavit, continuation statement or certificate or other document requested by the Mortgagee in order to perfect, preserve, maintain, continue and extend the security interest under and the priority of such chattel mortgage or other security instrument, it being understood that the Mortgagor will pay to the Mortgagee on demand all costs and expenses incurred by the Mortgagee in connection with the preparation, execution, recording and filing of any such document. (e) Whenever in this deed or in the Mortgage Note or by law, notice or demand shall be required to be given by the Mortgagee to the Mortgagor, such notice or demand shall be sufficient if in writing and delivered to an officer or employee of the Mortgagor, or if mailed to the Mortgagor addressed to it at its last address actually furnished to the Mortgagee or at the Mortgaged Premises, or as otherwise provided under the Loan Agreement. (f) In the event of the sale or transfer by operation of law, or otherwise, of all or any part of the Mortgaged Premises, the Mortgagee is hereby authorized and empowered to deal with such vendee or transferee with reference to the Mortgaged Premises, or the debt secured hereby, or with reference to any of the terms or conditions hereof, as fully and to the same extent as it might with the Mortgagor, without in any way releasing or discharging the Mortgagor from its liability or undertakings hereunder. The term "Mortgagor" as used herein shall mean and include the Mortgagor appearing herein and any subsequent owner, in whole or in part, of the Mortgaged Premises. 25. (g) All of the covenants hereof shall run with the Mortgaged Premises. TWENTY FIRST: THE MORTGAGE NOTE. The Mortgage Note referred to in paragraph SECOND of this deed is literally transcribed herein as follows: "MORTGAGE NOTE FOR VALUE RECEIVED, the undersigned, El Conquistador Partnership L.P. hereby promises to pay to the order of THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO, on demand, at such place as may be designated in writing by said payee or holder the principal sum of TWENTY FIVE MILLION DOLLARS ($25,000,000.00) in lawful money of the United States of America together with interest in like lawful money on the decreasing balance of the aforesaid principal sum until paid and throughout its life or through any period of non-payment, default, and after maturity, also payable on demand, at an annual variable interest rate to be computed on the basis of a three hundred sixty (360) days year equivalent to the London Interbank Offered Rate (LIBOR) as described on page 3750 of the Telerate's System at 11:00 A.M. (London Time) for a three (3) month period, plus ninety (90) basis points (LIBOR plus 0.9%). The initial interest rate on this Mortgage Note shall be Seven point Five Twenty Five Percent (7.525%) per annum. Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the payee or holder hereof shall promptly refund such excess to the undersigned; provided, however, that, if lawful, any such excess shall be paid by the undersigned to the payee or holder hereof as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less that the maximum legal rate. In case of recourse to the courts by the payee or holder of this Mortgage Note, including but not limited to collection, foreclosure and Bankruptcy Code proceedings, in order to collect the whole or any portion 26. of the principal and interest due on this Mortgage Note, the undersigned agree(s) to pay up to a maximum of five percent (5%) of the principal amount of this Mortgage Note to cover actual court costs, disbursements and reasonable attorney's fees. The undersigned, and all other who may become liable for all or any part of this obligation jointly and severally waive demand, presentment, protest, notice of dishonor and non-payment, and any and all lack of diligence or delays in collection or enforcement hereof. The payment of this Mortgage Note is secured by a mortgage constituted pursuant to the terms of Deed Number 2, executed on the 7th day of February, 1991, before Notary Ramon Moran Loubriel, and the payee or bearer hereof is entitled to the benefit and security of all of the provisions and conditions set forth in said Deed of Mortgage. No reference herein to the Deed of Mortgage shall alter or impair the obligation of the undersigned hereon, which is continuing, absolute and unconditional, nor shall such reference affect the negotiability hereof under the Negotiable Instruments Law of Puerto Rico. Nevertheless the obligations of the undersigned under this Mortgage Note shall be non-recourse, payable solely from the security constituted by the Mortgage securing payment of this Mortgage Note. IN WITNESS WHEREOF, the undersigned has caused this Mortgage Note to be executed at San Juan, Puerto Rico, this 7th day of February, 1991. (Signed): El Conquistador Partnership, L.P. By: Kumagai Caribbean, Inc. (Signed): Toru Fujita - Vice President By: WKA el Con Associates (Signed): Hugh Alanson Andrews-Authorized Signatory Affidavit Number: 4655 27. Subscribed and acknowledged to before by Mr. Toru Fujita and Hugh Alanson Andrews, both of legal age, married, business executives and residents of San Juan, Puerto Rico, this 7th day of February, 1991. (Signed): RAMON MORAN LOUBRIEL NOTARY PUBLIC". TWENTY SECOND: DESCRIPTION OF THE MORTGAGED PREMISES. The description of the Mortgaged Premises is as follows: "RUSTIC: Parcel of land located at the Cabezas Ward of the Municipality of Fajardo, Puerto Rico, with a survey area of TWO HUNDRED FIFTY SIX CUERDAS WITH ONE THOUSAND FOUR HUNDRED SEVENTY FOUR TEN THOUSANDTHS of another (256.1474) more or less, equivalent to TWO HUNDRED FIFTY ACRES WITH SEVEN THOUSAND ONE HUNDRED SEVENTY THREE TEN THOUSANDTHS of another (250.7173), as determined by a survey prepared by Engineer Manuel Ray based on various surveys prepared by surveyors Alex Hornedo Robles and David Lebron, and an area of record of two hundred sixty seven cuerdas with five thousand eight hundred and ninety ten thousandths of another (267.5890) more or less, bounded on the NORTH, by State Road Nine Hundred Eighty Seven (987), by a housing lot subdivision belonging to various owners, by land property of Justino Diaz Santini and his wife Jean Robertson, by land property of Las Croabas Development Corporation, by land comprising the Marina Lanais Condominium and by the Marina access road; on the SOUTH, by land formerly owned by Fajardo Development Corporation, currently Kumagai Caribbean, Inc., by land comprising the Marina Lanais Condominium, and by the Maritime Zone of the Atlantic Ocean; on the EAST, by land owned by Ramon Soto, by land property of Justino Diaz Santini and his wife Jean Robertson, by land comprising the Marina Lanais Condominium, and by the maritime Zone of the Atlantic Ocean; on the WEST, by land owned by Justino Diaz Santini, and his wife Jean Robertson, by housing lot subdivision, property of various owners, by land owed by Kumagai Caribbean, Inc., formerly Fajardo Development Corp. and by State Road Nine Hundred Eighty Seven (987). In accordance with the record, the aforedescribed property contains the following structures: 28. a) Structure know as the Clifftop Building, consisting of a four (4) story building, which contains approximately eight eight (88) hotel rooms and facilities. b) Administration Building consisting of a three (3) level concrete building which includes a casino area, kitchen facilities and meeting rooms. c) Structure known as Sea Wing Building, consisting of an irregular shaped five (5) story concrete building with approximately two hundred thirty (230) hotel rooms and facilities. d) Structure known as the Lanais Building consisting of spiral shaped four (4) level concrete building with swimming pool surrounded by two (2) structures forming a semicircle which contain one hundred (100) hotel rooms with facilities. e) Structure known as the Health SPA & GYM consisting of a three (3) level concrete building with a solarium on the uppermost level, and which has two (2) swimming pools. f) Structure known as Hotel Villas, comprising two (2) single level buildings formerly used as transient guest apartments and executive dwellings. g) Facilities known as Marina Sea Shore comprising a concrete structure, piers, docking facilities, fueling facilities, navigational aids, breakwater and other facilities for sea vessels, with an ocean opening towards the East. h) Sewer Treatment installations for the treatment and disposal of sanitary sewage. i) Structure originally containing the kitchen facilities of El Conquistador Hotel. j) Ocean Beach Pool, consisting of a salt-water artificial lagoon. 29. TITLE, LIENS, AND ENCUMBRANCES Mortgagor acquired the Mortgaged Premises by Deed number Six (6), Deed of Consolidation of Properties, of even date, before Notary Silvestre M. Miranda, pending presentment for recordation. Mortgagor represents that the above described Mortgaged Premises is free and clear, by its origin and by itself, of any and all liens and encumbrances, except that by its origin it is subject to easements in favor of the Puerto Rico Water and Sewer Authority, the Puerto Rico Electric Energy Company, Right of Way Easement and Special Maritime Zone Boundary easements in a width of said meters, except that such width is reduced to three meters along the inside boundary of the Marina. Under the terms of the Loan Agreement pursuant to which the Mortgage Note has been pledged to Mortgagee, Mortgagee has bound itself and any subsequent holders of the Mortgage Note and in such terms and conditions as specified in said Loan Agreement to: (i) Release from the lien represented by this mortgage and securing payment of the Mortgage Note a portion of the Mortgaged Premises not to exceed twenty (20) acres plus rights for required access for the development of condominium units as contemplated in the Loan Agreement; and (ii) Subordinate the lien constituted by this mortgage in favor of a first and prior mortgage constituted as per deed number One (1) of even date before Notary Public Leonor Aguilar Guerrero to guarantee mortgage notes in the principal amount of ONE HUNDRED TWENTY MILLION DOLLARS ($120,000,000.00), TWENTY MILLION DOLLARS ($20,000,000.00) AND SIX MILLIONS SIX HUNDRED TWELVE THOUSAND DOLLARS ($6,612,000.00). TWENTY THIRD: FORECLOSURE VALUATION. 30. The foreclosure valuation of the Mortgaged Premises is equal to the sum of the principal of the Mortgage Note the payment thereof secured by the lien of the Mortgage hereby constituted, which Mortgage Note is transcribed in paragraph TWENTY FIRST of this Deed. TWENTY FOURTH: LIMITATION OF LIABILITY. Notwithstanding anything to the contrary contained in this Mortgage, no recourse shall be had, whether by levy or execution or otherwise, for the payment of the principal of or interest on, or other amounts owed hereunder or under the Mortgage Note, or for any claim based on this Mortgage or in respect thereof, against any partner of the Mortgagor or any predecessor, successor or affiliate of any such partner or any of their assets (other than from the interest of such partner in the Mortgagor), or against any principal, partner, shareholder, officer, director, agent or employee of any such partner (other than from the interest of any such person in such partner), nor shall any such persons be personally liable for any such amount or claims, or liable for any deficiency judgment based thereon or with respect thereto, it being expressly understood that the sole remedies of the Mortgagee with respect to such amounts and claims shall be against the assets of the Mortgagor, including the Mortgaged Property, and that all such liability of the aforesaid persons, except as otherwise expressly provided herein or in the Loan Agreement, is expressly waived and released as a condition of and as consideration for the execution of the Mortgage; provided, however, that (A) nothing contained in this Mortgage (including, without limitation, the provisions of this paragraph TWENTY FOURTH shall constitute a waiver of any indebtedness of Mortgagor evidenced hereby or of any of the Mortgagor's other obligations under such other instruments executed in connection herewith or shall be taken to prevent recourse to and the enforcement against the Mortgagor, of all 31. the liabilities, obligations and undertakings contained in this Mortgage; (B) this paragraph TWENTY FOURTH shall not be applicable to a breach by any person of any independent obligation to the Mortgagee, including, but not limited to any other obligations of any person under any other guarantee or indemnity agreement executed or delivered in connection herewith or with any pledge agreement pursuant to which the Mortgage Note is pledged or assigned (including without imitation, the indemnities set forth in paragraph TWELFTH hereof) and (C) this paragraph TWENTY FOURTH shall not be applicable to the active party in the event of and to the extent of any claim against such party for (1) fraud by such party, (2) misappropriation of funds or other property by such party, or (3) damage to the Mortgaged Property or any part thereof intentionally inflicted in bad faith by such party. For the purposes of the foregoing, the term "shareholder" shall be deemed to include the shareholders of any corporation which is a shareholder of a corporation and the term "partner" shall be deemed to include the partners of any partnership which is a partner of a partnership. TWENTY FIFTH: ENVIRONMENTAL MATTERS. (a) Hazardous Substances. Except to the extent that failure to comply would not have a material adverse effect on the Mortgagor or the Mortgaged Premises and/or not result in or create a lien of any kind upon the Mortgaged Premises, the Mortgagor shall: (i) not store (except in compliance with all laws, ordinances, and regulations pertaining thereto), dispose of, release or allow the release of any hazardous substance, solid waste or oil, as defined in forty-two (42) United States Code ("USC") Sections nine six zero one (9601) et seq., forty-two (42) USC Sections six nine zero one (6901) et seq., fifteen (15) USC Sections two six zero one (2601 et seq., and the regulations 32. promulgated thereunder, and all applicable federal, state and local laws, rules and regulations, on the Mortgaged Premises; (ii) neither directly nor indirectly transport or arrange for the transport of any hazardous substance or oil (except in compliance with all laws, ordinances and regulations pertaining thereto); (iii) in the event of any change in the laws governing the assessment, release or removal of hazardous material, which change would lead a prudent lender to require additional testing to avail itself of any statutory insurance or limited liability, take all such action (including, without limitation, the conducting of engineering tests at the sole expense of the Mortgagor) to confirm that no hazardous substance or oil is or ever was stored, released or disposed of or on the Mortgaged Premises; and (iv) provide the Mortgagee with written notice: (aa) upon the Mortgagor obtaining knowledge of the release of any hazardous substance or oil at or from the Mortgaged Premises; (bb) upon the Mortgagor's receipt of any notice to such effect from any federal, state, or other governmental authority or making an assessment of any expense incurred in connection with the containment, removal or remediation of any hazardous substance or oil at or from the Mortgaged Premises, for which the Mortgagor may be liable or for which expense a lien may be imposed on the Mortgaged Premises. For purposes of this section, the terms "hazardous substance" and "release" shall have the meanings specified in the Comprehensive Environmental Response, Compensation and Liability Act of nineteen hundred eighty (1980), forty two (42) USC Sections nine six zero one (9601) et seq., ("CERCLA") and the terms "solid waste" and "disposal" (or "disposed") shall have the meanings specified in the Resource Conservation and Recovery act of nineteen hundred seventy six (1976), 33. forty-two (42) USC Sections six nine zero one (6901) et seq., ("RCRA") and regulations promulgated thereunder; provided, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date of such amendment and provided further, to the extent that the laws of the jurisdiction where the Mortgaged Premises is located establish a meaning for "hazardous substance", "release", "solid waste", or "disposal" which is broader than specified in either CERCLA or RCRA, such broader meaning shall apply. (b) Environmental Assessments. In addition to the Mortgagee's rights under Section (a)(iii), the Mortgagee may, at its election, if there is reasonable cause to suspect some environmental damage has occurred without regard to whether Mortgagor is in default hereunder or under the Mortgage Note, obtain one or more environmental assessments of the Mortgaged Premises prepared by a geohydrologist, and independent engineer or other qualified consultant or expert approved by the Mortgagee evaluating or confirming (i) whether any hazardous substances or other toxic substances are present in the soil or water at or adjacent to the Mortgaged Premises and (ii) whether the use and operation of the Mortgaged Premises comply with all applicable federal, state and local laws, rules and regulations (herein called ("Environmental Laws") relating to air quality, environmental control, release of oil, hazardous material, hazardous wastes and hazardous substances, and any and all other applicable environmental laws. Environmental assessments may include detailed visual inspections of the Mortgage Premises including, without limitation, any and all storage areas, and the taking of soil samples, surface water samples and ground water samples, as well as such other investigations or analyses as are necessary or appropriate for a complete 34. determination of the compliance of the Mortgaged Premises and the use and operation thereof with all applicable Environmental Laws. TWENTY SIXTH: RECORDATION IN THE ENGLISH LANGUAGE. Mortgagor and Mortgagee now state that this Deed has been drafted in the English language in satisfaction of their wishes and in compliance with their wishes and in compliance with their instructions and they further add that to prevent any translation mistake they have agreed to request that this Deed be recorded at the Registry of Property in the English language thus waiving by these presents any right that they may have to have the same translated to the Spanish language for recordation purposes. TWENTY SEVENTH: The provisions contained in paragraphs SEVENTH, EIGHTH, NINTH, TENTH, ELEVENTH, TWELFTH, FIFTEENTH, SEVENTEENTH AND TWENTY FIFTH, of this deed are subordinated to the provisions of the Loan Agreement or to any other agreement under which the Mortgage Note secured hereby is delivered in pledge or otherwise, and in the event of conflicts or inconsistencies the Loan Agreement provisions will govern. TWENTY EIGHTH: ACCEPTANCE BY MORTGAGEE. The Mortgage Note has been delivered in pledge to Mortgagee to secure payment to Mortgagee of credit facilities which have been granted by the Mortgagee to Mortgagor under a Loan Agreement executed on this same date in furtherance of Mortgagee's statutory duty and responsibility to aid an develop the economy of Puerto Rico, particularly its industrialization, thus complying with the public purpose of Mortgagee's creation of benefiting THE PEOPLE OF PUERTO RICO. Complying with the requirements of Article One Hundred Eighty Six (186) of the Mortgage 35. and Registry of Property Law of Puerto Rico of the year Nineteen Hundred Seventy Nine (1979), the Mortgagee states its acceptance to the mortgage lien constituted by these presents in its favor. ACCEPTANCE I, the Notary, made to the appearing party(ies) the necessary legal warnings concerning the execution of this deed and he(she)(they) was(were) fully advised by me thereon. I advised him(her)(them) as to his(her)(their) legal right to read the deed and to have witnesses present at the execution thereof, which he waived, and then I read this deed to him(her)(them). After having heard the contents of this deed, as stated in all preceding paragraphs, the appearing party(ies) fully ratified and confirmed the statements contained herein as the true and exact embodiment of his(her)(their) stipulations, terms, and conditions whereupon he(she)(they) signed this deed before me, the Notary, and initialed each and every page of this deed. I, the Notary, do hereby certify as to everything stated or contained in this instrument. Signed: Toru Fujita, Hugh Alanson Andrews and George Barr Wilson. Signed, Sealed, Marked and Flourished: RAMON MORAN LOUBRIEL. The corresponding Internal Revenue Stamps and that of Notarial Fee have been cancelled on the original. I, the Notary, CERTIFY that the foregoing is a true and exact copy of the original, which forms part of my Protocol for Public Instruments for the current year and which contains 39 pages. 36. IN WITNESS WHEREOF, and at the request of The Government Development Bank for Puerto Rico I issue this FIRST copy which I sign, seal, mark and flourish at San Juan, Puerto Rico, on the same date of its execution. I ATTEST. /s/ Ramon Moran Loubriel EX-10 25 EXHIBIT 10.22 NUMBER TWO LEASEHELD MORTGAGE In the City of San Juan, Commonwealth of Puerto Rico, this seventh (7th) day of February, nineteen hundred ninety-one (1991). BEFORE ME, LEONOR M. AGUILAR-GUERRERO, Notary Public in and for the Commonwealth of Puerto Rico, with residence in Guaynabo, Puerto Rico, and office on the Tenth Floor, Royal Bank Center, Two Hundred Fifty-Five (255) Ponce de Leon Avenue, Hato Rey, San Juan, Puerto Rico. APPEARS AS PARTY OF THE FIRST PART: EL CONQUISTADOR PARTNERSHIP L.P., a partnership organized and existing under the laws of Delaware, with a place of business at one hundred eighty-seven (187) East Isla Verde Road in the Municipality of Carolina, Puerto Rico, zero zero nine one three (00913), Taxpayer Identification Number 06-1288145 (hereinafter referred to as the "Mortgagor"), represented herein by its General Partners WKA EL CON ASSOCIATES, Taxpayer Identification Number 06-1288143, a partnership organized and existing under the laws of the state of New York, herein represent by its Authorized Signatory, HUGH ALANSON ANDREWS, Social Security Number ###-##-####, of legal age, married, business executive and resident of San Juan, Puerto Rico; and KUMAGAI CARIBBEAN, INC., Taxpayer Identification Number 75-2303665, a corporation organized and existing under the laws of the state of Texas, represented by its Vice President, TORU FUJITA UEDA; Social Security Number, of legal age, married, and resident of San Juan, Puerto Rico. AS PARTY OF THE SECOND PART: PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY, Taxpayer Identification Number 66-04-26994, with a place of business at Minillas Government Center, Avenida De Diego, Stop Twenty-Second (22), San Juan, Puerto Rico zero zero nine four zero (00940), (hereinafter referred to either as the "Mortgagee" or as the "Authority") a public corporation and a governmental instrumentality of the Commonwealth of Puerto Rico, represented by its Assistant Executive Director, Francisco Sierra Mendez, Social Security Number ###-##-####, of legal age, married, attorney-at-law and resident of Juncos, Puerto Rico. The above parties have agreed and bind themselves to show their authorities for this act whenever and wherever properly required. 2 I, the Notary do hereby certify that I personally know Mister Francisco Sierra Mendez and I have identified the other appearing parties by the means provided in Article Seventeen (c) of the Notarial Law of Puerto Rico, specifically by means of the following documents of identity which contain the signature and photograph of each of the appearing parties: To: Mister Hugh Alanson Andrews, United States of America Passport Number zero four one eight seven five five eight six (041875586). To: Mister Toru Fujita Ueda, Commonwealth of Puerto Rico Driver's License Number two one seven seven seven nine eight (2177798). STATE FIRST: The Mortgaged Property. The Mortgagor represents and warrants that: (A) It is the sole and valid tenant with a valid, good, insurable leasehold interest (the "Leasehold") in the real property (the "Leasehold Estate") and all presently existing buildings, structures and improvements thereon, which Leasehold Estate is described in the Spanish language as follows: "RUSTICA: Predio compuesto de 100 cuerdas, equivalentes a 39 hectareas, 30 areas y 4 centiareas, terreno quebrado y llano, destinado a pastos, situado en el islote denominado Palomino, en el Mar Caribe y frente al Puerto de Fajardo, al Este del mismo; colinda por sus cuatro puntos 3 cardinales con el mencionado Mar Caribe. Enclave una casa y un ranchon para peones y distintas cercas." (B) The Leasehold Estate is recorded at page thirty-five overleaf (35 vto.) of volume three hundred twenty-six (326) of Fajardo, Registry of Property of Puerto Rico Number Five Hundred Fifty (550). The Leasehold of the Mortgagor was constituted by Alberto Bachman Umpierre and Lillian Bachman Umpierre, as lessor, in favor of the Mortgagor, as lessee, for a term of thirty-two (32) years commencing on the first (1st) day of November, nineteen hundred and ninety (1990), subject to an option to renew on the same terms and conditions, for two additional consecutive five (5) year periods, as per Deed Number Twelve (12) of December fifteen (15), nineteen hundred and ninety (1990) before Notary Public Silvestre M. Miranda (the "Ground Lease"), which is pending recording at the Registry of Property, Fajardo Section. (C) Its leasehold interest in the Ground Lease is good and insurable, and is subject to no liens, charges, encumbrances, encroachments, reservations, restrictions, defects or claims of any kind, including taxes and assessments, easements or encumbrances, other than the Permitted Encumbrances. 4 The Leasehold and the Improvements (as hereinafter defined) and the Lease Rights (as hereinafter defined) are referred to herein collectively as the "Mortgaged Property". (a) The Improvements will consist of all buildings, structures and improvements on the Leasehold Estate that are constructed by or on behalf of or at the direction of Mortgagor after the date of the Ground Lease, and any appurtenances or additions thereto, as well as any accessions thereto in the future, including but not limited to the following: (i) all buildings or structures constructed thereon and all other buildings and improvements of every kind and description erected or placed on the Leasehold Estate and all materials intended for construction, reconstruction, alteration and repairs of such buildings, title to which materials reside in the Mortgagor, all of which materials shall be deemed to be included within the Mortgaged Property immediately upon the delivery thereof to the Mortgagor at the Leasehold Estate, and all other property immovable either by nature or destination now owned or hereafter acquired by the Mortgagor and now or hereafter located on said Leasehold Estate or in said buildings or any such other buildings or improvements used either for its adornment or for the purpose of comfort, or for the service of some industry operated on such 5 building or structure, even though the aforesaid shall have been attached to the same after the constitution of this Mortgage; and (ii) all fixtures and articles of movable property now or hereafter owned by the Mortgagor and attached to, contained in, located on or used in connection with the Leasehold Estate or in connection with any improvements thereto, including, but not limited to all of the Mortgagor's rights, title and interest in and to all furniture, furnishings, motors, transformers, fittings, radiators, gas ranges, ice boxes, mechanical refrigerators, awnings, shades, screens, blinds, drapes, office equipment, word processors, computers, typewriters, telephone and communications equipment and installations, elevators, conveyors, kitchen, bar-room and restaurant equipment, plates, forks, knives, spoons, silverware, napkins, tablecloths, tables, glasses, chinaware, cups, cooking equipment and installations, electrical appliances, television sets, radios, beds, vanities, chairs, mirrors, pillows, curtains, blankets, sheets, towels, bathroom equipment, mattresses, box springs, sprinkler equipment, carpeting, and other furnishings and all plumbing, heating, laundry, ventilating, refrigerating, incinerating, lighting, air conditioning and electrical equipment, compressors and related machinery, equipment and apparatus, and all fixtures and appurtenances thereto; and all renewals or replacements 6 thereof or articles in substitution therefor, whether or not the same are or shall be attached to said buildings or structures in any manner, it being understood and agreed that all the aforesaid property and any replacement or addition thereto owned by the Mortgagor and placed by it on the Leasehold Estate or on or in the improvements to be located thereon have been specially designated for use in connection with the operation of a destination resort hotel and casino and that the Mortgagor operates or will operate a destination resort hotel and casino doing business as El Conquistador Resort and Country Club in connection with which the same will be used, and, that for such purpose, the aforesaid property and any replacement or addition thereto shall be deemed to be immovable property, by nature or destination, affixation, incorporation, or appropriation to use, and shall be deemed necessary for and integral to the operation of the Mortgaged Property as a first-class destination resort hotel and casino. (b) In addition to the Leasehold and the Improvements, the Mortgaged Property shall also consist of all rights of the Mortgagor (the "Lease Rights") to receive payments of money under all concessions or leases of space existing or at any time hereafter made and any and all amendments, modifications, supplements, renewals and extensions thereof (all of such 7 concessions and leases being referred to individually as an "Occupancy Lease" and collectively as the "Occupancy Leases"), including, without limitation, all rents, additional rents, revenues, earnings, profits and income, payments incident to any assignment, sublease or surrender of any Occupancy Lease, claims for forfeited deposits and claims for damages which are due and unpaid with respect to any Occupancy Lease at the time payment of the secured loan is required. SECOND: The Mortgaged Note. Simultaneously herewith Mortgagor has subscribed before me a mortgage note (hereinafter the "Mortgage Note"), which is copied literally in paragraph FIFTEENTH hereof. The Mortgagor will pay, on demand, the principal of and interest on the Mortgage Note and all other sums due or to become due pursuant to the Mortgage Note, this Mortgage, or any pledge agreement pursuant to which the Mortgage Note is pledged or assigned. THIRD: Creation of Mortgage. In order to guarantee and secure: (i) the full and complete payment of the principal of and the interest on the Mortgage Note; (ii) the performance and observance of the terms therein and herein contained; 8 (iii) an additional credit in an amount equal to five (5) years of interest as provided in the Mortgage Note to cover accrued and unpaid interest on the Mortgage Note pursuant to the provisions of Article One Hundred Sixty-Six (166) of the Mortgage and Registry of Property Law of Puerto Rico (30 L.P.R.A. 2562) (hereinafter called the "interest credit"); (iv) an additional credit in an amount equal to fifteen percent (15%) of the principal amount of the Mortgage Note A to cover any amounts that may be paid by or advanced by the Mortgagee pursuant to Article Ninth (9th) hereof, together with interest thereon at the highest legal rate then prevailing (hereinafter called the "credit for additional advances"); (v) an additional credit in an amount up to but no greater than five percent (5%) of the principal amount of the Mortgage Note, to cover the actual costs and actual expenses (including attorneys' fees and disbursements), of the holder of the Mortgage Note, payable without necessity for approval by any court, in the even that such holder shall have recourse to the courts or to any other governmental agency in order to collect all or any part of the principal thereof or any interest thereon (by foreclosure or other proceedings or action) (hereinafter called the "credit for liquidated damages"); 9 (vi) an additional credit in an amount equal to fifteen percent (15%) of the principal amount of the Mortgage Note to cover any additional amounts that may be paid or advanced by the Mortgagee in connection with the condition of the improvements presently contemplated to be constructed on the Mortgaged Property, which improvements shall consist of approximately seven hundred fifty (75) guest rooms, approximately fifty thousand (50,000) square fee of meeting space (including prefunctionary space), six (6) restaurants, approximately thirteen thousand (13,000) square feet of retail space, an approximately ten thousand (10,000) square feet casino, a marina, approximately one hundred thousand (100,000) square feet of swimming pools and water features, an 18-hole golf course, an approximately forty thousand (40,000) square foot clubhouse and spa facility, eight (8) tennis courts, related amenities and facilities, and all related furniture, fixtures and equipment (hereinafter called the "credit for additional amounts"). Mortgagor hereby constitutes and creates a voluntary first mortgage in favor of the Mortgagee on the Mortgaged Property (references herein to Mortgagee shall be deemed to include the Authority and any future holder of the Mortgage Note either by endorsement or assignment and in the event the Mortgaged Note 10 is delivered in pledge to secure Mortgagor's obligations under a pledge agreement, the term Mortgagee shall also refer to the Pledgee(s) of the Mortgage Note under such pledge agreement). FOURTH: Additional Representation and Warranties. The Mortgagor represents, warrants and covenants to the Mortgagee as follows: (a) The Mortgagor, by its execution and delivery hereof, is mortgaging to the Mortgagee all of its right, title and interest in and to the Mortgaged Property. (b) The Mortgagor has full right, power and authority to mortgage the Mortgaged Property to the Mortgagee pursuant hereto; the Mortgagor knows of no adverse claim to the interest of the Mortgagor in or to the Mortgaged Property; no fire or casualty has affected the improvements on the Leasehold Estate within sixty (60) days prior to the date hereof; and the Mortgagor knows of no actual or proposed condemnation or eminent domain proceeding or settlement in lieu thereof that would affect any of its rights, title or interest in or to the Mortgaged Property. (c) The Mortgagor, at its sole cost and expense, will warrant and defend to the Mortgagee such title to the Mortgaged Property and the lien of the Mortgagee thereon and therein against all claims and demands and will maintain and preserve such lien 11 and will keep this Mortgage a valid and direct mortgage lien upon the Mortgaged Property, subject only to the Permitted Encumbrances and prior, at all times, to all Occupancy Leases. (d) The Mortgagor will pay, or cause to be paid, all charges for all public and private utility services at any time rendered to, or the payment of which is the obligation of, the Mortgagor in connection with the Mortgaged Property, or any part thereof, and will do all other things required for the maintenance and continuance of all such services. (e) It has taken all necessary and proper action, which has not been modified or revoked, to enter into this Mortgage and the execution and delivery of this Mortgage by the Persons who have signed this Mortgage on behalf of the Mortgagor have been duly qualified and are sufficient action to constitute this Mortgage as a valid, binding and enforceable obligation of the Mortgagor. FIFTH: The Ground Lease. (a) The Mortgagor represents, warrants and covenants to the Mortgagee as follows: (i) The Mortgagor will promptly pay when due and payable the rentals, additional rentals and other charges mentioned in and payable under the Ground Lease. 12 (ii) The Mortgagor will promptly perform and observe all of the terms, covenants and conditions required to be performed and observed by the Mortgagor under the Ground Lease, within the grace periods provided in the Ground Lease or such lesser grace periods as are provided in this Mortgage, and will do all things necessary to preserve and to keep unimpaired its rights under the Ground Lease. The Mortgagor will use its best efforts to obtain performance by the lessor of its obligations under the Ground Lease, to the end that the Mortgagor may enjoy all of the rights granted to it under the Ground Lease. (iii) The Mortgagor will promptly notify the Mortgagee of any default by the Mortgagor in the performance or observance of any of the terms, covenants or conditions on the part of the Mortgagor to be performed or observed under the Ground Lease. (iv) The Mortgagor will: (i) promptly notify the Mortgagee of the receipt by the Mortgagor of any notice from the lessor under the Ground Lease of default by the Mortgagor in the performance or observance of any of the terms, covenants or conditions on the part of the Mortgagor to be performed or observed under the Ground Lease; (ii) promptly notify the Mortgagee of the receipt by the Mortgagor of any notice from the 13 lessor under the Ground Lease to the Mortgagor of termination of the Ground Lease pursuant to the provision thereof; and (iii) promptly cause a copy of each such notice received by the Mortgagor from the lessor under the Ground Lease to be delivered to the Mortgagee. (v) The Mortgagor will promptly notify the Mortgagee of any request made by either party to the Ground Lease for arbitration proceedings pursuant to the Ground Lease and of the institution of any arbitration proceedings, and will promptly deliver to the Mortgagee a copy of the determination of the arbitrators in each such arbitration proceeding. (vi) The Mortgagor will not subordinate or consent to the subordination of the Ground Lease to any mortgage on the lessor's interest in the property demised by the Ground Lease. (vii) The Mortgagor will use best efforts within fifteen (15) days after demand from the Mortgagee, to obtain from the lessor under the Ground Lease and deliver to the Mortgagee a certificate that the Ground Lease is unmodified and in full force and effect and the date to which the rentals, additional rentals and other charges payable thereunder have been paid and stating whether to the lessor's knowledge the Mortgagor is in default in 14 the performance of any covenants, agreements or conditions contained in the Ground Lease and if so, specifying each such default. (viii) The Ground Lease is valid and in full force and effect in accordance with its terms and without modification and no default under the Ground Lease has occurred and is continuing. (ix) The execution and delivery of this Mortgage is permitted under the Ground Lease. (x) If the term of the Ground Lease is scheduled to expire prior to the payment in full of the indebtedness secured hereby and by any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned and the Mortgagor has the option to renew such term, the Mortgagor shall effectively exercise such option and deliver to the Mortgagee proof of such exercise, at least thirty (30) days before the expiration of the period during which such option may be exercised. The Mortgagor hereby irrevocably appoints the Mortgagee its attorney-in-fact, to exercise any such options within such thirty (30) day period if the Mortgagor has not theretofore exercised the same. (b) Spreader of Mortgage to Fee. So long as any of the indebtedness secured hereby or by any pledge agreement pursuant 15 to which the Mortgage Note has been pledged or assigned shall remain unpaid, (unless the Mortgagee shall otherwise consent), the Mortgagor covenants and agrees that, in case it shall become the owner in fee simple ("pleno dominio") of the Leasehold Estate, by purchase or otherwise, this Mortgage shall attach to and cover and be a lien upon the Estate so acquired. Mortgagor further agrees and consents to execute, acknowledge, deliver and record, at its sole cost and expense, all such instruments necessary to attach to this Mortgage the Estate so acquired. SIXTH: Maintenance of the Mortgaged Property. The Mortgagor will at all times maintain, preserve and keep, or cause to be maintained, preserved or kept, all and each part of the Leasehold Estate and the Improvements in good repair, working order and condition, such that the Mortgaged Property will be maintained and operated as part of a first-class destination resort. The Mortgagor will supply the Mortgaged Property, and keep the same or cause the same to be kept and supplied, with all necessary supplies and equipment and make all needful and proper repairs, renewals and replacements thereto, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen. All such repairs, renewals and replacements shall be at least equal in quality, value and class to the original 16 Improvements. Without limiting the generality of the foregoing, the Mortgagor covenants that it will not cause or permit to suffer damage, deterioration, loss or waste to the Mortgaged Property, other than that resulting from normal wear and tear. The Mortgagor will not alter, add to, remove or demolish any building, structure or property forming part of the Mortgaged Property without the prior written consent of the Mortgagee, except to the extent permitted in any pledge agreement pursuant to which the Mortgage Note is pledged or assigned. SEVENTH: Assignment of Leases and Rents. The Mortgagor hereby absolutely and irrevocably mortgages and assigns to the Mortgagee all rents, income and other sums due to the Mortgagor under each Occupancy Lease now existing or hereafter entered into, together with the right to collect and receive the same provided if and so long as no Event of Default (as hereinafter defined) shall have occurred and be continuing, the Mortgagor shall have the right to collect and receive such rents and other sums for its own uses and purposes. Upon the occurrence of an Event of Default, all such rents and other sums shall be collected and held by the Mortgagee to be applied as deed appropriate in the sole discretion of the Mortgagee to the obligations secured hereunder and in such other manner as is 17 permitted pursuant to the terms hereof and of any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned. The Mortgagee shall notify the Mortgagor of its exercise of its right to collect rent and other sums at the same time that it notifies any tenants thereof; provided, however, that failure on the part of the Mortgagee to give such notice to the Mortgagor shall not operate as a waiver of the right of the Mortgagee to collect and receive all rents, income and other sums due to the Mortgagor under each Occupancy Lease. The assignment of rents, income and other benefits contained herein shall constitute an absolute assignment, subject, however, to the conditional permission given herein to the Mortgagor to collect and use such rents, income and other benefits. The foregoing assignment shall be fully operative without any further action on the part of either party and the Mortgagee shall be entitled, at its option, upon the occurrence of an Event of Default hereunder, to all rents, income and other benefits from the Mortgaged Property, whether or not the Mortgagee takes possession of the Mortgaged Property. The Mortgagor hereby further grants to the Mortgagee and its agent the right, at the Mortgagee's option, upon the occurrence of an Event of Default, to (i) enter upon and take possession of the Mortgaged Property for the purpose of collecting said rents, income and other 18 benefits, (ii) dispossess by the usual summary proceedings any lessee defaulting in its obligations pursuant to its Occupancy Lease beyond any applicable grace and/or notice period, (iii) let the Mortgaged Property, or any part thereof, to the extent permitted by law, and (iv) apply such rents, income and other benefits, after payment of all necessary charges and expenses, on account of the indebtedness and other sums secured hereby or by any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned. Such assignment and grant shall continue in effect until the indebtedness and other sums secured by this Mortgage, and by any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned, are paid in full, the execution of this Mortgage constituting and evidencing the irrevocable consent of the Mortgagor to the entry upon and taking possession of the Mortgaged Property by the Mortgagee pursuant to such grant. Neither the exercise of any rights under this paragraph SEVENTH by the Mortgagee nor the application of any such rents, income or other benefits to the indebtedness and other sums secured hereby shall cure or waive any Default, Event of Default or notice of Default hereunder or invalidate any act done pursuant hereto or to any such notice, but shall be cumulative of all other rights and remedies. 19 EIGHTH: Insurance. As is provided in Article One Hundred Sixty (160) of the Mortgage and property Registry Act of Puerto Rico Act Number One Hundred Ninety-Eight (198) of August ten (10), nineteen hundred seventy-nine (1979), Thirty Laws of Puerto Rico Annotated Two Thousand Five Hundred Fifty-Six (30 L.P.R.A. 2556), this Mortgage shall be extensive to, and shall cover, all indemnities to which the Mortgagor may be entitled under any policy of insurance covering the Mortgaged Property or any part thereof, and the Mortgagee shall be entitled to receive directly from the insurance underwriter(s) all payments which become due under any such policy(ies) of insurance, unless otherwise provided in any pledge agreement under which the Mortgage Note is pledged or assigned. Such payments shall be applied in the manner provided in any pledge agreement or other instrument under which the Mortgage Note is pledged or assigned. NINTH: Additional Advances. The Mortgagee, without consent of or demand upon the Mortgagor and without waiving or releasing any obligation or Default or Event of Default, may (but shall be under no obligation to) at any time advance such funds as may in the Mortgagee's judgment be needed for the purpose of (i) paying real estate taxes assessed against the Mortgaged Property which the Mortgagor has failed to pay, (ii) maintaining insurance 20 coverage on the Mortgaged Property as required hereunder or otherwise as set forth in any pledge agreements pursuant to which any of the Mortgage Notes have been pledged or assigned, (iii) complying with any Legal Requirements relating to environmental matters with which the Mortgagor has failed to comply or (iv) paying any other expenses which the Mortgagee reasonably determines to be necessary to preserve the value of the Mortgaged Property, and the Mortgagor may, in such event, enter upon the Mortgaged Property for such purpose and take all action thereon that it considers necessary or appropriate, and may take such other and further action as it may consider necessary or appropriate for such purposes. All sums so advanced or paid by the Mortgagee and all costs and expenses (including, without limitation, attorneys' fees and expenses) so incurred, together with interest thereon at the rate provided for in the Mortgage Note from the date of payment or incurring, shall constitute additional indebtedness secured by this Mortgage and shall be paid by the Mortgagor to the Mortgagee on demand, regardless of the due date of the remainder of the indebtedness secured by this Mortgage. TENTH: Further Assurances; Additional Security. The Mortgagor, at its expense, will execute, acknowledge, deliver and record all such instruments and take all such action as the 21 Mortgagee from time to time may request better to assure the Mortgagee that the properties and rights hereby mortgaged and assigned or intended to have been mortgaged and assigned have so been. Without notice to or consent of the Mortgagor, and without impairment of the lien of and rights under this Mortgage, the Mortgagee may take from (but the Mortgagor shall not be obligated to furnish to) the Mortgagor or from any other Person or Persons (as hereinafter defined) additional security for the Mortgage Note or for the obligations of the Mortgagor secured by the assignment or pledge of the Mortgage Note; and neither the giving of this Mortgage nor the acceptance of any such additional security shall prevent the Mortgagee from resorting first to such additional security, or to the security created by this Mortgage, in either case without affecting the Mortgagee's lien and rights under this Mortgage. ELEVENTH: Foreclosure Valuation. In compliance with Article One Hundred Seventy-Nine (179) of the Mortgage and Property Registry Act of Puerto Rico [Act Number One Hundred Ninety-Eight (198) of August ten (10), nineteen hundred seventy-nine (1979) Thirty Laws of Puerto Rico Annotated Two Thousand Five Hundred Seventy-Five (30 L.P.R.A. 2575)], the Mortgagor hereby declares and agrees for the purpose of foreclosure that the 22 value of the Mortgaged Property is the amount of TWO MILLION THREE HUNDRED THOUSAND DOLLARS ($2,300,000). TWELFTH: Foreclosure. In the event that the Mortgage Note is assigned or pledged or otherwise encumbered by the Mortgagor as collateral security for the payment of any other note or debt of the Mortgagor or of any other Person, the Mortgagor agrees that: (a) The Mortgagee may foreclose this Mortgage and may exercise all other rights, remedies, powers and privileges provided herein or now or hereafter existing at law, in equity, by statute, or otherwise, without first foreclosing the pledge or other lien so constituted upon the Mortgage Note, to the same extent and with the same force and effect as if the Mortgage Note had been assigned or transferred directly to the Mortgagee rather than assigned or pledged as collateral security, provided that nothing contained in this paragraph TWELFTH shall relief the Mortgagee from the obligation to comply with the terms of any pledge agreement or other instrument under which the Mortgage Note is assigned or pledged. (b) The Mortgagor will not exercise any right which it might have to cancel the record of the Mortgage by reason of lapse of time counted from the date of the constitution of the Mortgage 23 either under the provisions of Article One Hundred Forty-Five (145) of the Mortgage and Property Registry Act of Puerto Rico [Act Number One Hundred Ninety-Eight (198) of August ten (10), nineteen hundred seventy-nine (1979), Thirty Laws of Puerto Rico Annotated Two Thousand Four Hundred Sixty-Nine (30 L.P.R.A. 2469) or otherwise and further agrees, whenever required by the Mortgagee, to execute and file in the appropriate Registry, at the Mortgagor's sole cost and expense, any and all supplemental instruments which may be necessary or convenient in the judgment of the Mortgagee for the preservation of the lien of this Mortgage until full payment of the note or debt so secured by the lien of the Mortgage Note and full payment of any obligations secured by any pledge of the Mortgage Note. Without limiting the generality of the foregoing, the Mortgagor agrees that, unless the Mortgagee shall consent in writing to the cancellation of the Mortgage at an earlier date, the Mortgage shall be conclusively presumed to subsist for a period of twenty-five (25) years from the date of its constitution or such lesser date as the Leasehold is terminated in accordance with the terms of the Ground Lease; and the Mortgagor does hereby waive any right which he might otherwise have under said Article One Hundred Forty-Five (145) of the Mortgage and 24 Property Registry Act to apply for an earlier cancellation of the record of the Mortgage. (c) The Mortgagee may, upon the occurrence of any Event of Default hereunder or under any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned, petition the court having jurisdiction over the Mortgaged Property to appoint a receiver for the Mortgaged Property, including all rents, issues and profits therefrom, and said receiver shall have the broadest powers and faculties permitted to be granted to a receiver by the court and his appointment shall be made by the court as a matter of absolute right granted to the Mortgagee without taking into consideration the value of the Mortgaged Property or the solvency of the Mortgagor or of any other party to the action, and the Mortgagor hereby consents to the appointment of such a receiver and agrees not to oppose the same, and waives any requirement for such a receiver to post a bond of any kind. THIRTEENTH: Definitions. As used in this Mortgage, the following terms shall have the following respective meanings: "Default" shall mean any event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. 25 "Event of Default" shall have the meaning ascribed thereto in paragraph EIGHTEENTH hereof. "Governmental Authority" shall mean any court, agency, authority, board (including, without limitation, any environmental protection, planning or zoning board), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States, the Commonwealth of Puerto Rico, or the Municipality of Fajardo, whether now or hereafter in existence, having jurisdiction over the Mortgagor or the Mortgaged Property. "Impositions" shall mean all real estate and other taxes, all assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof or while this Mortgage is in force), water, sewer, electricity, utility and other rents, rates and charges, excises, levies, license fees, permit fees, inspection fees and other authorization fees and other charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character (including all penalties or interest thereon), which at any time may be assessed, levied, confirmed or imposed on or in respect of or be a lien upon (a) the Mortgaged 26 Property or any part thereof or any rents, issues, income, profits or earnings therefrom or any estate, right or interest therein, or (b) any occupancy, use or possession of or sales from the Mortgaged Property or any part thereof, or (c) the Mortgage Note, this Mortgage, any interest herein or any other payments due from the Mortgagor under the terms of this Mortgage; excepting, however, the income taxes now or hereafter imposed by the United States under the Internal Revenue Code of nineteen hundred eighty-six (1986), as amended from time to time, and by the Commonwealth of Puerto Rico under the Income Tax Act of nineteen hundred fifty-four (1954) [Act Number Ninety-One (91), approved on June twenty-nine (29), nineteen hundred fifty-four (29), nineteen hundred fifty-four (1954)], as amended, or under any other Act of Congress or Act of the Legislature of Puerto Rico of the same nature, modifying, amending, or substituting the statutes above mentioned. "Legal Requirements" shall mean collectively (i) all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of any Governmental Authority having jurisdiction over the Mortgaged Property, the Mortgagor or any tenant of all or any of its commercial spaces, foreseen or 27 unforeseen, ordinary or extraordinary (including, without limitation, fire, health, handicapped access, sanitation, ecological, historic, zoning, environmental protection, wetlands, and building laws or regulations), which now or at any time hereafter may be applicable to the Mortgaged Property or any part thereof, or any of the streets, alleys, passageways, sidewalks, curbs, gutters, vaults or vault spaces adjoining the Mortgaged Property or any part thereof, or any use or condition of the Mortgaged Property or any part thereof, (ii) all material requirements of each permit, license, authorization and regulation relating to the Mortgaged Property, or any portion thereof, or to the ownership, leasing, use, occupancy, possession, operation or maintenance thereof and (iii) all requirements of the Puerto Rico Fire Department, the Factual Mutual System or the Industrial Risk Insurers or other similar body acting in and for the Commonwealth of Puerto Rico and all requirements of each insurance policy covering or applicable to all or any portion of the Leasehold Estate, or the use thereof, which are maintained or required to be maintained by the Mortgagor or of which the Mortgagor has notice, and all requirements of the issuer of each such policy, including any which may require repairs, modifications or alterations (structural or otherwise) in or to the Mortgaged Property, or any portion thereof. 28 "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind, including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, or the filing of, or any agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction (other than informational filings in respect of equipment leased under any lease not intended as security, within the meaning of the Uniform Commercial Code) and any comparable financing statement under the laws of the Commonwealth of Puerto Rico. "Permitted Encumbrances" shall have the meaning ascribed hereto in paragraph NINETEENTH hereof. "Person" shall mean an individual, corporation, partnership, joint venture, trust, association or any other entity or organization, including a government or political subdivision, agency or instrumentality thereof. FOURTEENTH: Miscellaneous. (a) Successors; No Oral Modification; Headings. All of the terms of this Mortgage shall apply to and be binding upon the successors and assigns of the Mortgagor and all Persons claiming under or through the Mortgagor or any such successor or assign, and shall inure to the benefit of the Mortgagee and its successors and assigns. Neither 29 this Mortgage nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Mortgagee, notice of which is endorsed on the Mortgage Note. No notice to or demand on the Mortgagor in any case shall entitle the Mortgagor to any other or further notice or demand in similar or other circumstances. The headings of the clauses of this Mortgage have been inserted for convenience of reference only and shall in no way define, modify or restrict any of the provisions hereof. FIFTEENTH: The Mortgage Note. The Mortgage Note referred to in paragraph SECOND of this Deed is literally transcribed herein as follows: "MORTGAGE NOTE "VALUE: $2,000,000 "DUE DATE: ON DEMAND "FOR VALUE RECEIVED, on demand the undersigned promises to pay to PUERTO RICO INDUSTRIAL, MEDICAL, EDUCATIONAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY (hereinafter the "Authority") or its order, the principal sum of TWO MILLION DOLLARS ($2,000,000) with interest on the unpaid balance at a fluctuating annual rate (computed on the basis of a 360-day year and the actual number of days elapsed) equal to two percent (2%) over and above the "reference rate," as defined below, such fluctuating rate to change simultaneously with the changes in the reference rate, from the date of this Mortgage Note until full payment hereof. As used herein, the term "reference rate" shall mean at any time the lower of (i) the fluctuating rate of interest announced publicly from time to time by The Chase Manhattan Bank, N.A. in New York, New York as its "prime," "base," or 30 "reference" rate and (ii) the fluctuating rate of interest announced publicly from time to time by Citibank, N.A. in New York, New York as its "prime," "base" or "reference" rate, it being understood that such rates of not necessarily be the best or lowest rates of interest available to such bank's best or more preferred large commercial customers. Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the holder hereof shall promptly refund such excess to the undersigned; provided, however, that, if lawful, any such excess shall be paid by the undersigned to the holder hereof as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less than the maximum legal rate. The Mortgagee shall be entitled to charge the maximum late charge permitted by law on any overdue principal under this Mortgage Note. Interest hereunder shall be payable on demand, and payments of interest and principal shall be made at the office or domicile of the Authority within the Commonwealth of Puerto Rico, or at such other place as may be designed in writing by said Authority or any holder hereof. "The undersigned, and all others who may become liable for all or any part of this obligation whether as maker, principal, surety, guarantor or endorser, agree hereby to be jointly and severally liable and jointly and severally waive demand, presentment, protest, notice of dishonor and nonpayment and any and all lack of diligence or delays in collection or enforcement hereof, and expressly agree to extend to the Authority or any holder hereof the right of set-off or compensation prior to, on or after maturity or default, and consent to any application of payment of any monies in possession of the Authority or any holder hereof belonging to the undersigned or any obligor hereunder related to this Mortgage Note and to any extension of time, modification of the terms of payment, releases of any party liable for this obligation, release, substitution or exchange of any property, real or personal, tangible or intangible, guaranteeing payment of the Mortgage securing this Mortgage Note, and agree also to any other indulgence or forbearance whatsoever. Any such extension, release, modification, substitution, exchange, indulgence 31 or forbearance may be made without notice to said party, and without in any way affecting the personal liability of any party obliged hereunder. "The holder of this Mortgage Note shall be entitled to the benefits and security afforded by Deed Number Two which was executed on the date hereof, before the undersigned Notary as security for this Mortgage Note and by any agreement executed by the undersigned assigning, pledging, or encumbering this Mortgage Note as security therefor, and may enforce the agreements of the undersigned contained in each of said instruments, and may exercise the remedies provided thereby or otherwise in respect thereof without being required first to foreclose the pledge or other lien or encumbrance so constituted upon this Mortgage Note, all in accordance with the terms of said instruments. No reference herein to said instruments, and no provision of this Mortgage Note or of said instruments, shall alter or impair the obligation of the undersigned hereon, which is joint and several, continuing, absolute and unconditional, nor shall such reference affect the negotiability hereof under the Negotiable Instruments Law of Puerto Rico. Recourse on this Mortgage Note is limited as provided in Deed Number Two. The undersigned hereby submits to the venue of the courts in the Commonwealth of Puerto Rico selected by the holder in case of legal action brought against the undersigned for the collection of this Mortgage Note. "In San Juan, Puerto Rico, this 7th day of February, 1991. "EL CONQUISTADOR PARTNERSHIP L.P. "By: Kumagai Caribbean, Inc. "(Signed) By: /s/ Toru Fujita Ueda --------------------------- Toru Fujita Ueda, "Vice President "WKA El Con Associates "(Signed) By: /s/ Hugh Alanson Andrew --------------------------- Hugh Alanson Andrew "Authorized Signatory 32 "Affidavit No. 101 "Acknowledged and subscribed before me in San Juan, Puerto Rico, this 7th day of February, 1991, by Hugh Alanson Andrew, of legal age, married, business executive and resident of San Juan, Puerto Rico in his capacity as Authorized Signatory of WKA EL CON ASSOCIATES, General Partner of EL CONQUISTADOR PARTNERSHIP L.P. and by Toru Fujita Ueda, of legal age, married, business executive and resident of San Juan, Puerto Rico, in his capacity as Vice President of KUMAGAI CARIBBEAN, INC., General Partner of EL CONQUISTADOR PARTNERSHIP L.P., identified by the means set forth in Article Seventeen "c" (17(c)) of the Notarial Law of Puerto Rico. (Signed) Leonor M. Aguilar-Guerrero -------------------------- "Notary Public" (Notarial Seal) SIXTEENTH: Deed in the Public Interest: (a) The Authority hereby states that its appearance in this Deed, made for its benefits, is in furtherance of the purpose for which the Authority was created and is a legitimate exercise of its powers. In approving the financing being provided to the Mortgagor and secured hereby, the Authority has determined that the Mortgage constituted by this Deed is in the public interest and serves the public interest and serves the public purpose of promoting the economic development, health, welfare and safety of the people of the Commonwealth of Puerto Rico, and that, therefore, under the provisions of Sections One Thousand Two Hundred Fifty-One (1251) to One Thousand Two Hundred Sixty-Nine (1269) of Tile 33 Twelve (12) of the Laws of Puerto Rico Annotated (L.P.R.A.) and Section One Thousand Seven Hundred Seventy Subsection (c)] (1770[c]) of Title Thirty (30) of the Laws of Puerto Rico Annotated, the constitution and recording of this Mortgage is exempt from the payment and/or cancellation of all internal revenue stamps and recording fees. (b) If such exemption is held to be invalid, or if additional costs and expenses are otherwise incurred, then all costs and expenses of this Deed, of obtaining a certified copy or copies hereof, and of the registration of this instrument in the proper public registry (including, without limitation, the cost of all recording fees payable in connection with the initial recordation or subsequent cancellation of this Mortgage or fees for the cancellation of any revenue stamps affixed hereto); all expenses of such additional documentation as may hereafter be required, including the registration thereof in the appropriate sections of the Registry of Property, if such be required; and all expenses of all documents of cancellation, including the cost of registration thereof, and all other recording, filing, notarial or other fees, taxes and charges, shall be for the account of Mortgagor. SEVENTEENTH: Disposition of Mortgaged Property. The Mortgagor covenants that it shall not sell, convey, mortgage, 34 or otherwise dispose of or encumber the Mortgaged Property, any portion thereof, or any of the Mortgagor's right, title or interest therein without first securing the written consent of the Mortgagee, except to the extent otherwise permitted under any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned. EIGHTEENTH: (a) Events of Default. The following shall constitute "Events of Default" under this Mortgage, and the term "Event of Default" shall mean, wherever used with reference to this Mortgage, any one or more of the following occurrences: (i) any principal, interest or any other sums payable pursuant to the Mortgage Note shall not be paid when due; (ii) any sums (other than those set forth in (i) above) payable pursuant to this Mortgage or any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned shall not be paid when due, and such failure shall continue for a period of thirty (30) days after notice is given to the Mortgagor by the Mortgagee, unless the Mortgagee shall agree to an extension of such time prior to its expiration; (iii) the Mortgagor shall fail in the due performance or observance of any covenant, agreement or term binding upon the Mortgagor contained in this Mortgage, the Mortgage Note or any 35 pledge agreement pursuant to which the Mortgage Note was pledged or assigned, other than those covenants, agreements or terms of which the Mortgagor's failure to perform would constitute another Event of Default referred to in this paragraph EIGHTEENTH, and such failure shall continue unremedied for more than ninety (90) days after notice thereof shall have been given to the Mortgagor by the Mortgagee or such shorter grace period provided for in any such documents; provided, however, that if such failure cannot be corrected within such ninety (90) day period, it shall not constitute an Event of Default hereunder if corrective action is instituted by the Mortgagor within such period and diligently pursued until such failure is corrected; (iv) any warranty, representation or other statement made by or on behalf of the Mortgagor in or pursuant to this Mortgage, any pledge agreement pursuant to which the Mortgage Note was pledged or assigned, or any document, instrument or certificate delivered in connection herewith or therewith shall prove to have been materially incorrect or misleading when made; provided, however, that if the incorrect or misleading nature of such warranty, representation or other statement is curable, such incorrect or misleading nature shall not be an Event of Default hereunder so long as the Mortgagor diligently proceeds to cure and 36 cures such incorrect or misleading nature within ten (10) days after notice from the Mortgagee of such incorrect or misleading nature such that the original warranty, representation or other statement made shall then not be materially incorrect or misleading; (v) the occurrence of an Event of Default under and pursuant to the terms of any pledge agreement pursuant to which the Mortgage Note has been pledged or otherwise encumbered; (vi) the occurrence of an Event of Default under and pursuant to the terms of the Ground Lease; or (vii) the Mortgagor shall breach its covenant contained in paragraph NINETEENTH hereof. To the extent that any circumstances constitute an Event of Default under any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned but would not otherwise constitute an Event of Default hereunder, then, notwithstanding the foregoing, such circumstances shall constitute an Event of Default hereunder. (b) Remedies. Upon the occurrence and continuance of an Event of Default hereunder or under any pledge agreement or other document pursuant to which the Mortgage Note may be assigned, pledged, or otherwise encumbered as collateral security, 37 the Mortgagee, its successors and assigns, may, at its or their election: (i) declare all or any portion of the principal sum of and interest on the Mortgage Note, along with all or any other sums payable under the Mortgage Note, this Mortgage or any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned immediately due and payable; (ii) proceed to enforce the payment of the Mortgage Note and/or to foreclose the lien of the Mortgage as against all or any part of the Mortgaged Property (by summary proceedings or otherwise) and to have the same sold under the judgment or decree of a court of competent jurisdiction; and/or (iii) enter upon and take possession of the Mortgaged Property or any part thereof by summary proceedings, ejectment or other legal proceedings and remove the Mortgagor and all other persons and any and all properties therefrom (to the extent permitted by law, other than pursuant to a foreclosure proceeding), and hold, operate and manage the same and receive all earnings, income, rents, issues and proceeds accruing with respect thereto or any part thereof. The Mortgagee shall be under no liability for or by reason of any such taking of possession, entry, removal or holding, operation or management, except that 38 any amounts so received by the Mortgagee shall be applied to pay all costs and expenses of so entering upon, taking possession of, holding, operating, maintaining, repairing, preserving and managing the Mortgaged Property or any part thereof, and any taxes, assessments or other charges prior to the Lien of this Mortgage which the Mortgagee may consider it necessary or desirable to pay, and any balance of such amounts shall be applied as determined by the Mortgagee in its sole and absolute discretion; and/or (iv) exercise any other remedy available at law or inequity. NINETEENTH: No Other Liens. (a) Subject to paragraph TWENTIETH below, relating to contests, the Mortgagor will not create or permit to be created or to remain, and will discharge, any Lien upon the Mortgaged Property or any part thereof other than the following (collectively, the "Permitted Encumbrances"): (a) the herein constituted Mortgage, (b) leases of commercial space at the Mortgaged Property, provided such leases are subordinate to the lien of this Mortgage, (c) a second mortgage in favor of Government Development Bank for Puerto Rico, as per Deed Number Three (3) of Leasehold Mortgage, dated February seven (7), nineteen hundred ninety-one (1991) before Notary Ramon 39 Moran Lubriel, which will be filed for registration contemporaneously with this Mortgage in the Fajardo Section, Registry of Property of Puerto Rico, (d) easements or reservations with respect to the servicing of the Mortgaged Property for rights of way for electric transmission and distribution lines, telephone and telegraph lines, fuel, water, sewage and drainage pipelines and channels and all other similar purposes, provided that such easements and reservations are approved by the Mortgagee and do not, in any single case or in the aggregate, materially interfere with the occupancy or use of the Mortgaged Property, and (i) any other liens or encumbrances specifically permitted by the terms of any pledge agreement pursuant to which the Mortgage Note has been pledged, assigned or otherwise encumbered. TWENTIETH: Payment of Impositions; Compliance with Legal Requirements and Contests. (a) Subject to subparagraph (c) below, the Mortgagor will pay or cause to be paid all Impositions before the same would become delinquent and before any fine, penalty, interest or cost may be added for non-payment of same. The Mortgagor promptly will deliver to the Mortgagee after payment of such Impositions copies of official receipts or other evidence satisfactory to the 40 Mortgagee evidencing the payment of any Imposition as required pursuant to this subparagraph (a). (b) The Mortgagor will comply promptly with any Legal Requirement and will furnish the Mortgagee, on demand, with the results of any requested official search made by a Governmental Authority regarding such compliance. (c) The Mortgagor, at its expense, and after prior written notice to Mortgagee and provided no Event of Default shall then have occurred and be continuing may contest in good faith by appropriate proceedings promptly initiated and conducted with due diligence, the amount or validity or application, in whole or in part, of any Imposition or any Legal Requirement or any Lien upon the Mortgaged Property or the application of any instrument of record referred to in paragraph NINETEENTH hereof and may defer payment thereof; provided that (i) in the case of any such unpaid Imposition or Lien, such proceedings shall suspend the collection thereof from the Mortgagor, the Mortgagee and the Mortgaged Property, (ii) in any case, the Mortgaged Property, any rent or other income therefrom or any part thereof or interest therein would not be in danger of being sold, forfeited, terminated, cancelled or lost, (iii) in the case of a Legal Requirement, neither the Mortgagor nor the Mortgagee would be subject to civil or 41 criminal liability as a result of such deferral of compliance therewith, (iv) in any case, the Mortgagor shall have furnished such security if any, as may be required in the proceedings or as may be requested by the Mortgagee, (v) in any case, the payment of any sums required to be paid under the Mortgage Note, this Mortgage, or any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned (other than any unpaid Imposition at the time being contested in accordance with this paragraph TWENTIETH shall not be interfered with or otherwise affected, and (vi) in any case, the Mortgagor shall hold the Mortgagee harmless of and from and indemnify the Mortgagee against any loss by reason of any such deferment. TWENTY-FIRST: Additional Payments. If any action or proceeding shall be commenced or taken (including, without limitation, an action to foreclose this Mortgage, collect the indebtedness secured hereby or enforce the Mortgagee's rights under the Mortgage Note) by the Mortgagee, or any other Person, in which action or proceeding the Mortgagee is involved or is made a party by reason of the execution and/or delivery of the Mortgage Note, this Mortgage, any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned or any other documents or in which it becomes necessary to enforce, 42 defend or uphold the lien on the Mortgaged Property pursuant to this Mortgage or any other documents (including, without limitation, any pledge agreement) or the Mortgagee's rights under the Mortgage Note or any other documents (including, without limitation, any pledge agreement), all sums paid by the Mortgagee for the expense of any such action or litigation shall be paid by the Mortgagor to the Mortgagee promptly after demand. The Mortgagor will hold the Mortgagee harmless against any and all liability with respect to any mortgage recording or intangible personal property tax or fees or similar imposition now or hereafter in effect, to the extent that the same may be payable by the Mortgagee with respect to this Mortgage, the Mortgage Note, any pledge agreement, or any other related document. Any amounts due and payable to the Mortgagee under this paragraph that are not paid within fifteen (15) days after written demand therefor by the Mortgagee shall bear interest at the rate then applicable under the terms of the Mortgage Note, from the date of such demand, and such amounts, together with such interest, shall be deemed to be indebtedness secured by this Mortgage. In the event of any action, suit or proceeding is brought against the Mortgagee by reason of any such occurrence, the Mortgagor upon request by the Mortgagee will, at the Mortgagor's expense, resist 43 and defend such action, suit or proceeding or cause the same to be resisted or defended, either by counsel designated by the Mortgagor and approved by the Mortgagee, or where such occurrence is covered by liability insurance, by counsel designated by the insurer. The obligations of the Mortgagor under this paragraph TWENTY-FIRST shall survive the termination or satisfaction of this Mortgage. TWENTY-SECOND: Application of Foreclosure Proceeds. The proceeds of any foreclosure sale of the Mortgaged Property or any part thereof shall be applied in accordance with the provisions of any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned or, if no such agreement exists, as follows: First: All taxes, assessments or liens prior to the lien of this Mortgage that the Mortgagee may consider necessary or desirable to pay, the costs and expenses (including without limitation, attorney's fees and expenses) of collection, including the costs and expenses of any foreclosure or sale of the Mortgaged Property, the cost and expenses of entering upon, taking possession of or holding, operating and managing the Mortgaged Property, as the case may be, and of the enforcement of any remedies hereunder, including court costs and expenses, and 44 reasonable compensation to the Mortgagee's agents, attorneys and counsel, and all expenses, liabilities and advances incurred or made by the Mortgagee with respect to such foreclosure; Second: All amounts disbursed for costs incurred by the Mortgagee, other than on account of principal and interest thereon due on all indebtedness of the Mortgagor secured by the Mortgage Note, under this Mortgage, any pledge agreement pursuant to which this Mortgage Note may be pledged or assigned or any documents secured thereby, plus accrued interest thereon; Third: All amounts of interest and principal due and unpaid on all indebtedness of the Mortgagor secured by the Mortgage Note, any pledge agreement pursuant to which this Mortgage Note may be pledged or assigned or any documents secured thereby; and Fourth: The balance, if any, to the Mortgagor, or to any other person or legal entity who may be legally entitled thereto, or as a court of competent jurisdiction may otherwise direct. TWENTY-THIRD: Remedies Cumulative. Each right, power and remedy of the Mortgagee provided for in this Deed shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Deed or in any agreement between the Mortgagor and the Mortgagee 45 secured by the Mortgage Note, or in any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Mortgagee of any one or more of the rights, powers or remedies provided for in this Deed or in any agreement between the Mortgagor and the Mortgagee secured by the Mortgage Note, or in any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned, or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Mortgagee of any or all such other rights, powers or remedies. All rights, remedies and powers provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and are intended to be limited to the extent necessary so that they will not render this Mortgage invalid, unenforceable or not entitled to be recorded, registered or filed under the provision of any applicable law. If any provision of this Deed shall be held to be invalid, illegal or unenforceable, the validity of other provisions of this Deed shall in no way be affected thereby. TWENTY-FOURTH: No Waiver of Remedies. No failure by the Mortgagee to insist upon the strict performance of any term 46 hereof or to exercise any right, power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term or of any such breach. No waiver of any breach shall affect or alter this Deed or the Mortgage constituted herein, which shall continue in full force and effect with respect to any other than existing or subsequent breach. Any action, suit or proceeding brought by the Mortgagee against the Mortgagor pursuant to any of the terms of this Mortgage or otherwise, and any claim made by the Mortgagee hereunder may be compromised, withdrawn or otherwise dealt with by the Mortgagee without any notice to or approval of the Mortgagor. Nothing contained in this Deed shall constitute any consent or request by Mortgagee, express or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Mortgaged Property or any part thereof, nor as giving Mortgagor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Mortgagee in respect thereof or any claim that any lien based on the performance of such labor or services or the furnishings of any such materials or other property is prior to the lien of this Mortgage. 47 TWENTY-FIFTH: Notices. All notices to and demands and requests upon or from the Mortgagor under this Deed shall be made in the manner called for in any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned; otherwise, such notices shall be in writing and shall be deemed to have been properly given or made if sent by United States registered or certified mail, postage prepaid, return receipt requested, addressed to the Mortgagor or the Mortgagee, as the case may be, at such place as the Mortgagor or the Mortgagee may have furnished to each other in writing. All such notices, demands and requests shall be effective when received at the address specified as aforesaid. TWENTY-SIXTH: Interim Sums. The Mortgagee will have the right from time to time to sue for any sums whether for interest, damages for failure to pay principal or any installment thereof, taxes, or any other sums required to be paid under the terms of this Mortgage, any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned or any other related document as the same become due, without regard to whether or not the principal sum or any other sum evidenced by the Mortgage Note and secured by this Mortgage becomes due and without prejudice to the right of the Mortgagee thereafter to bring 48 an action of foreclosure, or any other action, as a consequence of a Default or Event of Default existing at the time such earlier action was commenced. TWENTY-SEVENTH: No Credits on Account of the Debt. The Mortgagor will not claim or demand or be entitled to any credit or credits on account of the indebtedness secured by this Mortgage for any part of the Impositions assessed against the Mortgaged Property or any part thereof and no deduction shall otherwise be made or claimed from the taxable value of the Mortgaged Property, or any part thereof, by reason of this Mortgage or the indebtedness secured by this Mortgage. TWENTY-EIGHTH: Inspection. The Mortgagor will permit the Mortgagee and any representatives designated by the Mortgagee to visit and inspect the Mortgaged Property, or any part thereof, (i) in an Emergency, at any time and (ii) at all other times, during normal business hours and upon reasonable notice, or as otherwise permitted pursuant to the terms of any pledge agreement pursuant to which the Mortgage Note may have been pledged or assigned. The Mortgagee shall not have any duty to make any such inspection and shall not incur any liability or obligation for not making any such inspection or, once having undertaken any such inspection, for making the inspection, not 49 making the same carefully or properly, or for not completing the same; nor shall the fact that such inspection may not have been made by the Mortgagee relieve the Mortgagor of any obligations that it may otherwise have under this Mortgage. TWENTY-NINTH: Actions and Proceedings. Except as otherwise provided in any pledge agreement pursuant to which the Mortgage Note may have been pledged or assigned, the Mortgagee shall have the right to appear in and defend any action or proceeding brought with respect to the Mortgaged Property, and to bring any action or proceeding, in the name and on behalf of the Mortgagor, which the Mortgagee, in its discretion, feels should be brought to protect its interest in the Mortgaged Property, provided that unless an Event of Default shall have occurred and be continuing at the time the Mortgagee first appears in or brings any such action or proceeding, prior to the Mortgagee's appearance in or bringing of any such action or proceeding, the Mortgagee shall give the Mortgagor notice of the Mortgagee's intention with respect thereto. THIRTY: Officers of Mortgagee Not Liable. All covenants, stipulations, promises, agreements and obligations of the Mortgagee contained herein shall be deemed to be covenants, stipulations, promises, agreements and obligations of the 50 Mortgagee and not of any member of the governing body of the Mortgagee or any officer, agent, servant or employee of the Mortgagee in his individual capacity, and no recourse shall be had for any claim based thereon or hereunder against any member of the governing body of the Mortgagee or any officer, agent, servant or employee of the Mortgagee. THIRTY-FIRST: No Charge Against Mortgagee Credit. No provision hereof shall be construed to impose a charge against the general credit of the Mortgagee or shall impose any personal or pecuniary liability upon any director, official or employee of the Mortgagee. THIRTY-SECOND: Mortgagee Not Liable. Notwithstanding any other provision of this Deed, (a) the Mortgagee shall not be liable to the Mortgagor or any other person for any failure of the Mortgagee to take action under this Deed unless the Mortgagee (i) is requested in writing by an appropriate Person to take such action and (ii) is assured of payment of or reimbursement for any expenses in such action, and (b) except with respect to any action for specific performance or any action in the nature of a prohibitory or mandatory injunction, neither the Mortgagee nor any director of the Mortgagee or any other official or employee of the Mortgagee shall be liable to the Mortgagor or 51 any other person for any action taken by it or by its officers, servants, agents or employees, or for any failure to take action under this Deed. In acting under this Deed, or in refraining from acting under this Deed, the Mortgagee may conclusively rely on the advice of its legal counsel. THIRTY-THIRD: Waivers. In view of the assignment of the Mortgagee's rights under and interest in this Deed to the Trustee by the provisions of the Trust Agreement and in view of any pledge agreement pursuant to which the Mortgage Note may be pledged or assigned, the Mortgagee shall have no power to waive the performance by the Mortgagor of any provision hereunder or extend the time for the correction of any default of the Mortgagor without the consent of the Trustee to such waiver by the Trustee and by any such pledge agreement. THIRTY-FOURTH: Waiver of Moratorium and Redemption. The Mortgagor, to the full extent that it may lawfully do so, agrees that it will not at any time insist upon, plead or in any way take advantage of and hereby waives any redemption or moratorium law now or hereafter in force and effect which would prevent or hinder the enforcement of the provisions of this Deed or any rights or remedies the Mortgagee may have hereunder or by law. 52 THIRTY-FIFTH: Limitation of Liability. Notwithstanding anything to the contrary contained in this Mortgage, no recourse shall be had, whether by levy or execution or otherwise, for the payment of the principal of or interest on, or other amounts owed hereunder or under the Mortgage Note, or for any claim based on this Mortgage or in respect thereof, against any partner of the Mortgagor or any predecessor, successor or affiliate of any such partner or any of their assets (other than from the interest of such partner in the Mortgagor), or against any principal, partner, shareholder, officer, director, agent or employee of any such partner (other than from the interest of any such person in such partner), nor shall any such persons be personally liable for any such amount or claims, or liable for any deficiency judgment based thereon or with respect thereto, it being expressly understood that the sole remedies of the Mortgagee with respect to such amounts and claims shall be against the assets of the Mortgagor, including the Mortgaged Property, and that all such liability of the aforesaid persons, except as otherwise expressly provided herein, is expressly waived and released as a condition of and as consideration for the execution of the Mortgage; provided, however, that (A) nothing contained in this Mortgage (including, without limitation, the provisions of this paragraph THIRTY- 53 FIFTH) shall constitute a waiver of any indebtedness of Mortgagor evidenced hereby or of any of the Mortgagor's other obligations under such other instruments executed in connection herewith or shall be taken to prevent recourse to and the enforcement against the Mortgagor, of all the liabilities, obligations and undertakings contained in this Mortgage; (B) this paragraph THIRTY-FIFTH shall not be applicable to a breach by any person of any independent obligation to the Mortgagee, including, but not limited to any other obligations of any Person under any other guarantee or indemnity agreement executed or delivered in connection herewith or with any pledge agreement pursuant to which the Mortgage Note is pledged or assigned and (C) this paragraph THIRTY-FIFTH shall not be applicable to the active party in the event of (1) fraud by such party, (2) misappropriation of funds or other property by such party, or (3) damage to the Mortgaged Property or any part thereof intentionally inflicted in bad faith by such party. For the purposes of the foregoing, the term "shareholder" shall be deemed to include the shareholders of any corporation which is shareholder of a corporation and the term "partner" shall be deemed to include the partners of any partnership which is a partner of a partnership. 54 THIRTY-SIXTH: Satisfaction of Debt. Should the Mortgagor satisfy the Mortgage Note or the obligations hereunder, under the Mortgage Note and under any pledge agreement pursuant to which the Mortgage Note is pledged or assigned, in the time and manner heretofore set forth, and comply with, and execute all agreements and stipulations required herein, then the Mortgagee shall execute in its favor the corresponding release and shall endorse to Mortgagor or its nominee the Mortgage Note without recourse, representations and warranties, or at Mortgagor's election shall endorse the same for cancellation purposes only, delivering said Mortgage note so endorsed to the Mortgagor, except to the extent otherwise provided in any pledge agreement pursuant to which it may have been assigned. ACCEPTANCE, WARNINGS AND EXECUTION. The appearing parties accept this Deed as drafted and fully ratify and confirm the statements contained herein as the true and exact embodiment of their stipulations, terms and conditions. I, the Notary, made to the appearing parties the necessary legal reserves and warnings concerning the execution of this Deed and they were fully advised by me thereon. Specifically, I advised the appearing parties with respect to: 55 (a) The meaning and legal effects of the acts consummated pursuant to this Deed, having asked each of the persons appearing herein whether they had any further questions and allowing each of them ample time and opportunity to ask questions and to understand and comprehend the meaning, legal nature and effects of their acts; (b) That in the execution hereof they are relying in a title report prepared by an independent third party and not by the undersigned Notary; (c) That any liens or encumbrances or any other matter affecting the title to the Leasehold Estate that may be filed for recordation with the Registry of Property prior to the filing of this Deed may be legally binding and could take precedence over this Deed; (d) The advisability for the Mortgagee to obtain an insurance policy insuring its Leasehold interest; (e) The advisability of the parties to have someone with the appropriate expertise conduct an investigation to determine the environmental conditions of the Leasehold Estate; (f) That recordation at the Registry of Property of the Mortgage constituted by this Deed is conditioned upon the recordation of the documents described in Paragraph FIRST; 56 (g) That the full effectiveness of this Deed is subordinated to the presentation of documentary evidence confirming the authority of the persons appearing herein. I, the Notary, certify that this Deed was read by the persons appearing herein; that I advised them of their right to have witnesses present at the execution hereof, which right they waived; that I advised them of the legal effect of this Deed; that they acknowledged that they understood the contents of this Deed and such legal effect; and that thereupon they signed this Deed before me and affixed their initials to each and every page hereof. 57 EX-10 26 EXHIBIT 10.23 NUMBER THREE DEED OF LEASEHOLD MORTGAGE In the Municipality of San Juan, Commonwealth of Puerto Rico, on this seventh (7th) day of February, nineteen hundred ninety one (1991). BEFORE ME RAMON MORAN LOUBRIEL, Attorney at Law and Notary Public, with residence in Guaynabo, Puerto Rico, and office in the Eleventh Floor of the First Federal Savings Bank Building, Santurce, Puerto Rico. APPEAR AS PARTY OF THE FIRST PART: EL CONQUISTADOR PARTNERSHIP L.P., (hereinafter referred to as the "MORTGAGOR"), a limited partnership organized and existing under the laws of the State of Delaware and duly authorized to do business in the Commonwealth of Puerto Rico, with taxpayer identification Number Zero Six dash One Two Eight Eight One Four Five (06-1288145), represented herein by its general partners Kumagai Caribbean, Inc., a corporation organized and existing under the laws of Texas and duly authorized to do business in the Commonwealth of Puerto Rico, taxpayer identification Number Seven Five dash Two Three Zero Three Six Six Five (75-2303665), in turn represented by its Vice President Mister TORU FUJITA, Social Security Number Five Hundred Seventy Five dash Forty Nine dash One Thousand Twenty One (###-##-####), of legal age, married, executive and resident of San Juan, Puerto Rico, and by WKA el Con Associates, a general partnership organized existing under the Laws of the State of New York and duly authorized to do business in the Commonwealth of Puerto Rico, in turn represented hereby its Authorized Signatory Mister HUGH ALANSON ANDREWS, Social Security Number Zero Seventy Five dash Thirty Two dash Eight Thousand Two Hundred Eighteen (###-##-####), of legal age, married, executive and resident of San Juan, Puerto Rico, whose authorities to appear in such capacities they will evidence whenever and wherever requested to do so. AS PARTY OF THE SECOND PART: THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO, (hereinafter referred to as the "MORTGAGEE"), taxpayer identification Number Sixty Six dash Zero Three Four Eight dash Five Seven Two (66-0348-572), and instrumentality of the Commonwealth of Puerto Rico, created by Law Number Seventeen (17) of September Twenty Three (23), Nineteen Hundred Forty Eight (1948) as amended, having its principal offices at the Minillas Governmental Center in Santurce, San Juan, Puerto Rico, represented herein by its Executive Vice President, MISTER GEORGE BARR WILSON, Social Security Number Five Thousand Forty Five dash Seventy Eight dash Nine Thousand Eighty Three (###-##-####), who is of legal age, married, bank executive and resident of San Juan, Puerto Rico, who binds himself to show evidence that he has been authorized to appear on behalf and in representation of the instrumentality, whenever and wherever so required. I, the subscribing Notary, do hereby certify and give faith that I personally know the natural person(s) who appear(s) herein and I further certify and attest, from his(her)(their) statement(s), as to his(her)(their) age(s), civil status, profession(s) and residence(s). He(they) assure me of having, and in my judgment he(she)(they) do(does) has(have), the necessary legal 2 capacity and authority to execute this instrument and therefore, he(she)(they) do hereby freely and voluntarily SET FORTH FIRST: THE LEASEHOLD ESTATE. Mortgagor represents and warrants that it is the owner of record and holder of a valid, good, insurable leasehold estate ("the Leasehold Estate") in the real property and all presently existing buildings, structures and improvements located on said real property described in paragraph TWENTY SECOND of this deed. SECOND: THE MORTGAGE NOTE. Simultaneously herewith Mortgagor as subscribed and issued before the Authorizing Notary a mortgage note (hereinafter referred to as the "Note" or "Mortgage Note"), which is copied literally in paragraph TWENTY FIRST hereof. THIRD: CREATION OF MORTGAGE. For the purpose of securing the payment, when and as due and payable in accordance with the terms thereof and hereof, of the principal of the Mortgage Note and the interest thereon, and also to secure payment of: (a) An additional amount equal to five (5) annuities of interest as provided in the Mortgager Note to cover accrued and unpaid interest on the Mortgage Note; (b) An additional amount equal to twenty per cent (20%) of the principal sum of the Note to cover any additional sums which may be paid or advanced by the Mortgagee and the interest that may accrue on such payments or advances, and all other indebtedness of the Mortgagor secured by the terms thereof; 3 (c) An additional amount up to but not to exceed ten percent (10%) of the principal amount of the Mortgage Note to cover Mortgagee's actual costs and expenses (including attorneys' fees and expenses) incurred by Mortgagee in the event the Mortgagee shall have recourse to foreclose or other judicial proceedings for the collection of the Mortgage Note; and (d) All other obligations of the Mortgagor to the Mortgagee herein or under any other agreement secured by the pledge of the Mortgage Note; the Mortgagor, by these presents, DOES HEREBY EXECUTE, CONSTITUTE, AND CREATE in favor of the Mortgagee, or the future holder either by endorsement or assignment of the Mortgage Note, a voluntary mortgage lien on the Leasehold Estate and which mortgage lien shall extend, subject to the provisions of the Ground Lease as hereinafter defined in paragraph TWENTY SECOND, to the following property (hereinafter referred to collectively as the "Mortgaged Premises"): (one) All right, title, and interest of the Mortgagor (including, without limitation, its interest in Leasehold Estate) in the real estate described in paragraph TWENTY SECOND hereof and all other buildings and improvements of every kind and description now or hereafter erected or placed on said real estate and all materials intended for construction, reconstruction, alteration and repairs of such real estate, buildings or improvements now or hereafter erected thereon, all of which materials shall be deemed to be included within the Mortgaged Premises immediately upon the delivery thereof to the Mortgaged Premises immediately upon the delivery thereof to the Mortgaged Premises, and all other property immovable either by nature or destination now owned or hereafter located on said real estate or in any of such other buildings or improvements used either for its adornment or for purposes of comfort, or for the service of 4 some industries or commerce, operated, conducted or exploited by Mortgagor on the Mortgaged Premises, even though the aforesaid shall have been attached to the same after constitution of this Mortgage; (two) All rents, issues, proceeds and profits accruing and to accrue from the Mortgaged Premises; (three) All fixtures and articles of movable property nor or hereafter owned by the Mortgagor and attached to or contained in or used in connection with the said real estate, including but not limited to all partitions, furniture, furnishings, apparatus, machinery, motors, transformers, elevators, fittings, radiators, gas ranges, ice boxes, mechanical refrigerators, awnings, shades, screens, blinds, drapes, office equipment, word processors, computers, typewriters, telephone and communications equipment and installations, kitchen, bar-room and restaurant equipment, plates, forks, knives, napkins, tablecloths, tables, glasses, chinaware, cups, cooking equipment and installations, laundry, ventilating, refrigerating, incinerating, electrical appliances, television sets, radios, beds, vanities, chairs, mirrors, pillows, curtains, blankets, sheets, towels, bathroom equipment, mattresses, box springs, sprinkler equipment, carpeting and other furnishings and all plumbing, heating, lighting, cooking, laundry, ventilating, refrigerating, incinerating, air conditioning and sprinkler equipment and fixtures and appurtenances thereof; and all renewals or replacements thereof or articles in substitution therefor, whether or not the same are or shall be attached to said buildings or structures in any manner, it being agreed that all the aforesaid property owned by the Mortgagor and placed by it on said real estate or on or in such buildings or improvements located thereon have been specially designed for use in connection with the operation of a hotel, and shall, so far as 5 permitted by law, be deemed to be immovable property, security for the said indebtedness and covered by the mortgage hereby constituted, and as to the balance of the property aforesaid, this deed shall be deemed to be as well a security interest in said property, securing the said indebtedness, for the benefit of the Mortgagee; (four) All insurance proceeds allowable to the Mortgagor in the event of any damage or destruction of the Mortgaged Premises; and (five) All awards and other payments allowable to Mortgagor in respect of taking of all or any part of the Mortgaged Premises, or any other interest therein, or right accruing thereto, as the result of or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Mortgaged Premises or any part thereof. (six) Spreader of Mortgage to Fee. So long as any of the indebtedness secured hereby or by any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned shall remain unpaid, (unless the Mortgagee shall otherwise consent), the Mortgagor covenants and agrees that, in case it shall become the owner in fee simple ("pleno dominio") of the Leasehold Estate, by purchase or otherwise, this Mortgage shall attach to and over and be a lien upon the Estate so acquired. Mortgagor further agrees and consents to execute, acknowledge, deliver and record, at its sole cost and expense, all such instruments necessary to attach to this Mortgage the Estate so acquired. The Mortgagor hereby warrants and agrees that all of the property comprising the Mortgaged Premises, taken together, constitutes and will constitute an integrated business unit. FOURTH: RECORDING. 6 The Mortgagor will at all times cause this deed and the mortgage lien hereby constituted and any supplement hereto or thereto to be recorded, registered, and filed in the proper Registry or Registries of Property and otherwise filed in such manner and in such other place as may be required in order to establish, create, protect and preserve the lien hereof as a mortgage lien encumbering the Mortgaged Premises, subject to no liens, charges, encumbrances, encroachments, reservations, restrictions, defects or claims of any kid, with the exception of any specific liens or easements described in paragraph TWENTY SECOND, and comply with all statutes and regulations relating thereto. The parties state that since the Mortgage Note collaterally secures a loan to promote and develop the economy, the original of this deed and its certified copy shall be exempt from cancelling internal revenue stamps, as otherwise required by law and also exempt from the payment of the recording rights thereof in the Registry of the Property. The Mortgagee will reimburse the authorizing notary any internal revenue stamps that it may be required to cancel in the original and/or copy of this deed. The Mortgagor will execute, protocolize, deliver and record all such other instruments and take all such other action as the Mortgagee from time to time may reasonably request for the purpose of further assuring to the Mortgagee the properties and rights now or hereafter subjected to the line of the mortgage lien hereby constituted or intended so to be. In the event that any Registrar of Property to whom a certified copy of this deed shall be presented for recordation shall reject the same for any reason or shall record this deed against the Mortgaged Premises, junior to any other, lien or encumbrance other than those specifically described in paragraph TWENTY SECOND hereof, then upon such rejection becoming final and beyond appeal, the debt evidenced by the Mortgage Note shall become totally due and the Mortgagee may proceed to its collection judicially. 7 FIFTH: AGREED VALUE. In compliance with the pertinent and applicable provisions of the Mortgage Law of Puerto Rico, as amended, and for the purpose of foreclosure of the Mortgage, and for no other purpose, the Mortgagor hereby declares and agrees with the Mortgagee that the value of the Mortgaged Premises is appraised at the sum stated under the title "Foreclosure Valuation" of paragraph TWENTY THIRD hereof and the Mortgagor waives any new appraisal. SIXTH: ADDITIONAL COVENANTS. The Mortgagor further covenants and agrees with the Mortgagee as follows: A. The Mortgagor will pay promptly the principal of and interest on, and all other obligations set forth in the Mortgage Note, at the place, in the currency, at the times and in the manner herein and in the Mortgage Note provided. B. To the extent of its obligations under the Ground Lease, Mortgagor will pay as they become due all: (i) Taxes, assessments, water rates, sewer rentals and other governmental or municipal or public dues, charges, fines and other impositions and premiums on fire, rental value, and other insurance; (ii) Rental, additional rentals and other charges mentioned and payable under the Ground Lease. Upon prior notice to Mortgagor, the Mortgagee shall have the right to make any such payment notwithstanding that at the time any such tax, assessment, charge or imposition is then being protested or contested by Mortgagor, unless, upon not less than thirty (30) days prior to the due date thereof, the Mortgagor shall have notified the Mortgagee, in writing, of 8 such protest or contest, in which event, as the case may be, the Mortgagee shall make such payment under protest in the manner prescribed by law or shall withhold such payment; provided, however, that such contest shall preclude enforcement of collection and the sale of the Mortgaged Premises in satisfaction of such tax, assessment, charge or imposition. C. The Mortgagor will promptly perform and observe all of the terms, covenants and conditions required to be performed and observed by the Mortgagor under the Ground Lease, within the grace periods provided in the Ground Lease, and will do all things necessary to preserve and to keep unimpaired its rights under the Ground Lease. The Mortgagor will use its best efforts to obtain performance by the lessor of its obligations under the Ground Lease, to the end that the Mortgagor may enjoy all of the rights granted to it under the Ground Lease. D. The Mortgagor will promptly notify the Mortgagee of any default by the Mortgagor in the performance or observance of any of the terms, covenants or conditions on the part of the Mortgagor to be performed or observed under the Ground Lease. E. The Mortgagor will: (i) promptly notify the Mortgagee of the receipt by the Mortgagor of any notice from the lessor under the Ground Lease of default by the Mortgagor in the performance of observance of any of the terms, covenants or conditions on the part of the Mortgagor to be performed or observed under the Ground Lease; (ii) promptly notify the Mortgagee of the receipt by the Mortgagor of any notice from the lessor under the Ground Lease to the Mortgagor of termination of the Ground Lease pursuant to the provision thereof; and (iii) promptly cause a copy of each such notice received by the Mortgagor from the lessor under the Ground Lease to be delivered to the Mortgagee. 9 F. The Mortgagor will promptly notify the Mortgagee of any request made by either party to the Ground Lease for arbitration proceedings pursuant to the Ground Lease and of the institution of any arbitration proceedings, and will promptly deliver to the Mortgagee a copy of the determination of the arbitrators in each such arbitration proceeding. G. The Mortgagor will not subordinate or consent to the subordination of the Ground Lease to any mortgage on the lessor's interest in the property demised by the Ground Lease, other than as provided for under Paragraph TWENTY SECOND hereof. H. The Mortgagor will use best efforts within fifteen (15) days after demand from the Mortgagee, to obtain from the lessor under the Ground Lease and deliver to the Mortgagee a certificate that the Ground Lease is unmodified and in full force and effect and the date to which the rentals, additional rentals and other charges payable thereunder have been paid and stating whether to the lessor's knowledge the Mortgagor is in default in the performance of any covenants, agreements or conditions contained in the Ground Lease and if so, specifying each such default. I. The Ground Lease is valid and in full force and effect in accordance with its terms and without modification and no default under the Ground Lease has occurred and is continuing. J. The execution and delivery of this Mortgage is permitted under the Ground Lease. K. If the term of the Ground Lease is scheduled to expire prior to the payment in full of the indebtedness secured hereby and by any pledge agreement pursuant to which the Mortgage Note has been pledged or assigned and the Mortgagor has the option to renew such 10 term, the Mortgagor shall effectively exercise such option and deliver to the Mortgagee proof of such exercise, at least thirty (30) days before the expiration of the period during which such option may be exercised. The Mortgagor hereby irrevocably appoints the Mortgagee its attorney-in-fact, to exercise any such options within such thirty (30) day period if the Mortgagor has not theretofore exercised the same. SEVENTH: TAXES. The Mortgagor will pay taxes which may become preferential lines on the Mortgaged Premises as provided elsewhere in this deed or in the loan agreement of even date between the Mortgagor and the Mortgagee (the "Loan Agreement"). EIGHTH: INSURANCE. The Mortgagor will keep the improvements existing or hereafter erected on the Mortgaged Premises insured as may be required from time to time by the Mortgagee against loss or damage by, or abatement of rental income resulting from fire and such other hazards, casualties, and contingencies in such amounts and for such periods as reasonably may be required by the Mortgagee, and will pay promptly when due all premiums of such insurance. All such insurance shall be carried in companies approved by the Mortgagee and the policies ad renewals thereof shall be deposited with and held by the Mortgagee and have attached thereto the standard noncontributing mortgage clause (in favor of and entitling the Mortgagee to collect any and all proceeds payable under all such insurance) as well as the standard waiver of subrogation endorsement, all to be in and acceptable to the Mortgagee. The insurance proceeds shall be applied in the manner provided in the Loan Agreement between Mortgagor and Mortgagee dated on the same date of this Deed of Mortgage (the "Loan Agreement"). The Mortgagor shall not 11 carry separate insurance, concurrent in kind or form and contributing, in the event of loss, with any insurance required hereunder. In the event of a change in ownership or of occupancy of the Mortgaged Premises, immediate notice thereof by mail shall be delivered to all insurers and in the event of loss, the Mortgagor will give immediate written notice to the Mortgagee. In the event of foreclosure of the mortgage hereby constituted, or other transfer of title to the Mortgaged Premises or any portion thereof in extinguishment of the indebtedness secured hereby, all right, titled, and interest of the Mortgagor in any to any insurance policies then in force shall pass to the purchaser or grantee. The Mortgagor will also carry and maintain such liability and indemnify insurance as may be required from time to time by the Mortgagee in forms, amounts and with companies satisfactory to the Mortgagee. NINTH: MAINTENANCE OF MORTGAGED PREMISES. The Mortgagor will not alter, remove or demolish any building or other improvement now existing or hereafter erected on the Mortgaged Premises or sever, remove, sell or mortgage any fixture or appliance on, in or about said buildings or improvements or any other property included in the Mortgaged Premises without the consent of the Mortgagee other than in the ordinary course of business; and in the event of the demolition or destruction in whole or in party of any of the fixtures or articles of movable property covered by the mortgage hereby constituted, the same shall be replaced promptly by similar fixtures and articles of movable property at least equal in quality and condition to those replaced, free from any security interest in or encumbrance thereon or reservation of title thereto; will not permit, commit or suffer any waste, impairment or deterioration of the Mortgaged Premises or any part thereof; will keep and 12 maintain the Mortgaged Premises and every part thereof, including the buildings, fixtures, machinery and appurtenances and adjoining sidewalks, parking areas, roadways and means of ingress and egress in reasonably good repair and conditions; will effect such repairs as the Mortgagee may reasonably require and make all needful and proper replacements so that said building, fixtures, machinery, appurtenances, sidewalks, parking areas, roadways and means of ingress and egress will at all time be in good condition, fit and proper for the respective purposes for which they were originally erected or installed; will comply with all statutes, orders, requirements or decrees relating to the Mortgaged Premises by any Commonwealth, municipal or other governmental authority; will observe and comply with all conditions and requirements necessary to preserve and extend any and all rights, licenses, permits (including, but not limited to, zoning variances, special exceptions and non-conforming uses), privileges, franchises, and concessions which are applicable to the Mortgaged Premises or which are applicable to the Mortgaged Premises or which have been granted to or contracted for by the Mortgagor in connection with any existing or presently contemplated use of the Mortgaged Premises; and will permit the Mortgagee or its agents, at all reasonable times to enter into and inspect the Mortgaged Premises. The Mortgagee shall have the right at any time provided that there is reasonable cause to suspect that the proper maintenance of the Mortgaged Premises has not been undertaken, to engage an independent realtor to survey the adequacy of the maintenance of the Mortgaged Premises, and to require the Mortgagor, by notice in writing, to make such repairs and replacements thereof as such realtor shall determine to be necessary in order to protect and preserve the rentability and usability of the Mortgaged Premises, it being understood that the Mortgagor shall reimburse the Mortgagee for the cost of such survey unless the same 13 determines such maintenance to be reasonably adequate, in which case the cost thereof shall be at the expense of the Mortgagee. TENTH: SUBSEQUENT LIENS. The Mortgagor will not voluntarily create or permit to be created or filed against the Mortgaged Premises, or any part thereof, any mortgage lien or other lien or liens inferior or superior to the lien of the mortgage hereby constituted, and will keep and maintain the Mortgaged Premises free from the claim of any persons supplying labor or materials for the construction of any buildings or other improvements on the Mortgaged Premises, notwithstanding by whom such labor or materials may have been contracted, except for a third mortgage lien to be constituted as security for advances to be made by the Partners of Mortgagor, or except for purchase money mortgages on personal property subsequently acquired by Borrower not for the purposes of substituting or replacing previously existing personal property and to be used in the Mortgaged Premises, if such personal property, due to its nature does not become real property by having been used at or incorporated to the Mortgaged Premises, and as may be provided under the Loan Agreement. ELEVENTH: PLEDGE: In the event that the Mortgage Note is assigned or pledged or otherwise encumbered as collateral security for the payment of any other note or debt of the Mortgagor or of any other person, the Mortgagor agrees that the Mortgagee shall have and may exercise all rights, remedies, powers and privileges provided herein or now or hereafter existing at law, in equity, by statute, or otherwise, in favor of Mortgagee, including, but not limited to that of foreclosing this mortgage without first foreclosing the pledge or other lien so constituted upon the Mortgage Note, to the same extent and with the same force and effect as if the Mortgage Note had been assigned or 14 transferred directly to Mortgagee rather than assigned or pledged as collateral security, provided that nothing contained in this paragraph ELEVENTH shall relieve Mortgagor from the obligation to comply wit the terms of the pledge agreement or other instrument under which the Mortgage Note is assigned or pledged. TWELFTH: INDEMNITY. The Mortgagor will hold harmless and indemnify the Mortgagee from and against all costs and expenses, including reasonably attorneys' fees and costs of a title search, continuation of abstract and preparation of survey, incurred by reason of any action, suit, proceeding, hearing, motion or application before any court or administrative body (excepting an action to foreclose or to collect the debt secured hereby), in and to which the Mortgagee may be or become a party by reason hereof, including but not limited to condemnation, bankruptcy, probate and administration proceedings, as well as any other of the foregoing wherein proof of claim is by law required to be filed or in which it may be necessary to defend or uphold the terms and the lien created by the mortgage hereby constituted. THIRTEENTH: CONDEMNATION. The Mortgagor hereby assigns to the Mortgagee all rights of the Mortgagor to any awards or other compensation heretofore or hereafter to be made to the present and all subsequent owners of the Mortgaged Premises for any taking by eminent domain, either permanent or temporary, of all or any part of the Mortgaged Premises or any easement or appurtenance thereof, including severance and consequential damage and change in grade of streets, and hereby irrevocably authorizes and empowers the Mortgagee, in the name of the Mortgagor or otherwise, to prosecute what would be the Mortgagor's claim for any such awards or compensation, to collect 15 and receive the proceeds of any such claim, to give proper receipts and acquittances therefor and, after deducting expenses of collection, to apply the net proceeds in accordance with the terms of the Loan Agreement. The Mortgagor will give the Mortgagee immediate notice of the actual or threatened commencement of any such proceedings under eminent domain and will deliver to the Mortgagee copies of any and all papers served in connection with such proceedings. The Mortgagor further covenants and agrees to make, execute, and deliver to the Mortgagee, at any time or times upon request, any and all further assignments and/or instruments deemed necessary by the Mortgagee for the purpose of validly and sufficiently assigning all awards and other compensation heretofore and hereafter to be made to the Mortgagor (including the assignment of any award from the United States government at any time after the allowance of the claim therefor, the ascertainment of the amount thereof and the issuance of the warrant for payment thereof) for any taking, either permanent or temporary, under any such proceeding. The proceeds of any condemnation award shall be applied as provided for under the Loan Agreement. FOURTEENTH: MORTGAGOR'S CERTIFICATE. The Mortgagor will, upon ten (10) business days' prior written request by the Mortgagee, but not more than twice in any calendar year, furnish the Mortgagee a written statement duly acknowledged of the amount due upon the mortgage hereby constituted and whether any offset or defenses exist against the mortgage debt. FIFTEENTH: BOOKS AND RECORDS. The Mortgagor will keep the maintain full and correct books and records showing in detail the earnings and expenses of the Mortgaged Premises and will permit the Mortgagee or its 16 representative to examine such books and records and all supporting vouchers and data at any time and from time to time on request at its offices, hereinbefore identified, or at such other location as may be mutually agreed upon and following the expiration of each fiscal year the Mortgagor will furnish to the Mortgagee a statement showing in detail all such earnings and expenses since the last such statement, prepared by an independent certified public accountant acceptable to the Mortgagee in accordance with generally accepted accounting principles, including also, if so requested, statements from all tenants of the Mortgaged Premises showing all sales made therein, together also with a current rent roll of the Mortgaged Premises showing with respect to each tenancy: the name of the tenant, the space occupied, the date and term of such lease, the amount of annual rental and additional rental and all renewal and termination options; and in the event that the Mortgagor shall refuse or fail to furnish any statement as aforesaid, or in the event such statement shall be inaccurate or false, or in the event of the failure of the Mortgagor or any subsequent owner to permit the Mortgagee or its representative to inspect the Mortgaged Premises or the said books and record on request, the Mortgagee may consider such acts of the Mortgagor as a default hereunder and proceed in accordance with the rights and remedies afforded it at law and under the provisions of this deed. SIXTEENTH: ADVANCES AND EXPENSES. Upon default by the Mortgagor in the performance of any material terms, covenants or conditions in this deed or in the Note contained, the Mortgagee may, at its option and whether electing to declare the whole indebtedness due and payable or not, upon prior written notice to the Mortgagor, perform the same without waiver of any other remedy, and any amount paid or advanced by the Mortgagee in connection therewith, and any other costs, charges, and expenses 17 incurred by the Mortgagee in the protection of the Mortgaged Premises or the maintenance of the lien of the mortgage hereby constituted are hereby secured by the lien of said mortgage up to an amount equal to twenty per cent (20%) of the principal sum of the Mortgage Note, shall be repayable by the Mortgagor on demand, with interest at the rate set forth in the Mortgage Note and shall constitute and additional indebtedness secured in this Mortgaged. Failure by Mortgagor to give notice, shall in any manner affect the guarantee herein provided for such payments or advances. SEVENTEENTH: DEFAULTS, RIGHTS, AND REMEDIES. Upon default in the payment of any installment of principal and/or interest when due under the Mortgage Note or in the payment, when due, of any other obligation set forth in the Mortgage Note, or in any of the payments required to be made under this deed, or upon default in the performance of observance of any of the other terms, covenants, conditions or warranties herein contained, or under any other written agreement with the Mortgagee, or should any proceedings under the Bankruptcy Law of the Untied States or any similar law be brought by or against the Mortgagor or should a receiver be appointed for any properties of the Mortgagor by any court in a proceeding wherein the Mortgagor is alleged to be insolvent or unable to pay its debts as they mature, then in any such event, at the option of the Mortgagee, the principal of and all other sums evidenced by the Mortgage Note plus accrued interest thereon to that date, and all other sums secured by the mortgage hereby constituted shall, without notice, become immediately due, demandable, and payable as fully as if it had been stipulated that all such sums would be due on that date and the Mortgagee, with or without entry, personally or by attorney, at its option, may proceed to protect and enforce its rights hereunder by suit or suits in equity 18 or action or actions by law, whether for specific performance of any covenant or agreement contained herein or in aid of the execution of any power herein granted, or for the foreclosure of the mortgage hereby constituted and the sale of the Mortgaged Premises or for the enforcement of any other appropriate legal or equitable remedy as the Mortgagee shall deem most effectual to protect and enforce any of its rights or duties hereunder. Upon any such default by the Mortgagor and following the acceleration of mature as aforesaid tender of payment of the amount necessary to satisfy the entire indebtedness secured hereby made at any time prior to foreclosure sale (including sale under power of sale hereunder), by the Mortgagor, its successors or assigns, or by anyone on behalf of the Mortgagor, its successors or assigns, shall constitute an evasion of the payment terms hereunder and shall be deemed to be a voluntary prepayment hereunder, and any such payment, to the extent permitted by law, will therefore include the exit fee, if any, required under the prepayment privilege, contained in the Mortgage Note, or the Loan Agreement. In connection with any judicial proceedings initiated by the Mortgagee under the Mortgage Note or this deed the Mortgagee may petition the court having jurisdiction in the premises to appoint a receiver, and said court shall appoint said receiver for the Mortgaged Premises and of all the rents, issues, income, profits and yields of any nature derived from the Mortgaged Premises, which receiver shall have the broadest powers and faculties usually granted to a receiver by the court. Such appointment shall be made by the court as a matter of absolute right granted to the Mortgagee, without taking into consideration the value of the Mortgaged Premises or the solvency or insolvency of the Mortgagor or defendants, and regardless of whether the Mortgagee has an adequate remedy at law. All of said rents, income issues, profits 19 and yield shall be employed by the receiver in conformity with the terms of the mortgage hereby constituted and the rulings of said court. The remedies provided for herein shall be cumulative and not exclusive. The failure of the Mortgagee to exercise the option for acceleration of maturity and/or foreclosure following any default as aforesaid or to exercise any other option granted to the Mortgagee in any one or more instances and the acceptance by the Mortgagee of partial payments hereunder shall not constitute a waiver of any such default nor extend or affect the grace period, if any, but such option shall remain continuously in force. Acceleration of maturity, once claimed hereunder by the Mortgagee, may, at the option of the Mortgagee, be rescinded by written acknowledgement to that effect by the Mortgagee, but the tender and acceptance of partial payments alone shall not in any way affect or rescind such acceleration of maturity, nor extend or affect the grace period, if any. EIGHTEENTH: ASSIGNMENT. As further security for the payment of the indebtedness hereby secured, the Mortgagor hereby irrevocably assigns, transfers, and sets over to the Mortgagee all of the Mortgagor's right, title, and interest in and to all leases and/or subleases (hereinafter referred to collectively as "leases") affecting the Mortgaged Premises to which the Mortgagor is or hereafter shall be a party, together with any and all further leases upon all or any part of the Mortgaged Premises and together will all of the rents, income, receipts, revenues, issues and profits from or due or arising out of the Mortgaged Premises, it being understood that the Mortgagor will from time to time, promptly upon request by Mortgagee, execute and deliver to the Mortgagee a specific, present, and irrevocable assignment satisfactory in substance and form to the Mortgagee, of all 20 of the Mortgagor's right, title, and interest in, to, and under each lease affecting the Mortgaged Premises, it being understood and agreed that every such lease shall be subordinate to the lien of the mortgage hereby constituted. The Mortgagor will promptly give the Mortgagee notice in the event that the tenant under any such lease of the Mortgaged Premises shall institute any judicial or administrative proceeding under the Reasonable Rents Act of Puerto Rico or any similar statute at the time in effect for the reduction of the rent payable by such tenant. NINETEENTH: RELEASES. The Mortgagee may, without notice and without regard to the consideration, if any, paid therefor, and notwithstanding the existence at that time of any inferior liens thereof, release any part of the security described herein or by any person liable for any indebtedness secured hereby, without in any way affecting the priority of the lien of the mortgage hereby constituted, to the full extent of the indebtedness remaining unpaid hereunder, upon any part of the security not expressly released, and may agree with any party obligated on said indebtedness or having any interest in the security described herein to extend the time for payment of any part or all of the indebtedness secured hereby. Such agreement shall not in any way release or impair the lien of said mortgage, but shall extend such lien as against the title of all partes having any interest in said security which interest is subject to such lien. In the event the Mortgagee (i) releases, as aforesaid, any party of the security described herein or any person liable for any indebtedness secured hereby; or (ii) grants an extension of time for any payments of the indebtedness secured hereby; or (iii) takes other or additional security for the payment thereof; or (iv) waives or fails to exercise any right granted in this deed or in the Note, said act or omission shall not release the Mortgagor or any make, endorser or 21 surety of the mortgage hereby constituted or of the Note or under any covenant of this deed or of the Note, nor preclude the Mortgagee from exercising any right, power or privilege herein granted or intended to be granted in the event of any other default then made or any subsequent default. TWENTIETH: MISCELLANEOUS. Mortgagor will not exercise any right which he might have to cancel the record of the Mortgage by reason of lapse of time counted from the date of the constitution of the Mortgage either under the applicable provisions of the Mortgage Law or otherwise and further agrees, whenever requested by the Mortgagee, to execute and file in the appropriate Registry, at Mortgagor's costs and expense, any and all supplemental instruments which may be necessary or convenient for the preservation of the lien of the mortgage until full payment of the Mortgage Note or debt so secured by the lien upon the Mortgaged Premises. Without limiting the generality of the foregoing, Mortgagor agrees that: (a) Unless the Mortgagee shall consent in writing to the cancellation of the Mortgage at an earlier date, the Mortgage shall be conclusively presumed to subsist until full payment to the Mortgagee of all amounts lent and secured hereunder, and the Mortgagor does hereby waive any right which he might otherwise have under the Mortgage Law of Puerto Rico to apply for an earlier cancellation of the record of the Mortgage. (b) The Mortgagor will give immediate notice by mail to the Mortgagee of any conveyance, transfer or change of ownership or of occupancy of the Mortgaged Premises or any part thereof. 22 (c) Nothing herein contained nor any transaction related thereto shall be construed or shall operate, either presently or prospectively, to require the Mortgagor to make any payment or do any act contrary to law, but if any clause and provision herein contained shall otherwise so operate to invalidate the mortgage hereby constituted, in whole or in part, then such clause and provision shall be held for naught as though not herein contained and the remainder of this deed shall remain operative and in full force and effect. (d) The Mortgagor will, within ten (10) days after written request by the Mortgagee, execute, acknowledge, and deliver to the Mortgagee a chattel mortgage, security agreement or other similar security instrument in form satisfactory to the Mortgagee, covering all property of any kind whatsoever owned by the Mortgagor, which, in the reasonable opinion of the Mortgagee, is required for the operation of the Mortgaged Premises and may not be covered by the lien of the mortgage hereby constituted under the laws of the Commonwealth of Puerto Rico, and will further execute, acknowledge and deliver any financing statement, affidavit, continuation statement or certificate or other document requested by the Mortgagee in order to perfect, preserve, maintain, continue and extend the security interest under and the priority of such chattel mortgage or other security instrument, it being understood that the Mortgagor will pay to the Mortgagee on demand all costs and expenses incurred by the Mortgagee in connection with the preparation, execution, recording and filing of any such document. (e) Whenever in this deed or in the Mortgage Note or by law, notice or demand shall be required to be given by the Mortgagee to the Mortgagor, such notice or demand shall be sufficient if in writing and delivered to an officer or employee of the Mortgagor, or if 23 mailed to the Mortgagor addressed to it at its last address actually furnished to the Mortgagee or at the Mortgaged premises. (f) In the event of the sale or transfer by operation of law, or otherwise, of all or any part of the Mortgaged Premises, the Mortgagee is hereby authorized and empowered to deal with such vendee or transferee with reference to the Mortgaged Premises, or the debt secured hereby, or with reference to any of the terms or conditions hereof, as fully and to the same extent as it might with the Mortgagor, without in any way releasing or discharging the Mortgagor from its liability or undertakings hereunder. The term "Mortgagor" as used herein shall mean and include the Mortgagor appearing herein and any title holder, in whole or in part, of the Mortgaged Premises. (g) All of the covenants hereof shall run with the Mortgaged Premises. TWENTY FIRST: THE MORTGAGE NOTE. The Mortgage Note referred to in paragraph SECOND of this deed is literally transcribed herein as follows: "MORTGAGE NOTE FOR VALUE RECEIVED, the undersigned, El Conquistador Partnership L.P. hereby promises to pay to the order of THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO, on demand, at such place as may be designated in writing by said payee or holder the principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) in lawful money of the United States of America together with interest in like lawful money on the decreasing balance of the aforesaid principal sum until paid and throughout its life or through any period of non-payment, default, and after maturity, also payable on demand, at an annual variable interest rate to be computed on the basis of a three hundred sixty (360) days year equivalent to the London Interbank Offered Rate (LIBOR) as described on page 3750 of the Telerate's System at 11:00 A.M. (London Time) for a three (3) month period, plus ninety (90) basis points (LIBOR plus 0.9%). The initial interest rate on this Mortgage Note shall be Seven point Five Twenty Five Percent (7.525%) per annum. 24 Anything herein to the contrary notwithstanding, if the rate of interest required to be paid hereunder exceeds the rate lawfully chargeable, the rate of interest to be paid shall be automatically reduced to the maximum rate lawfully chargeable so that no amounts shall be charged which are in excess thereof, and, in the event it should be determined that any excess over such highest lawful rate has been charged or received, the payee or holder hereof shall promptly refund such excess to the undersigned; provided, however, that, if lawful, any such excess shall be paid by the undersigned to the payee or holder hereof as additional interest (accruing at a rate equal to the maximum legal rate minus the rate provided for hereunder) during any subsequent period when regular interest is accruing hereunder at less that the maximum legal rate. In case of recourse to the courts by the payee or holder of this Mortgage Note, including but not limited to collection, foreclosure and Bankruptcy Code proceedings, in order to collect the whole; or any portio of the principal and interest due on this Mortgage Note, the undersigned agree(s) to pay up to a maximum of ten percent (10%) of the principal amount of the Mortgage Note, to cover actual court costs, disbursements and reasonable attorneys' fees. The undersigned, and all others who may become liable for all or any part of this obligation jointly and severally waive demand, presentment, protest, notice of dishonor and non-payment, and any and all lack of diligence or delays in collection or enforcement hereof. The payment of this Mortgage Note is secured by a mortgage constituted pursuant to the terms of Deed Number 3, execute on the 7th day of February, 1991, before Notary Ramon Moran Loubriel, and the payee or bearer hereof is entitled to the benefit and security of all of the provisions and conditions set forth in said Deed of Mortgage. No reference herein to the Deed of Mortgage shall alter or impair the obligation of the undersigned hereon, which is continuing, absolute and unconditional, nor shall such reference affect the negotiability hereof under the Negotiable Instruments Law of Puerto Rico. Nevertheless, the obligations of the undersigned under this Mortgage Note shall be non-recourse, payable solely from the security constituted by the Mortgage securing payment of this Mortgage Note. IN WITNESS WHEREOF, the undersigned has caused this Mortgage Note to be executed at San Juan, Puerto Rico, this 7th day of February, 1991. (Signed): El Conquistador Partnership, L.P. By: Kumagai Caribbean, Inc. (Signed): Toru Fujita - Vice President By: WKA el Con Associates 25 (Signed): Hugh Alanson Andrews - Authorized Signatory Affidavit Number: 4656 Subscribed and acknowledged to before by Mr. Toru Fujita and Mr. Hugh Alanson Andrews, both of legal age, married, business executives and residents of San Juan, Puerto Rico, this 7th day of February, 1991. (Signed): RAMON MORAN LOUBRIEL NOTARY PUBLIC". TWENTY SECOND: DESCRIPTION OF THE MORTGAGED PREMISES: The description of the Mortgaged Premises is as follows: "RUSTICA: Predio compuesto de Cien (100) cuerdas, equivalentes a Treinta y Nueve (39) hectareas, Treinta (30) areas y Cuatro (4) centiareas, terreno quebrado y llano, destinado a pastos, situado en el islote denominado Palomino, en el Mar Caribe y frente al Puerto de Fajardo, al Este del mismo, colinda por sus cuatro puntos cardinales con el mencionado Mar Caribe. Enclava una casa y un ranchon para peones y distintas cercas". TITLE, LIENS, AND ENCUMBRANCES The Leasehold Estate is recorded at page thirty six overleaf (36 vto.) of volume three hundred twenty six (326) of Fajardo, Registry of Property of Puerto Rico, Property Number Five Hundred Fifty (550). The Leasehold of the Mortgagor was constituted by Alberto Bachman Umpierre and Lillian Bachman Umpierre, as lessor, in favor of the Mortgagor, as lessee, for a term of thirty two (32) years commending on the first (1st) day of December, nineteen hundred and ninety (1990), subject to an option to renew on the same terms and conditions, for two additional consecutive five (5) years periods, as per that certain ground lease recorded as Deed Number Twelve (12) of December fifteen (15), nineteen hundred and ninety (1990) before Notary Public 26 Silvestre M. Miranda (the "Ground Lease"), which is pending recording at Entry number Five Hundred and Eighty (580) of Volume Thirty Nine (39) at Page Two Hundred and Ninety (290) of the Book of Daily Entries of the Registry of Property, Fajardo Section, as modified by agreement dated January thirty first (31st.), nineteen hundred ninety one (1991). Mortgagor represents that the above described Mortgaged premises is free and clear, by its origin and by itself, of any and all liens and encumbrances other than a first and prior mortgage in the principal amount of TWO MILLION DOLLARS ($2,000,000.00) constituted pursuant to Deed of Leasehold Mortgage Number Two (2) executed this same date before Notary Public Leonor Aguilar Guerrero to secure payment of a Mortgage Note for the same principal amount. TWENTY THIRD: FORECLOSURE VALUATION. The foreclosure valuation of the Leasehold Estate comprising the Mortgaged Premises is equal to the sum of the principal of the Mortgage Note the payment thereof secured by the line of the Mortgage hereby constituted, which Mortgage Note is transcribed in paragraph TWENTY FIRST of this Deed. TWENTY FOURTH: LIMITATION OF LIABILITY. Notwithstanding anything to the contrary contained in this Mortgage, no recourse shall be had, whether by levy or execution or otherwise, for the payment of the principal of or interest on, or other amounts owed hereunder or under the Mortgage Note, or for any claim based on this Mortgage or in respect thereof, against any partner of the Mortgagor or any predecessor, successor or affiliate of any such partner or any of their assets (other than from the interest of such partner in the Mortgagor), or against any principal, partner, shareholder, officer, director, 27 agent or employee of any such partner (other than from the interest of any such person in such partner), nor shall any such persons be personally liable for any such amount or claims, or liable for any deficiency judgment based thereon or with respect thereto, it being expressly understood that the sole remedies of the Mortgagee with respect to such amounts and claims shall be against the assets of the Mortgagor, including the Mortgaged Property, and that all such liability of the aforesaid persons, except as otherwise expressly provided herein, is expressly waived and released as a condition of and as consideration for the execution of the Mortgage; provided, however, that (A) nothing contained in this Mortgage (including, without limitation, the provisions of this paragraph TWENTY FOURTH shall constitute a waiver of any indebtedness of Mortgagor evidenced hereby or of any of the Mortgagor's other obligations under such other instruments executed in connection herewith or shall be taken to prevent recourse to and the enforcement against the Mortgagor, of all the liabilities, obligations and undertakings contained in this Mortgage; (b) this paragraph TWENTY FOURTH shall not be applicable to a breach by any person of any independent obligation to the Mortgagee, including, but not limited to any other obligations of any person under any other guarantee or indemnity agreement executed or delivered in connection herewith or with any pledge agreement pursuant to which the Mortgage Note is pledged or assigned (including without limitation, the indemnities set forth in paragraph TWELFTH hereof) and (C) this paragraph TWENTY FOURTH shall not be applicable to the active party in the event of and to the extent of any claim against such party for (1) fraud by such party, (2) misappropriation of funds or other property by such party, or (3) damage to the Mortgaged Property or any part thereof intentionally inflicted in bad faith by such party. For the purposes of the foregoing, the term "shareholder" shall be deemed to include the 28 shareholders of any corporation which is a shareholder of a corporation and the term "partner" shall be deemed to include the partners of any partnership which is a partner of a partnership. TWENTY FIFTH: ENVIRONMENTAL MATTERS. (a) Hazardous Substances. Except to the extent that failure to comply would not have a material adverse effect on the Mortgagor or the Mortgaged Premises and/or not result in or create a lien of any kind upon the Mortgaged Premises, the Mortgagor shall: (i) not store (except in compliance with all laws, ordinances, and regulations pertaining thereto), dispose of, release or allow the release of any hazardous substance, solid waste or oil, as defined in forty-two (42) United States Code ("USC") Sections nine six zero one (9601) et seq., forty-two (42) USC Sections six nine zero one (6901) et seq., fifteen (15) USC Sections two six zero one (2601 et seq., and the regulations promulgated thereunder, and all applicable federal, state and local laws, rules and regulations, on the Mortgaged Premises; (ii) neither directly nor indirectly transport or arrange for the transport of any hazardous substance or oil (except in compliance with all laws, ordinances and regulations pertaining thereto); (iii) in the event of any change in the laws governing the assessment, release or removal of hazardous material, which change would lead a prudent lender to require additional testing to avail itself of any statutory insurance or limited liability, take all such action (including, without limitation, the conducting of engineering tests at the sole expense of the Mortgagor) to confirm that no hazardous substance or oil is or ever was stored, released or disposed of or on the Mortgaged Premises; and 29 (iv) provide the Mortgagee with written notice: (aa) upon the Mortgagor obtaining knowledge of the release of any hazardous substance or oil at or from the Mortgaged Premises; (bb) upon the Mortgagor's receipt of any notice to such effect from any federal, state, or other governmental authority or making an assessment of any expense incurred in connection with the containment, removal or remediation of any hazardous substance or oil at or from the Mortgaged Premises, for which the Mortgagor may be liable or for which expense a lien may be imposed on the Mortgaged Premises. For purposes of this section, the terms "hazardous substance" and "release" shall have the meanings specified in the Comprehensive Environmental Response, Compensation and Liability Act of nineteen hundred eighty (1980), forty two (42) USC Sections nine six zero one (9601) et seq., ("CERCLA") and the terms "solid waste" and "disposal" (or "disposed") shall have the meanings specified in the Resource Conservation and Recovery Act of nineteen hundred seventy six (1976), forty two (42) USC Sections six nine zero one (6901) et seq., ("RCRA") and regulations promulgated thereunder; provided, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date such amendment and provided further, to the extent that the laws of the jurisdiction where the Mortgaged Premises is located establish a meaning for "hazardous substance", "release", "solid waste", or "disposal" which is broader than specified in either CERCLA or RCRA, such broader meaning shall apply. (b) Environmental Assessments. In addition to the Mortgagee's rights under Section (a)(iii), the Mortgagee may, at its election, if there is reasonable cause to suspect some environmental damage has occurred without regard to whether Mortgagor is in default hereunder 30 or under the Mortgage Note, obtain one or more environmental assessments of the Mortgaged Premises prepared by a geohydrologist, and independent engineer or other qualified consultant or expert approved by the Mortgagee evaluating or confirming (i) whether any hazardous substances or other toxic substances are present in the soil or water at or adjacent to the Mortgaged Premises and (ii) whether the use and operation of the Mortgaged Premises comply with all applicable federal, state and local laws, rules and regulations (herein called ("Environmental Laws") relating to air quality, environmental control, release of oil, hazardous material, hazardous wastes and hazardous substances, and any and all other applicable environmental laws. Environmental assessments may include detailed visual inspection of the Mortgaged Premises including, without limitation, any and all storage areas, and the taking of soil samples, surface water samples and ground water samples, as well as such other investigations or analyses as are necessary or appropriate for a complete determination of the compliance of the Mortgaged Premises and the use and operation thereof with all applicable Environmental Laws. TWENTY SIXTH: RECORDATION IN THE ENGLISH LANGUAGE. Mortgagor and Mortgagee now state that this Deed has been drafted in the English language in satisfaction of their wishes and in compliance with their wishes and in compliance with their instructions and they further add that to prevent any translation mistake they have agreed to request that this Deed be recorded at the Registry of Property in the English language thus waiving by these presents any right that they may have to have the same translated to the Spanish language for recordation purposes. TWENTY SEVENTH: 31 The provision contained in paragraphs EIGHTH, NINTH, TENTH, TWELFTH, FIFTEENTH, SEVENTEENTH and TWENTY FIFTH of this deed are subordinated to the provisions of the Loan Agreement or to any other agreement under which the Mortgage Note secured hereby is delivered in pledge or otherwise, and in the event of conflict or inconsistencies, the Loan Agreement provisions will govern. TWENTY EIGHTH: ACCEPTANCE BY MORTGAGEE. The Mortgage Note has been delivered in pledge to Mortgagee to secure payment to Mortgagee of credit facilities which have been granted by the Mortgagee to Mortgagor under a Loan Agreement executed on this same date in furtherance of Mortgagee's statutory duty and responsibility to aid an develop the economy of Puerto Rico, particularly its industrialization, thus complying with the public purpose of Mortgagee's creation of benefiting THE PEOPLE OF PUERTO RICO. Complying with the requirements of Article One Hundred Eighty Six (186) of the Mortgage and Registry of Property Law of Puerto Rico of the year Nineteen Hundred Seventy Nine (1979), the Mortgagee states its acceptance to the mortgage lien constituted by these presents in its favor. ACCEPTANCE I, the Notary, made to the appearing party(ies) the necessary legal warnings concerning the execution of this deed and he(she)(they) was(were) fully advised by me thereon. I advised him(her)(them) as to his(her)(their) legal right to read the deed and to have witnesses present at the execution thereof, which he waived, and then I read this deed to him(her)(them). After having heard the contents of this deed, as stated in all preceding paragraphs, the appearing party(ies) fully ratified and confirmed the statements contained herein as the true and 32 exact embodiment of his(her)(their) stipulations, terms, and conditions whereupon he(she)(they) signed this deed before me, the Notary, and initialed each and every page of this deed. I, the Notary, do hereby certify as to everything stated or contained in this instrument. Signed: Toru Fujita, Hugh Alanson Andrews and George Barr Wilson. Signed, Sealed, Marked and Flourished: RAMON MORAN LOUBRIEL. The corresponding Internal Revenue Stamps and that of Notarial Fee have been cancelled on the original. I, the Notary, CERTIFY that the foregoing is a true and exact copy of the original, which forms part of my Protocol for Public Instruments for the current year and which contains --37-- pages. IN WITNESS WHEREOF, and at the request of The Government Development Bank for Puerto Rico I issue this --FIRST-- copy which I sign, seal, mark and flourish at San Juan, Puerto Rico, on the same date of its execution. I ATTEST. /s/ 33 EX-12 27 EXHIBIT 12
EL CONQUISTADOR RATIO OF EARNINGS TO FIXED CHARGES ENDING MARCH 31, ---------------------------------------------------------------------------------------- FISCAL FISCAL FISCAL FISCAL FISCAL 1994 1995 1996 1997 1998 EARNINGS AUDITED AUDITED AUDITED AUDITED UNAUDITED -------- ---------------------------------------------------------------------------------------- PRETAX INCOME (LOSS) FROM $(10,047,684) $(27,476,720) $(12,241,033) $(9,403,173) $(7,936,178) CONTINUING OPERATIONS CURRENT PERIOD AMORTIZATION OF INTEREST CAPITALIZED IN PREVOIUS PERIODS $236,328 $ 237,320 $ 237,343 $ 237,343 $ 237,343 INTEREST EXPENSE $ 5,297,771 $16,136,755 $17,021,764 $17,162,132 $ 17,228,735 LESS INTEREST CAPITALIZED DURING PERIOD $ (49,623) $ (1,138) $ 0 $ 0 $ 0 NET AMORTIZATION OF DEBT ISSUANCE $ 742,822 $ 978,007 $ 978,012 $ 978,002 $ 978,007 INTEREST PORTION OF RENTAL EXPENSE $ 0 $ 0 $ 0 $ 0 $ 0 EARNINGS $(3,820,386) $(10,125,776) $ 5,996,086 $ 8,974,304 $ 10,507,907 ------------ ---------- ------------ ---------- ----------- FIXED CHARGES INTEREST EXPENSE $ 5,297,771 $ 16,136,755 $17,021,764 $17,162,132 $17,228,735 NET AMORTIZATION OF DEBT ISSUANCE $ 742,822 $ 978,007 $ 978,012 $ 978,002 $ 978,007 INTEREST PORTION OF RENTAL EXPENSE $ 0 $ 0 $ 0 $ 0 $ 0 ------------ ------------ ---------- ---------- ----------- TOTAL FIXED CHARGES $ 6,040,593 $ 17,114,762 $17,999,776 $18,140,134 $18,206,742 RATIO OF EARNINGS TO FIXED NEGATIVE $(3,820,386) NEGATIVE $(10,125,776) 0.3 0.5 0.6 CHARGES ----------- ------------ --- --- --- FOOTNOTE FOOTNOTE TO 1 TO 1 TO 1 EARNINGS INADEQUATE EARNINGS INADEQUATE ------------------- ------------------- ---------- ----------- --------------
1
EL CONQUISTADOR RATIO OF EARNINGS TO FIXED CHARGES ENDING DEC 31, ------------------------------------------------- 9 MONTHS 9 MONTHS DEC 96 DEC 97 EARNINGS UNAUDITED AUDITED -------- -------------------------------------------------- PRETAX INCOME (LOSS) FROM $ (14,810,798) $ (15,042,122) CONTINUING OPERATIONS CURRENT PERIOD AMORTIZATION OF INTEREST CAPITALIZED IN PREVOIUS PERIODS $ 178,007 $ 178,007 INTEREST EXPENSE $ 12,691,707 $ 13,156,711 LESS INTEREST CAPITALIZED DURING PERIOD $ 0 NET AMORTIZATION OF DEBT ISSUANCE $ 733,509 $ 733,509 INTEREST PORTION OF RENTAL EXPENSE $ 0 $ 0 EARNINGS $ (1,207,575) $ (973,895) --------- --------- FIXED CHARGES INTEREST EXPENSE $ 12,691,707 $ 13,156,711 NET AMORTIZATION OF DEBT ISSUANCE $ 733,509 $ 733,502 INTEREST PORTION OF RENTAL EXPENSE $ 0 $ 0 ----------- ---------- TOTAL FIXED CHARGES $ 13,425,216 $ 13,890,213 RATIO OF EARNINGS TO FIXED CHARGES NEGATIVE $ (1,207,575) NEGATIVE $ (973,895) FOOTNOTE FOOTNOTE EARNINGS INADEQUATE EARNINGS INADEQUATE --------------------------------------------------
2
EL CONQUISTADOR RATIO OF EARNINGS TO FIXED CHARGES ENDING JUNE 30, ---------------------------------------------- 6 MONTHS 6 MONTHS JUNE 97 JUNE 98 EARNINGS UNAUDITED UNAUDITED -------- ---------------------------------------------- PRETAX INCOME (LOSS) FROM $ 3,072,415 $ 7,585,569 CONTINUING OPERATIONS CURRENT PERIOD AMORTIZATION OF INTEREST CAPITALIZED IN PREVOIUS PERIODS $ 118,672 $ 118,672 INTEREST EXPENSE $ 8,871,260 $ 8,669,672 LESS INTEREST CAPITALIZED DURING PERIOD NET AMORTIZATION OF DEBT ISSUANCE $ 489,001 $ 489,001 INTEREST PORTION OF RENTAL EXPENSE $ 0 EARNINGS $12,551,348 $16,862,914 ---------- ---------- FIXED CHARGES INTEREST EXPENSE $ 8,871,260 $ 8,669,672 NET AMORTIZATION OF DEBT ISSUANCE $ 489,001 $ 489,001 INTEREST PORTION OF RENTAL EXPENSE $ 0 $ 0 ---------- ---------- TOTAL FIXED CHARGES $ 9,360,261 $ 9,158,673 RATIO OF EARNINGS TO FIXED CHARGES 1.3 1.8 --- --- TO 1 TO 1 ------------------------- ---------------------
3
EL CONQUISTADOR RATIO OF EARNINGS TO FIXED CHARGES PROFORMA P/L ----------------------------------------------------------------- PROFORMA PROFORMA PROFORMA 12 MONTH 9 MONTH 6 MONTH EARNINGS 1998 FISCAL DEC 1997 JUNE 98 -------- ----------------------------------------------------------------- PRETAX INCOME (LOSS) FROM $ 1,556,888 $(9,056,900) $ 13,499,096 CONTINUING OPERATIONS CURRENT PERIOD AMORTIZATION OF INTEREST CAPITALIZED IN PREVOIUS PERIODS $ 237,343 $ 178,007 $ 118,672 INTEREST EXPENSE $10,829,826 $ 8,413,369 $ 5,608,913 LESS INTEREST CAPITALIZED DURING PERIOD NET AMORTIZATION OF DEBT ISSUANCE $ 166,667 $ 125,000 $ 83,333 INTEREST PORTION OF RENTAL EXPENSE EARNINGS $12,790,724 $ (340,524) $ 19,310,014 ----------- -------- ---------- FIXED CHARGES INTEREST EXPENSE $11,272,761 $ 8,454,571 $ 5,636,381 NET AMORTIZATION OF DEBT ISSUANCE $ 166,667 $ 125,000 $ 83,333 INTEREST PORTION OF RENTAL EXPENSE $ 0 $ 0 $ 0 ---------- --------- --------- TOTAL FIXED CHARGES $11,439,428 $8,579,571 $ 5,692,246 RATIO OF EARNINGS TO FIXED CHARGES 1.1 NEGATIVE $ (340,524) 3.4 --- FOOTNOTE --- TO 1 EARNINGS INADEQUATE TO 1 -----------------------------------------------------------
4 EX-23 28 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption 'Experts' in Registration Statement on Form S-11 and the related Preliminary Official Statement and Prospectus for the Offering of the Undivided Interests in the Loan Agreement between Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority and El Conquistador Partnership L.P. and to the use of our reports: (a) dated June 12, 1998 (except for the third, fourth and sixth paragraphs of Note 14, as to which the dates are July 13, August 3, and September 21, 1998, respectively) with respect to the Financial Statements of El Conquistador Partnership L.P.; (b) dated June 11, 1998 (except for the second, third and fifth paragraphs of Note 7, as to which the dates are July 13, August 3, and September 21, 1998, respectively) with respect to the Balance Sheet of WKA El Con Associates; and (c) dated October 2, 1998 with respect to the Balance Sheet of WHG El Con Corp; all of which are included in the Registration Statement on Form S-11 and the related Preliminary Official Statement and Prospectus of El Conquistador Partnership L.P., to be filed with the Securities and Exchange Commission on or about October 20, 1998. ERNST & YOUNG LLP San Juan, Puerto Rico October 16, 1998 EX-23 29 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption 'Experts' in Registration Statement on Form S-11 and the related Preliminary Official Statement and Prospectus for the Offering of the Undivided Interests in the Loan Agreement between Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority and El Conquistador Partnership L.P. and to the use of our report dated October 16, 1998 with respect to the Balance Sheet of Conquistador Holding, Inc. which is included in the Registration Statement on Form S-11 and the related Preliminary Official Statement and Prospectus of El Conquistador Partnership L.P., to be filed with the Securities and Exchange Commission on or about October 20, 1998. ERNST & YOUNG LLP Dallas, Texas October 16, 1998 EX-27 30 EXHIBIT 27
5 9-MOS 6-MOS DEC-31-1997 JUN-30-1998 APR-1-1997 JAN-1-1998 DEC-31-1997 JUN-30-1998 4,608,716 3,379,480 0 0 6,197,830 5,903,314 346,436 271,136 1,673,266 1,603,891 13,953,344 12,926,494 207,070,810 232,320,782 25,944,072 2,594,881 200,421,664 246,075,784 151,661,696 137,946,610 120,000,000 120,000,000 0 0 0 0 0 0 0 0 200,421,664 246,075,784 0 0 60,126,627 64,385,452 0 0 62,139,878 48,214,988 0 0 119,000 59,368 13,156,711 8,669,671 (15,042,122) 7,585,570 0 0 (15,042,122) 7,585,570 0 0 0 0 0 0 (15,042,122) 7,585,570 0 0 0 0 -----END PRIVACY-ENHANCED MESSAGE-----