-----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, WPUm+4Bnfjv86efRK3Oj1QI4ESq0FTdtJaivlEfaS6SfWOQueV8g8Wgxwf9bqDbx Fxvb7JiNy0YnEtGm2kGtXg== 0000898822-06-000608.txt : 20060517 0000898822-06-000608.hdr.sgml : 20060517 20060517153922 ACCESSION NUMBER: 0000898822-06-000608 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20060511 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060517 DATE AS OF CHANGE: 20060517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Morgans Hotel Group Co. CENTRAL INDEX KEY: 0001342126 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 161736884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51802 FILM NUMBER: 06849094 BUSINESS ADDRESS: STREET 1: 475 TENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 212-277-4100 MAIL ADDRESS: STREET 1: 475 TENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10018 8-K 1 mhg8kwlrkcomments.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________________________________________________________________ FORM 8-K ________________________________________________________________________________ CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT: MAY 11, 2006 (DATE OF EARLIEST EVENT REPORTED) ________________________________________________________________________________ MORGANS HOTEL GROUP CO. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ________________________________________________________________________________ DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION) 000-51802 16-1736884 (COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.) 475 TENTH AVENUE NEW YORK, NY 10018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 277-4100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE ________________________________________________________________________________ (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. MERGER AGREEMENT On May 11, 2006, Morgans Hotel Group Co., a Delaware corporation ("MHGC"), MHG HR Acquisition Corp., a Nevada corporation and a direct wholly-owned subsidiary of MHGC ("Merger Sub") and Hard Rock Hotel, Inc., a Nevada corporation ("HRH") entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into HRH (the "Merger"), with HRH continuing as the surviving corporation after the Merger. As a result of the Merger, HRH will become a wholly-owned subsidiary of MHGC. The Board of Directors of MHGC and HRH approved the Merger and the Merger Agreement. The holder of all of the issued and outstanding shares of HRH Class A voting common stock and of approximately 94% of HRH Class B non-voting common stock has approved the Merger and the Merger Agreement. At the effective time of the Merger (the "Effective Time"), by virtue of the Merger and without any action on the part of any holder of any shares of capital stock of HRH, MHGC or Merger Sub, each share of common stock of HRH issued and outstanding immediately prior to the Effective Time (other than any dissenting shares, if applicable) shall be canceled and shall be converted into the right to receive the per share amount of the total Merger Consideration. The "Merger Consideration" shall be an amount equal to $421 million, subject to adjustments for working capital and other transaction-related items. At the time of the execution of the Merger Agreement, the Company deposited $30 million (the "Merger Deposit") into an escrow account, which amount shall be released at the closing of the Merger in accordance with an escrow agreement entered into by the parties to the Merger Agreement, a stockholders' representative and an escrow agent. The Merger Deposit is non-refundable under certain circumstances, including a material breach by MHGC of its obligations under the Merger Agreement and MHGC's failure to obtain required gaming approvals. At the closing of the Merger, MHGC shall deposit $15 million of the Merger Consideration into an indemnification escrow fund to be disbursed in accordance with the Merger Agreement and the applicable escrow agreement, with the remaining funds from the indemnification escrow fund to be released on the one-year anniversary of the closing date. The completion of the Merger is subject to various customary conditions, including the receipt of required gaming approvals and the closing of the other transactions contemplated by the Merger Agreement, including the Land Purchase (as defined herein) and the execution of agreements related to the acquisition of certain intellectual property, including a trademark agreement, a license agreement and a trademark assignment agreement (collectively, the "IP Agreements"). A copy of the Merger Agreement is attached hereto as Exhibit 2.1 and is incorporated herein by reference. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement. LAND PURCHASE AGREEMENT Additionally, on May 11, 2006, Morgans Group LLC, a Delaware limited liability company and an affiliate of MHGC ("Morgans Group") entered into a purchase and sale agreement with PM Realty, LLC (the "Land Purchase Agreement") to acquire, for $259 million, a parcel of land adjacent to the Hard Rock Hotel & Casino (the "Resort"), comprising a 544 unit multi-family residential apartment project (the "Land Purchase"). At the time of the execution of the Land Purchase Agreement, Morgans Group deposited $18.5 million (the "Land Deposit") into an escrow account in accordance with an escrow agreement entered into among the parties to the Land Purchase Agreement, Red, White and Blue Pictures, Inc., a California corporation ("RWB"), Peter A. Morton and the escrow agent. At the closing date, $3.5 million of the deposit will be released and credited towards the purchase price and the remaining $15 million of the deposit will be retained as part of an indemnification escrow fund to be disbursed in accordance with the Land Purchase Agreement and the applicable escrow agreement, with the remaining funds from the indemnification escrow fund to be released on the eighteen-month anniversary of the closing date. The completion of the Land Purchase is subject to various customary conditions, including the closing of the transactions contemplated by the Merger Agreement and the execution of the IP Agreements. A copy of the Land Purchase Agreement is attached hereto as Exhibit 10.1 and is incorporated herein by reference. The foregoing description of the Land Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Land Purchase Agreement. HARD ROCK CAFE PURCHASE AGREEMENT Additionally, on May 11, 2006, Morgans Group entered into a purchase and sale agreement with RWB (the "Cafe Purchase Agreement") to acquire, for $20 million, a parcel of land on which the Hard Rock Cafe restaurant in Las Vegas is situated (the "Cafe Purchase"). At the time of the execution of the Cafe Purchase Agreement, the Company deposited $1.5 million in an escrow account, which amount shall be released at the closing in accordance with an escrow agreement. The completion of the Cafe Purchase is subject to various customary conditions, including the closing of the other transactions contemplated by the Merger Agreement and the Land Purchase Agreement and the execution of the IP Agreements. A copy of the Cafe Purchase Agreement is attached hereto as Exhibit 10.2 and is incorporated herein by reference. The foregoing description of the Cafe Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Cafe Purchase Agreement. CONDOMINIUM-RELATED DOCUMENTS PURCHASE AGREEMENT Additionally, on May 11, 2006, Morgans Group entered into a purchase and sale agreement with HR Condominium Investors (Vegas), L.L.C. (the "Condo Docs Purchase Agreement") to acquire, for $1 million, certain assets related to a proposal for a condominium development on certain real property adjacent to the Resort (the "Condo Docs Purchase"). The completion of the Condo Docs Purchase is subject to various customary conditions, including the closing of the other transactions contemplated by the Merger Agreement and the Land Purchase Agreement and the execution of the IP Agreements. A copy of the Condo Docs Purchase Agreement is attached hereto as Exhibit 10.3 and is incorporated herein by reference. The foregoing description of the Condo Docs Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Condo Docs Purchase Agreement. FIRST AMENDMENT TO MORGANS LAS VEGAS, LLC LIMITED LIABILITY COMPANY AGREEMENT AND THE LETTER AGREEMENT On May 15, 2006, Morgans/LV Investment LLC, a Delaware limited liability company and an affiliate of MHGC ("Morgans LV") and Echelon Resorts Corporation, a Nevada corporation and a subsidiary of Boyd Gaming Corporation ("Boyd"), entered into the first amendment (the "First Amendment") to the limited liability company agreement of Morgans Las Vegas, LLC, a joint venture between Morgans LV and Boyd (the "Joint Venture"), which agreement governs the development of the Delano Las Vegas and the Mondrian Las Vegas at Echelon Place (the "LLC Agreement"). In connection with the First Amendment, Morgans LV and Boyd also entered into a letter agreement, dated May 15, 2006 (the "Letter Agreement"). The First Amendment confirms that Morgans LV and its affiliates are not prohibited by the LLC Agreement from entering into or consummating the transactions described above. Additionally, the First Amendment requires Morgans LV or one of its affiliates to make a $30 million deposit (the "Boyd Deposit") to Boyd at the closing of the Merger and the other transactions described above. The Boyd Deposit shall be non-refundable in certain circumstances, including Morgans LV's failure to satisfy its financial commitments under the LLC Agreement. The First Amendment also provides that if Morgans LV commits a default under the LLC Agreement or the First Amendment, Boyd shall have the exclusive right to use at Echelon Place (and Morgans shall not use in Las Vegas), without payment of any fee or other compensation, the names "Delano Las Vegas" and "Mondrian Las Vegas" until December 31, 2055. The Letter Agreement provides, among other things, that neither Morgans LV nor any of its affiliates shall (i) invest capital in the any of the real properties covered by the above transactions in an aggregate amount in excess of, or with a value in excess of, 175% of Morgans LV's capital commitment to the Joint Venture or (ii) negotiate with, hire or retain a public gaming company as gaming operator of the Resort without first providing Boyd with a right of first refusal and right of last offer with respect thereto. Copies of the First Amendment and the Letter Agreement are attached hereto as Exhibits 10.4 and 10.5, respectively, and are incorporated herein by reference. The foregoing descriptions of the First Amendment and the Letter Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the First Amendment and the Letter Agreement. ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT. Pursuant to a commitment letter from Column Financial, Inc. ("Column"), an affiliate of Credit Suisse, dated as of May 11, 2006 (the "Commitment Letter"), Column has committed to provide Merger Sub, with a facility (the "Credit Facility") with an 2 aggregate principal amount equal to the lesser of $700,000,000 and 82.5% of the capitalized cost (including certain costs, fees and funding requirements) of the Acquisition described above, subject to certain adjustments. The proceeds from the Credit Facility may be used by Merger Sub (i) to finance the acquisition by Merger Sub, directly or indirectly, of HRH, which owns and operates the Resort, and certain other assets (collectively, the "Acquisition"), (ii) to finance the repayment, restructuring or redemption of certain indebtedness of the HRH, and (iii) to finance all transaction costs of the Acquisition and of such refinancings. The Credit Facility will consist of one or more mortgage loans or mezzanine loans (the "CMBS Loans") to certain subsidiaries of Merger Sub which will initially mature on the date that is two years after the closing date of the Acquisition. To the extent that the conditions precedent to the CMBS Loans cannot be fulfilled prior to the closing date, a portion of the Credit Facility may be funded as a bridge facility (the "Bridge Loan"), the availability of which is subject to a more limited set of conditions. The Bridge Loan will initially mature on a date that is one year after the closing date of the Acquisition. The Bridge Loan may be extended for an additional six-month period at the option of the applicable borrower, subject to certain conditions. The CMBS Loans may be extended for two additional one-year periods at the option of the applicable borrowers, subject to certain conditions. The CMBS Loans, to the extent they are mortgage loans, will be borrowed by one or more single purpose, bankruptcy remote subsidiaries of Merger Sub that own, among other things, the Resort, certain land and any improvements thereon or adjacent thereto and certain rights in improvements known as the Hard Rock Cafe, and will be secured by a first lien on, among other things, such properties. The CMBS Loans, to the extent they are mezzanine loans, will be borrowed by one or more single purpose, bankruptcy remote subsidiaries that hold equity interests in other borrowers of the CMBS Loans, and will be secured by, among other things, certain intellectual property owned or licensed by HRH and/or its affiliates and a first lien on such equity interests. Any Bridge Loan will be borrowed by Merger Sub or one or more single purpose, bankruptcy remote subsidiaries of Merger Sub and will be secured by, among other things, certain intellectual property owned or licensed by HRH and/or its affiliates and equity interests in each of the other borrowers and on certain properties. The CMBS Loans are expected to initially bear interest at a rate per annum equal to LIBOR plus 3.85%. The Bridge Loan is expected to initially bear interest at a rate per annum equal to LIBOR plus 3.85%, subject to increases of 0.25% for each 90 day period during which the Bridge Loan is not repaid or refinanced in full. Column's financing commitments under each of the CMBS Loans and the Bridge Loan are subject to certain customary conditions for such financing transactions as set forth in the Commitment Letter. The loans under the Credit Facility will be non-recourse to the borrowers other than to certain collateral, except in the case of certain bankruptcy-related events and other customary non-recourse carveout events. Morgans Hotel Group Co. and other principals, if any, of Merger Sub and the borrowers may be required to provide guarantees to lenders under the credit facility to the extent of certain non-recourse carveouts customary in financing transactions of this kind. The foregoing description of the Commitment Letter does not purport to be complete and is qualified in its entirety by reference to the Commitment Letter, which is attached as Exhibit 10.6 hereto. 3 ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (a) None (b) None (c) None (d) EXHIBIT NO. EXHIBIT DESCRIPTION 2.1 Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and Peter Morton 10.1 Purchase and Sale Agreement and Joint Escrow Instructions dated May 11, 2006, by and between Morgans Group LLC and PM Realty, LLC 10.2 Purchase and Sale Agreement and Joint Escrow Instructions dated May 11, 2006, by and between Morgans Group LLC and Red, White and Blue Pictures, Inc. 10.3 Purchase and Sale Agreement, dated May 11, 2006, by and between Morgans Group LLC and HR Condominium Investors (Vegas), L.L.C. 10.4 First Amendment to Morgans Las Vegas, LLC Limited Liability Company Agreement, dated May 15, 2006, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation 10.5 Letter Agreement Re: Morgans Las Vegas, LLC, dated May 15, 2006, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation 10.6 Commitment Letter from Column Financial, Inc., dated May 11, 2006 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MORGANS HOTEL GROUP CO. Date: May 17, 2006 By: /s/ RICHARD SZYMANSKI ---------------------------------------- Richard Szymanski Chief Financial Officer 5 EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION 2.1 Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans Hotel Group Co.; MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and Peter Morton 10.1 Purchase and Sale Agreement and Joint Escrow Instructions dated May 11, 2006, by and between Morgans Group LLC and PM Realty, LLC 10.2 Purchase and Sale Agreement and Joint Escrow Instructions dated May 11, 2006, by and between Morgans Group LLC and Red, White and Blue Pictures, Inc. 10.3 Purchase and Sale Agreement, dated May 11, 2006, by and between Morgans Group LLC and HR Condominium Investors (Vegas), L.L.C. 10.4 First Amendment to Morgans Las Vegas, LLC Limited Liability Company Agreement, dated May 15, 2006, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation 10.5 Letter Agreement Re: Morgans Las Vegas, LLC, dated May 15, 2006, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation 10.6 Commitment Letter from Column Financial, Inc., dated May 11, 2006 6 EX-2.1 2 agtandpom.txt EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 11, 2006 BY AND AMONG MORGANS HOTEL GROUP CO., MHG HR ACQUISITION CORP., HARD ROCK HOTEL, INC. AND PETER A. MORTON TABLE OF CONTENTS PAGE ARTICLE I THE MERGER SECTION 1.1 The Merger.......................................................1 SECTION 1.2 Effective Time...................................................1 SECTION 1.3 Closing of the Merger............................................2 SECTION 1.4 Effects of the Merger............................................2 SECTION 1.5 Articles of Incorporation and Bylaws.............................2 SECTION 1.6 Directors........................................................2 SECTION 1.7 Officers.........................................................2 ARTICLE II CONVERSION OF SHARES; CONSIDERATION SECTION 2.1 Conversion of Shares.............................................2 SECTION 2.2 Total Transaction Consideration; Adjustments.....................3 SECTION 2.3 Merger Fund; Exchange of Certificates............................8 SECTION 2.4 Dissenters' Rights..............................................11 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of the Company...................11 SECTION 3.2 Representations and Warranties of Parent and Merger Sub.........18 ARTICLE IV COVENANTS SECTION 4.1 Conduct of Business.............................................20 SECTION 4.2 Access to Information; Confidentiality..........................22 SECTION 4.3 Consents and Governmental Approvals.............................23 SECTION 4.4 Company Bonds; Credit Agreement.................................24 SECTION 4.5 Employee Benefit Plans..........................................25 SECTION 4.6 [INTENTIONALLY OMITTED].........................................27 SECTION 4.7 Financial Information...........................................27 SECTION 4.8 [INTENTIONALLY OMITTED].........................................27 SECTION 4.9 Publicity.......................................................27 SECTION 4.10 Certain Understandings..........................................27 SECTION 4.11 Taxes...........................................................28 SECTION 4.12 Certain Notifications...........................................28 SECTION 4.13 Indemnification of Directors and Officers.......................28 SECTION 4.14 Debt Financing..................................................29 SECTION 4.15 Further Assurances..............................................29 SECTION 4.16 Selected Memorabilia............................................30 SECTION 4.17 Termination of Affiliate Agreements.............................30 SECTION 4.18 Other Transaction Documents.....................................30 i ARTICLE V CONDITIONS PRECEDENT SECTION 5.1 Conditions Precedent to Each Party's Obligations................30 SECTION 5.2 Conditions Precedent to Parent's and Merger Sub's Obligations...31 SECTION 5.3 Conditions Precedent to the Company's Obligations...............31 ARTICLE VI TERMINATION SECTION 6.1 Termination.....................................................32 SECTION 6.2 Effect of Termination...........................................33 SECTION 6.3 Specific Performance............................................36 ARTICLE VII SURVIVAL; INDEMNIFICATION SECTION 7.1 Survival of Representations, Warranties and Covenants...........36 SECTION 7.2 Obligation of Stockholders......................................36 SECTION 7.3 Obligation of Parent............................................37 SECTION 7.4 Minimum Losses..................................................37 SECTION 7.5 Maximum Indemnification.........................................37 SECTION 7.6 No Tax Attribute Indemnity......................................37 SECTION 7.7 Notice; Procedure for Third-Party Claims........................37 SECTION 7.8 Survival of Indemnity...........................................38 SECTION 7.9 No Consequential Damages........................................39 SECTION 7.10 No Double Recovery..............................................39 ARTICLE VIII DEFINITIONS SECTION 8.1 Definitions.....................................................39 SECTION 8.2 Interpretation..................................................42 ARTICLE IX MISCELLANEOUS SECTION 9.1 Notices.........................................................42 SECTION 9.2 Severability....................................................44 SECTION 9.3 Counterparts....................................................44 SECTION 9.4 Mutual Drafting.................................................44 SECTION 9.5 Entire Agreement................................................44 SECTION 9.6 Governing Law; Jurisdiction.....................................44 SECTION 9.7 Amendment; Waiver...............................................44 SECTION 9.8 Assignment......................................................44 SECTION 9.9 No Third-Party Beneficiaries....................................45 SECTION 9.10 Stockholders' Representative....................................45 SECTION 9.11 Arbitration.....................................................45 ii EXHIBITS Exhibit A Copy of PMR Purchase and Sale Agreement Exhibit B Form of Trademark Agreement Exhibit C Copy of Escrow Agreement Exhibit D Form of License Agreement Exhibit E Form of Morton Trademark Assignment Exhibit F Copy of Action by Written Consent iii TABLE OF DEFINITIONS DEFINED TERM INITIAL SECTION REFERENCE Accountants...........................................................2.2(c)(ii) Additional Consideration...............................................2.2(a)(i) Affected Employee.........................................................4.5(a) Affiliate....................................................................8.1 Affiliate Agreements........................................................4.17 Agreement........................................................First Paragraph Applicable First Call Date...................................................8.1 Applicable Percentage.................................................2.2(a)(ii) Articles of Merger...........................................................1.2 Business Day.................................................................8.1 Cage Cash.............................................................2.2(a)(ix) Class A Company Common Stock...........................................2.1(a)(i) Class B Company Common Stock...........................................2.1(a)(i) Closing......................................................................1.3 Closing Balance Sheet.....................................................2.2(c) Closing Date.................................................................1.3 Closing Date Cage Cash....................................................2.2(c) Closing Date Working Capital..............................................2.2(c) Closing Schedule..........................................................2.2(c) Company..........................................................First Paragraph Company Bonds................................................................8.1 Company Common Stock...................................................2.1(a)(i) Company Condition Failure.................................................6.1(c) Company Consents..........................................................3.1(e) Company Disclosure Letter....................................................8.1 Company Intellectual Property.............................................3.1(q) Company Junior Notes.........................................................8.1 Company SEC Report........................................................3.1(f) Company SEC Reports.......................................................3.1(f) Company Second Lien Notes....................................................8.1 Confidentiality Agreement.................................................4.2(c) Contract.....................................................................8.1 Credit Agreement.............................................................8.1 Deposit...................................................................2.2(d) Disputed Holdback Amount..............................................2.2(c)(ii) Dissenting Shares............................................................2.4 Effective Time...............................................................1.2 Employee Benefit Plan.....................................................3.1(m) Enterprise Price.....................................................2.2(a)(vii) Environmental Laws........................................................3.1(s) ERISA.................................................................3.1(o)(ii) ERISA Affiliate........................................................3.1(o)(v) Escrow Agent..............................................................2.2(d) Escrow Agreement..........................................................2.2(d) Escrow Costs..............................................................2.2(e) iv Estimated Cage Cash....................................................2.2(b)(i) Estimated Working Capital..............................................2.2(b)(i) Exchange Act..............................................................3.1(f) Expense Reimbursement.................................................6.2(b)(iv) Expiration Date..............................................................7.1 Final Adjustments....................................................2.2(c)(iii) Final Adjustment Consideration........................2.2(c)(iv), 2.2(c)(iii)(2) Final Adjustment Date................................................2.2(c)(iii) Final Balance Sheet Adjustment....................................2.2(c)(iii)(2) Final Determination Date..............................................2.2(c)(ii) Final Holdback Amount................................................2.2(c)(iii) Financial Statements......................................................3.1(f) Financing.................................................................3.2(e) Financing Commitments.....................................................3.2(e) GAAP......................................................................3.1(f) Gaming Approvals.............................................................8.1 Gaming Authorities...........................................................8.1 Gaming Laws..................................................................8.1 Gaming Operator..............................................................8.1 Governmental Authority.......................................................8.1 hazardous substance.......................................................3.1(s) herein.......................................................................8.1 hereof.......................................................................8.1 hereto.......................................................................8.1 hereunder....................................................................8.1 herewith.....................................................................8.1 Holdback Amount......................................................2.2(a)(iii) Holdback Shortfall...................................................2.2(c)(iii) HSR Act...................................................................3.1(e) include......................................................................8.1 include, without limitation..................................................8.1 including....................................................................8.1 including, without limitation................................................8.1 Indemnification Escrow Amount.............................................2.2(e) Indemnification Escrow Final Balance......................................2.2(e) Indemnification Escrow Fund...............................................2.2(e) Indemnification Escrow Net Earnings.......................................2.2(e) Indemnification Escrow Surplus............................................2.2(e) Indemnified Parties......................................................4.13(a) Indemnified Party.........................................................7.7(a) Indemnifying Party........................................................7.7(a) Indemnity Threshold..........................................................7.4 Inspection................................................................4.2(a) Junior Note First Call Date..................................................8.1 Knowledge of the Company.....................................................8.1 License Agreement............................................................8.1 Liens........................................................................8.1 Losses.......................................................................7.2 New Plans..............................................................4.5(e)(i) Material Adverse Effect......................................................8.1 Material Contracts........................................................3.1(m) v Merger.......................................................................1.1 Merger Consideration..................................................2.2(a)(iv) Merger Fund...............................................................2.3(a) Merger Sub.......................................................First Paragraph Minimum Cage Cash............................................................8.1 Minimum Working Capital......................................................8.1 Morton Trademark Assignment..................................................8.1 Morton Trademarks............................................................8.1 NRS..........................................................................1.1 Old Plans..............................................................4.5(e)(i) Obligations..................................................................8.1 Other Parties.........................................................6.1(f)(ii) Other Transaction Closings...................................................8.1 Other Transaction Documents..................................................8.1 Outside Date..............................................................6.1(d) Owned Real Property.......................................................3.1(k) Parent...........................................................First Paragraph Parent Condition Failure..................................................6.1(d) Parent Indemnitees...........................................................7.2 Parties.....................................................................9.11 Party.......................................................................9.11 Paying Agent..............................................................2.3(a) Per Share Merger Consideration.........................................2.2(a)(v) Per Share Transaction Consideration....................................2.1(a)(i) Permits...................................................................3.1(i) Person.......................................................................8.1 PMR..........................................................................8.1 PMR Asset Purchase Agreement.................................................8.1 PMR/RWB Escrow Agreement.....................................................8.1 PMR/RWB Escrow Funds.........................................................8.1 Preliminary Cage Cash Adjustment.....................................2.2(b)(iii) Preliminary Closing Balance Sheet......................................2.2(b)(i) Preliminary Closing Schedule...........................................2.2(b)(i) Preliminary Working Capital Adjustment................................2.2(b)(ii) Pro Rata Portion......................................................2.2(a)(vi) PSV Policies..............................................................4.5(g) Remaining Holdback Amount.............................................2.2(c)(ii) Retention Bonus Adjustment............................................2.2(c)(iv) SEC.......................................................................3.1(f) Second Lien Note First Call Date.............................................8.1 Securities Act............................................................3.1(f) Selected Memorabilia........................................................4.16 Stockholders.....................................................Third Paragraph Stockholder Indemnitees......................................................7.3 Stockholders' Representative.............................................9.10(a) Surviving Corporation........................................................1.1 Taxes....................................................................15, 8.1 Termination Agreement........................................................8.1 Termination Amount...........................................................8.1 Third-Party Claim.........................................................7.7(b) Total Transaction Consideration......................................2.2(a)(vii) vi Trademark Agreement..........................................................8.1 transactions contemplated by this Agreement..................................8.1 transactions contemplated hereby.............................................8.1 transactions under this Agreement............................................8.1 Transfer Tax................................................................4.11 Transfer Taxes..............................................................4.11 Treasury Calculation Amount..................................................8.1 Undisputed Holdback Amount............................................2.2(c)(ii) WARN Act..................................................................4.5(h) Working Capital.....................................................2.2(a)(viii) vii AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of May 11, 2006, is by and among HARD ROCK HOTEL, INC., a Nevada corporation (the "COMPANY"), PETER A. MORTON, an individual (solely with respect to SECTIONS 4.18(B) and 6.3 and ARTICLe IX), MORGANS HOTEL GROUP CO., a Delaware corporation ("PARENT"), and MHG HR ACQUISITION CORP., a Nevada corporation and a direct wholly owned subsidiary of Parent ("MERGER SUB"). WHEREAS, (i) the Board of Directors of each of Parent and Merger Sub have, upon the terms and subject to the conditions set forth in this Agreement, determined that this Agreement and the transactions contemplated hereby, including the Merger, taken together, are advisable and fair to, and in the best interests of, its respective stockholders, (ii) the Board of Directors of Merger Sub has recommended acceptance and approval by its sole stockholder of this Agreement, the Merger and the other transactions contemplated hereby, and (iii) this Agreement and the transactions contemplated hereby have been approved by the respective Boards of Directors of each of Parent and Merger Sub and by Parent, in its capacity as the sole stockholder of Merger Sub; WHEREAS, the Board of Directors of the Company has, upon the terms and subject to the conditions set forth in this Agreement, (i) determined that this Agreement and the transactions contemplated hereby, including the Merger, taken together, are advisable and fair to, and in the best interests of, its stockholders and has approved this Agreement and (ii) recommended acceptance and approval by the holders of shares of Company Common Stock (as herein defined) (the "STOCKHOLDERS") of this Agreement, the Merger and the other transactions contemplated hereby; and WHEREAS, this Agreement and the transactions contemplated hereby have been approved by the holder of 100% of the issued and outstanding shares of Company Class A Common Stock (as herein defined) and by the holder of a majority of the issued and outstanding shares of Company Class B Common Stock (as herein defined), in each case, pursuant to an Action by Written Consent, a copy of which is attached hereto as EXHIBIT F. NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, each of the Company, Parent and Merger Sub hereby agrees as follows: ARTICLE I THE MERGER SECTION 1.1 THE MERGER. At the Effective Time and upon the terms and subject to the conditions of this Agreement and in accordance with the applicable provisions of the Nevada Revised Statutes (as amended from time to time, the "NRS"), Merger Sub shall be merged with and into the Company (the "MERGER"). At the Effective Time, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation (the "SURVIVING CORPORATION") and a wholly owned subsidiary of Parent. SECTION 1.2 EFFECTIVE TIME. Subject to the provisions of this Agreement, Parent, Merger Sub and the Company shall cause the Merger to be consummated by filing appropriate Articles of Merger or other appropriate documents (the "ARTICLES OF MERGER") with the Secretary of State of the State of Nevada in such form as required by, and executed in accordance with, the applicable provisions of the NRS, as soon as practicable on the Closing Date. The Merger shall become effective upon such filing or at such time thereafter as is provided in the Articles of Merger (the "EFFECTIVE TIME"). SECTION 1.3 CLOSING OF THE MERGER. The closing of the Merger (the "CLOSING") shall take place at a time and on a date to be specified by the parties (the "CLOSING DATE"), which shall be no later than the fifth Business Day (as herein defined) after satisfaction or waiver of the conditions set forth in Article V (other than those conditions, including the occurrence of the Other Transaction Closings, that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions), at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York, 10019-6150, or at such other time, date or place as agreed to in writing by the parties hereto. SECTION 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the NRS, including Section 92A.250 of the NRS. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.5 ARTICLES OF INCORPORATION AND BYLAWS. The articles of incorporation of the Company shall be amended in the Merger to be the same as the articles of incorporation of Merger Sub immediately prior to the Effective Time and shall be the articles of incorporation of the Surviving Corporation until amended in accordance therewith and with applicable law. The bylaws of Merger Sub in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance therewith, with the articles of incorporation and with applicable law. SECTION 1.6 DIRECTORS. The directors of Merger Sub at the Effective Time shall be the initial directors of the Surviving Corporation, to hold office in accordance with the articles of incorporation and bylaws of the Surviving Corporation until their successors are duly elected or appointed and qualified or until their earlier death, resignation or removal. SECTION 1.7 OFFICERS. The officers of Merger Sub at the Effective Time shall be the initial officers of the Surviving Corporation, to hold office in accordance with the articles of incorporation and bylaws of the Surviving Corporation until their successors are duly elected or appointed and qualified or until their earlier death, resignation or removal. ARTICLE II CONVERSION OF SHARES; CONSIDERATION SECTION 2.1 CONVERSION OF SHARES. (a) At the Effective Time, by virtue of the Merger and without any action on the part of any holder of any shares of capital stock of the Company, Parent or Merger Sub, each of the following shall occur: (i) (A) each share of Class A voting common stock, no par value, of the Company (the "CLASS A COMPANY COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than any shares of Class A Company Common Stock to be canceled pursuant to SECTION 2.1(A)(II)) and all rights in respect thereof, and (B) each share of Class B non-voting common stock, no par value, of the Company (the "CLASS B COMPANY COMMON STOCK" and, together with the Class A Common Stock, the "COMPANY COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than any shares of Class B Company Common Stock to be canceled pursuant 2 to SECTION 2.1(A)(II)) and all rights in respect thereof, shall be canceled and shall be converted automatically into the right to receive (x) the Per Share Merger Consideration and (y) the Pro Rata Portion of any Additional Consideration that is released or paid to the Paying Agent in accordance with SECTIONS 2.2(C)(II), 2.2(C)(III), 2.2(C)(IV) and 2.2(E) (the sum of clauses (x) and (y), the "PER SHARE TRANSACTION CONSIDERATION"). As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Company Common Stock shall cease to have any rights with respect thereto, except for the right to receive upon surrender of the certificate (or delivery of a duly executed affidavit of lost certificate) that formerly evidenced such share of Company Common Stock, in the manner provided in SECTION 2.3, the Per Share Transaction Consideration without interest (other than any interest or other income accrued on the Indemnification Escrow Fund and distributed to the Stockholders as part of the Indemnification Escrow Surplus, which is included as part of the calculation of Additional Consideration); (ii) each share of Company Common Stock held by Parent, Merger Sub, any other subsidiary of Parent, or the Company immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or any holder of such share, be canceled, retired and cease to exist and no payment shall be made with respect thereto; and (iii) each outstanding share of the common stock, no par value per share, of Merger Sub shall, by virtue of the Merger and without any action on the part of Parent, Merger Sub or the Company, be converted into one fully paid and non-assessable share of common stock, no par value per share, of the Surviving Corporation. (b) At the Effective Time, in accordance with SECTION 2.3, Parent shall wire or cause to be wired to an account designated by the Paying Agent an amount equal to (i) the Total Transaction Consideration (not including clause (H) of the definition thereof, which shall be determined following the Closing in accordance with SECTION 2.2(C)(IV)) MINUS (ii)(A) the Deposit as of such time and (B) the Indemnification Escrow Amount, which Indemnification Escrow Amount Parent shall deliver in escrow at the Closing to the Escrow Agent, as provided in SECTION 2.2(E). SECTION 2.2 TOTAL TRANSACTION CONSIDERATION; ADJUSTMENTS. (a) CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the following respective meanings: (i) "ADDITIONAL CONSIDERATION" means the sum of: (A) any Undisputed Holdback Amount, (B) any Final Adjustment Consideration, (C) any Final Holdback Amount and (D) any Indemnification Escrow Surplus. (ii) "APPLICABLE PERCENTAGE" of any Stockholder means the quotient (expressed as a percentage) obtained by dividing (A) the aggregate number of shares of Company Common Stock held by such Stockholder immediately prior to the Effective Time, by (B) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time. (iii) "HOLDBACK AMOUNT" means an amount equal to $2,500,000. 3 (iv) "MERGER CONSIDERATION" means the dollar amount in cash equal to (A) the Total Transaction Consideration MINUS (B) the Holdback Amount MINUS (C) the Indemnification Escrow Amount minus (D) the Termination Amount. (v) "PER SHARE MERGER CONSIDERATION" means the dollar amount in cash equal to the quotient obtained by dividing (A) the Merger Consideration by (B) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time. (vi) "PRO RATA PORTION" means an amount equal to the quotient obtained by dividing (A) one by (B) the aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time. (vii) "TOTAL TRANSACTION CONSIDERATION" means the dollar amount in cash determined as follows: (A) Four Hundred Twenty-One Million Dollars ($421,000,000.00) (the "ENTERPRISE PRICE"), MINUS (B) the sum of (1) the principal amount of, and any accrued and unpaid interest on, the outstanding Company Bonds and (2) the principal amount of, and any accrued and unpaid interest on, outstanding borrowings under the Credit Agreement, in each case, as of the Closing Date, MINUS (C) the sum of (1) the dollar amount of any premium (or, if the Company Bonds are being defeased, the amount necessary to defease the Company Bonds pursuant to the respective indentures governing the Company Bonds) paid or to be paid by Parent or one of its Affiliates to holders of the Company Bonds to repurchase (or defease) the Company Bonds in accordance with SECTION 4.4 (up to an aggregate dollar amount for each $1,000 principal amount of Company Bonds tendered (or defeased) as of the Closing Date not to exceed (x) the Treasury Calculation Amount LESS (y) the dollar amount set forth in clause (B)(1) above), and (2) any amounts payable upon or after the Closing to investment bankers, financial advisors and counsel of the Company with respect to services rendered in connection with the transactions contemplated by this Agreement, PLUS (D) the amount of cash and cash equivalents (other than Cage Cash) as of the Closing Date, PLUS (E) the Preliminary Working Capital Adjustment in accordance with SECTION 2.2(B), PLUS (F) the Preliminary Cage Cash Adjustment in accordance with SECTION 2.2(B), PLUS (G) the amount of any expenditures made by the Company after the date hereof and on or prior to the Closing Date that require Parent's consent under this Agreement and that have been made with the consent of Parent, PLUS (H) the amount of any retention bonuses paid by the Company at Closing to any employees that are then terminated by the Surviving Corporation within forty-five days following the Closing, which amount shall be determined following the Closing in accordance with SECTION 2.2(C)(IV), MINUS (I) the amount of any related party payables as of the Closing Date (which amount if a credit balance shall be subtracted from Enterprise Price and, which amount if a debit balance, shall be added to Enterprise Price). Notwithstanding any change with respect to the Company's accounting policies or procedures subsequent to the date hereof, the accounting policies and procedures used to calculate Total Transaction Consideration and the components thereof, including Working Capital, shall be the same as those in effect on the date hereof. By way of example only and for purposes of clarification, SCHEDULE 2.2(A)(VII) of the Company Disclosure Letter sets forth a calculation of the Total Transaction Consideration using the Company's balance sheet as of March 31, 2006. (viii) "WORKING CAPITAL" means a dollar amount equal to (A) the sum of accounts receivable (net of reserves), inventory and prepaid and other current assets, MINUS (B) the sum of accounts payable, insurance payable and accrued expenses (provided that any liabilities with respect to the Company's deferred bonus plan that are included in clause (B) shall be offset by the cash surrender value of the related life insurance assets to the extent that 4 such assets have not previously been converted to cash), other than, in the case of this clause (B), related party payables, it being expressly agreed for purposes of avoiding any double counting that any amount or item which would otherwise be included in the calculation of Working Capital but is otherwise an addition or deduction pursuant to the calculation of Total Transaction Consideration shall be excluded from the calculation of Working Capital for purposes of the Preliminary Closing Balance Sheet, the Closing Balance Sheet, the example set forth on SCHEDULE 2.2(A)(VII) of the Company Disclosure Letter or otherwise. "Working Capital" shall be calculated in the manner set forth on SCHEDULE 2.2(A)(VIII) of the Company Disclosure Letter. (ix) "CAGE CASH" shall be calculated in the manner set forth on SCHEDULE 2.2(A)(IX) of the Company Disclosure Letter. (b) PRELIMINARY CLOSING SCHEDULE; PRELIMINARY ADJUSTMENTS. (i) No later than five Business Days prior to the Closing, the Company shall deliver to Parent a preliminary calculation of the Total Transaction Consideration (the "PRELIMINARY CLOSING SCHEDULE"), together with an estimated balance sheet of the Company as of the Closing Date (immediately prior to the Effective Time) (the "PRELIMINARY CLOSING BALANCE SHEET"). The Preliminary Closing Balance Sheet shall be prepared in accordance with GAAP and in accordance with the accounting policies and procedures of the Company in effect on the date hereof. The Preliminary Closing Schedule shall set forth a good faith estimate of the amount of Working Capital of the Company as of the Closing Date (immediately prior to the Effective Time) (such estimate, the "ESTIMATED WORKING CAPITAL") and a good faith estimate of the amount of Cage Cash of the Company as of the Closing Date (such estimate, the "ESTIMATED CAGE CASH"), in each case based on the Preliminary Closing Balance Sheet. (ii) The "PRELIMINARY WORKING CAPITAL ADJUSTMENT" (which may be positive or negative) shall equal (x) Estimated Working Capital MINUS (y) Minimum Working Capital. (iii) The "PRELIMINARY CAGE CASH ADJUSTMENT" (which may be positive or negative) shall equal (x) Estimated Cage Cash MINUS (y) Minimum Cage Cash. (c) POST-CLOSING ADJUSTMENTS. (i) As soon as reasonably practical following (but not more than 30 days after) the Closing Date, the Surviving Corporation shall deliver to the Stockholders' Representative a calculation of the Total Transaction Consideration (the "CLOSING SCHEDULE"), together with an unaudited balance sheet of the Company as of the Closing Date (immediately prior to the Effective Time) (the "CLOSING BALANCE SHEET"). The Closing Balance Sheet shall be prepared in accordance with GAAP and in accordance with the accounting policies and procedures of the Company in effect on the date hereof. The Closing Schedule shall set forth the Working Capital of the Company as of the Closing Date (immediately prior to the Effective Time) (the "CLOSING DATE WORKING CAPITAL") and the amount of Cage Cash of the Company as of the Closing Date (the "CLOSING DATE CAGE CASH"). (ii) The Closing Schedule, including the Closing Balance Sheet, the Closing Date Working Capital and the Closing Date Cage Cash, shall become final and binding upon the parties, and not subject to any appeal, unless within 30 days following the date of delivery of the Closing Schedule by the Surviving Corporation to the Stockholders' Representative, the Stockholders' Representative and the Surviving Corporation have been unable to agree on a final Closing Schedule, including the Closing Balance Sheet, the Closing Date 5 Working Capital and the Closing Date Cage Cash, in which case (A) the Stockholders' Representative shall provide instructions to the Escrow Agent, in accordance with the Escrow Agreement, to release any portion of the Holdback Amount that is not in dispute (such amount, LESS any expenses of the Stockholders' Representative to be paid from, or reimbursed through deduction from, the Holdback Amount in accordance with SECTION 9.10(D)), the "UNDISPUTED HOLDBACK AMOUNT," and the amount of any remaining Holdback Amount, the "DISPUTED HOLDBACK AMOUNT") to the Paying Agent, as agent for the Stockholders, for distribution to the Stockholders in accordance with the Escrow Agreement and their Applicable Percentages and (B) the Stockholders' Representative and Parent shall submit all differences and disputes between the Stockholders' Representative and Parent relating to the Closing Schedule, including the Closing Balance Sheet, the Closing Date Working Capital and the Closing Date Cage Cash, to the Las Vegas, Nevada office of Deloitte & Touche LLP, the Company's accountants (the "ACCOUNTANTS"), to be resolved by such firm, and such firm's opinion thereon and the resulting Closing Schedule, including the Closing Balance Sheet, the Closing Date Working Capital and the Closing Date Cage Cash, shall be final and binding on the parties and not subject to any appeal. The Stockholders' Representative and Parent agree to request that the Accountants resolve all such difference and disputes within 15 days of submission to the Accountants. Parent and the Stockholders' Representative shall each pay (solely, in the case of the Stockholders' Representative, by deduction from the Disputed Holdback Amount prior to the making of any payments to Parent pursuant to SECTION 2.2(C)(III)) the percentage of the amount of the fees and expenses of the Accountants equal to (A) the aggregate amount of the disputed matters submitted to the Accountants that are not settled in favor of such party (as finally determined by the Accountants), divided by (B) the aggregate amount of all disputed matters submitted to the Accountants. The Disputed Holdback Amount, less (x) any fees and expenses of the Accountants and (y) any expenses of the Stockholders' Representative, in the case of each of clauses (x) and (y), to be paid from, or reimbursed by deduction from, the Holdback Amount pursuant to this SECTION 2.2(C)(II)or SECTION 9.10(D) and not previously paid from the Holdback Amount, is referred to as the "REMAINING HOLDBACK AMOUNT." The date that the Closing Date Schedule, including the Closing Balance, the Closing Date Working Capital and the Closing Date Cage Cash, become final and binding on the parties and not subject to any appeal is referred to as the "FINAL DETERMINATION DATE." (iii) Within 10 days following the Final Determination Date pursuant to SECTION 2.2(C)(II), final adjustments to the Enterprise Price (the "FINAL ADJUSTMENTS") shall be made and paid as follows (the date the Final Adjustments are so made and paid, the "FINAL ADJUSTMENT DATE"): (1) if (A) the sum of (x) the Closing Date Working Capital and (y) the Closing Date Cage Cash is less than (B) the sum of (x) the Estimated Working Capital and (y) the Estimated Cage Cash, then a portion of the Remaining Holdback Amount equal to such difference shall be released by the Escrow Agent, pursuant to the Escrow Agreement, and paid to Parent; , PROVIDED, HOWEVER, that in the event that the amount of the Remaining Holdback Amount is less than the amount of such difference (the amount by which the Remaining Holdback Amount is less than the amount of such difference, the "HOLDBACK SHORTFALL"), then a portion of the Indemnification Escrow Fund equal to such Holdback Shortfall (up to the amount of the Indemnification Escrow Fund), shall be released by the Escrow Agent, pursuant to the Escrow Agreement, and paid to Parent; and (2) if the sum of (x) the Closing Date Working Capital and (y) the Closing Date Cage Cash is greater than (B) the sum of (x) the Estimated 6 Working Capital and (y) the Estimated Cage Cash, then Parent shall promptly pay, or cause to be paid to the Paying Agent, as agent for the Stockholders, an amount in cash equal to such difference (such amount, the "FINAL BALANCE SHEET ADJUSTMENT") for distribution to the Stockholders in accordance with the Escrow Agreement and their Applicable Percentages. Upon the instruction of the Stockholders' Representative in accordance with the Escrow Agreement, any Holdback Amount that remains after making (A) any payment required to be made to Parent pursuant to SECTION 2.2(C)(III)(1) and (B) any payment of any expenses of the Stockholders' Representative to be paid from, or reimbursed by deduction from, the Holdback Amount in accordance with SECTION 9.10(D) and not previously paid from the Holdback Amount (such remaining Holdback Amount, the "FINAL HOLDBACK AMOUNT") shall be promptly released by the Escrow Agent to the Paying Agent for distribution to the Stockholders in accordance with the Escrow Agreement and their Applicable Percentages. (iv) On the later of (x) the Final Adjustment Date and (y) the 46th day following the Closing, Parent shall pay, or cause to be paid to the Paying Agent, as agent for the Stockholders, an amount in cash equal to the amount of any retention bonuses paid by the Company at Closing to any employees that have been terminated by the Surviving Corporation within forty-five days following the Closing (such amount, the "RETENTION BONUS ADJUSTMENT" and, together with the Final Balance Sheet Adjustment, the "FINAL ADJUSTMENT CONSIDERATION") for distribution to the Stockholders in accordance with the Escrow Agreement and their Applicable Percentages. (v) Nothing in this SECTION 2.2(C) shall preclude any party from exercising, or shall adversely affect or otherwise limit in any respect the exercise of, any right or remedy available to it hereunder for any misrepresentation or breach of warranty hereunder, but none of Parent, Merger Sub or the Company shall have any right to dispute the Closing Schedule, including Closing Balance Sheet, the Closing Date Working Capital or the Closing Date Cage Cash, or any portion thereof, once it has been finally determined in accordance with SECTION 2.2(C)(II). (d) DEPOSIT; ESCROW. On the date hereof, Parent shall deposit in readily available funds of Thirty Million Dollars ($30,000,000) (such amount, including the interest accrued, and any other income earned, thereon, the "DEPOSIT"), with Chicago Title Company of Nevada, Inc. (the "ESCROW AGENT"), pursuant to an escrow agreement dated as of the date hereof, a copy of which is attached hereto as EXHIBIT C (as it may be amended from time to time, the "ESCROW AGREEMENT"), executed and delivered by Parent, the Stockholders' Representative and the Escrow Agent. At the Closing, (i) the Deposit (less the Holdback Amount) shall be released by the Escrow Agent to the Paying Agent pursuant to SECTION 2.3(A)(I) and in accordance with the terms of the Escrow Agreement, and (ii) the Holdback Amount shall continue to be held by the Escrow Agent in accordance with the Escrow Agreement until released pursuant to the terms of the Escrow Agreement and SECTION 2.2(C) of this Agreement. Upon the termination of this Agreement, the Deposit shall be payable pursuant to SECTION 6.3, and thereafter shall be promptly released by the Escrow Agent to Parent or the Company, as applicable, pursuant to SECTION 6.3 and the terms of the Escrow Agreement. In the event of any inconsistency between the terms and provisions of the Escrow Agreement and the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control, absent an express written agreement between the parties hereto to the contrary which acknowledges this SECTION 2.2(D). (e) INDEMNIFICATION ESCROW FUND. Subject to the terms and conditions hereof, on the Closing Date, Parent shall deposit in escrow a portion of the Total Transaction Consideration equal to Fifteen Million ($15,000,000) (the "INDEMNIFICATION ESCROW AMOUNT"), in readily available funds 7 (the Indemnification Escrow Amount, together with the interest accrued and any other income earned thereon, the "INDEMNIFICATION ESCROW FUND") with the Escrow Agent, pursuant to the Escrow Agreement. The Indemnification Escrow Fund shall be held and disbursed as provided in the Escrow Agreement, which shall provide, among other things, that (i) any fees or expenses payable to the Escrow Agent under the Escrow Agreement on account of, in connection with or related to the Indemnification Escrow Fund (the "ESCROW COSTS") shall first be paid out of any income and interest accrued on the Indemnification Escrow Amount in the Indemnification Escrow Fund; (ii) the Indemnification Escrow Fund shall be disbursed (A) to Parent to satisfy any Holdback Shortfall pursuant to SECTION 2.2(C)(III)(1) and (B) to the Parent Indemnitees to satisfy any indemnification obligation of the Stockholders under SECTION 7.2, in the case of this clause (B) only, when the conditions for indemnification set forth in SECTION 7.2 have been satisfied; PROVIDED, HOWEVER, that to the extent that the balance of the Indemnification Escrow Fund is not sufficient to satisfy any indemnification obligations of the Stockholders to the Parent Indemnitees under SECTION 7.2 when the conditions for indemnification set forth in SECTION 7.2 have been satisfied, then such shortfall shall be satisfied from any balance remaining in the PMR/RWB Escrow Funds pursuant to, and in accordance with the terms and subject to the conditions of, the PMR/RWB Escrow Agreement; (iii) any income or interest on the Indemnification Escrow Amount (net of any Escrow Costs) shall be distributed to the Stockholders as provided in the Escrow Agreement (such net amount, the "INDEMNIFICATION ESCROW NET EARNINGS"); and (iv) as of the one year anniversary of the Closing Date, any amount of cash remaining in the Indemnification Escrow Fund (other than any amount of cash required to satisfy the maximum amount of the aggregate of any claims for indemnification for which written notice has been given to the Indemnifying Party in accordance with ARTICLE VII and which as of such one-year anniversary have not been finally determined), including any income or interest accrued thereon but less any Escrow Costs and less any amounts then due and payable from the Indemnification Escrow Fund to any Parent Indemnitee pursuant to SECTION 7.2, shall be distributed by the Escrow Agent to the Paying Agent in accordance with the Escrow Agreement (any such remaining amounts, the "INDEMNIFICATION ESCROW FINAL BALANCE") and, together with the Indemnification Escrow Net Earnings, the "INDEMNIFICATION ESCROW SURPLUS"). Parent shall be treated as the owner of the Indemnification Escrow Fund for all tax purposes. SECTION 2.3 MERGER FUND; EXCHANGE OF CERTIFICATES. (a) Prior to the Effective Time, Parent shall appoint a commercial bank or trust company reasonably acceptable to the Company to act as paying agent under this Agreement (the "PAYING AGENT") for the purpose of exchanging shares of Company Common Stock for the Merger Consideration and, as applicable, the Additional Consideration. At the Effective Time, (i) the Deposit (less the Holdback Amount) shall be released by the Escrow Agent and deposited with the Paying Agent, as agent for the Stockholders, subject to and in accordance with the terms of the Escrow Agreement, (ii) Parent shall irrevocably deposit or cause to be deposited with the Paying Agent, as agent for the Stockholders, cash in an aggregate amount equal to the Total Transaction Consideration minus (1) the Deposit, (2) the Indemnification Escrow Amount and (3) the Termination Amount (the sum of the immediately preceding clauses (i) and (ii), together with any Additional Consideration deposited with or paid to the Paying Agent pursuant to SECTION 2.2(C)(II), 2.2(C)(III) or 2.2(C)(IV), the "MERGER FUND") and (iii) Parent shall pay the Termination Amount in accordance with the instructions of the Company and Peter A. Morton. Pending distribution pursuant to SECTION 2.3(B), the Merger Fund, the Deposit and the Indemnification Escrow Fund shall be held in trust pursuant to the Escrow Agreement and shall not be used except as permitted by the Escrow Agreement; PROVIDED, HOWEVER, that the Surviving Corporation may direct the Paying Agent to invest the Merger Fund, PROVIDED that such investments (i) shall be in obligations of or guaranteed by the United States of America, in commercial paper obligations receiving the highest rating from either Moody's Investors Services, Inc. or Standard & Poor's Corporation, in certificates of deposit, bank repurchase agreements or bankers acceptances of domestic commercial banks with equity capital exceeding $500,000,000 or in money market funds and (ii) shall have maturities that 8 will not prevent or delay payments to be made pursuant to SECTION 2.3(B) and that do not exceed, in any event, 90 days. Each holder of a certificate or certificates representing shares of Company Common Stock canceled and extinguished at the Effective Time pursuant to SECTION 2.1 may thereafter in accordance with the provisions of SECTION 2.3(B), surrender such certificate or certificates to the Paying Agent, as agent for such Stockholder, to effect the exchange of such certificate or certificates for the Per Share Transaction Consideration on such holder's behalf for a period ending twelve months after the Effective Time. (b) (i) At the Closing, the Stockholders may surrender the certificate or certificates representing their shares of Company Common Stock to the Paying Agent (or such other agent or agents as may be appointed by the Surviving Corporation), as agent for the Stockholders, for cancellation. Upon surrender of such certificate or certificates for cancellation to the Paying Agent (or such other agent or agents as may be appointed by the Surviving Corporation), the certificate or certificates so surrendered shall be cancelled and the Paying Agent shall pay (A) on the Closing Date (by check or wire transfer as directed by such Stockholder in writing delivered to the Paying Agent (or such other agent or agents as may be appointed by the Surviving Corporation)) as soon as practicable prior to the Closing Date to the Stockholder who surrendered such certificate or certificates an amount of cash equal to the product of (x) the Per Share Merger Consideration and (y) the number of shares of Company Common Stock represented by the certificate or certificates so surrendered and (B) thereafter, promptly following the release of any Additional Consideration by the Escrow Agent to the Paying Agent in accordance with SECTION 2.2(C) and the Escrow Agreement, an amount in cash equal to the product of (x) the Pro Rata Portion of any such Additional Consideration (as determined pursuant to SECTIONS 2.2(C)(II), 2.2(C)(III), 2.2(C)(IV) and 2.2(E) and (y) the number of shares of Company Common Stock represented by the certificate or certificates so surrendered. (ii) With respect to any certificates not so surrendered at the Closing, the Surviving Corporation, as soon as reasonably practicable after the Effective Time, shall cause the Paying Agent to mail to each holder of record of Company Common Stock represented by such certificates, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificates shall pass, only upon delivery of such certificates to the Paying Agent and shall be in such form and have such other provisions not inconsistent with this Agreement as the Surviving Corporation may specify) and (ii) instructions for use in effecting the surrender of such certificates in exchange for payment of the Per Share Transaction Consideration. Upon surrender of a certificate or certificates for cancellation to the Paying Agent or to such other agent or agents as may be appointed by the Surviving Corporation, together with such letter of transmittal, duly executed and completed, the holder of such certificate or certificates shall be entitled to receive in exchange therefor, for each share of Company Common Stock, formerly represented by such certificate or certificates, an amount in cash equal to the product of (x) the Per Share Merger Consideration and (y) the number of shares of Company Common Stock represented by the certificate or certificates so surrendered and (B) thereafter, promptly following the release of any Additional Consideration by the Escrow Agent to the Paying Agent in accordance with SECTION 2.2(C) and the Escrow Agreement, an amount in cash equal to the product of (x) the Pro Rata Portion of any such Additional Consideration (as determined pursuant to SECTIONS 2.2(C)(II), 2.2(C)(III), 2.2(C)(IV) and 2.2(E) and (y) the number of shares of Company Common Stock represented by the certificate or certificates so surrendered, and the certificate or certificates so surrendered shall forthwith be canceled. (iii) After the Effective Time, until so surrendered in accordance with SECTION 2.3(B)(I) or 2.3(B)(II), each certificate representing shares of Company Common Stock shall be deemed, for all corporate purposes thereafter, to evidence only the right to receive an amount of cash equal to the product of (x) the Per Share Transaction Consideration 9 and (y) the number of shares of Company Common Stock evidenced by such certificate. No consideration will be paid to, or delivered on behalf of the holder of any unsurrendered certificate with respect to shares of Company Common Stock formerly represented thereby until the holder of record of such certificate shall surrender such certificate pursuant hereto. (c) If payment is to be made to a Person other than the registered holder of the shares of Company Common Stock represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Paying Agent any transfer or other Taxes required as a result of such payment to a Person other than the registered holder of such shares of Company Common Stock or establish to the satisfaction of the Paying Agent that such Tax has been paid or is not payable. (d) After the Effective Time, there shall be no further transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, certificates representing shares of Company Common Stock are presented to the Surviving Corporation, they shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Agreement. (e) If any cash deposited with the Paying Agent for purposes of payment in exchange for shares of Company Common Stock remains unclaimed twelve months after the Effective Time, such cash, together with all interest and earnings thereon, shall be returned to the Surviving Corporation, upon demand, and any such holder who has not converted his, her or its shares of Company Common Stock into the Per Share Transaction Consideration prior to that time shall thereafter look only to the Surviving Corporation for payment of the Per Share Transaction Consideration. Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of shares of Company Common Stock for any amount paid to a public official pursuant to applicable unclaimed property laws. Any amounts remaining unclaimed by holders of shares of Company Common Stock five years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Authority) shall, to the extent permitted by applicable law, become the property of the Surviving Corporation free and clear of any claims or interest of any Person previously entitled thereto. (f) Following the Final Adjustment Date, the Surviving Corporation shall have the right to demand that the Paying Agent return to the Surviving Corporation such portion of the cash deposited with the Paying Agent pursuant to SECTION 2.3(A) that represents the Per Share Transaction Consideration in respect of shares of Company Common Stock for which dissenters' rights have been perfected in accordance with the NRS. (g) No dividends or other distributions with respect to capital stock of the Surviving Corporation with a record date after the Effective Time shall be paid to the holder of any unsurrendered certificate for shares of Company Common Stock. (h) In the event that any certificate representing shares of Company Common Stock shall have been lost, stolen or destroyed, upon Parent's receipt of evidence reasonably satisfactory to Parent of that fact by the Person claiming such certificate representing shares of Company Common Stock to be lost, stolen or destroyed, the Paying Agent shall issue, in exchange for such lost, stolen or destroyed certificate, (i) an amount in cash equal to the product of (x) the Per Share Merger Consideration and (y) the number of shares of Company Common Stock represented by such certificate, and (ii) thereafter, promptly following the release of any Additional Consideration by the Escrow Agent to the 10 Paying Agent in accordance with SECTION 2.2(C) or 2.2(E) and the Escrow Agreement, an amount in cash equal to the product of (x) the Pro Rata Portion of any Additional Consideration (as determined pursuant to SECTIONS 2.2(C)(II), 2.2(C)(III), 2.2(C)(IV) and 2.2(E)) and (y) the number of shares of Company Common Stock represented by such certificate. SECTION 2.4 DISSENTERS' RIGHTS. Notwithstanding anything in this Agreement to the contrary, any shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and that are held by a Stockholder who has properly exercised his, her or its dissenter's rights under the NRS (the "DISSENTING SHARES") shall not be converted into the right to receive the Per Share Transaction Consideration pursuant to SECTION 2.1(A), but, instead, such shares shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to and subject to the requirements of the NRS. If any such holder shall have failed to perfect, or shall have effectively withdrawn or lost, his, her or its right to dissent from the Merger under the NRS, each share of such holder's Company Common Stock shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive, without any interest thereon, the Per Share Transaction Consideration. The Company shall give Parent prompt notice of any notice or demands for appraisal or payment for shares of Company Common Stock received by the Company. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of Parent and Merger Sub, except (i) as set forth herein, (ii) as set forth in the Company SEC Reports (other than as set forth in "forward-looking statements" for purposes of the Securities Act and the Exchange Act) filed prior to the date hereof, (iii) as set forth in the Company Disclosure Letter, and (iv) with respect to the Selected Memorabilia, as follows: (a) ORGANIZATION, STANDING AND POWER. The Company (i) is duly organized, validly existing and in good standing under the laws of the State of Nevada, (ii) has all requisite corporate power and authority to own, lease or operate the assets it now owns, leases or operates, as applicable, and (iii) is duly qualified or licensed to do business in each jurisdiction in which the ownership or use of its assets or conduct of its business requires it to be so qualified, except, in the case of each of clauses (ii) and (iii), for such failures that would not reasonably be expected to have a Material Adverse Effect. (b) SUBSIDIARIES. Except as set forth in SCHEDULE 3.1(B) of the Company Disclosure Letter, the Company does not own any equity in any corporation, association or other entity. (c) STOCK. The entire authorized and outstanding capital stock of the Company is as set forth in SCHEDULE 3.1(C) of the Company Disclosure Letter. The outstanding shares of Company Common Stock are duly authorized, have been validly issued and are fully paid and nonassessable and have not been issued in violation of any preemptive rights. Except as set forth in SCHEDULE 3.1(C) of the Company Disclosure Letter, there are no options, warrants or other rights, agreements, arrangements or commitments of any kind relating to the issued or unissued capital stock of the Company. (d) AUTHORITY. The execution and delivery of this Agreement by the Company, and the performance by the Company of its obligations under this Agreement, have been duly authorized by all necessary corporate action on the part of the Company and by all necessary action on the part of the Stockholders. This Agreement has been duly executed and delivered by the Company and, assuming the due execution and delivery of this Agreement by each other party hereto, this Agreement constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its 11 terms, except as such enforcement may be limited by (i) bankruptcy, insolvency, reorganization, moratorium (whether general or specific) or similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). (e) NO CONFLICT. The consummation of the transactions under this Agreement will not require the consent, waiver or approval of any party to any Material Contract, or the consent, approval, order or authorization of, or the registration, declaration or filing with, any Governmental Authority, except for (i) any approvals or filing of notice under, or in connection with, the Gaming Laws and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), (ii) the filing and recordation of the Articles of Merger as required by the NRS, (iii) those consents, waivers and approvals set forth in SCHEDULE 3.1(E) of the Company Disclosure Letter, (iv) those consents, waivers and approvals that relate to or are applicable to Parent, Merger Sub or any of their Affiliates but not to the Company or any of its Affiliates or (v) those consents, waivers and approvals the failure of which to make or obtain would not reasonably be expected to have a Material Adverse Effect (the immediately preceding clauses (i) through (v), collectively, the "COMPANY CONSENTS"). Except as set forth in SCHEDULE 3.1(E) of the Company Disclosure Letter, and assuming the Company Consents are timely obtained or made, as applicable, the execution, delivery and performance by the Company of this Agreement will not (i) violate any law applicable to the Company, (ii) result in a breach or violation of any provision of, or constitute a default under, any Material Contract or (iii) conflict with any provision of the charter or bylaws of the Company, except, in the case of each of clauses (i) and (ii), except for any such violation, breach, default or conflict which would not reasonably be expected to have a Material Adverse Effect. (f) SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed all required forms, statements, reports and documents with the Securities and Exchange Commission (the "SEC") since January 1, 2005 (each, a "COMPANY SEC REPORT," collectively, the "COMPANY SEC REPORTS"), each of which complied in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or both, as the case may be, each as in effect on the date such Company SEC Report was filed. Except as and to the extent amended, modified, restated or revised in any subsequent Company SEC Report filed prior to the date of this Agreement, none of the Company SEC Reports contained, when filed, any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company contained in the Company SEC Reports (the "FINANCIAL STATEMENTS") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with United States generally accepted accounting principles ("GAAP"), except as may be indicated, and fairly present in all material respects (i) the financial position of the Company as of the dates thereof, and (ii) the Company's results of operations, cash flows and changes in stockholders' equity for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). (g) NO UNDISCLOSED LIABILITIES. The Company does not have any liabilities of a nature required by GAAP to be reflected on a balance sheet or in the notes thereto, except (i) as set forth or reflected on the Financial Statements (or described in the notes thereto), (ii) as disclosed in SCHEDULE 3.1(G) of the Company Disclosure Letter, (iii) for liabilities (other than for borrowed money) incurred in the ordinary course of business since December 31, 2005 or (iv) for liabilities that would not reasonably be expected to have a Material Adverse Effect. (h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in SCHEDULE 3.1(H) of the Company Disclosure Letter and except for this Agreement and the transactions contemplated 12 hereby, since December 31, 2005 there has not been any event that, after taking into account any insurance recoveries payable in respect thereof, has had or would reasonably be expected to have a Material Adverse Effect. (i) COMPLIANCE WITH APPLICABLE LAWS; GAMING PERMITS. To the Knowledge of the Company, except as set forth in SCHEDULE 3.1(I) of the Company Disclosure Letter and except for environmental matters (which are addressed in SECTION 3.1(S) hereof), the conduct of the Company's business complies with all statutes, laws, regulations and ordinances applicable thereto, except where the failure to so comply would not reasonably be expected to have a Material Adverse Effect. The Company holds all permits, registrations, findings of suitability, licenses, variances, exemptions, orders and approvals of all Governmental Authorities (including all authorizations under Gaming Laws) (collectively "PERMITS"), necessary to conduct its business and operations as currently conducted, except for such Permits, the failure of which to hold would not reasonably be expected to have a Material Adverse Effect. (j) LITIGATION. Except as set forth in SCHEDULE 3.1(J) of the Company Disclosure Letter and except for environmental matters (which are addressed in SECTION 3.1(S) hereof), (i) there is no suit, action or proceeding pending or, to the Knowledge of the Company, threatened against the Company before any Governmental Authority that would reasonably be expected to have a Material Adverse Effect, and (ii) the Company is not in default under any judgment, order or decree of any Governmental Authority applicable to its business, except for any such default which would not reasonably be expected to have a Material Adverse Effect. (k) PROPERTIES. SCHEDULE 3.1(K)(I) of the Company Disclosure Letter sets forth a list of all real property locations in which the Company owns a fee interest (collectively, "OWNED REAL PROPERTY"). SCHEDULE 3.1(K)(II) of the Company Disclosure Letter contains a complete and correct list of all material leases, subleases, licenses or similar other agreements (other than transient occupancy arrangements) to which the Company is a party (and all amendments, modifications or supplements thereto), which are for the use or occupancy of real estate. (l) TITLE TO PROPERTIES. Except as set forth in SCHEDULE 3.1(L) of the Company Disclosure Letter, the Company has title to, or valid fee simple title to or valid leasehold interests in, all of its material properties and assets, including the Owned Real Property, except for such as are no longer used or useful in the conduct of its businesses or as have been disposed of in the ordinary course of business and except for defects in title, easements, restrictive covenants, and other encumbrances or impediments that, in the aggregate, do not materially interfere with its ability to conduct its business as currently conducted. All such assets and properties, other than assets and properties in which the Company has a leasehold interest, are free and clear of all Liens other than (i) those set forth in SCHEDULE 3.1(L) of the Company Disclosure Letter, (ii) matters of record, (iii) those that will be released in connection with the Closing and (iv) Liens that, in the aggregate, do not materially interfere with the existing use of the applicable property or the ability of the Company to conduct its business as currently conducted. (m) CONTRACTS. Except for the Contracts listed in SCHEDULE 3.1(M)(I) of the Company Disclosure Letter and those Contracts filed (including through incorporation by reference) as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (collectively, "MATERIAL CONTRACTS"), the Company is not a party to any contracts or agreements that would be required to be filed as an exhibit to a Form 10-K if such Form 10-K were filed by the Company with the SEC on the date hereof. Except as disclosed in SCHEDULE 3.1(M)(II) of the Company Disclosure Letter, the Company is not in breach of any Material Contract and to the Knowledge of the Company, no other party thereto is in breach of or default under any Material Contract, except for such breaches and 13 defaults as to which requisite waivers or consents have been or will be obtained prior to the Closing Date or which would not reasonably be expected to have a Material Adverse Effect. (n) TAXES. (i) The Company has filed (taking into account any extension of time within which to file) all material Tax Returns required to be filed by it and all such filed Tax Returns are complete and accurate in all material respects. (ii) Other than Taxes not yet due and payable or for which adequate reserves have been provided on the Financial Statements, the Company has paid or caused to be paid all Taxes that are required to be paid and has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, stockholder, creditor or other third party, except for any such amounts which individually or in the aggregate are not material. Other than amounts not yet due and payable or for which adequate reserves have been provided on the Financial Statements in accordance with GAAP, all amounts required to be collected and remitted to a taxing authority from customers with respect to hotel occupancy, gaming and similar taxes and charges have been collected and remitted, except for such amounts which are not, individually or in the aggregate, material. (iii) All deficiencies asserted in writing or assessments made as a result of any examinations or other audits by federal, state, local or foreign taxing authorities have been paid in full, settled, or adequately provided for in accordance with GAAP in the most recent Financial Statements filed on or prior to the date of this Agreement. The Company has not executed any unexpired waiver of any statute of limitations on or extension of any period for the assessment or collection of any Tax. No audit or other examination of any Tax Return of the Company by any Tax authority is presently in progress, nor has the Company been notified in writing of any request for such an audit or other examination and no material adjustment relating to any Tax Returns filed or required to be filed by the Company has been proposed in writing by any Tax authority to the Company. (iv) The Company has never been a member of a group filing a consolidated, unitary, combined or similar Tax Return under any federal, state, local or foreign law. The Company is not a party to or bound by any material Tax sharing, allocation or indemnification agreement or arrangement. No written claim has ever been made by a Tax authority in a jurisdiction where the Company does not file Tax returns that the Company is or may be subject to a material Tax liability in that jurisdiction. (v) The Company has not constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code in the two years prior to the date of this Agreement. (vi) The Company has not been a party to a "reportable transaction," as such term is defined in Treasury Regulations Section 1.6011-4(b)(1), a transaction that is or is substantially similar to a "listed transaction," as such term is defined in Treasury Regulations Section 1.6011-4(b)(2) or any other transaction requiring disclosure under analogous provisions of state or local Tax law. (vii) SCHEDULE 3.1(N)(VII) of the Company Disclosure Letter sets forth an estimate as of the tax year ended December 31, 2005, of the amount and expiration date of all federal income tax net operating loss carryforwards, capital loss carryforwards and credit carryforwards of the Company. Except with respect to the transactions contemplated by this Agreement, to the Knowledge 14 of the Company after inquiry, such carryforwards are not subject to any restrictions on their use, by reason of the Code or otherwise. (viii) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any Tax Period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a Tax Period ending on or prior to the Closing Date, (ii) material prepaid amount received on or prior to the Closing Date to the extent that such amount did not reduce Working Capital or Total Transaction Consideration, (iii) installment sale or open transaction disposition made on or prior to the Closing Date or (iv) closing agreement, settlement, or similar agreement executed on or prior to the Closing Date. (ix) For purposes of this Agreement (i) the term "TAX" or "TAXES" means all federal, state, local and foreign income, profits, franchise, gross receipts, stamp, payroll, hotel occupancy, gaming, employment, use, property, withholding, excise, and other taxes, duties or assessments of any nature whatsoever, together with all interest, penalties and additions imposed with respect to such amounts, and (ii) the term "TAX RETURN" means all returns and reports required to be filed with, or supplied to, any federal, state, local or foreign tax authority with respect to Taxes. (o) EMPLOYEE BENEFIT PLANS. (i) Set forth in SCHEDULE 3.1(O)(I) of the Company Disclosure Letter is a list of each "EMPLOYEE BENEFIT PLAN." Employee Benefit Plan means any material employee benefit or compensation plan, agreement or other arrangement providing compensation or benefits to any current or former consultant, employee, officer or director of the Company that is sponsored by the Company or to which the Company contributes. (ii) The Company has heretofore made or, promptly following the date of this Agreement, will make available to Parent copies of each of the Employee Benefit Plans and each of the following, if applicable: (A) each writing constituting a part of such Employee Benefit Plan, including all plan documents, material employee communications, benefit schedules, trust agreements, and insurance contracts and other funding vehicles; (B) the actuarial report for each of the last two years; (C) the most recent determination letter from the IRS for each Employee Benefit Plan; (D) the summary plan description and any material modifications thereto, if any (in each case whether or not required to be furnished by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and (E) the Form 5500 (if applicable) for each of the last two years. (iii) Each of the Employee Benefit Plans has been operated and administered in all material respects in compliance with its terms (including contribution requirements) and applicable laws, including, but not limited to, ERISA and the Code, and to the extent an Employee Benefit Plan is intended to be tax-qualified under Section 401(a) of the Code, the IRS has issued a favorable determination letter for such plan, and, except as set forth in SCHEDULE 3.1(O)(III) of the Company Disclosure Letter, to the Knowledge of the Company, no circumstances exist and no events have occurred that would be reasonably expected to adversely affect the qualified status of any such plan or any related trust. (iv) Except as set forth in SECTION 3.1(O)(IV) of the Company Disclosure Letter, no Employee Benefit Plan provides welfare benefits, with respect to current or former employees or directors of the Company or any of their dependents beyond their retirement or other termination of service, other than health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA and there has been no communication to employees by the Company 15 which could reasonably be interpreted to promise or guarantee employees retiree health or life insurance or other retiree death benefits on a permanent basis. (v) No Employee Benefit Plan is a "multiemployer plan" (as defined in section 4001(a)(3) of ERISA), a "multiple employer plan" (within the meaning of section 413(c) of the Code) or subject to Title IV of ERISA and none of the Company, or any trade or business which together with the Company would be deemed a "single employer" within the meaning of Section 4001 of ERISA (an "ERISA AFFILIATE") has at any during the last six (6) years contributed to any such plan. No event has occurred with respect to the Company in connection with which the Company could be subject to any material liability with respect to any Employee Benefit Plan under ERISA or the Code. (vi) SECTION 3.1(O)(VI) of the Company Disclosure Letter sets forth (i) a list of any Employee Benefit Plan under which the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby or any related event would (either alone or in conjunction with any other event) result in, cause the accelerated vesting, funding or delivery of, or increase the amount or value of, any payment or benefit to any employee, officer or director of the Company or any of its subsidiaries, and (ii) the maximum amount of the "excess parachute payments" within the meaning of Section 280G of the Code that could become payable by the Company or any of its subsidiaries in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. (vii) There are no pending or, to the Knowledge of the Company, threatened or anticipated claims by, on behalf of or against any Employee Benefit Plan or any trusts related thereto, except (i) routine claims for benefits and (ii) claims that would not be expected to be, individually or in the aggregate, material. Except as set forth in SCHEDULE 3.1(O)(VII) of the Company Disclosure Letter, with respect to any Employee Benefit Plan, to the Knowledge of the Company, no administrative investigation, audit or other administrative proceeding by the Department of Labor, the Internal Revenue Service or other United States governmental agencies is pending or threatened. (p) LABOR MATTERS. (i) Except as set forth in SCHEDULE 3.1(P) of the Company Disclosure Letter, (A) the Company does not have any agreements with labor unions or associations representing employees of the Company, (B) no labor strike, lock-out, slowdown or work stoppage against the Company is pending or, to the Knowledge of the Company, threatened, (C) no grievance or arbitration proceeding arising out of or under collective bargaining agreements or employment relationships (involving more than one employee) is pending, or, to the Knowledge of the Company, threatened (D) as of the date of this Agreement, no labor organization or group of employees of the Company has made a demand (which demand is pending as of the date of this Agreement) for recognition or certification, and (E) to the Knowledge of the Company, there are no unfair labor practice charges or complaints pending or threatened against the Company before the National Labor Relations Board or any other comparable foreign or domestic authority or any workers' council, except, in the case of each of clauses (B) and (C), as would not reasonably be expected to have a Material Adverse Effect. (ii) The Company complies and has complied in all material respects with all applicable laws respecting employment and employment practices, and except as set forth in SCHEDULE 3.1(P) no claims or investigations are pending or, to the Company's knowledge, threatened with respect to such law, either by private individuals or by governmental agencies. (q) INTELLECTUAL PROPERTY. Except as set forth in SCHEDULE 3.1(Q)(I) of the Company Disclosure Letter, the Company owns or possesses licenses or other rights in or under all 16 intellectual property and know-how necessary to conduct its business as currently conducted, including patents, trademarks, service marks, trade names, logos and designs, all goodwill symbolized thereby and associated therewith, copyrights, confidential or proprietary technical and business information, processes and trade secrets, computer software, and technical manuals and documentation used in connection with the foregoing (collectively, the "COMPANY INTELLECTUAL PROPERTY"), free and clear of all Liens, except where the failure to so own or possess such Company Intellectual Property would not reasonably be expected to have a Material Adverse Effect. Except as set forth in SCHEDULE 3.1(Q)(II) of the Company Disclosure Letter, there are no pending, or, to the Knowledge of the Company, threatened, claims based on the use by, or challenging the ownership by, the Company of any Company Intellectual Property that would reasonably be expected to have a Material Adverse Effect. Except as set forth in SCHEDULE 3.1(Q)(III) of the Company Disclosure Letter, to the Knowledge of the Company, no third party has infringed any Company Intellectual Property, except where such infringement would not reasonably be expected to have a Material Adverse Effect. The Company has taken reasonable actions to maintain and protect the Company Intellectual Property. Set forth in SCHEDULE 3.1(Q)(IV) of the Company Disclosure Letter is a list of all Company Intellectual Property that is owned by Peter A. Morton. (r) INSURANCE. SCHEDULE 3.1(R) of the Company Disclosure Letter sets forth a list of all material insurance policies held by the Company as of the date hereof. Such policies are in full force and effect, the Company is not in material breach under such policies, and such policies, (together with self-insurance programs in effect) provide coverage for the Company's business in amounts and against risks consistent with past practice. No representation or warranty is made by the Company that any such policy will not lapse or terminate by reason of consummation of the transactions contemplated by this Agreement. (s) ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 3.1(S) of the Company Disclosure Letter or as would not reasonably be expected to have a Material Adverse Effect, to the Knowledge of the Company, (i) the Company is in compliance with all applicable federal, state and local laws governing pollution or the protection of the environment ("ENVIRONMENTAL LAWS"), (ii) the Company has not received any written notice or claim from any Governmental Authority or third party alleging that the Company is not in compliance with any Environmental Law, and (iii) neither the Company nor any of its entity predecessors has caused any release of a "hazardous substance", as that term is defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss. 9601 et seq., as amended from time to time, that would require investigation or remediation on any of the Owned Real Property. (t) BROKERS, FINDERS, ETC. Except as set forth in SCHEDULE 3.1(T) of the Company Disclosure Letter, the Company is not subject to any valid claim of any broker, investment banker, finder or other intermediary in connection with the transactions contemplated by this Agreement. (u) SUFFICIENCY OF ASSETS. The assets held by the Company are in all material respects sufficient for the conduct of its business following the Closing in substantially the same manner as currently conducted. (v) NO OTHER REPRESENTATIONS OR WARRANTIES. Other than the representations and warranties expressly set forth in this SECTION 3.1, the Company shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby, and no other Person (including any Stockholder or any officer, director, employee or Affiliate of the Company) shall be deemed to have made any representation or warranty to Parent or Merger Sub in connection with this Agreement or the transactions contemplated hereby. 17 SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. Each of Parent and Merger Sub hereby jointly and severally represents and warrants to the Company as follows: (a) ORGANIZATION AND STANDING. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. Each of Parent and Merger Sub has the requisite power and authority to carry on its business as now being conducted, to own or use the properties and assets that it purports to own or use, and to perform its obligations under this Agreement and its other material contracts, in each case, except as would not reasonably be expected to prevent consummation of the Merger. (b) AUTHORITY. The execution and delivery of this Agreement by each of Parent and Merger Sub and the performance by each of Parent and Merger Sub of its obligations under this Agreement have been duly authorized by all necessary action on the part of each of Parent and Merger Sub. This Agreement has been duly executed and delivered by each of Parent and Merger Sub and, assuming the due execution and delivery of this Agreement by the Company, this Agreement constitutes a valid and binding obligation of each of Parent and Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms, except as such enforcement may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). (c) NO CONFLICT. The consummation of the transactions under this Agreement and the Escrow Agreement will not require the consent, waiver or approval of any party to any material contract to which Parent, Merger Sub or any of their Affiliates is a party or by which any of them is bound, or the consent, approval, order or authorization of, or the registration, declaration or filing with, any Governmental Authority, except for (i) any approvals or filings of notice under, or in connection with, the Gaming Laws and the HSR Act, (ii) the filing and recordation of the Articles of Merger as required by the NRS, and (iii) those consents, waivers and approvals that relate to or are applicable to the Company or any of its Affiliates but not to Parent, Merger Sub or any of their Affiliates. Assuming the consents, waivers and approvals set forth in the immediately preceding clauses (i) and (ii) are obtained or made, as applicable, the execution, delivery and performance by each of Parent and Merger Sub of this Agreement, and the execution, delivery and performance by Parent of the Escrow Agreement, will not (x) violate any law applicable to Parent, Merger Sub or any of their Affiliates, (y) result in a breach or violation of any provision of, or constitute a default under, any contract to which Parent, Merger Sub or any of their Affiliates is a party or by which any of them is bound, or (z) conflict with any provision of the charter, bylaws or other organizational documents of Parent or Merger Sub, except in the case of clauses (x) and (y) above, for any such breach, violation or default which would not reasonably be expected to delay or prevent consummation of the Merger. (d) LITIGATION. There is no suit, action or proceeding pending or, to the knowledge of Parent, threatened against Parent, Merger Sub or, if applicable, the Gaming Operator, or any of their Affiliates before any Governmental Authority, which could prevent or delay the transactions contemplated by this Agreement. (e) FINANCING. Parent has obtained written commitments (the "FINANCING COMMITMENTS") for any and all financing (whether equity financing, debt financing or otherwise) necessary to pay the Enterprise Price and all fees, costs and expenses related to the Merger and the other transactions contemplated by this Agreement (the "FINANCING"). Parent has provided true, accurate and complete copies of the Financing Commitments to the Company, and Parent has paid all commitment fees and any other fees and amounts due at or prior to the date hereof under the Financing Commitments. 18 None of the Financing Commitments has been amended, modified or terminated, and the respective commitments contained in the Financing Commitments have not been withdrawn or rescinded in any respect in any way materially adverse to the Company. The Financing Commitments are in full force and effect and no event has occurred which, with or without notice, lapse of time (other than the expiration of the term thereof) or both, would constitute a default on the part of Parent under any of the Financing Commitments. There are no conditions precedent or other contingencies related to the funding of the full amount of the Financing, other than as set forth in or contemplated by the Financing Commitments. The aggregate proceeds to be disbursed pursuant to the agreements contemplated by the Financing Commitments, together with Parent's cash and cash equivalents, will be sufficient for Parent to pay the Enterprise Price and all fees, costs and expenses related to the Merger and the other transactions contemplated by this Agreement. Parent has no reason to believe that any of the conditions to the Financing contemplated by the Financing Commitments will not be satisfied or that Parent will not receive the proceeds of the Financing on or prior the Closing Date. (f) NO VOTE REQUIRED. No vote of the stockholders of Parent is required by law, Parent's certificate of incorporation or bylaws or otherwise for Parent and Merger Sub to consummate the transactions contemplated by this Agreement. (g) OPERATIONS OF MERGER SUB. Merger Sub is a direct wholly owned subsidiary of Parent, was formed solely for the purpose of engaging in the transactions contemplated by this Agreement and has engaged in no other business activities. (h) BROKERS, FINDERS, ETC. Except for Jefferies & Company, Inc., neither Parent nor Merger Sub is subject to any valid claim of any broker, investment banker, finder or other intermediary in connection with the transactions under this Agreement. Parent is solely responsible for any payment, fee or commission that may be due to Jefferies & Company, Inc. in connection with the transactions contemplated by this Agreement. (i) LICENSABILITY OF PRINCIPALS. None of Parent, Merger Sub or, if applicable, the Gaming Operator, or any of their directors, officers, employees or Affiliates, or other related Persons subject to licensure by a Gaming Authority, has ever been denied, or had revoked or suspended, a gaming license by any Gaming Authority. There are no facts, which if known to the Gaming Authorities, would (a) be reasonably likely to result in the denial, revocation, limitation or suspension of a gaming license or (b) result in a negative outcome to any finding of suitability proceedings currently pending, or under the suitability proceedings necessary for the consummation of the transactions contemplated by this Agreement. (j) INVESTIGATION BY PARENT AND MERGER SUB. Each of Parent and Merger Sub acknowledges and agrees that it has conducted its own independent investigation, review and analysis of the business, operations, assets, liabilities, results of operations, financial condition, software, technology and prospects of the Company, which investigation, review and analysis was done by Parent and its Affiliates and, to the extent Parent deemed appropriate, by Parent's agents and representatives. Without limitation of the foregoing, each of Parent and Merger Sub acknowledges that the Total Transaction Consideration has been negotiated based on Parent's express agreement that there would be no contingencies (financial or otherwise) to Closing other than the conditions set forth in ARTICLE V. Each of Parent and Merger Sub acknowledges that, should the Closing occur, except as otherwise set forth in this Agreement, each of Parent and Merger Sub will acquire the Company and its business, properties, assets and liabilities in an "as is" condition and on a "where is" basis, without any representation or warranty of any kind, express or implied, except such representations and warranties expressly set forth in this Agreement. Further, without limiting any representation, warranty or covenant of the Company expressly set forth herein, except as otherwise set forth in ARTICLE V, each of Parent and Merger Sub acknowledges 19 that it has waived and hereby waives as a condition to Closing any further due diligence reviews, inspections or examinations with respect to the Company, including, without limitation, with respect to engineering, environmental, title, survey, financial, operational, regulatory and legal compliance matters. ARTICLE IV COVENANTS SECTION 4.1 CONDUCT OF BUSINESS. From the date of this Agreement through to the Effective Time, the Company agrees that, except (i) as disclosed in SCHEDULE 4.1 of the Company Disclosure Letter, (ii) as otherwise provided for in this Agreement or the Other Transaction Documents, (iii) as approved in writing by Parent (such approval not to be unreasonably withheld or delayed) or (iv) with respect to the Selected Memorabilia: (a) the Company shall carry on and operate its business in the ordinary course consistent with past practice (which may include contracting for and booking entertainment, conferences and other events, any of which may take place after the Closing Date) and in compliance in all material respects with applicable law; (b) the Company shall not directly or indirectly take any of the following actions: (i) amend, restate, modify or repeal or add any provisions to its certificate of incorporation or bylaws; (ii) pay or declare or set aside for payment any dividend or other distribution, payable in cash, stock or property, with respect to any shares of any class or series of its capital stock; (iii) redeem, purchase or otherwise acquire directly or indirectly any of its securities (including equity securities, debt securities, securities convertible into or exchangeable or exercisable for debt securities or equity securities, phantom stock, stock appreciation rights, options, warrants, calls, commitments or rights of any kind to acquire any equity or debt securities) or any instrument or security which consists of or includes a right to acquire such securities; (iv) other than in the ordinary course of business, create, incur, issue, assume, guarantee, permit, suffer to exist or otherwise become directly or indirectly liable with respect to any indebtedness or Liens other than indebtedness and Liens not to exceed $1,000,000 in the aggregate for all such indebtedness and Liens; (v) other than as required by applicable law or the terms of a Material Contract, or in a connection with the transactions contemplated by SECTION 4.4, modify, amend or repeal any Material Contract (other than an Affiliate Agreement) (or waive compliance with the terms of or breaches thereunder); (vi) in a single transaction or through a series of similar or related transactions, consolidate with or merge with or into any other Person, or transfer (by lease, assignment, sale or otherwise) any material portion of its assets to another Person or group of Affiliated Persons; (vii) in a single transaction or through a series of similar or related transactions, sell, lease, sublease, convey, transfer, mortgage, subject to a Lien or otherwise dispose of 20 any assets material to the operation of the Company, other than transient occupancy arrangements and gaming equipment in the ordinary course of business; (viii) in a single transaction or through a series of similar or related transactions, acquire any real property; (ix) consummate any acquisition of the stock or assets of any other Person, in a single transaction or series of similar or related transactions, involving consideration in excess of $1,000,000 in the aggregate (other than acquisitions of inventory and equipment in the ordinary course of business); (x) other than in the ordinary course of business or as set forth in the Company's 2006 capital expenditure budget (a copy of which is attached to SCHEDULE 4.1(B)(X) of the Company Disclosure Letter), make any capital expenditures in excess of $1,000,000 in the aggregate; PROVIDED, HOWEVER, that the Company may make capital expenditures pursuant to the terms of contracts which have been executed prior to the date hereof; (xi) effect a complete or partial liquidation, dissolution, winding-up, recapitalization, reclassification or reorganization in any form of transaction; (xii) amend any Tax Return in any material respect; (xiii) fail to maintain with financially responsible insurance companies insurance coverage substantially similar to the insurance coverage maintained by the Company on the date hereof, to the extent available at reasonable cost; (xiv) except as otherwise required by the terms of any written agreement, as such agreement is in existence as of the date hereof, or in the ordinary course of business consistent with past practice (including customary annual changes in compensation that do not result in a material increase in benefit or compensation expense to the Company), or except as set forth in SCHEDULE 4.1(B)(XIV) of the Company Disclosure Letter, (A) make any change in the compensation or benefits payable or to become payable to any of its directors, officers or employees, (B) pay any severance or retirement benefits not required by any existing plan or agreement to any such employees, directors or officers, (C) accelerate the vesting of, or the lapsing of restriction with respect to, any stock options or other stock-based compensation or cause the funding of any rabbi trust or similar arrangement, or (D) make any loan or advance to, any of such Persons or make any change in its existing borrowing or lending arrangements for or on behalf of any of such Persons pursuant to an employee benefit plan or otherwise; or (xv) (A) except as set forth in SCHEDULE 4.1(B)(XV) of the Company Disclosure Letter, enter into any new employment, severance or compensatory agreements or arrangements with any officer or director of the Company or with any employee of the Company (except with respect to any such agreements or agreements pursuant to which the Company or any of its subsidiaries would not reasonably be expected to have any obligation to provide compensation and/or benefits (including without limitation severance pay or benefits or payments related to change in control of the Company) in any amount or having a value in excess of $150,000 per year or $250,000 in the aggregate); PROVIDED, that the hiring of an at will employee shall not be construed as entering into or amending an employment agreement; (B) promote any employee, other than promotions on terms that are not materially more favorable (in terms of compensation, severance, duration and other matters) than the terms upon which any employee previously serving in the applicable capacity was entitled; or (C) hire or appoint any officer or director, except in connection with the replacement of an officer whose 21 employment has terminated, PROVIDED the overall compensatory package of such newly hired officer or director is not materially more favorable than that of the replaced officer or director; (xvi) settle or compromise any material litigation other than settlement or compromises for litigation providing (A) solely for the payment of money damages in all events paid prior to the Closing Date or reserved for in the balance sheet of the Company as of the Closing Date (immediately prior to the Effective Time) and (B) a complete release of the Company of all claims and which do not provide for any admission of liability by the Company; (xvii) enter into any agreement, contract, commitment or arrangement (oral or written) to do any of the foregoing, or authorize, recommend, propose or announce an intention to do any of the foregoing actions; and (xviii) make any expenditures with respect to the renovation of the suites at the Hard Rock Hotel. (c) except as required by law or regulation, the Company shall not knowingly perform any act, or omit to perform any act within its reasonable control, which will cause a breach of any representation, warranty or obligation contained in this Agreement. SECTION 4.2 ACCESS TO INFORMATION; CONFIDENTIALITY. (a) Subject to any restrictions imposed by the Gaming Laws or the antitrust laws, the Company shall afford to representatives of Parent, including its counsel, accountants and lenders, reasonable access during normal business hours during the period prior to the Closing Date to all the properties, books, Contracts and records of the Company (collectively, the "INSPECTION"); PROVIDED, HOWEVER, that (i) Parent shall provide the Company with at least twenty-four hours' prior written notice of any Inspection; (ii) if the Company so requests, Parent's representatives shall be accompanied by a representative of the Company; (iii) Parent shall not initiate contact with employees or other representatives of the Company without the prior written consent of the Company; (iv) Parent's representatives shall not be entitled to perform any physical testing of any nature with respect to any of the Company's properties or assets or any portion thereof without the Company's prior written consent, which consent may be withheld if in the judgment of the Company's representatives such testing would interfere with the operation of the Company's business; (v) Parent shall not interfere with the operation of the Company's business; (vi) Parent shall, at its sole cost and expense, promptly repair any damage to any of the Company's properties or assets or any portion thereof or any other property owned by a Person other than Parent, as the case may be, arising from or caused by such Inspection, and shall promptly reimburse the Company for any loss arising from or caused by any Inspection, and restore the Company's properties and assets or such other third-party property, as the case may be, to substantially the same condition as existed prior to such Inspection, and shall indemnify, defend and hold harmless the Company, the Stockholders and their respective Affiliates from and against any personal injury or property damage claims, liabilities, judgments or expenses (including reasonable attorneys' fees) incurred by any of them arising or resulting from any Inspection of the Company's real property; and (vii) in no event shall the results of any such Inspection or Parent's satisfaction therewith be a condition to Parent's obligations hereunder, it being the intent of Parent to purchase the Company and its business, properties, assets and liabilities on an "as is, where is" basis as set forth in SECTION 4.10. If, in the course of any investigation pursuant to this SECTION 4.2(A), Parent discovers any breach of any representation or warranty contained in this Agreement or any circumstance or condition that, upon Closing, would constitute such a breach, Parent shall promptly inform the Company in writing and any failure to notify the Company shall constitute a waiver of any such breach. 22 (b) Nothing in this SECTION 4.2 shall require the Company to permit any inspection, or to disclose any information, that in the reasonable judgment of the Company would (i) result in the disclosure of any trade secrets of third parties or violate any of its respective obligations with respect to confidentiality, PROVIDED that the Company shall use its commercially reasonable efforts to obtain the consent of such third party to such inspection or disclosure, or (ii) result in a violation of applicable law, including the Gaming Laws and the antitrust laws. (c) Each of Parent and Merger Sub acknowledges that the information being provided to Parent, Merger Sub and their representatives by the Company is subject to the terms of a confidentiality agreement, dated April 20, 2006, among the Company, Peter A. Morton, HR Condominium Investors (Vegas), L.L.C., a Delaware limited liability company, PMR and Parent (as it may be amended, the "CONFIDENTIALITY AGREEMENT"), the terms of which are incorporated herein by reference. SECTION 4.3 CONSENTS AND GOVERNMENTAL APPROVALS (a) Subject to the terms and conditions of this Agreement, and except as otherwise set forth in this Agreement, each of the Company, Parent and Merger Sub agrees (in all cases, without being obligated to make any payment to any third party (other than filing fees to Governmental Authorities)) to use its reasonable best efforts to, and each of Parent and Merger Sub agrees to use its reasonable best efforts to cause the Gaming Operator to, take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions under this Agreement and to cooperate with the others in connection with the foregoing, including using its reasonable best efforts to: (i) obtain all necessary waivers, consents and approvals from other parties to Material Contracts (to which the Company is a party) and other material contracts (to which Parent, Merger Sub or the Gaming Operator, if applicable, is a party); (ii) obtain, and cause (with respect to the Company) the Company's and (with respect to Parent or Merger Sub) Parent's, Merger Sub's and the Gaming Operator's directors, officers, employees or Affiliates or other related Persons as may be so required to obtain, all material consents, approvals and authorizations that are required to be obtained under any Federal, state, local or foreign law or regulations; (iii) prevent the entry, enactment or promulgation of any threatened or pending injunction or order that could materially adversely affect the ability of the parties hereto to consummate the transactions under this Agreement; (iv) lift or rescind any injunction or order that could materially adversely affect the ability of the parties hereto to consummate the transactions under this Agreement; and (v) effect all necessary registrations and filings and submissions of information requested by any Governmental Authorities. (b) In furtherance and not in limitation of the foregoing, each party hereto agrees to make any required filing of a Notification and Report Form pursuant to the HSR Act, with respect to the transactions contemplated by this Agreement as promptly as practicable and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and use its reasonable best efforts to take, or cause to be taken, as promptly as 23 practicable all other actions consistent with this SECTION 4.3 necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act as soon as practicable. Parent shall pay all fees incurred in connection with all notices and filings under the HSR Act. (c) In addition to and not in limitation of the foregoing, Parent shall, and shall, if applicable, cause the Gaming Operator to, use its reasonable best efforts (i) to as promptly as practicable, obtain, and cause Parent's, and, if applicable, the Gaming Operator's directors, officers, employees or Affiliates or other related Persons as may be so required to obtain, all Gaming Approvals, (ii) to avoid any action or proceeding by any Gaming Authority challenging the consummation of the transactions contemplated hereby, (iii) to make or cause to be made all necessary filings, and thereafter make or cause to be made any other required submissions with respect to this Agreement, as required under the Gaming Laws, (iv) to schedule and attend (or cause to be scheduled and attended) any hearings or meetings with Gaming Authorities to obtain the Gaming Approvals as promptly as possible and (v) to comply with the terms and conditions of any and all of the foregoing. Parent and its representatives and Affiliates shall (i) file or cause to be filed as promptly as practicable all required applications and documents in connection with obtaining the Gaming Approvals, (ii) request or cause to be requested an accelerated review from the Gaming Authorities in connection with such filings, (iii) act diligently and promptly to pursue the Gaming Approvals, (iv) cooperate with the Company in connection with the making of all filings referenced in the preceding sentence, including providing copies of all such documents to the Company and its advisors prior to filing and, if requested, accepting all reasonable additions, deletions or changes suggested in connection therewith, (v) notify the Company of the receipt of comments or requests from Gaming Authorities relating to Gaming Approvals, (vi) upon reasonable request of the Company, supply the Company with copies of all such correspondence, and (vii) keep the Company informed of the status of Parent's and, if applicable, the Gaming Operator's application for Gaming Approvals and its activities related to obtaining the Gaming Approvals, as applicable. SECTION 4.4 COMPANY BONDS; CREDIT AGREEMENT. (a) Parent shall use its best efforts, at its expense, to (i) repay or otherwise satisfy on or prior to the Closing Date all outstanding borrowings under the Credit Agreement, all accrued and unpaid interest thereon and all other Obligations under the Credit Agreement, and (ii) subject to SECTION 4.4(B) below, on or prior to the Closing Date, to defease, repay or otherwise satisfy the entire outstanding aggregate principal amount of the Company Bonds, all accrued and unpaid interest thereon and all other Obligations under the Company Bonds (it being understood that any amounts repaid or otherwise satisfied by Parent pursuant to this SECTION 4.4 shall be deemed to be outstanding as of the Closing Date for purposes of SECTION 2.2(A)(VII)(B)). Parent shall indemnify the Company, the Stockholders and their respective directors, officers, employees, Affiliates and representatives for any and all liabilities arising out of or in connection with any action taken by the Company or any of the foregoing Persons at the request of Parent and pursuant to this SECTION 4.4 to the maximum extent permitted by law. For the avoidance of doubt, nothing in this SECTION 4.4 shall supersede SECTION 2.2(A)(VII)(C). (b) Notwithstanding any provision to the contrary in this Agreement, including, without limitation, SECTIONS 4.4(A) and 5.3(C), if (i) allowing a portion of the Company Junior Notes to remain outstanding would not violate any provision of law or regulation applicable to the Company or Parent or their respective shareholders, and (ii) such portion of the Company Junior Notes may remain outstanding without breaching the Financing Commitments or causing a condition to the Financing Commitments not to be satisfied, then (A) Parent shall not be obligated to pay, defease, redeem, purchase or otherwise satisfy such portion of the Company Junior Notes and (B) the fact that Parent has not caused such portion of Company Junior Notes to be paid, defeased, redeemed, purchased or otherwise satisfied shall not affect or impair the obligations of Parent or the Company hereunder. 24 SECTION 4.5 EMPLOYEE BENEFIT PLANS. Parent hereby agrees that: (a) For a period of one year following the Closing Date, Parent shall, or shall cause the Surviving Corporation or one of its subsidiaries, to provide each employee of the Company who was an employee of the Company (other than employees subject to collective bargaining or similar agreements) immediately prior to the Closing (each, an "AFFECTED EMPLOYEE") compensation and benefits that are substantially similar, in the aggregate, to those benefits provided by the Company Benefit Plans; PROVIDED, HOWEVER, that, in lieu of the foregoing, Parent at its sole option may provide such Affected Employee with employee benefits that, in the aggregate, are substantially similar to those applicable to similarly situated employees of Parent. (b) With respect to each employee benefit plan, practice or policy of Parent or any of its Affiliates, each Affected Employee shall be given credit under such plan for all service prior to the Closing Date with the Company or any predecessor employer (to the extent such credit was given by the Company or any predecessor employer under a comparable plan, practice or policy), for purposes of determining eligibility and vesting and levels of benefits; PROVIDED, HOWEVER, such service need not be credited to the extent (i) it would result in a duplication of benefits or for benefit accrual under defined benefit plans or (ii) is prohibited by applicable law. (c) If any Affected Employee is discharged by the Company as of or after the Closing, then Parent shall be responsible for any and all severance costs for such Affected Employee, including payments owing under those agreements, plans or arrangements listed in SCHEDULE 3.1(O) of the Company Disclosure Letter. Parent shall be responsible and assume all liability for all notices or payments due to any Affected Employees, and all notices, payments, fines or assessments due to any governmental entity, pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees by the Company on or after the Closing Date, including the WARN Act or similar state statute, Section 4980B of the Code and any rules or regulations as have been issued in connection with the foregoing; PROVIDED, however, that prior to the Closing Date, the Company shall cooperate with Parent (including giving notices if requested by Parent) in the giving of notices pursuant to the immediately preceding sentence, if any such notices are to be given. (d) Parent shall take all action as may be necessary and appropriate to cause a tax-qualified 401(k) plan in which it or any of its subsidiaries sponsors to accept the rollovers of all Affected Employees who elect such rollovers of their 401(k) plan accounts and to provide the Affected Employees with a tax-qualified 401(k) type plan effective immediately as of the Closing Date, which plan shall recognize service with the Company and any predecessor employer for purposes of eligibility, participation and vesting. (e) In addition, and without limiting the generality of the foregoing, except as prohibited by applicable law: (i) at the Effective Time, each Affected Employee immediately shall be eligible to participate, without any waiting time, in any and all employee benefit plans of Parent and its Affiliates (other than the Company and its subsidiaries) providing benefits to any Affected Employees after the Effective Time (the "NEW PLANS") to the extent coverage under such New Plan replaces coverage under a similar or comparable Company Benefit Plans in which such Affected Employee participated immediately before the Effective Time (such plans, collectively, the "OLD PLANS"); 25 (ii) for purposes of each New Plan providing welfare benefits to any Affected Employee, Parent shall cause all pre-existing condition exclusions of such new Plan to be waived for such Affected Employee and his or her covered dependents to the extent such pre-existing condition exclusions were in applicable to or had been satisfied by such Affected Employee and his or her covered dependents immediately prior to the Effective Time under the relevant Old Plan; and (iii) each Affected Employee and their eligible dependents shall receive credit for the plan year in which the Effective Time (or commencement of participation in a New Plan) occurs towards applicable deductibles and annual out-of-pocket limits for expenses incurred prior to the Effective Time (or the date of commencement of participation in a New Plan). (f) From and after the Closing, Parent shall be responsible for, and shall indemnify and hold harmless the Company, the Stockholders and their respective directors, officers, Affiliates, representatives and agents, and the fiduciaries (including plan administrators) of the Employee Benefit Plans of the Company, from and against, any and all claims, losses, damages, costs and expenses (including attorneys' fees and expenses) and other liabilities and obligations relating to or arising out of (i) all salaries, wages, commissions, employee incentive or other compensation, severance, holiday, vacation, or retirement benefits earned but unpaid as of the Closing and post-Closing bonuses due to any Affected Employee; and (ii) any claims of, or damages or penalties sought by, any Affected Employee, or any Governmental Authority on behalf of or concerning any Affected Employee, with respect to any act or failure to act by Parent to the extent arising from the employment, discharge, layoff or termination of any Affected Employee, including any failure to perform or breach by Parent under this SECTION 4.5. (g) With respect to any accrued but unused personal, sick or vacation time to which any Affected Employee is entitled pursuant to the personal, sick or vacation policies applicable to such Affected Employee immediately prior to the Closing Date (the "PSV POLICIES"), such Affected Employee shall be allowed to use such accrued personal, sick or vacation time following the Closing Date, in accordance with such PSV Policies. (h) Parent acknowledges and agrees that any employment loss within the meaning of the Worker Adjustment and Retraining Notification Act (the "WARN ACT"), 29 U.S.C. ss.ss. 2101 et seq., suffered by any employee immediately upon or within 90 days of the Closing, shall have been caused by Parent's decision not to continue the employment of such employee, and not by the sale of the Company. The Company acknowledges and agrees that, at Parent's request, it shall give any notices required by the WARN Act if necessary prior to the Closing Date and otherwise cooperate with Parent. Parent shall be responsible to and shall indemnify and hold harmless the Company and its Affiliates for any and all claims asserted under the WARN Act because of a "plant closing" or "mass layoff," as defined therein, occurring on or after the Closing Date, unless the Company does not cooperate with Parent or provide requested notices as required by immediately preceding sentence. For purposes of this Agreement, the Closing Date is and shall be the same as the "effective date" of the sale within the meaning of the WARN Act. Effective as of the Closing, Parent shall (i) assume liability for all active workers' compensation cases attributable to any employee and (ii) provide employees with coverage for all workers' compensation benefits and, from and after Closing, Parent shall be responsible for all workers' compensation claims filed by employees, regardless of whether the underlying event of such claims occurred prior to the Closing. (i) Nothing herein expressed or implied shall confer upon any current or former employee of the Company or upon any representative of any such person, or upon any collective bargaining agent, any rights or remedies, including any third party beneficiary rights or any right to employment or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement. 26 SECTION 4.6 [INTENTIONALLY OMITTED] SECTION 4.7 FINANCIAL INFORMATION (a) After the Closing, upon reasonable written notice, Parent and the Company shall furnish or cause to be furnished to the Stockholders and their respective accountants, counsel and other representatives access to, during normal business hours, such information (including records pertinent to the Company) as is reasonably necessary for financial reporting and accounting matters. (b) Parent shall retain all of the books and records of the Company for a period of five years after the Closing Date or such longer time as may be required by law. After the end of such period, before disposing of such books or records, Parent shall give notice to such effect to the Stockholders and give the Stockholders an opportunity to remove and retain all or any part of such books or records as the Stockholders may select. SECTION 4.8 [INTENTIONALLY OMITTED]. SECTION 4.9 PUBLICITY. Each of Parent and Merger Sub agrees that no public release or announcement concerning the transactions under this Agreement shall be issued by Parent, Merger Sub or any of their Affiliates, agents or representatives without the prior written consent and approval of the Company and prior notice by the Company to the Gaming Authorities in accordance with the Gaming Laws and consistent with the Company's responsibilities as a gaming licensee and until after the Company and its Affiliates have been given an opportunity to first issue such a public release or announcement. SECTION 4.10 CERTAIN UNDERSTANDINGS. (a) Each of Parent and Merger Sub acknowledges that it has received from the Company certain projections, forecasts and information relating to the Company. Each of Parent and Merger Sub acknowledges that (i) there are uncertainties inherent in attempting to make such projections and forecasts and in such information, (ii) each of Parent and Merger Sub is familiar with such uncertainties and is taking full responsibility for making its own evaluation of the adequacy and accuracy of all projections, forecasts and information so furnished and (iii) neither Parent nor Merger Sub or any of their Affiliates shall have any claim against the Company, the Stockholders or any of their respective directors, officers, Affiliates, agents or representatives with respect thereto. Accordingly, without limiting the generality of SECTION 3.1(U), the Company makes no representation or warranty with respect to such projections, forecasts or information. (b) Parent acknowledges that, except as expressly set forth herein, without limiting the generality of SECTION 3.1(U), neither the Company nor any other Person has made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding the Company, and neither the Company nor any other Person will be subject to any liability to Parent, Merger Sub or any other Person resulting from the distribution to Parent or Merger Sub, or the use of, any such information. Each of Parent and Merger Sub acknowledges that, should the Closing occur, each of Parent and Merger Sub will acquire the Company and its business, properties, assets and liabilities in an "as is" condition and on a "where is" basis, without any representation or warranty of any kind, express or implied, except such representations and warranties expressly set forth in this Agreement. Further, without limiting any representation, warranty or covenant of the Company expressly set forth herein, each of Parent and Merger Sub acknowledges that it has waived and hereby waives as a condition to Closing any further due diligence reviews, inspections or examinations with respect to the Company, 27 including, without limitation, with respect to engineering, environmental, title, survey, financial, operational, regulatory and legal compliance matters. SECTION 4.11 TAXES. All Taxes arising out of, in connection with, or attributable to any preparatory act or the transactions effected pursuant to this Agreement shall be borne (directly or, if a Company level tax, indirectly) by Parent. In the case of any Transfer Tax, Parent shall pay all such Transfer Taxes (whether imposed on Parent, the Surviving Corporation or any Stockholder), shall prepare and timely file all relevant Transfer Tax returns required to be filed in respect of such Transfer Tax and shall pay the Transfer Tax shown on such Transfer Tax return. For purposes of this Agreement, "TRANSFER TAX" or "TRANSFER TAXES" means all sales (including, without limitation, bulk sales), use, transfer, recording, ad valorem, privilege, documentary, gross receipts, registration, conveyance, excise, license, stamp, duties, or similar taxes and fees. SECTION 4.12 CERTAIN NOTIFICATIONS. From the date of this Agreement until the Closing, the Company, on one hand, and Parent, on the other hand, shall promptly notify the other in writing regarding (a) any breach of any covenant or obligation of such party hereunder, as applicable, and (b) any fact, circumstance, event or action which will result in, or would reasonably be expected to result in, the failure of such party to timely satisfy any of the closing conditions specified in ARTICLE V, as applicable. SECTION 4.13 INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Parent agrees that (i) all rights to indemnification existing in favor of any director, officer, employee or agent of the Company (the "INDEMNIFIED PARTIES") as provided in its charter or bylaws or in indemnification agreements with the Company or any other Person, or otherwise in effect as of the date hereof, shall survive the Closing and shall continue in full force and effect for a period of not less than six years from the Closing Date and (ii) Parent shall guarantee the performance by the Company of its obligations referred to in immediately preceding clause (i); PROVIDED that, in the event any claim or claims are asserted or made within such six-year period, all rights to indemnification in respect of any such claim or claims, and Parent's guarantee with respect thereto, shall continue until final disposition of any and all such claims. Parent also agrees to indemnify all Indemnified Parties to the fullest extent permitted by applicable law with respect to all acts and omissions arising out of such individuals' services as directors, officers, employees or agents of the Company or as trustees or fiduciaries of any plan for the benefit of employees or directors of, or otherwise on behalf of, the Company, occurring prior to the Closing Date including, without limitation, the transactions under this Agreement. Without limiting the generality of the foregoing, if any such Indemnified Party is or becomes involved in any capacity in any action, proceeding or investigation in connection with any matter, arising out of such individuals' services as directors, officers, employees or agents of the Company or as trustees or fiduciaries of any plan for the benefit of employees or directors of, or otherwise on behalf of, the Company, including the transactions under this Agreement, occurring prior to or at the Closing, Parent shall pay as incurred such Indemnified Party's reasonable out-of-pocket legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith. From and after the Closing, Parent shall pay all reasonable out-of-pocket expenses, including attorneys' fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided for in this SECTION 4.13. (b) Parent agrees that, from and after the Closing, the Company shall cause to be maintained in effect for not less than six years from the Closing Date the current policies of the directors' and officers' liability insurance maintained by the Company; PROVIDED that the Company may substitute therefor policies of at least the same coverage containing terms and conditions which are no less advantageous to the directors and officers covered by such policies and PROVIDED that such substitution shall not result in any gaps or lapses in coverage with respect to matters occurring prior to the 28 Closing; PROVIDED, FURTHER, that the Company shall not be required to pay an annual premium in excess of 300% of the last annual premium paid by the Company prior to the date hereof, and if the Company is unable to obtain the insurance required by this SECTION 4.13(B) it shall obtain as much comparable insurance as possible for an annual premium equal to such maximum amount. SECTION 4.14 DEBT FINANCING (a) From the date hereof until the Effective Time, the Company shall, and shall use its reasonable best efforts to cause each of their respective officers, directors, employees and representatives to, provide such cooperation as is reasonably requested by Parent in connection with the arrangement of the Financing, including (A) causing appropriate officers and employees to be available, on a customary basis and on reasonable advance notice, to meet with prospective lenders and investors in meetings, drafting sessions, due diligence sessions, management presentations, road shows and sessions with rating agencies, (B) assisting with the preparation of materials for rating agency presentations, business projections and financial statements (including those required by the SEC), and assisting Parent in preparing offering memoranda, private placement memoranda, prospectuses and similar documents, (C) requesting its independent accountants to provide reasonable assistance to Parent, including requesting such accountants to provide consent to Parent to prepare and use their audit reports relating to the Company and any necessary "comfort letters," (D) forming, on or prior to the Closing Date, new wholly owned subsidiaries, and transferring assets into those subsidiaries, to the extent not prohibited by law or any contracts to which the Company is a party or is bound (provided that in the event a contract prohibits such transfer and the transfer cannot otherwise be structured in a manner to avoid conflict with the terms of such contract, the Company agrees to use reasonable efforts to obtain consents necessary to effectuate such transfers), and (E) provide reasonable access to the Owned Real Property, in accordance with SECTION 4.2, during normal business hours to the extent necessary for Parent to obtain surveys, engineering reports, zoning reports, environmental reports and appraisals required by the Financing Commitments with respect to the Owned Real Property. Parent shall pay to the Company any costs or expenses incurred by the Company in connection with the foregoing. (b) Notwithstanding the foregoing or SECTION 4.4 or 5.3(C), the parties acknowledge and agree that nothing in this Agreement shall (i) require the Company, any of the Stockholders or any of their respective officers, directors or Affiliates to (x) enter into or execute any commitment letter, underwriting or placement agreement, pledge or security document, loan agreement, note purchase agreement, registration rights agreement, indenture or any other Contract, or any registration statement or other filing with the SEC, or any certificate or other document in connection with any financing or other funds sought by Parent, (y) commence or take any other action with respect to any tender offer for, or any consent with respect to, or any repayment of, or amendment or modification to, any debt securities or other indebtedness of the Company (other than ministerial actions, including facilitating access to the trustee with respect to, or providing a list of the holders of, any such debt securities), or (z) obtain any rating agency confirmations or approvals, (ii) require counsel to the Company or the Stockholders to deliver any legal opinion in connection with any financing or funds sought by Parent, or (iii) require the Company or any of the Stockholders, or any officer, director, employee, counsel or advisor thereof, to make any representation or warranty, incur any liability or provide for any indemnification or expense reimbursement in connection with any financing or funds sought by Parent. SECTION 4.15 FURTHER ASSURANCES. Subject to the terms and conditions of this Agreement, each party will use its commercially reasonable efforts (except where a different efforts standard is specifically contemplated by this Agreement, in which case such different standard shall apply) to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or 29 advisable under applicable laws and orders to consummate the transactions contemplated by this Agreement. SECTION 4.16 SELECTED MEMORABILIA. Notwithstanding anything in this Agreement to the contrary, Peter A. Morton shall have the right to purchase, or otherwise acquire, from the Company on an "as is, where is," no representation basis, such items of rock and roll or other memorabilia owned by the Company, as Peter A. Morton may select, in his sole discretion, up to an aggregate appraised value of $100,000 (the "SELECTED MEMORABILIA"), and there shall not be sold, assigned, transferred, conveyed or delivered to Parent or Merger Sub any right, title or interest in or to any of the Selected Memorabilia. Peter A. Morton shall have the right to take all actions he deems necessary or desirable to remove, transfer, sever or otherwise separate such right, title and interest in or to the Selected Memorabilia from the other assets of the Company on or prior to the Closing Date. SECTION 4.17 TERMINATION OF AFFILIATE AGREEMENTS. The Company shall use its best efforts to terminate or cancel, as applicable, effective at the Closing, all Contracts between the Company and Peter Morton (including the Amended and Restated Supervisory Agreement, dated as of October 21, 1997, by and between the Company and Peter A. Morton), and all other Contracts between the Company and an Affiliate of the Company, except for (i) this Agreement and (ii) the Contracts listed in SCHEDULE 4.17 of the Company Disclosure Letter (collectively, the "AFFILIATE AGREEMENTS"). SECTION 4.18 OTHER TRANSACTION DOCUMENTS. (a) The Company shall use its best efforts to cause Peter A. Morton to execute the Trademark Agreement, the License Agreement and the Morton Trademark Assignment on or prior to the Closing Date. (b) Peter A. Morton agrees to execute the Trademark Agreement, the License Agreement and the Morton Trademark Assignment on or prior to the Closing Date. ARTICLE V CONDITIONS PRECEDENT SECTION 5.1 CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to effect the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction, or waiver by Parent and the Company, on or before the Closing Date of the following conditions precedent (which shall not be construed as covenants): (a) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order or preliminary or permanent injunction of any court or administrative agency of competent jurisdiction prohibiting the Merger or any of the other transactions contemplated by this Agreement shall be in effect; (b) HSR ACT. Any waiting period under the HSR Act applicable to the Merger or any of the other transactions contemplated by this Agreement shall have expired or early termination thereof shall have been granted without limitation, restriction or condition that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect (after giving effect to the Merger and the other transactions contemplated by this Agreement); and (c) OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. 30 SECTION 5.2 CONDITIONS PRECEDENT TO PARENT'S AND MERGER SUB'S OBLIGATIONS. The obligation of each of Parent and Merger Sub to effect the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction or waiver by Parent on or before the Closing Date of the following conditions precedent (which shall not be construed as covenants): (a) REPRESENTATIONS AND WARRANTIES. (i) The representations and warranties of the Company set forth in this Agreement shall be true and correct in all respects on and as of the Closing Date, as though made on and as of the Closing Date (except for representations and warranties made as of a specified date which shall be true and correct in all respects as of such date), except where the failure of such representations and warranties to be so true and correct would not reasonably be expected to have a Material Adverse Effect; PROVIDED, HOWEVER, that notwithstanding the preceding, the representations and warranties of the Company contained in SECTION 3.1(D) shall be true and correct in all material respects; and (ii) between the date of this Agreement and the Closing, there shall have been no Material Adverse Effect; (b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have performed in all material respects the obligations required to be performed by it under this Agreement on or prior to the Closing Date; (c) GOVERNMENTAL CONSENTS. Each of Parent and Merger Sub shall have obtained (or the Gaming Operator shall have obtained) any and all Gaming Approvals and other Governmental Approvals required to be obtained in connection with the transactions under this Agreement (which Gaming Approvals and other Governmental Approvals shall have been granted to Parent or Merger Sub (or, if applicable, the Gaming Operator) without the imposition of limitations, restrictions or conditions materially detrimental to the Company); and (d) AFFILIATE AGREEMENTS. The Affiliate Agreements shall have been terminated or cancelled. SECTION 5.3 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS. The obligations of the Company to effect the Merger and the other transactions contemplated by this Agreement are subject to the satisfaction or waiver on or before the Closing Date of each of the following conditions precedent (which shall not be construed as covenants): (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of each of Parent and Merger Sub set forth in this Agreement shall be true and correct in all respects on and as of the Closing Date, as though made on and as of the Closing Date (except for representations and warranties made as of a specified date which shall be true and correct in all respects as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "materiality" set forth therein) would not reasonably be expected to have a material adverse effect on the ability of Parent or Merger Sub to consummate the Merger and the other transactions contemplated by this Agreement; PROVIDED, HOWEVER, that notwithstanding the preceding, the representations and warranties of Parent contained in SECTION 3.2(B) shall be true and correct in all material respects; (b) PERFORMANCE OF OBLIGATIONS OF PARENT AND MERGER SUB. Each of Parent and Merger Sub shall have performed in all material respects the obligations required to be performed by it under this Agreement on or prior to the Closing Date; and (c) COMPANY BONDS; CREDIT AGREEMENT. Parent shall have paid in full, defeased or otherwise satisfied all Obligations under the Credit Agreement and the Company Bonds. 31 ARTICLE VI TERMINATION SECTION 6.1 TERMINATION. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (a) by mutual written consent of the Company and Parent; (b) [INTENTIONALLY OMITTED] (c) by the Company, by written notice to Parent, if (i) Parent or Merger Sub shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in SECTION 5.1 or 5.3 (the "COMPANY CONDITION FAILURE"), and (ii) such Company Condition Failure is incapable of being cured by Parent or Merger Sub or, if curable, is not cured by Parent or Merger Sub within 120 days following receipt of written notice from the Company of such Company Condition Failure; (d) by Parent, by written notice to the Company, if (i) the Company shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would give rise to the failure of a condition set forth in SECTION 5.1 or 5.2 (the "PARENT CONDITION FAILURE"), and (ii) such Parent Condition Failure is incapable of being cured by the Company or, if curable, is not cured by the Company within 120 days following receipt of written notice from Parent of such Parent Condition Failure; (e) by either the Company or Parent, by written notice to the other, if the Closing has not occurred by (i) the earlier of (x) seven (7) Business Days following the receipt by Parent or Merger Sub (or, if applicable, the Gaming Operator) of all Gaming Approvals (which Gaming Approvals shall have been granted to Parent or Merger Sub (or, if applicable, the Gaming Operator) without the imposition of limitations, restrictions or conditions materially detrimental to the Company); and (y) February 11, 2007, or (ii) such later date, as is agreed to by the Company (the later of (i) and (ii), the "OUTSIDE DATE"); or (f) by the Company or Parent, by written notice to the other, if there shall be any law or regulation that makes consummation of the Merger or any of the other transactions contemplated by this Agreement illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining the Company or Parent from consummating the Merger or any of the other transactions contemplated by this Agreement is entered and such judgment, injunction, order or decree shall become final and nonappealable. Notwithstanding anything contained in this Agreement to the contrary, except as provided in SECTIONS 6.1(A) and (F) in no event shall: (i) a party that has breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained (A) in this Agreement, which breach or failure to perform would give rise to the failure of, in the case of a breach of failure to perform by Parent, a condition set forth in SECTION 5.1, 5.2(C) or 5.3, and, in the case of a breach or failure to perform by the Company, a condition set forth in SECTION 5.1 or 5.2, in each case, to be satisfied on or before the Closing Date, or (B) in the Other Transaction Documents, terminate this Agreement under this SECTION 6.1; or 32 (ii) the Company terminate this Agreement under this SECTION 6.1 if any of the parties to the Other Transaction Documents (other than Parent or any Affiliate of Parent and the Escrow Agent) (collectively, the "OTHER PARTIES") has breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained herein or therein, as applicable. SECTION 6.2 Effect of Termination. (a) EFFECT OF TERMINATION. In the event of termination of this Agreement in accordance with SECTION 6.1, this Agreement shall forthwith become void and have no effect, except (i) as set forth in SECTIONS 6.2(B), 6.2(C) and 6.3; (ii) as otherwise set forth in any written termination agreement; and (iii) that SECTIONS 4.2(A)(VI) and 4.2(C), this SECTION 6.2 and ARTICLE IX shall survive termination of this Agreement. (b) APPLICATION OF DEPOSIT. (i) If this Agreement is terminated pursuant to SECTION 6.1(A), then the Escrow Agent shall deliver to Parent the Deposit pursuant to Parent's instructions, and the sole remedy of Parent and Merger Sub against the Company shall be the amount of the Deposit, which Deposit shall be compensation and liquidated damages as provided in SECTION 6.2(C). (ii) [INTENTIONALLY OMITTED] (iii) If this Agreement is terminated by the Company pursuant to SECTION 6.1(C), then the Escrow Agent shall deliver the Deposit to the Stockholders' Representative pursuant to the Stockholders' Representative's instructions, and the sole remedy of the Company against Parent and Merger Sub shall be such delivery by the Escrow Agent of the amount of the Deposit, which Deposit shall be compensation and liquidated damages as provided in SECTION 6.2(C). (iv) If this Agreement is terminated by Parent pursuant to SECTION 6.1(D), then the Escrow Agent shall deliver to Parent the Deposit pursuant to Parent's instructions, and the sole remedy of Parent and Merger Sub against the Company shall be such delivery by the Escrow Agent of the amount of the Deposit, which Deposit shall be compensation and liquidated damages as provided in SECTION 6.2(C). (v) If this Agreement is terminated by the Company or Parent pursuant to SECTION 6.1(E), then the Escrow Agent shall deliver the Deposit to the Stockholders' Representative pursuant to the Stockholders' Representative's instructions, and the sole remedy of the Company against Parent and Merger Sub shall be such delivery by the Escrow Agent of the amount of the Deposit, which Deposit shall be compensation and liquidated damages as provided in SECTION 6.2(C); PROVIDED, HOWEVER, that if the Company has breached, or has failed to perform its obligations or satisfy its conditions under, this Agreement or any of the Other Parties has breached, or has failed to perform its obligations or satisfy its conditions under, the Other Transaction Documents, and such breach or failure caused or resulted in the failure of the Closing to occur on or before the Outside Closing Date, then the Escrow Agent shall deliver to Parent the Deposit pursuant to Parent's instructions, and the sole remedy of Parent and Merger Sub against the Company shall be such delivery by the Escrow Agent of the amount of the Deposit, which Deposit shall be compensation and liquidated damages as provided in SECTION 6.2(C). (vi) If this Agreement is terminated by the Company or Parent pursuant to SECTION 6.1(F), then the Escrow Agent shall deliver the Deposit to the Parent pursuant to Parent's instructions, and the sole remedy of Parent and Merger Sub against the Company shall be such 33 delivery by the Escrow Agent of the amount of the Deposit, which Deposit shall be compensation and liquidated damages as provided in SECTION 6.2(C); PROVIDED, HOWEVER, that if the actions or inaction of Parent or Merger Sub (but not the Company or the Other Parties) have been the cause of, or have materially contributed to, such judgment, injunction, order or decree, then the Escrow Agent shall instead deliver the Deposit to the Stockholders' Representative pursuant to the Stockholders' Representative's instructions, and the sole remedy of the Company against Parent and Merger Sub shall be such delivery by the Escrow Agent to the Stockholders' Representative of the amount of the Deposit, which amount shall be compensation and liquidated damages as provided in SECTION 6.2(C). 34 (c) LIQUIDATED DAMAGES. BY INITIALLING BELOW, ON BEHALF OF PARENT: ON BEHALF OF THE COMPANY: INITIALS: /s/ W.E.S INITIALS: /s/ B.O. NAME: ------------ NAME: ------------ TITLE: TITLE: ON BEHALF OF MERGER SUB: INITIALS: /s/ W.E.S NAME: ------------ TITLE: EACH OF THE PARTIES HERETO AGREES THAT IT WOULD BE IMPRACTICAL OR EXTREMELY DIFFICULT TO FIX ACTUAL DAMAGES IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 6.1, AND, THEREFORE, EACH OF PARENT AND THE COMPANY AGREES THAT THE PAYMENTS PROVIDED IN SECTION 6.2(b) SHALL BE THE SOLE AND EXCLUSIVE REMEDY OF THE PARTIES UPON, AND LIQUIDATED DAMAGES FOR, TERMINATION OF THIS AGREEMENT PURSUANT TO ARTICLE VI, AND SUCH REMEDY SHALL BE LIMITED TO THE PAYMENTS STIPULATED IN SECTION 6.2(b). 35 SECTION 6.3 SPECIFIC PERFORMANCE. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IN THE EVENT THAT THE MERGER FAILS TO CLOSE AS A RESULT OF (a) THE DEFAULT OF THE COMPANY OR PETER A. MORTON IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, OR (b) A DEFAULT OF ANY OTHER PARTY (AS DEFINED IN SECTION 6.1) IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER ANY OF THE OTHER TRANSACTION DOCUMENTS, THEN IN LIEU OF PARENT'S REMEDIES SET FORTH IN SECTION 6.1 AND 6.2, PARENT MAY ELECT TO PURSUE THE REMEDY OF SPECIFIC PERFORMANCE AGAINST THE COMPANY AND PETER A. MORTON, IT BEING AGREED THAT IRREPARABLE DAMAGE WOULD OCCUR IN THE EVENT THAT THE COMPANY OR PETER A. MORTON FAILS TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY TO WHICH IT IS A PARTY AS A RESULT OF THE COMPANY'S OR PETER A. MORTON'S DEFAULT HEREUNDER. ARTICLE VII SURVIVAL; INDEMNIFICATION SECTION 7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and warranties of the Company contained in this Agreement shall survive the Closing until the first anniversary of the Closing Date (the "EXPIRATION DATE"). The covenants and agreements contained in this Agreement shall not survive the Closing, other than those covenants and agreements that are expressly required to remain in full force and effect after the Closing. SECTION 7.2 OBLIGATION OF STOCKHOLDERS. As provided in the Escrow Agreement and the PMR/RWB Escrow Agreement, the Stockholders shall, jointly and severally, indemnify, defend and hold harmless Parent and the Surviving Corporation and each of their predecessors and successors, stockholders, employees, officers, directors, agents and representatives (collectively, the "PARENT INDEMNITEES") from and against, and pay or reimburse the Parent Indemnitees for, any and all damages, liabilities, losses, claims, obligations, Liens, assessments, judgments, fines and penalties (collectively, "LOSSES") that any of them may suffer, incur or sustain, directly or indirectly, arising out of, attributable to, relating to or resulting from: (a) (i) any inaccuracy in or breach of any representation and warranty made by the Company in this Agreement; and (ii) any inaccuracy in or breach of any representation and warranty (without giving effect to any qualifiers or exceptions relating to knowledge, Knowledge of the Company, materiality or Material Adverse Effect) made by the Company in this Agreement if such inaccuracy or breach, individually or together with all such other inaccuracies or breaches, would be reasonably expected to have a Material Adverse Effect, in each case, by virtue of the failure of such representation or warranty to be true and correct (i) on and as of the Closing Date with the same effect as though made on and as of the Closing Date (other than any such representation or warranty that speaks as of a specific date or time other than the Closing Date) or (ii) on and as of the date or time when made, in the case of any representation or warranty that speaks as of a specific date or time other than the Closing Date; (b) any breach or nonperformance of any of the covenants or other agreements made and to be performed by the Company pursuant to this Agreement; and (c) the exercise by any Stockholder of dissenters' rights with respect to the Merger pursuant to the NRS. 36 SECTION 7.3 OBLIGATION OF PARENT. Parent and Merger Sub shall indemnify, defend and hold harmless the Stockholders and each of their predecessors and successors, stockholders, employees, officers, directors, agents and representatives (collectively, the "STOCKHOLDER INDEMNITEES") from and against, and pay or reimburse the Stockholder Indemnitees for, any and all Losses that any of them may suffer, incur or sustain, directly or indirectly, arising out of, attributable to, relating to or resulting from: (a) any inaccuracy in or breach of any representation and warranty (without giving effect to any qualifiers or exceptions relating to knowledge, Knowledge of Parent, materiality or Material Adverse Effect) made by Parent or Merger Sub in this Agreement by virtue of its failure to be true and correct (i) on and as of the Closing Date with the same effect as though made on and as of the Closing Date (other than any such representation or warranty that speaks as of a specific date or time other than the Closing Date) or (ii) on and as of the date or time when made, in the case of any representation or warranty that speaks as of a specific date or time other than the Closing Date; and (b) any breach or nonperformance of any of the covenants or other agreements made and to be performed by Parent or Merger Sub pursuant to this Agreement. SECTION 7.4 MINIMUM LOSSES. No Parent Indemnitee shall have any right to indemnification under SECTION 7.2 until aggregate Losses incurred by all Parent Indemnitees would exceed Two Million Five Hundred Thousand Dollars ($2,500,000) (the "INDEMNITY THRESHOLD"), after which there may only be recovered those Losses in excess of the Indemnity Threshold, subject to the conditions of this ARTICLE VII, including the limitations set forth in SECTION 7.5. SECTION 7.5 MAXIMUM INDEMNIFICATION. The Stockholders shall not be obligated to provide indemnification pursuant to SECTION 7.2 exceeding, in the aggregate, the Indemnification Escrow Amount. Notwithstanding anything in this Agreement, any indemnification obligation of the Stockholders under SECTION 7.2 shall be satisfied solely from the Indemnification Escrow Fund, except that to the extent that the balance of the Indemnification Escrow Fund is not sufficient to satisfy any indemnification obligations of the Stockholders to the Parent Indemnitees under SECTION 7.2 when the conditions for indemnification set forth in SECTION 7.2 have been satisfied, then such shortfall shall be satisfied from any balance remaining in the PMR/RWB Escrow Funds pursuant to, and in accordance with the terms and subject to the conditions of, the PMR/RWB Escrow Agreement. SECTION 7.6 NO TAX ATTRIBUTE INDEMNITY. Notwithstanding anything in this Agreement to the contrary, no indemnification shall be provided for the absence or loss of any tax attributes, including by reason of a breach of SECTION 3.1(N)(I) and/or SECTION 3.1(N)(VII); provided, that for the avoidance of doubt, the Parent Indemnitees shall be, subject to the limitations on indemnification otherwise set forth in this ARTICLE VII, indemnified for (and this SECTION 7.6 does not limit), a breach of SECTION 3(N)(I) that gives rise to a liability for Taxes of the Company for pre-Closing periods (as opposed to a reduction of tax attributes carried forward to a post-Closing period). SECTION 7.7 NOTICE; PROCEDURE FOR THIRD-PARTY CLAIMS. (a) Any Person entitled to indemnification under Article VII (an "INDEMNIFIED PARTY") may seek indemnification for any Loss or potential Loss by giving written notice to the applicable party or parties from whom indemnification is sought (the "INDEMNIFYING PARTY") before, if applicable, the Expiration Date. Written notice to such Indemnifying Party of the existence of a claim shall be given by the Indemnified Party as soon as practicable after the Indemnified Party first receives notice of the potential claim, PROVIDED that any failure to provide such prompt notice of the existence of a claim to the applicable Indemnifying Party shall not affect the Indemnified Party's right to 37 seek indemnification pursuant to this ARTICLE VII except and only to the extent that such failure results in such Indemnifying Party actually incurring an expense or otherwise being prejudiced as a result of such delay. In the case of a claim involving a Third Party Claim (as hereinafter defined), (i) the notice of claim shall describe in reasonable detail the facts known to the Indemnified Party giving rise to such indemnification claim and the amount, or good faith estimate of the amount, of Losses arising therefrom, and (ii) the Indemnified Party shall deliver to the Stockholders' Representative (if the Indemnified Party is a Parent Indemnitee) or to Parent (if the Indemnified Party is a Stockholder Indemnitee), as applicable, promptly after the Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Party relating to such Third Party Claim. (b) In the case of any claim asserted by a Person that is not a party to this Agreement against an Indemnified Party (a "THIRD-PARTY CLAIM"), the Indemnified Party shall permit the Indemnifying Party (at the expense of such Indemnifying Party) to assume the defense of such Third-Party Claim and any litigation or proceeding resulting therefrom; provided that (i) counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be reasonably satisfactory to the Indemnified Party and (ii) the Indemnified Party may participate in such defense at such Indemnified Party's expense. Notwithstanding the election of the Indemnifying Party to assume control of such defense, the Indemnified Party shall be entitled to retain or assume the defense of such Third-Party Claims (at such Indemnified Party's expense) if (A) the amount of Losses from such claim (x) if the Indemnified Party is a Parent Indemnitee, could reasonably be expected to exceed, when aggregated with all other pending claims and unpaid claims for indemnification from such Indemnifying Party (together with, in the case of any Stockholder as the Indemnifying Party, pending claims and unpaid claims for indemnification from each such other Indemnifying Party), the Indemnification Escrow Fund, and (y) if the Indemnified Party is a Stockholder Indemnitee, otherwise may not, in the good faith judgment of the Indemnified Party, be capable of being satisfied in full by such Indemnifying Party; (B) the claim for indemnification relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation that could reasonably be expected to adversely affect the business of Parent or the Surviving Corporation; or (C) the Indemnified Party has been advised in writing by counsel that a conflict of interest exists between the Indemnifying Party and the Indemnified Party with respect to such claim (including the defense thereof). No Indemnifying Party, in the defense of any Third-Party Claim, shall consent to entry of any judgment or enter into any settlement without the consent of the Indemnified Party, which consent may be withheld in the Indemnified Party's sole discretion (unless the terms of such judgment or settlement include an unconditional full release of the Indemnified Party from all liability with respect to such Third-Party Claim and solely the payment of money and all such moneys shall be paid by the Indemnifying Party, in which case such consent shall not be unreasonably withheld). In the event that the Indemnifying Party does not accept the defense of any matter as above provided, the Indemnified Party shall have the right to defend against any such claim or demand, and shall be entitled to settle or agree to pay in full such claim or demand. In any event, the parties to this Agreement shall cooperate in the defense of any Third-Party Claim subject to this ARTICLE VII and the records of each shall be made reasonably available to the other with respect to such defense. SECTION 7.8 SURVIVAL OF INDEMNITY. Any matter as to which a claim has been asserted in good faith by an Indemnified Party, by formal notice satisfying the requirements of SECTION 7.7, and prior to the Expiration Date, that is pending or unresolved as of the Expiration Date, by law or otherwise shall continue to be covered by this Article VII notwithstanding such limitation (which the parties hereby waive solely with respect to such circumstances), until such matter is finally terminated or otherwise resolved by the parties under this Agreement, by an arbitration or by a court of competent jurisdiction and any amounts payable hereunder are finally determined and paid. 38 SECTION 7.9 NO CONSEQUENTIAL DAMAGES. Notwithstanding anything to the contrary contained in this Agreement, no person shall be liable to or otherwise responsible for consequential, incidental or punitive damages. SECTION 7.10 NO DOUBLE RECOVERY. Notwithstanding anything herein to the contrary, no Indemnified Party shall be entitled to indemnification under any provision of this Agreement for any amount to the extent such Indemnified Party has been indemnified or reimbursed for such amount under any other provision of this Agreement (including, (i) to the extent that such amount reduced Total Transaction Consideration or Working Capital, if the Indemnified Party is a Parent Indemnitee, and (ii) to the extent that such amount increased Total Transaction Consideration or Working Capital, if the Indemnified Party is a Stockholder Indemnitee) or any other agreement or action at law or equity or otherwise. ARTICLE VIII DEFINITIONS SECTION 8.1 DEFINITIONS. As used in this Agreement and the Exhibits and Schedules delivered pursuant to this Agreement, the following terms shall have the following respective meanings. "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first-mentioned Person. The term "Affiliated" shall have a corresponding meaning. "BUSINESS DAY" means a day that is not a Saturday, Sunday, federal holiday or legal holiday in both Clark County, Nevada and New York, New York. In the event that the date for the performance of any covenant or obligation under this Agreement shall fall on a Saturday, Sunday or legal holiday, the date for performance thereof shall be extended to the next Business Day. "COMPANY BONDS" means both (i) the Company Second Lien Notes and (ii) the Company Junior Notes. "COMPANY DISCLOSURE LETTER" means the Disclosure Letter delivered by the Company to Parent on the date of this Agreement. "COMPANY JUNIOR NOTES" means the Company's Junior Subordinated Notes due 2014. "COMPANY SECOND LIEN NOTES" means the Company's 8 7/8% Second Lien Notes due 2013. "CONTRACT" means any contract, lease, mortgage, indenture or other agreement to which the Company is a party or is bound, but shall not include the Employee Benefit Plans referred to in SECTION 3.1(O). "CREDIT AGREEMENT" means the Credit Agreement, dated as of May 30, 2003 (as it may be amended, supplemented or modified from time to time), among the Company, as borrower, the lenders referred to therein and Bank of America, N.A., as administrative agent. "GAMING APPROVALS" means all licenses, permits, approvals, authorizations, registrations, findings of suitability, franchises, entitlements, waivers and exemptions issued by any Gaming Authority required to permit the parties hereto to consummate the transactions contemplated by this Agreement or necessary to permit Parent to own and operate the Company. 39 "GAMING AUTHORITIES" means any governmental authority or agency with regulatory control or jurisdiction over the conduct of lawful gaming or gambling, including the Nevada Gaming Commission, the Nevada State Gaming Control Board and the Clark County Liquor and Gaming Licensing Board. "GAMING LAWS" means any federal, state, local or foreign statute, ordinance, rule, regulation, permit, consent, registration, finding of suitability, approval, license, judgment, order, decree, injunction or other authorization (including any condition or limitation placed thereon and including liquor laws) governing or relating to the current or contemplated casino and gaming activities and operations of the Company. "GAMING OPERATOR" means any Person which is experienced in the gaming business and is reasonably likely to obtain, prior to the Outside Date, all Gaming Approvals required to consummate the transactions contemplated by this Agreement, which Person Parent and Merger Sub may select prior to the Closing. "GOVERNMENTAL AUTHORITY" means any court, administrative agency, commission, Gaming Authority or other governmental authority or instrumentality. "KNOWLEDGE OF THE COMPANY" means the actual knowledge of Peter A. Morton, Kevin Kelley and James D. Bowen; and the knowledge of no other Person shall be imputed to any such individual. "LICENSE AGREEMENT" means the License Agreement, to be dated as of the Closing Date, substantially in the form attached hereto as EXHIBIT D. "LIENS" means any lien, pledge, claim, mortgage, security interest, encumbrance or restriction (except for any transfer restriction generally arising under any applicable federal or state securities laws or licenses of or other agreements related to Company Intellectual Property that are not intended to secure Obligations) other than Liens (x) that will be released in connection with the Closing, (y) for Taxes not yet due and payable, or (z) that are set forth in SCHEDULE 8.1 of the Company Disclosure Letter. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, assets, financial condition or results of operations of the Company; PROVIDED, that none of the following, individually or in the aggregate, shall be deemed to have a Material Adverse Effect itself or be considered in any determination as to whether a Material Adverse Effect has occurred or is continuing: (i) changes in international or national political or regulatory conditions generally, (ii) changes, events or conditions generally affecting the U.S. economy or financial markets or affecting any of the travel, hospitality or gaming industries generally or in Las Vegas, Nevada, (iii) any change in law, tax rates or GAAP, (iv) any change, event or effect resulting from the entering into or public announcement of the transactions contemplated by this Agreement (including any facts or circumstances relating to Parent, its equity owners or investors, its financing sources or their respective Affiliates (including their respective identities)), and (v) any change, event or effect resulting from any act of terrorism, commencement, escalation, continuation or cessation of armed hostilities in the United States or internationally or declaration of war by or against or otherwise involving the United States. Further, no event or condition that results primarily from such events shall be deemed to have, individually or in the aggregate, a Material Adverse Effect. "MINIMUM CAGE CASH" means $5,500,000. 40 "MINIMUM WORKING CAPITAL" means $(2,700,000). "MORTON TRADEMARK ASSIGNMENT" means that assignment to be dated as of the Closing Date, substantially in the form attached here to as EXHIBIT E. "MORTON TRADEMARKS" means those trademarks set forth on Schedule A to the Morton Trademark Assignment. "OBLIGATIONS" means, with respect to any indebtedness, any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities and obligations payable under the documentation governing such indebtedness, including, without limitation, interest after the commencement of any bankruptcy proceeding at the rate specified in the applicable instrument governing or evidencing such indebtedness. "OTHER TRANSACTION CLOSINGS" means (i) the "Closing," as such term is defined in Section 7 of the PMR Asset Purchase Agreement, (ii) the execution by the parties thereto of the Trademark Agreement, (iii) the execution by the parties thereto of the License Agreement and (iv) the assignment of the Morton Trademarks pursuant to the Morton Trademark Assignment in accordance with the terms thereof. "OTHER TRANSACTION DOCUMENTS" means (i) the PMR Asset Purchase Agreement, (ii) the Trademark Agreement, (iii) the License Agreement and (iv) the Morton Trademark Assignment. "PERSON" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization or a government or agency or political subdivision thereof. "PMR" means PM Realty, LLC, a Nevada limited-liability company. "PMR Asset Purchase Agreement" means the Purchase and Sale Agreement and Joint Escrow Instructions, dated as of the date hereof, by and between Parent and PMR, a copy of which is attached hereto as EXHIBIT A. "PMR/RWB ESCROW AGREEMENT" means the Escrow Agreement, dated as of the date hereof, by and among PMR, Parent, Red, White and Blue Pictures, Inc., a California corporation, and the Escrow Agent, as it may be amended from time to time. "PMR/RWB ESCROW FUNDS" has the meaning given to "Escrow Funds" in the PMR/RWB Escrow Agreement. "TERMINATION AGREEMENT" means the Termination Agreement and Mutual Release by and between Peter A. Morton and the Company to be entered into on or prior to the Closing Date. "TERMINATION AMOUNT" means an aggregate amount in cash equal to Forty Million Dollars ($40,000,000). "TRADEMARK AGREEMENT" means the Agreement, to be dated as of the Closing Date, substantially in the form attached hereto as EXHIBIT B. "TREASURY CALCULATION AMOUNT" means an amount equal to the sum of (a) the present value on the Closing Date of $1,000 principal amount of Company Notes calculated in accordance with standard market practice, assuming each $1,000 principal amount of the Company Second Lien Notes would be repaid at $1,044.38 on June 1, 2008 (the "SECOND LIEN NOTE FIRST CALL DATE"), and each 41 $1,000 principal amount of the Company Subordinated Notes would be repaid at $1,049.38 on January 15, 2009 (the "JUNIOR NOTE FIRST CALL DATE" and, together with the Second Lien Note First Call Date, the "APPLICABLE FIRST CALL DATE"), PLUS (b) the present value of the interest that would be payable on, or accrue from, the most recent interest payment date on $1,000 principal amount of Notes until the Applicable First Call Date determined on the basis of a yield to the Applicable First Call Date equal to the sum of (x) the bid-side yield on the 5.625% U.S. Treasury Note due May 15, 2008, PLUS (y) 50 basis points. SECTION 8.2 INTERPRETATION. For all purposes of this Agreement, except as otherwise expressly provided, (a) defined terms have the meanings assigned to them in this Agreement and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned under GAAP, as in effect on the date hereof, unless otherwise stated, (c) all references in this Agreement to designated Articles, Sections, Exhibits or Schedules are to the designated Article, Section, Exhibit or Schedule to this Agreement, unless otherwise indicated, and all Exhibits and Schedules to this Agreement are incorporated herein by reference; when a reference is made in this Agreement to a specific Schedule, such reference shall be deemed to include, to the extent applicable, all the other Schedules; all references to Schedules herein shall be deemed to be a reference to such Schedule as it may be amended prior to the Closing, (d) the table of contents, table of definitions and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement, (e) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (f) the words "TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT," "TRANSACTIONS UNDER THIS AGREEMENT," "TRANSACTIONS CONTEMPLATED HEREBY" and words of similar import shall not be deemed or construed to include any of the transactions contemplated by the Other Transaction Documents, (g) the words "HEREIN," "HEREOF," "HEREWITH," "HEREUNDER" and "HERETO" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, and (h) the words "INCLUDE," "INCLUDING" and other words of similar import mean "INCLUDE, WITHOUT LIMITATION" OR "INCLUDING, WITHOUT LIMITATION," regardless of whether any reference to "without limitation" or words of similar import is made. ARTICLE IX MISCELLANEOUS SECTION 9.1 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given (i) upon actual receipt by the recipient, if delivered personally, (ii) one business day after deposit with an overnight courier, as shown on the records of such overnight courier, if delivered by overnight courier or (iii) on the business day of transmission (or if such day is not a business 42 day or if such notice is transmitted after 5:00 p.m., Pacific Time, then on the next succeeding business day) if by facsimile and the sender receives electronic confirmation of receipt by the recipient, in each case to the parties at the following addresses or facsimile numbers (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Merger Sub: Morgans Hotel Group Co. 475 Tenth Avenue, 11th Floor New York, New York 10018 Facsimile: (212) 277-4260 Attention: W. Edward Scheetz with a copy to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Fax No.: (212) 403-2000 Attention: Stephen G. Gellman, Esq. Adam O. Emmerich, Esq. (b) if to the Company: Hard Rock Hotel, Inc. 510 North Robertson Boulevard Los Angeles, California 90048 Facsimile: (310) 652-8747 Attention: Brian Ogaz with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Facsimile: (213) 687-5600 Attention: Gregg A. Noel and Gordon & Silver, Ltd. 3960 Howard Hughes Parkway Ninth Floor Las Vegas, Nevada 89109 Facsimile: (702) 369-2666 Attention: Jeffrey A. Silver (c) if to the Stockholders' Representative: Lily Pond Investments, Inc. 510 North Robertson Boulevard 43 Los Angeles, California 90048 Facsimile: (310) 652-8747 Attention: Brian Ogaz SECTION 9.2 SEVERABILITY. If any provision of this Agreement or the application of any such provision shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. In lieu of any such invalid, illegal or unenforceable provision, the parties hereto agree to negotiate in good faith to add to this Agreement a provision as similar in terms to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable. SECTION 9.3 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. Faxed signatures shall be valid and binding for all purposes. SECTION 9.4 MUTUAL DRAFTING. Each party hereto has participated in the drafting of this Agreement, which each party acknowledges is the result of extensive negotiations between the parties. In the event any ambiguity or question of intent arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. SECTION 9.5 ENTIRE AGREEMENT. This Agreement (including the Confidentiality Agreement and the Escrow Agreement), the Company Disclosure Letter and the Schedules hereto and thereto constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. SECTION 9.6 GOVERNING LAW; JURISDICTION. Except to the extent that the laws of the State of Nevada are mandatorily applicable to the Merger, this Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York without regard to the conflict of laws rules thereof other than Sections 5-1401 and 5-1402 of the New York General Obligations Law and Rule 327(b) of the New York Civil Practice Laws and Rules. Each of the parties hereto irrevocably consents to the exclusive jurisdiction and venue of any state or federal district court within New York County, The City of New York, New York in connection with any matter based upon or arising out of this Agreement or the transactions under this Agreement, agrees that process may be served upon them in any manner authorized by the laws of the State of New York and waives and covenants not to assert or plead any objection that they might otherwise have to such jurisdiction, venue and process. SECTION 9.7 AMENDMENT; WAIVER. This Agreement may not be amended except by an instrument in writing signed by the party against whom enforcement of any such amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by any other party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. SECTION 9.8 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated by any of the parties hereto without the prior written consent of the other parties, except that Parent or Merger Sub may assign and delegate its rights, interests and obligations hereunder to any subsidiary of Parent; PROVIDED that no such assignment or delegation shall release Parent from any of its obligations under this Agreement. 44 SECTION 9.9 NO THIRD-PARTY BENEFICIARIES. Except as provided in Sections 4.5 and 4.13, nothing herein expressed or implied shall be construed to give any Person other than the parties hereto (and their successors and assigns permitted by SECTION 9.8) any legal or equitable rights hereunder. SECTION 9.10 STOCKHOLDERS' REPRESENTATIVE. (a) Lily Pond Investments, Inc. is hereby appointed, effective as of the Effective Time, as agent and representative (in such capacities, the "STOCKHOLDERS' REPRESENTATIVE"), of the Stockholders and shall have exclusive power and authority, on behalf of the Stockholders, to give and receive notices and communications to or from Parent, Merger Sub and/or the Escrow Agent relating to this Agreement, the Escrow Agreement or any of the transactions and other matters contemplated hereby or thereby (except to the extent that this Agreement or the Escrow Agreement expressly contemplates that any such notice or communication shall be given or received by the Stockholders individually). (b) A decision, act, consent or instruction of the Stockholders' Representative shall constitute a decision of all of the Stockholders and shall be final, binding and conclusive upon each Stockholder and the Escrow Agent, and Parent may rely upon any decision, act, consent or instruction of the Stockholders' Representative as being the decision, act, consent or instruction of each and every Stockholder. The Escrow Agent and Parent are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Stockholders' Representative. (c) The Stockholders' Representative shall not be liable to any Stockholder for any act done or omitted hereunder as the Stockholders' Representative while acting in good faith, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. No bond shall be required of the Stockholders' Representative, and the Stockholders' Representative shall receive no compensation for its services. (d) If Lily Pond Investments, Inc. incurs any out-of-pocket expenses (including, without limitation, any reasonable fees and expenses of counsel) in its capacity as Stockholders' Representative under this Agreement or the Escrow Agreement or in connection with any of the transactions contemplated hereby or thereby, such out-of-pocket expenses shall be paid from, or reimbursed through deduction from, the Holdback Amount in accordance with SECTION 2.2(c) hereof and the Escrow Agreement, prior to making any payments or distributions pursuant to SECTION 2.2(C)(II) or 2.2(C)(III) hereof. SECTION 9.11 ARBITRATION. Any dispute that may arise between the Indemnifying Parties and the Indemnified Parties (collectively, the "PARTIES," and each, a "PARTY") with respect to the performance, interpretation or enforcement of this Agreement (other than a dispute in which specific performance is sought under the terms of SECTION 6.3) shall be submitted to arbitration conducted in Los Angeles, California pursuant to the rules and procedures of the American Arbitration Association, and, to the maximum extent applicable, the Federal Arbitration Act (Title 9 of the United States Code). The arbitrator shall be a retired judge of the Federal District Court, or some similarly qualified, mutually agreeable individual. The arbitration of such issues shall be final and binding upon the Parties. The arbitrator shall be entitled to impose sanctions and to take such other actions as the arbitrator deems necessary to the same extent as a judge could under the Federal Rules of Civil Procedure and applicable law. Notwithstanding the foregoing, the arbitrator shall not be authorized to award punitive damages with respect to any dispute(s) arising under this Agreement, nor shall any Party seek punitive damages relating to any such dispute(s) in any other forum. The cost of any arbitration hereunder, including the cost, if any, of the record or transcripts thereof, administrative fees, and all other fees involved, including reasonable attorneys' fees incurred by the party determined by the arbitrator to be the prevailing party, shall be paid 45 by the party determined by the arbitrator not to be the prevailing party. The parties to the arbitration shall instruct the arbitrator to render its decision no later than sixty (60) days after the submission of the dispute(s). The Company shall use its commercially reasonable efforts to cause each Stockholder to execute an acknowledgment of and agreement to this SECTION 9.11 and a consent to the Merger and the transactions contemplated by this Agreement. [SIGNATURE PAGE FOLLOWS] 46 IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the Company, Parent and Merger Sub, all as of the date first written above. HARD ROCK HOTEL, INC. By: /s/ Brian Ogaz --------------------------------- Name: Brian Ogaz Title: Senior Vice President MORGANS HOTEL GROUP CO. By: /s/ W. Edward Scheetz --------------------------------- Name: W. Edward Scheetz Title: Chief Executive Officer MHG HR ACQUISITION CORP. By: /s/ W. Edward Scheetz --------------------------------- Name: W. Edward Scheetz Title: President /s/ Peter A. Morton --------------------------------- Peter A. Morton (solely with respect to SECTIONS 4.18(B) and 6.3 and ARTICLE IX) EX-10.1 3 pmrealtypurchaseagreement1.txt EXHIBIT 10.1 PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS DATED MAY 11, 2006, BY AND BETWEEN MORGANS GROUP LLC AS BUYER, AND PM REALTY, LLC AS SELLER TABLE OF CONTENTS PAGE 1. PURCHASE AND SALE.......................................................1 2. PURCHASE PRICE..........................................................1 2.1 Deposit........................................................2 2.2 Balance........................................................2 2.3 Adjustment for Prorations......................................2 2.4 Indemnification Escrow Fund....................................2 3. OPENING OF ESCROW.......................................................3 4. PRE-EXECUTION ACTIONS...................................................3 4.1 Due Diligence..................................................3 4.2 Title..........................................................3 5. DESCRIPTION OF PROPERTY.................................................4 5.1 The Improvements...............................................4 5.2 The Real Property..............................................4 5.3 The Personal Property..........................................4 5.4 The Intangible Property........................................5 6. CONDITIONS TO CLOSING...................................................5 6.1 Buyer's Closing Conditions.....................................5 6.2 Failure of Buyer's Closing Conditions..........................6 6.3 Seller's Closing Conditions....................................7 6.4 Failure of Seller's Closing Conditions.........................7 7. CLOSING.................................................................8 7.1 Closing Date...................................................8 7.2 Deliveries by Seller...........................................8 7.3 Deliveries by Buyer...........................................10 7.4 Actions by Escrow Agent.......................................10 7.5 Prorations....................................................11 7.6 Closing Costs.................................................12 7.7 Deliveries Outside of Escrow..................................12 8. SELLER'S REPRESENTATIONS AND WARRANTIES................................13 8.1 Due Organization..............................................13 8.2 Seller's Authority; Validity of Agreements; Noncontravention............................................13 8.3 Leases........................................................14 8.4 [Intentionally Omitted].......................................14 8.5 Contracts.....................................................14 8.6 Violations....................................................14 8.7 Litigation....................................................14 8.8 Condemnation..................................................15 i 8.9 Foreign Person................................................15 8.10 Environmental.................................................15 8.11 Seller's Knowledge............................................15 8.12 No Other Representations or Warranties; Schedules; Survival....................................................15 9. BUYER'S REPRESENTATIONS AND WARRANTIES.................................16 9.1 Due Organization..............................................16 9.2 Buyer's Authority; Validity of Agreements.....................16 9.3 Financing.....................................................16 9.4 Survival......................................................17 10. ADDITIONAL COVENANTS AND AGREEMENTS....................................17 10.1 As-Is.........................................................17 10.2 [Intentionally Omitted].......................................18 10.3 Cross Termination.............................................18 10.4 Interim Covenants.............................................18 11. RISK OF LOSS...........................................................19 11.1 Condemnation..................................................19 11.2 Casualty......................................................19 12. REMEDIES...............................................................19 12.1 Seller's Liquidated Damages...................................19 12.2 Buyer's Liquidated Damages....................................20 13. BROKERS................................................................23 14. INDEMNIFICATION........................................................23 14.1 Indemnification by Seller.....................................23 14.2 Indemnification by Buyer......................................24 14.3 Minimum Losses................................................24 14.4 Maximum Indemnification.......................................24 14.5 [Intentionally Omitted].......................................24 14.6 Notice; Procedure for Third-Party Claims......................24 14.7 Survival of Indemnity.........................................25 14.8 No Consequential Damages......................................26 14.9 No Double Recovery............................................26 15. MISCELLANEOUS PROVISIONS...............................................26 15.1 Governing Law.................................................26 15.2 Entire Agreement..............................................26 15.3 Amendment; Waiver.............................................26 15.4 Notices.......................................................26 15.5 Expenses......................................................28 15.6 Assignment....................................................28 15.7 Severability..................................................28 ii 15.8 Successors and Assigns; Third Parties.........................28 15.9 Counterparts..................................................29 15.10 Interpretation................................................29 15.11 [Intentionally Omitted].......................................30 15.12 Further Assurances............................................30 15.13 Number and Gender.............................................30 15.14 Mutual Drafting...............................................30 15.15 Exhibits......................................................30 15.16 Attorneys' Fees...............................................30 15.17 Business Days.................................................30 15.18 Early Termination.............................................31 15.19 Confidentiality...............................................31 15.20 [Intentionally Omitted].......................................31 15.21 Section 1031 Exchange.........................................31 15.22 Arbitration...................................................31 ESCROW AGENT:...............................................................35 LIST OF EXHIBITS AND SCHEDULES..............................................36 iii PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS THIS PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS (this "AGREEMENT") is made and entered into as of May 11, 2006 (the "EXECUTION DATE"), by and between MORGANS GROUP LLC, a Delaware limited liability company ("BUYER"), and PM REALTY, LLC, a Nevada limited-liability company ("SELLER"), for the purpose of setting forth the agreement of the parties and of instructing CHICAGO TITLE AGENCY OF NEVADA, INC., a Nevada corporation ("ESCROW AGENT"), with respect to the transaction contemplated by this Agreement. R E C I T A L S A. Seller is the owner of an undivided fee simple interest in those certain parcels of real property located at 4185 Paradise Road, in Paradise Township, County of Clark, State of Nevada, as more particularly described on EXHIBIT A attached hereto (the "LAND PARCEL"), comprising a 544 unit multi-family residential apartment project commonly known as "Paradise Bay Club." The Land Parcel, together with the "Improvements," the balance of the "Real Property," the "Personal Property," and the "Intangible Property" (each as hereinafter defined), are sometimes collectively referred to herein as the "PROPERTY." B. Seller desires to sell, transfer and convey the Property to Buyer, and Buyer desires to purchase and acquire the Property from Seller, upon and subject to the terms and conditions set forth in this Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree, and instruct Escrow Agent, as follows: 1. PURCHASE AND SALE. Subject to all of the terms and conditions of this Agreement, Seller agrees to sell, transfer and convey to Buyer, and Buyer agrees to purchase and acquire from Seller, Seller's right, title and interest in and to the Property, upon and subject to the terms and conditions set forth herein. 2. PURCHASE PRICE. The purchase price of the Property (the "PURCHASE PRICE") shall equal Two Hundred Fifty-Nine Million Dollars ($259,000,000.00), subject to adjustment as hereinafter provided. The Purchase Price shall be payable as follows: 2.1 DEPOSIT. Concurrently with the "Opening of Escrow" (as hereinafter defined), Buyer shall deposit into "Escrow" (as hereinafter defined) the sum of Eighteen Million Five Hundred Thousand Dollars ($18,500,000.00) (which amount, together with any and all interest and dividends earned thereon, shall hereinafter be 1 referred to as the "DEPOSIT"), by wire transfer of immediately available federal funds, pursuant to that certain Escrow Agreement, dated as of the date hereof, by and among Seller, Merger Parent, Red, White and Blue Pictures, Inc., a California corporation, and the Escrow Agent (as amended from time to time, the "ESCROW AGREEMENT"). At the "Closing" (as hereinafter defined), the Deposit shall be credited against the Purchase Price, an amount equal to the positive difference between the amount of the Deposit and the Indemnification Escrow Amount shall be paid to Seller, and an amount equal to the Indemnification Escrow Amount shall be retained by Escrow Agent in escrow in accordance with the Escrow Agreement. In the event that the sale of the Property is not consummated for any reason, then the Deposit shall be held and disbursed in accordance with the terms hereof and the Escrow Agreement. The Deposit shall be held in an interest bearing account and/or invested by the Escrow Agent in accordance with the Escrow Agreement and written instructions delivered pursuant thereto. Seller shall not be responsible for, nor shall Seller bear the risk of loss of, the Deposit and Seller shall not be responsible for the return thereof or the rate of return thereon. 2.2 BALANCE. Subject to Section 2.4 hereof, at the Closing, Buyer shall pay to Seller the balance of the Purchase Price over and above the Deposit, by wire transfer of immediately available federal funds, net of all prorations and adjustments as provided in Sections 2.3, 7.5 and 7.6. 2.3 ADJUSTMENT FOR PRORATIONS. On the "Closing Date" (as hereinafter defined), Buyer shall receive as a credit against the Purchase Price an amount equal to the sum of all: (a) unrefunded and unapplied security deposits which were paid by tenants of the Property (collectively, "TENANTS") to or for the account of Seller; (b) rentals already received by Seller attributable to the period from and after the Closing Date; and (c) the amount, if any, by which prorated amounts and "Closing Costs" (as hereinafter defined) allocated to Seller pursuant to Sections 7.5.1 and 7.6 hereof exceed prorated amounts and Closing Costs allocated to Buyer pursuant to Sections 7.5.1 and 7.6 hereof. 2.4 INDEMNIFICATION ESCROW FUND. Subject to the terms and conditions hereof, on the Closing Date, a portion of the Deposit equal to Fifteen Million Four Hundred Thousand Dollars ($15,000,000.00) (the "INDEMNIFICATION ESCROW AMOUNT") (the Indemnification Escrow Amount, together with the interest accrued and any other income earned thereon, the "INDEMNIFICATION ESCROW FUND") shall be retained by Escrow Agent in the escrow account, pursuant to the Escrow Agreement. Buyer shall be treated as the owner of the Indemnification Escrow Fund for all tax purposes. 3. OPENING OF ESCROW. On or before the second (2nd) "Business Day" (as hereinafter defined) after the Execution Date, Buyer and Seller shall cause an escrow ("ESCROW") to be opened with Escrow Agent (the "OPENING OF ESCROW") by delivery to Escrow Agent of a fully executed copy of this Agreement. Escrow Agent shall promptly deliver to Buyer and Seller written notice of the date of the Opening of Escrow. This Agreement shall constitute escrow instructions to Escrow Agent as well as the agreement of the parties. Escrow Agent is hereby appointed and designated to act as Escrow Agent and instructed to deliver, pursuant to the terms of this Agreement, the documents and funds to be deposited into Escrow as herein provided. The parties hereto shall execute 2 such additional escrow instructions (not inconsistent with this Agreement as determined by counsel for Buyer and Seller) as Escrow Agent shall deem reasonably necessary for its protection, including Escrow Agent's general provisions (as may be modified by Buyer, Seller and Escrow Agent). In the event of any inconsistency between the provisions of this Agreement and such additional escrow instructions, the provisions of this Agreement shall govern. 4. PRE-EXECUTION ACTIONS. 4.1 DUE DILIGENCE. On or prior to the Execution Date, Buyer has (i) reviewed all contracts, documents, books, records and other materials relating to the Property that have been made available to Buyer by Seller or Seller's agents or representatives (collectively, the "PROPERTY DOCUMENTS") that it deems appropriate or necessary, and (ii) performed any inspections, investigations, studies and tests of the Property that it deems appropriate or necessary, and Buyer is satisfied with all of the foregoing. By its execution hereof, Buyer hereby accepts the Property in its present "AS IS, WHERE IS" condition "WITH ALL FAULTS," and acknowledges that it has been afforded the opportunity to make any and all inspections of the Property and such related matters as Buyer has desired and, accordingly, except as expressly set forth in Section 8 hereof, Buyer will rely solely on its own due diligence and investigations in purchasing the Property. Notwithstanding anything to the contrary contained herein, in the event that this Agreement terminates for any reason other than a default by Seller, as a condition to the release of the Deposit to Buyer if Buyer is otherwise entitled to such release under the terms of this Agreement, Buyer shall deliver to Seller copies of all third party reports, plans, studies, surveys and test results developed by or for Buyer relating to the Property. 4.2 TITLE. 4.2.1 TITLE DOCUMENTS. (a) Prior to the Execution Date, Seller has caused to be delivered to Buyer from Chicago Title Agency of Nevada, Inc., a Nevada corporation (in such capacity, "TITLE COMPANY") (i) a current preliminary title report for a standard coverage owner's policy of title insurance for the Real Property (the "PTR"), (ii) copies of all documents referenced as exceptions therein (collectively, the "UNDERLYING DOCUMENTS"), and (iii) a current preliminary ALTA survey of the Real Property certified to Seller; provided, however, Seller shall deliver a current ALTA survey of the Real Property certified to Seller, Buyer, Buyer's lender and Title Company as promptly as practicable after the execution and delivery hereof (the "SURVEY"). In the event the Closing occurs, Buyer shall reimburse Seller for the cost of the Survey in lieu of the payment therefor as set forth in Section 7.6.4 below. The PTR, the Underlying Documents and the Survey shall be collectively referred to herein as the "TITLE DOCUMENTS." (b) Buyer and Seller agree that in addition to all leases and other occupancy agreements in effect at the Property (collectively, the "LEASES"), all matters set forth on EXHIBIT "B" attached hereto shall be hereinafter referred to as "PERMITTED EXCEPTIONS"; PROVIDED, HOWEVER, in no event shall a deed of trust, mortgage or other voluntary monetary lien be a Permitted Exception, and Seller (at Seller's cost) shall 3 cause all such deeds of trust, mortgages and voluntary monetary liens to be paid off and discharged of record at Closing. 4.2.2 CONDITION OF TITLE AT CLOSING. Upon the Closing, Seller shall sell, transfer and convey to Buyer fee simple title to the Real Property by a duly executed and acknowledged grant bargain and sale deed in the form of EXHIBIT "C" attached hereto (the "DEED"), subject only to the Permitted Exceptions. 5. DESCRIPTION OF PROPERTY. 5.1 THE IMPROVEMENTS. As used herein, the term "IMPROVEMENTS" shall mean all of Seller's right, title and interest in and to all buildings, improvements, structures and fixtures now or hereafter located on or in the Land Parcel. 5.2 THE REAL PROPERTY. As used herein, the term "REAL PROPERTY" shall mean, collectively, all of Seller's right, title and interest in and to: (a) the Land Parcel; (b) the Improvements; (c) all apparatus, equipment and appliances affixed to and used in connection with the operation or occupancy of the Land Parcel and/or any of the Improvements (such as heating, air conditioning or mechanical systems and facilities used to provide any utility services, refrigeration, ventilation, waste disposal or other services) and now or hereafter located on or in the Land Parcel and/or any of the Improvements; and (d) all of Seller's rights, benefits, entitlements, privileges and easements appurtenant to or used in connection with the Land Parcel and/or any of the Improvements, including, without limitation, all minerals, oil, gas and other hydrocarbon substances, all development rights, air rights, water, water rights and water stock relating to the Land Parcel, all strips and gores, streets, alleys, easements, rights-of-way, public ways, or other rights of Seller appurtenant, adjacent or connected to the Land Parcel. 5.3 THE PERSONAL PROPERTY. As used herein, the term "PERSONAL PROPERTY" shall mean all of Seller's right, title and interest in and to that certain tangible personal property, equipment and supplies owned by Seller and situated at the Real Property and used by Seller exclusively in connection with the use, operation, maintenance or repair of all or any portion of the Real Property as of the Closing Date, including, without limitation, all of the personal property described on SCHEDULE "1" attached hereto. 5.4 THE INTANGIBLE PROPERTY. As used herein, the term "INTANGIBLE PROPERTY" shall mean all of Seller's right, title and interest in and to that certain intangible property owned by Seller and used by Seller exclusively in connection with all or any portion of the Real Property and/or the Personal Property, including, without limitation, all of Seller's right, title and interest, if any, in and to: (a) the Leases, all maintenance or service contracts identified on SCHEDULE "2" attached hereto (collectively, the "SERVICE CONTRACTS"), all books, records, reports, test results, environmental assessments, if any, as-built plans, specifications and other similar documents and materials relating to the use, operation, maintenance, repair, construction or fabrication of all or any portion of the Real Property and/or the Personal Property; (b) all rights, if any, in and to the name "Paradise Bay Club"; (c) all transferable business licenses, architectural, site, landscaping 4 or other permits, applications, approvals, authorizations and other entitlements affecting any portion of the Real Property; and (d) all transferable guarantees, warranties and utility contracts relating to all or any portion of the Real Property. 6. CONDITIONS TO CLOSING. 6.1 BUYER'S CLOSING CONDITIONS. The obligation of Buyer to complete the transaction contemplated by this Agreement is subject to the following conditions precedent (and conditions concurrent, with respect to deliveries to be made by the parties at the Closing) (the "BUYER'S CLOSING CONDITIONS"), which conditions may be waived, or the time for satisfaction thereof extended, by Buyer only in a writing executed by Buyer (provided, however, that Buyer's acceptance of the Deed shall be deemed to be a waiver of any unsatisfied conditions regardless of whether Buyer executes a separate written instrument to that effect at the Closing): 6.1.1 TITLE. Title Company shall be prepared and irrevocably committed to issue to Buyer (with an effective date not earlier than the Closing Date), a standard coverage owner's policy of title insurance in favor of Buyer for the Real Property (a) showing fee title to the Real Property vested in Buyer, (b) with liability coverage in an amount equal to the Purchase Price, (c) with those endorsements reasonably requested by Buyer (provided that such endorsements are available in the State of Nevada and are paid for by Buyer in accordance with the terms hereof) and (d) containing no exceptions other than the Permitted Exceptions (the "OWNER'S TITLE POLICY"). 6.1.2 SELLER'S DUE PERFORMANCE. All of the representations and warranties of Seller set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date (except for representations and warranties made as of a specified date set forth in the applicable representation or warranty, which shall be true and complete in all material respects as of such date), except where the failure of such representations and warranties to be so true and correct in all material respects (without giving effect to any limitation as to "materiality" or material adverse effect) would not reasonably be expected to have a material adverse effect on the value of the Property. Seller, on or prior to the Closing Date, shall have complied with and/or performed in all material respects all of the obligations, covenants and agreements required on the part of Seller to be complied with or performed pursuant to the terms of this Agreement. 6.1.3 PHYSICAL CONDITION OF PROPERTY. Subject to the terms of Section 11 hereof, the physical condition of the Property shall be substantially the same on the Closing Date as on the Execution Date, except for reasonable wear and tear and any damages due to any act of Buyer or Buyer's representatives. 6.1.4 BANKRUPTCY. No action or proceeding shall have been commenced by or against Seller under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors, and no attachment, execution, lien or levy shall have attached to or been issued with respect to Seller's 5 interest in the Property or any portion thereof. 6.1.5 DELIVERIES. Seller shall have delivered to Escrow Agent or Buyer, as the case may be, such documents or instruments as are required to be delivered by Seller pursuant to the terms of this Agreement. 6.1.6 OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. For purposes hereof, "OTHER TRANSACTION CLOSINGS" shall mean (i) the "Closing," as such term is defined in Section 1.3 of the Agreement and Plan of Merger, dated as of the date hereof (the "MERGER AGREEMENT"), by and among Hard Rock Hotel, Inc., a Nevada corporation ("HRH"), Morgans Hotel Group Co., a Delaware corporation ("MERGER PARENT"), and MHG HR Acquisition Corp., a Nevada corporation, (ii) the execution of the Trademark Agreement, to be dated as of the Closing, by and between Peter A. Morton and HRH (the "TRADEMARK AGREEMENT"), (iii) the execution of the License Agreement, to be dated as of the Closing, by and between Peter A. Morton and Merger Parent (the "LICENSE AGREEMENT"), and (iv) the execution of the "Morton Trademark Assignment" (as defined in the Merger Agreement) (the "MORTON TRADEMARK ASSIGNMENT" and, together with the Merger Agreement and the License Agreement, the "OTHER TRANSACTION AGREEMENTS"). 6.2 FAILURE OF BUYER'S CLOSING CONDITIONS. If any of Buyer's Closing Conditions have not been fulfilled on or prior to the "Outside Closing Date" (as defined herein), Buyer may: 6.2.1 waive any such unfulfilled Buyer's Closing Condition and close Escrow in accordance with this Agreement, without adjustment or abatement of the Purchase Price; or 6.2.2 terminate this Agreement by written notice to Seller and Escrow Agent, in which event (1)(a) Escrow Agent shall return the Deposit to Buyer, (b) Escrow Agent shall return all other documents, instruments and funds delivered into Escrow to the party that delivered the same into Escrow, (c) to the extent that the failure of any applicable Buyer's Closing Condition is not caused by a Seller default, Seller and Buyer shall each pay fifty percent (50%) of the cancellation charges of Title Company and Escrow Agent, if any, and (d) to the extent that the failure of any applicable Buyer's Closing Condition is caused by a Seller default, Buyer shall be entitled to pursue its rights and remedies pursuant to the terms of Section 12.2 hereof. 6.3 SELLER'S CLOSING CONDITIONS. The obligation of Seller to complete the transaction contemplated by this Agreement is subject to the following conditions precedent (and conditions concurrent, with respect to deliveries to be made by the parties at the Closing) (the "SELLER'S CLOSING CONDITIONS"), which conditions may be waived, or the time for satisfaction thereof extended, by Seller only in a writing executed by Seller: 6.3.1 BUYER'S DUE PERFORMANCE. All of the representations and 6 warranties of Buyer set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date, and Buyer, on or prior to the Closing Date, shall have complied with and/or performed in all material respects all of the obligations, covenants and agreements required on the part of Buyer to be complied with or performed pursuant to the terms of this Agreement. 6.3.2 BANKRUPTCY. No action or proceeding shall have been commenced by or against Buyer under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors. 6.3.3 DELIVERIES. Buyer shall have delivered to Escrow Agent or Seller, as the case may be, such documents or instruments as are required to be delivered by Buyer pursuant to the terms of this Agreement. 6.3.4 OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. 6.4 FAILURE OF SELLER'S CLOSING CONDITIONS. If any of the Seller's Closing Conditions have not been fulfilled on or prior to the Outside Closing Date, Seller may: 6.4.1 waive any such unfulfilled Seller's Closing Condition and close Escrow in accordance with this Agreement, without adjustment or abatement of the Purchase Price; or 6.4.2 terminate this Agreement by written notice to Buyer and Escrow Agent, in which event (a) Escrow Agent shall deliver the Deposit to Seller (which Seller shall retain as liquidated damages, as its sole and exclusive remedy hereunder, in accordance with the terms of Section 12.1 hereof); provided, however, that if Seller or any of the other parties to the Other Transaction Agreements (other than Buyer, Merger Parent or the Escrow Agent) has breached or failed to perform in any material respect its obligations or satisfy the conditions under any of the Other Transaction Agreements, then Seller shall not be entitled to retain the Deposit and, in such case, Escrow Agent shall return the Deposit to Buyer (which shall be liquidated damages, and Buyer's sole and exclusive remedy hereunder, in accordance with the terms of Section 12.2 hereof), (b) Escrow Agent shall return all other documents, instruments and funds delivered into Escrow to the party that delivered the same into Escrow and (c) to the extent that the failure of any applicable Seller's Closing Condition is not caused by a Buyer default, Seller and Buyer shall each pay fifty percent (50%) of the cancellation charges of Title Company and Escrow Agent, if any. 7. CLOSING. 7.1 CLOSING DATE. Subject to the provisions of this Agreement, the Closing shall take place at a time and on a date specified by the parties, which shall be no later than the fifth Business Day after satisfaction or waiver of the conditions set forth in 7 Sections 6.1 and 6.3 (other than those conditions, including the occurrence of the Other Transaction Closings, that by their nature are to be satisfied at the Closing, but subject to fulfillment or waiver of those conditions, it being the intention of Buyer and Seller that the Closing and the Other Transaction Closings occur concurrently) at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019-6150, or at such other time, date or place as agreed to in writing by the parties hereto. As used herein, the following terms shall have the following meanings: (a) the "CLOSING" shall mean the recordation of the Deed in the official records of Clark County, Nevada (the "OFFICIAL RECORDS"); (b) the "CLOSING DATE" shall mean the date upon which the Closing actually occurs; and (c) the "OUTSIDE CLOSING DATE" shall mean (i) the earlier of (x) seven (7) Business Days following Merger Parent's receipt of Gaming Approvals (as such term is defined in the Merger Agreement) and (y) February 11, 2007 or (ii) such later date as is agreed to by Seller. 7.2 DELIVERIES BY SELLER. On or before the Closing Date, Seller, at its sole cost and expense, shall deliver or cause to be delivered into Escrow the following documents and instruments, each dated as of the Closing Date, in addition to all other items and payments required by this Agreement to be delivered by Seller at the Closing: 7.2.1 DEED. The original executed and acknowledged Deed conveying the Real Property to Buyer; 7.2.2 NON-FOREIGN AFFIDAVIT. The original executed non-foreign affidavit in the form of EXHIBIT D" attached hereto (the "NON-FOREIGN AFFIDAVIT"); 7.2.3 ASSIGNMENT OF LEASES. Four (4) original executed counterparts of an assignment and assumption of leases and security deposits in the form of EXHIBIT "E" attached hereto (the "ASSIGNMENT OF LEASES"), pursuant to which Seller shall assign all of its rights and remedies under the Leases (including, without limitation, its right to any security deposits and prepaid rent) to Buyer, and Buyer shall assume the obligations of Seller with respect thereto arising from and after the Closing Date; 7.2.4 BILL OF SALE. Four (4) original executed counterparts of a bill of sale, assignment and assumption in the form of EXHIBIT "F" attached hereto (the "BILL OF SALE"), pursuant to which Seller shall transfer to Buyer (and Buyer shall assume Seller's obligations arising from and after the Closing Date, if any, with respect to) all of the Personal Property and the Intangible Property (other than the Leases), in each case free of all liens and encumbrances (other than the Permitted Exceptions); 7.2.5 PROOF OF AUTHORITY. Such proof of Seller's authority and authorization to enter into this Agreement and the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing or delivering any instruments, documents or certificates on behalf of Seller to act for and bind Seller as may be reasonably required by Title Company or Buyer; and 7.2.6 LEASES AND SERVICE CONTRACTS. Originals or, if originals are unavailable, copies, of the Leases and Service Contracts then in effect, to the extent same 8 are in Seller's possession; 7.2.7 PLANS. Originals or, if originals are unavailable, copies of plans and specifications, technical manuals and similar materials for the Improvements, to the extent same are in Seller's possession; 7.2.8 BOOKS AND RECORDS; PERMITS. Originals or, if originals are unavailable, copies, of all books, records, permits and licenses relating to the operation, maintenance and repair of the Property during Seller's ownership thereof to the extent same are in Seller's possession; 7.2.9 TITLE AFFIDAVITS. Any other affidavit, document or instrument expressly required to be delivered by Seller pursuant to the terms of this Agreement, or that is reasonable and customary to be required by the Title Company in connection with the issuance of the Owner's Title Policy; and 7.2.10 OTHER. Such other documents and instruments, signed and properly acknowledged by Seller, if appropriate, as may be reasonably required by Buyer, Title Company, Escrow Agent or otherwise in order to effectuate the provisions of this Agreement and the Closing of the transaction contemplated herein, including without limitation, a declaration of value form prepared by the Escrow Agent with respect to the Real Property. 7.3 DELIVERIES BY BUYER. On or before the Closing Date, Buyer, at its sole cost and expense, shall deliver or cause to be delivered into Escrow the following funds, documents and instruments, each dated as of the Closing Date, in addition to all other items and payments required by this Agreement to be delivered by Buyer at the Closing: 7.3.1 PURCHASE PRICE. Cash in an amount equal to the sum of the Purchase Price and all of the Buyer's Closing Costs (and otherwise sufficient to close the transaction contemplated herein); 7.3.2 ASSIGNMENT OF LEASES. Four (4) original executed counterparts of the Assignment of Leases; 7.3.3 BILL OF SALE. Four (4) original executed counterparts of the Bill of Sale; 7.3.4 PROOF OF AUTHORITY. Such proof of Buyer's authority and authorization to enter into this Agreement and the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing or delivering any instruments, documents or certificates on behalf of Buyer to act for and bind Buyer as may be reasonably required by Title Company or Seller; and 7.3.5 OTHER. Such other documents and instruments, signed and properly acknowledged by Buyer, if appropriate, as may reasonably be required by Seller, Title Company, Escrow Agent or otherwise in order to effectuate the provisions of 9 this Agreement and the Closing of the transaction contemplated herein, including without limitation, a declaration of value form prepared by the Escrow Agent with respect to the Real Property. 7.4 ACTIONS BY ESCROW AGENT. Provided that Escrow Agent shall not have received written notice from Buyer or Seller of (a) the failure of any condition to the Closing or of the termination of the Escrow and this Agreement or (b) the termination of any Other Transaction Agreement, when Buyer and Seller have deposited into Escrow the documents and funds required by this Agreement and Title Company is irrevocably and unconditionally committed to issue the Owner's Title Policy in accordance with the terms hereof, and the Escrow Agent has been informed that the conditions to the "Closings" under the Other Transaction Agreements are being satisfied concurrently with the Closing, Escrow Agent shall, in the order and manner herein below indicated, take the following actions: 7.4.1 RECORDING. Cause the Deed and any other documents which the parties hereto may mutually direct to be recorded in the Official Records and obtain conformed copies thereof for distribution to Buyer and Seller; 7.4.2 FUNDS. Disburse all funds as follows: 7.4.2.1 pursuant to the "Closing Statement" (as hereinafter defined), retain for Escrow Agent's own account all escrow fees and costs, disburse to Title Company the fees and expenses incurred in connection with the issuance of the Owner's Title Policy and disburse to any other persons or entities entitled thereto the amount of any other Closing Costs; 7.4.2.2 disburse to Seller an amount equal to the Purchase Price, less or plus the net debit or credit to Seller by reason of the prorations and allocations of Closing Costs provided for herein; and 7.4.2.3 disburse to the party who deposited the same any remaining funds in the possession of Escrow Agent after payments pursuant to Sections 7.4.1.1 and 7.4.1.2 above have been completed; and 7.4.3 DELIVERY OF DOCUMENTS. Deliver: (a) to Seller (i) two originals of all documents deposited into Escrow (other than the Deed and the Non-Foreign Affidavit), (ii) one copy of the Non-Foreign Affidavit and (iii) one conformed copy of each document recorded pursuant to the terms hereof; and (b) to Buyer, (i) two originals of all documents deposited into Escrow (other than the Deed and the Non-Foreign Affidavit), (ii) the original Deed, (iii) the original Non-Foreign Affidavit and (iv) one conformed copy of each document recorded pursuant to the terms hereof. 7.4.4 OWNER'S TITLE POLICY. Cause Title Company to issue to Buyer the Owner's Title Policy. 7.5 PRORATIONS. 10 7.5.1 Rentals, revenues, and other income, if any, from the Property, taxes, assessments, improvement bonds, Service Contract fees, utility costs, and other expenses affecting the Property shall be prorated between Buyer and Seller as of the Closing Date based on a 365 day year. For purposes of calculating prorations, Buyer shall be deemed to be title holder of the Property, and therefore entitled to the income and responsible for the expenses, after 12:01 a.m. Pacific Standard Time on the Closing Date. Delinquent rentals as of the Closing Date shall not be prorated, but when paid to Buyer shall be delivered by Buyer to Seller, net of Buyer's reasonable collection costs. After the Closing, Buyer shall use commercially reasonable efforts to collect delinquent rentals on behalf of Seller, provided that Buyer shall have no obligation to commence any action or proceeding to collect any delinquent rent. All non-delinquent real estate taxes or assessments on the Property shall be prorated based on the actual current tax bill, but if such tax bill has not yet been received by Seller by the Closing Date or if supplemental taxes are assessed after the Closing for the period prior to the Closing, the parties shall make any necessary adjustment after the Closing by cash payment to the party entitled thereto so that Seller shall have borne all real property taxes, including all supplemental taxes, allocable to the period prior to the Closing and Buyer shall bear all real property taxes, including all supplemental taxes, allocable to the period from and after the Closing. If any expenses attributable to the Property and allocable to the period prior to the Closing are discovered or billed after the Closing, the parties shall make any necessary adjustment after the Closing by cash payment to the party entitled thereto so that Seller shall have borne all expenses allocable to the period prior to the Closing and Buyer shall bear all expenses allocable to the period from and after the Closing. Upon the Closing, Buyer assumes all expenses and real property taxes, including all supplemental taxes, allocable to the period from and after the Closing. The provisions of this Section 7.5.1 shall survive the Closing. 7.5.2 Five (5) Business Days prior to the Closing Date, Escrow Agent shall deliver to each of the parties for their review and approval a preliminary closing statement (the "PRELIMINARY CLOSING STATEMENT") setting forth: (a) the proration amounts allocable to each of the parties pursuant to Section 7.5 hereof; and (b) the Closing Costs allocable to each of the parties pursuant to Section 7.6 hereof. Based on each of the party's comments, if any, regarding the Preliminary Closing Statement, Escrow Agent shall revise the Preliminary Closing Statement and deliver the final version of a closing statement to each of the parties. Each of the parties shall execute and deliver counterparts of the final version of a closing statement at the Closing (the "CLOSING STATEMENT"), and Escrow Agent shall deliver a fully executed counterpart thereof to each party. 7.6 CLOSING COSTS. Each party shall pay its own costs and expenses arising in connection with the Closing (including, without limitation, its own attorneys' and advisors' fees, charges and disbursements), except the following costs (the "CLOSING COSTS"), which shall be allocated between the parties as follows: 7.6.1 all documentary transfer, stamp, sales and other taxes related to the transfer of the Property, which shall be paid by Buyer; 11 7.6.2 Escrow Agent's escrow fees and costs, which shall be paid one-half (1/2) by Seller and one-half (1/2) by Buyer; 7.6.3 the cost of the premium for a CLTA Owner's Title Policy, which shall be paid by Seller; 7.6.4 the cost of the Survey, the difference of the cost of the premium between a CLTA owner's title policy and ALTA owner's title policy, and the cost of any endorsements to the Owner's Title Policy, which shall be paid by Buyer; and 7.6.5 all recording fees, which shall be paid by Buyer. 7.7 DELIVERIES OUTSIDE OF ESCROW. Seller shall deliver possession of the Property, subject only to the Leases and the other Permitted Exceptions, to Buyer upon the Closing. Further, Seller hereby covenants and agrees to deliver to Buyer, on or prior to the Closing, the following items: 7.7.1 INTANGIBLE PROPERTY. The Intangible Property, including, without limitation, the original Property Documents; 7.7.2 PERSONAL PROPERTY. The Personal Property, including, without limitation, any and all keys, pass cards, remote controls, security codes, unlicensed computer software and other devices relating to access to the Improvements; and 7.7.3 NOTICES. 7.7.3.1 NOTICE TO TENANTS. A letter, duly executed by Seller's property manager, dated as of the Closing Date and addressed to all Tenants, informing such Tenants of the transfer of the Property and the assignment of the Leases to Buyer, together with an instruction to pay all amounts due or to become due under the Leases to Buyer; and 7.7.3.2 SERVICE CONTRACTS NOTICE. A letter to all of the vendors of the Service Contracts, duly executed by Seller's property manager, dated as of the Closing Date and addressed to the Service Contract vendors, informing such vendors of the assignment of the Service Contracts to Buyer. 8. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to and agrees with Buyer, as of the Execution Date and as of the Closing Date, except as set forth in the Schedules, as follows: 8.1 DUE ORGANIZATION. Seller is a limited-liability company duly organized and existing in good standing under the laws of the State of Nevada. 8.2 SELLER'S AUTHORITY; VALIDITY OF AGREEMENTS; NONCONTRAVENTION. Seller has full right, power and authority to sell the Property to Buyer as provided in this Agreement and to carry out its obligations hereunder. The individual(s) executing this Agreement and the instruments referenced herein on behalf of Seller have the legal 12 power, right and actual authority to bind Seller to the terms hereof and thereof. This Agreement is, and all other instruments, documents and agreements to be executed and delivered by Seller in connection with this Agreement shall be, duly authorized, executed and delivered by Seller and shall be valid, binding and enforceable obligations of Seller (except as enforcement may be limited by bankruptcy, insolvency or similar laws). Neither the execution and delivery of this Agreement nor its performance by Seller will (i) result in the breach of any material contract or agreement to which Seller is a party or by which the Property is bound or (ii) violate any law applicable to the Seller. Except as set forth on SCHEDULE "3", no approvals, consents, authorizations, declarations, registrations or notices of or to any governmental authority that have not been received or made on or prior to the Closing Date are required by or with respect to Seller in connection with the consummation by Seller of the transactions contemplated hereby. 8.3 LEASES. SCHEDULE "4" annexed hereto is, as of the date hereof, a true and correct copy of the list provided to Seller by the Property Manager setting forth all of the Leases for tenants in occupancy at the Property currently in effect, and the security deposits currently held thereunder. To Seller's Knowledge, except for that certain Lease by and between HRH, Seller and Mr. Chow of Las Vegas, LLC, dated December 24, 2004 (the "MR. CHOW'S LEASE"), all of the Leases are month-to-month residential leases or similar agreements. Other than the Mr. Chow's Lease, Seller has not directly entered into any leases or subleases of the Property. 8.4 [INTENTIONALLY OMITTED]. 8.5 CONTRACTS. Except as set forth on SCHEDULE "2", to Seller's Knowledge, Seller has not executed any service, maintenance, repair, management, supply or other contracts (including, without limitation, any service contracts) affecting the Property which would be binding on Buyer subsequent to the Closing. To Seller's Knowledge, the Property Management Agreement, dated September 17, 2004 (as amended, the "PROPERTY MANAGEMENT AGREEMENT"), by and between Seller and ConAm Management Corporation, a California corporation ("PROPERTY MANAGER"), is in full force and effect on a month-to-month basis, and Seller is not in default thereunder nor does Seller have any knowledge of any event or circumstance which, with or without the giving of notice, the passage of time or both, would constitute a default thereunder. To Seller's Knowledge, there are no other agreements for residential leasing brokerage services or management services with respect to the Property to which Seller is a party. 8.6 VIOLATIONS. Except as set forth on SCHEDULE "5", Seller has not received any written notice of, and to Seller's Knowledge, there are no, material violations of any laws, ordinances, orders or requirements of any governmental authority, agency or officer having jurisdiction over or affecting the Property, which have not previously been complied with. 8.7 LITIGATION. Except as set forth on SCHEDULE "6", there are (a) no actions, investigations, suits or proceedings (other than tax appeals or protests) pending 13 or to Seller's Knowledge threatened in writing against Seller that if adversely decided would have, or are reasonably likely to have, a material adverse effect on the value of the Property, or the ownership, operation or development thereof, (b) no material actions, investigations, suits or proceedings pending or to Seller's Knowledge threatened in writing against Seller by any buyers pursuant to condominium purchase agreements, and (c) no judgments, orders, awards or decrees currently in effect against Seller with respect to the ownership or operation of the Property which have not been fully discharged prior to the Execution Date; PROVIDED, HOWEVER, in no event shall this representation be deemed to be untrue, incorrect or incomplete in any respect if the subject of any of the foregoing matters would be an "Indemnified Claim" (as such term is defined in that certain Indemnification Agreement, dated as of that date hereof, by and among Morgan Hotel Group Co., a Delaware corporation, and Peter A. Morton, an individual). 8.8 CONDEMNATION. As of the date hereof, there are no pending proceedings or, to Seller's Knowledge, except as set forth on SCHEDULE "7", proceedings threatened in writing by applicable governmental authority, to condemn all or any portion of the Property by eminent domain proceedings or otherwise. 8.9 FOREIGN PERSON. Seller is not a "foreign person" as defined in Section 1445 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. 8.10 ENVIRONMENTAL. To Seller's Knowledge, except as would not result in a material adverse effect, Seller has not received any written notice or claim from any governmental authority or third party alleging that Seller is not in compliance with any applicable federal, state and local laws governing pollution or the protection of the environment. 8.11 SELLER'S KNOWLEDGE. As used herein, the term "SELLER'S KNOWLEDGE" shall mean the actual knowledge of Peter A. Morton or Brian Ogaz; and the knowledge of no other Person shall be imputed to any such individual. 8.12 NO OTHER REPRESENTATIONS OR WARRANTIES; SCHEDULES; SURVIVAL. Other than the representations and warranties expressly set forth in this Section 8, Seller shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby and no other person (including any officer, director, employee, stockholder, or Affiliate of Seller) shall be deemed to have made any representation or warranty in connection with this Agreement or the transactions contemplated hereby. "SCHEDULES" shall mean the Schedules numbered 1 through 7 attached to this Agreement. The representations and warranties of Seller set forth in this Agreement shall survive until the first anniversary of the Closing Date (the "EXPIRATION DATE"). 9. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants to Seller, as of the Execution Date and as of the Closing Date, as follows: 14 9.1 DUE ORGANIZATION. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. 9.2 BUYER'S AUTHORITY; VALIDITY OF AGREEMENTS. Buyer has full right, power and authority to purchase and acquire the Property from Seller as provided in this Agreement and to carry out its obligations hereunder. The individual(s) executing this Agreement and the instruments referenced herein on behalf of Buyer have the legal power, right and actual authority to bind Buyer to the terms hereof and thereof. This Agreement is, and all instruments, documents and agreements to be executed and delivered by Buyer in connection with this Agreement shall be, duly authorized, executed and delivered by Buyer and shall be valid, binding and enforceable obligations of Buyer (except as enforcement may be limited by bankruptcy, insolvency or similar laws) and do not, and as of the Closing Date will not, violate any provision of any agreement or judicial order to which Buyer is a party or to which Buyer is subject. 9.3 FINANCING. Buyer has obtained written commitments (the "FINANCING COMMITMENTS") for any and all financing (whether equity financing, debt financing or otherwise) necessary to pay the Purchase Price and all fees, costs and expenses relating to the transactions contemplated by this Agreement (the "FINANCING"). Buyer has provided true, accurate and complete copies of the Financing Commitments to Seller, and Buyer has paid all commitment fees and any other fees and amounts due at or prior to the date hereof under the Financing Commitments. None of the Financing Commitments has been amended, modified or terminated, and the respective commitments contained in the Financing Commitments have not been withdrawn or rescinded in any respect in any way materially adverse to Seller. The Financing Commitments are in full force and effect and no event has occurred which, with or without notice, lapse of time (other than the expiration of the term thereof) or both, would constitute a default on the part of Buyer under any of the Financing Commitments. There are no conditions precedent or other contingencies related to the funding of the full amount of the Financing, other than as set forth in or contemplated by the Financing Commitments. The aggregate proceeds to be disbursed pursuant to the agreements contemplated by the Financing Commitments, together with Buyer's cash and cash equivalents, will be sufficient for Buyer to pay the Purchase Price and all fees, costs and expenses related to the transactions contemplated by this Agreement. Buyer has no reason to believe that any of the conditions to the Financing contemplated by the Financing Commitments will not be satisfied or that Buyer will not receive the proceeds of the Financing on or prior the Closing Date. 9.4 SURVIVAL. Other than the representations and warranties expressly set forth in this Section 9, Buyer shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby and no other person (including any officer, director, employee, stockholder, or Affiliate of Buyer) shall be deemed to have made any representation or warranty in connection with this Agreement or the transactions contemplated hereby. The representations and warranties of Buyer set forth in this Section 9 shall survive the delivery of the Deed and the Closing for twelve (12) months following the Closing Date. Each such representation and warranty shall automatically be null and void and of no 15 further force and effect on the date that is twelve (12) months after the Closing Date, and Seller shall not be entitled to commence an action or proceeding claiming breach of any such representation or warranty by Buyer at any time subsequent to such date that is twelve (12) months after the Closing Date. 10. ADDITIONAL COVENANTS AND AGREEMENTS. 10.1 AS-IS. THE PARTIES HEREBY ACKNOWLEDGE AND AGREE AS FOLLOWS: (A) BUYER IS A SOPHISTICATED PURCHASER WHO IS FAMILIAR WITH THIS TYPE OF PROPERTY; AND (B) EXCEPT AS MAY BE SPECIFICALLY SET FORTH IN THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, IN SECTION 8 HEREOF, NEITHER SELLER NOR ANY OF ITS AGENTS, REPRESENTATIVES, BROKERS, OFFICERS, DIRECTORS, SHAREHOLDERS, OR EMPLOYEES HAS MADE OR WILL MAKE ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY. THE PROPERTY IS BEING SOLD TO BUYER IN ITS PRESENT "AS IS, WHERE IS" CONDITION "WITH ALL FAULTS." SUBJECT TO SECTION 8 HEREOF, BUYER ACKNOWLEDGES THAT IT HAS BEEN AFFORDED THE OPPORTUNITY TO MAKE ANY AND ALL INSPECTIONS OF THE PROPERTY AND SUCH RELATED MATTERS AS BUYER HAS DESIRED AND, ACCORDINGLY, EXCEPT AS MAY BE SPECIFICALLY SET FORTH TO THE CONTRARY HEREIN, BUYER WILL RELY SOLELY ON ITS OWN DUE DILIGENCE AND INVESTIGATIONS IN PURCHASING THE PROPERTY. SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 10.1, AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. /s/ P.M. /s/ W.E.S. - ---------- ---------- Seller's Buyer's Initials Initials 10.2 [INTENTIONALLY OMITTED]. 10.3 CROSS TERMINATION. If the Merger Agreement is terminated in accordance with the terms thereof, then unless Buyer and Seller shall otherwise expressly agree in writing, this Agreement shall automatically terminate, and this Agreement and all of the provisions hereof shall be void and of no further force or effect (except that Section 13 shall survive the termination of this Agreement), and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. If this Agreement is terminated as a result of the termination of the Merger Agreement pursuant to Section 6.1 thereof, then upon such termination, (i) if HRH is entitled to and elects to receive the "Deposit" (as defined in the Merger Agreement) under the Merger Agreement (the 16 "MERGER DEPOSIT") then upon termination of this Agreement the Deposit shall be paid to Seller, and (ii) if Merger Parent is entitled to and elects to receive the Merger Deposit under the Merger Agreement, then upon termination of this Agreement the Deposit shall be delivered to Buyer. 10.4 INTERIM COVENANTS. During the period from the date hereof until the Closing Date, Seller: (a) shall not enter into any agreements with respect to all or any portion of the Property, unless such agreements expire by their terms on or prior to the Closing Date or may be terminated by the owner of the Property without penalty upon not more than thirty (30) days' prior notice; (b) shall maintain in full force and effect the insurance policies currently in effect with respect to the Property (or replacement policies providing for substantially similar coverage if available on commercially reasonable terms); and (c) shall operate, maintain, manage and repair the Property in a manner consistent in all material respects with Seller's past practice. 11. RISK OF LOSS. 11.1 CONDEMNATION. If, prior to the Closing, all or any "Material Portion" (as hereinafter defined) of the Property is taken by condemnation or eminent domain (or is the subject of a pending or contemplated taking which has not been consummated), Seller shall within five (5) Business Days notify Buyer of such fact. In such event, Buyer shall have the option to terminate this Agreement upon written notice to Seller given not later than fifteen (15) days after receipt of such notice from Seller. Upon such termination, Escrow Agent shall return the Deposit to Buyer, the parties shall equally share the cancellation charges of Escrow Agent and Title Company, if any, and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. Buyer shall have no right to terminate this Agreement as a result of any taking of any portion of the Property that is not a Material Portion. If Buyer does not elect or has no right to terminate this Agreement, Seller shall assign and turn over to Buyer, and Buyer shall be entitled to receive and keep, all awards for the taking by condemnation and Buyer shall be deemed to have accepted the Property subject to the taking without reduction in the Purchase Price. As used herein, the term "MATERIAL PORTION" shall mean any portion having a value in excess of ten percent (10%) of the Purchase Price. 11.2 CASUALTY. Prior to the Closing and notwithstanding the pendency of this Agreement, the entire risk of loss or damage by earthquake, hurricane, tornado, flood, landslide, fire or other casualty shall be borne and assumed by Seller. If, prior to the Closing, any material damage occurs to any portion of the Property as a result of any earthquake, hurricane, tornado, flood, landslide, fire or other casualty, Seller shall within five (5) Business Days notify Buyer of such fact. Buyer shall have no right to terminate this Agreement as a result of any damage or destruction of any portion of the Property; 17 however, Seller shall assign and turn over, and Buyer shall be entitled to receive and keep, all insurance proceeds payable with respect to such damage or destruction (which shall then be repaired or not at Buyer's option and cost) and the parties shall proceed to the Closing pursuant to the terms hereof without modification of the terms of this Agreement. Buyer shall have the right to participate in any adjustment of the insurance claim. 12. REMEDIES. 12.1 SELLER'S LIQUIDATED DAMAGES. IN THE EVENT THAT THE ESCROW AND THIS TRANSACTION FAIL TO CLOSE AS A RESULT OF (x) THE DEFAULT OF BUYER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR (y) THE TERMINATION OF THIS AGREEMENT DESCRIBED IN THE SECOND SENTENCE OF SECTION 10.3 ABOVE AND CLAUSE (i) OF THE SECOND SENTENCE OF SECTION 10.3 APPLIES, BUYER AND SELLER AGREE THAT (1) SELLER'S ACTUAL DAMAGES WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, (2) EXCEPT AS SET FORTH IN SECTION 6.4.2(a), IN THE CASE OF THE TERMINATION OF THIS AGREEMENT PURSUANT TO SECTION 6.4.2, , SELLER, AS SELLER'S SOLE AND EXCLUSIVE REMEDY, IS ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF THE DEPOSIT AND (3) (A) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF BUYER AND SELLER HEREUNDER AND THE ESCROW CREATED HEREBY SHALL TERMINATE, (B) ESCROW AGENT SHALL, AND IS HEREBY AUTHORIZED AND INSTRUCTED TO, RETURN PROMPTLY TO BUYER AND SELLER ALL DOCUMENTS AND INSTRUMENTS TO THE PARTIES WHO DEPOSITED THE SAME, (C) EXCEPT AS SET FORTH IN SECTION 6.4.2(a), IN THE CASE OF THE TERMINATION OF THIS AGREEMENT PURSUANT TO SECTION 6.4.2, ESCROW AGENT SHALL DELIVER THE DEPOSIT TO SELLER PURSUANT TO SELLER'S INSTRUCTIONS, AND THE SAME SHALL BE THE FULL, AGREED AND LIQUIDATED DAMAGES, AND (D) ALL TITLE AND ESCROW CANCELLATION CHARGES, IF ANY, SHALL BE CHARGED TO BUYER; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT LIMIT SELLER'S RIGHTS OR REMEDIES WITH RESPECT TO (1) THE OBLIGATIONS OF BUYER UNDER SECTIONS 4, 13 AND 15.16 HEREOF AND (2) THOSE RIGHTS AND OBLIGATIONS THAT, BY THEIR TERMS, SURVIVE THE TERMINATION OF THIS AGREEMENT. 12.2 BUYER'S REMEDIES. IN THE EVENT THAT THE ESCROW AND THIS TRANSACTION FAIL TO CLOSE AS A RESULT OF (x) THE DEFAULT OF SELLER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR (y) THE TERMINATION OF THIS AGREEMENT PURSUANT TO SECTION 10.3 ABOVE AND CLAUSE (ii) OF THE SECOND SENTENCE OF SECTION 10.3 ABOVE APPLIES, (1) BUYER AND SELLER AGREE THAT BUYER'S ACTUAL DAMAGES WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, (2) BUYER, AS BUYER'S SOLE AND EXCLUSIVE REMEDY, IS ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF THE DEPOSIT, AND (3) (A) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF 18 BUYER AND SELLER HEREUNDER AND THE ESCROW CREATED HEREBY SHALL TERMINATE, (B) ESCROW AGENT SHALL, AND IS HEREBY AUTHORIZED AND INSTRUCTED TO, RETURN PROMPTLY TO BUYER AND SELLER ALL DOCUMENTS AND INSTRUMENTS TO THE PARTIES WHO DEPOSITED THE SAME, (C) ESCROW AGENT SHALL DELIVER THE DEPOSIT TO BUYER PURSUANT TO BUYER'S INSTRUCTIONS, AND THE SAME SHALL BE THE FULL, AGREED AND LIQUIDATED DAMAGES, AND (D) ALL TITLE AND ESCROW CANCELLATION CHARGES, IF ANY, SHALL BE CHARGED TO SELLER; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT LIMIT BUYER'S RIGHTS OR REMEDIES WITH RESPECT TO (1) THE OBLIGATIONS OF SELLER UNDER SECTIONS 13 AND 15.16 HEREOF AND (2) THOSE RIGHTS AND OBLIGATIONS THAT, BY THEIR TERMS, SURVIVE THE TERMINATION OF THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, IN THE EVENT THAT THE ESCROW AND THIS TRANSACTION FAIL TO CLOSE AS A RESULT OF THE DEFAULT OF SELLER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, OR A DEFAULT OF ANY AFFILIATE OF SELLER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER ANY OF THE OTHER TRANSACTION DOCUMENTS THAT GIVES RISE TO A RIGHT ON THE PART OF MERGER PARENT TO PURSUE SPECIFIC PERFORMANCE UNDER THE MERGER AGREEMENT, THEN IN LIEU OF BUYER'S REMEDIES SET FORTH ABOVE IN THIS PARAGRAPH, BUYER MAY ELECT TO PURSUE THE REMEDY OF SPECIFIC PERFORMANCE AGAINST SELLER, IT BEING AGREED THAT IRREPARABLE DAMAGE WOULD OCCUR IN THE EVENT THAT THE SELLER FAILS TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED AS A RESULT OF SELLER'S DEFAULT HEREUNDER; PROVIDED, HOWEVER, IN NO EVENT MAY BUYER ELECT TO PURSUE THE REMEDY OF SPECIFIC PERFORMANCE AGAINST SELLER UNLESS MERGER PARENT AND MHG HR ACQUISITION CORP. CONCURRENTLY ARE PERMITTED TO PURSUE AND ELECT TO PURSUE THE REMEDY OF SPECIFIC PERFORMANCE AGAINST THE COMPANY UNDER THE MERGER AGREEMENT, IT BEING THE EXPRESS INTENT OF THE PARTIES THAT THE CLOSE OF ESCROW UNDER THIS AGREEMENT, WHETHER VOLUNTARY OR BY EXERCISE OF REMEDY OF SPECIFIC PERFORMANCE, SHALL OCCUR CONCURRENTLY WITH THE CLOSING UNDER THE MERGER AGREEMENT, AND IF THE CLOSING UNDER THE MERGER AGREEMENT SHALL NOT OCCUR, THEN THE CLOSE OF ESCROW UNDER THIS AGREEMENT SHALL NOT OCCUR AND BUYER'S SOLE REMEDY IN SUCH CASE SHALL BE A RETURN OF THE DEPOSIT, WHICH SHALL BE THE FULL, AGREED AND LIQUIDATED DAMAGES OF BUYER HEREUNDER. Notwithstanding anything to the contrary contained herein, Seller shall not be in default with respect to any of its obligations hereunder unless and until (y) it receives written notice from Buyer specifying such default and (z) it fails to cure such default within twenty (20) Business Days after receipt of such notice. 19 SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS ARTICLE 12, AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. /s/ P.M. /s/ W.E.S. - ---------- ---------- Seller's Buyer's Initials Initials 13. BROKERS. Buyer and Seller each hereby represent, warrant to and agree with each other that it has not had, and shall not have, any dealings with any third party to whom the payment of any broker's fee, finder's fee, commission or other similar compensation ("COMMISSION") shall or may become due or payable in connection with the transaction contemplated hereby, other than Leeds Equity Partners (the "BROKER"). Seller hereby agrees to pay any Commission due and payable to the Broker in connection with the transaction contemplated hereby pursuant to its separate agreement with the Broker. Seller shall indemnify, defend, protect and hold Buyer harmless from and against any and all claims, causes of action, demands, obligations, losses, damages, liabilities, judgments, costs and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) (collectively, "CLAIMS") incurred by Buyer by reason of any breach or inaccuracy of the representation, warranty and agreement of Seller contained in this Section 13. Buyer shall indemnify, defend, protect and hold Seller harmless from and against any and all Claims incurred by Seller by reason of any breach or inaccuracy of the representation, warranty and agreement of Buyer contained in this Section 13. The provisions of this Section 13 shall survive the Closing or earlier termination of this Agreement. 14. INDEMNIFICATION. 14.1 INDEMNIFICATION BY SELLER. Seller shall indemnify, defend and hold harmless Buyer and each of its predecessors and successors, members, managers, stockholders, employees, officers, directors, agents and representatives (collectively, the "BUYER INDEMNITEES") from and against, and pay or reimburse the Buyer Indemnitees for, any and all damages, liabilities, losses, claims, obligations, Liens, assessments, judgments, fines and penalties (collectively, "LOSSES") that any of them may suffer, incur or sustain, directly or indirectly, arising out of, attributable to, relating to or resulting from: (a) any inaccuracy in or breach of any representation and warranty made by the Seller in this Agreement; (b) any inaccuracy in or breach of any representation and warranty (without giving effect to any qualifiers or exceptions relating to knowledge, Seller's knowledge or materiality) made by Seller in this Agreement if such inaccuracy or breach, individually or together with all such inaccuracies or breaches, would reasonably be expected to have a material adverse effect on the value of the Property, in each case by virtue of the failure of such representation or warranty to be true and correct (i) on and as of the Closing Date with the same effect as thought made on and as of the Closing Date (other than any such representation or warranty that speaks as of a specific date or time other than the Closing Date), or (ii) on and as of the date or time when made, in the case of any representation or warranty that speaks as of a specific date of time other than the Closing Date; and (c) any breach or nonperformance of any of the covenants or 21 other agreements made and to be performed by the Seller pursuant to this Agreement. 14.2 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold harmless Seller and each of its predecessors and successors, members, managers, stockholders, employees, officers, directors, agents and representatives (collectively, the "SELLER INDEMNITEES") from and against, and pay or reimburse the Seller Indemnitees for, any and all Losses that any of them may suffer, incur or sustain, directly or indirectly, arising out of, attributable to, relating to or resulting from: (a) any inaccuracy in or breach of any representation and warranty made by Buyer in this Agreement; and (b) any breach or nonperformance of any of the agreements made and to be performed by the Buyer pursuant to this Agreement. 14.3 MINIMUM LOSSES. No Buyer Indemnitee shall have any right to indemnification under Section 14.1 until aggregate Losses incurred by all Buyer Indemnitees would exceed $250,000 (the "INDEMNITY THRESHOLD"), after which there may only be recovered those Losses in excess of the Indemnity Threshold, subject to the conditions of this ARTICLE 14, including the limitations set forth in SECTION 14.4. 14.4 MAXIMUM INDEMNIFICATION. Seller shall not be obligated to provide indemnification pursuant to SECTION 14.2 exceeding, in the aggregate, the Indemnification Escrow Amount . Notwithstanding anything in this Agreement, any indemnification obligation of Seller under SECTION 14.1 shall be satisfied solely from the Indemnification Escrow Fund. 14.5 [INTENTIONALLY OMITTED]. 14.6 NOTICE; PROCEDURE FOR THIRD-PARTY CLAIMS. (a) Any Person entitled to indemnification under ARTICLE 14 (an "INDEMNIFIED PARTY") may seek indemnification for any Loss or potential Loss by giving written notice to the applicable party or parties from whom indemnification is sought (the "INDEMNIFYING PARTY") before, if applicable, the Expiration Date. Written notice to such Indemnifying Party of the existence of a claim shall be given by the Indemnified Party as soon as practicable after the Indemnified Party first receives notice of the potential claim, PROVIDED that any failure to provide such prompt notice of the existence of a claim to the applicable Indemnifying Party shall not affect the Indemnified Party's right to seek indemnification pursuant to this ARTICLE 14 except and only to the extent that such failure results in such Indemnifying Party actually incurring an expense or otherwise being prejudiced as a result of such delay. In the case of a claim involving a Third-Party Claim (as hereinafter defined), (i) the notice of claim shall describe in reasonable detail the facts known to the Indemnified Party giving rise to such indemnification claim and the amount, or good faith estimate of the amount, of Losses arising therefrom, and (ii) the Indemnified Party shall deliver to the Seller (if the Indemnified Party is a Buyer Indemnitee) or to Buyer (if the Indemnified Party is a Seller Indemnitee), as applicable, promptly after the Indemnified Party's receipt thereof, copies of all notices and 22 documents (including court papers) received by the Indemnified Party relating to such Third-Party Claim. (b) In the case of any claim asserted by a Person that is not a party to this Agreement against an Indemnified Party (a "THIRD-PARTY CLAIM"), the Indemnified Party shall permit the Indemnifying Party (at the expense of such Indemnifying Party) to assume the defense of such Third-Party Claim and any litigation or proceeding resulting therefrom; provided that (i) counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be reasonably satisfactory to the Indemnified Party and (ii) the Indemnified Party may participate in such defense at such Indemnified Party's expense. Notwithstanding the election of the Indemnifying Party to assume control of such defense, the Indemnified Party shall be entitled to retain or assume the defense of such Third-Party Claims (at such Indemnified Party's expense) if (A) the amount of Losses from such claim (x) if the Indemnified Party is a Buyer Indemnitee, could reasonably be expected to exceed, when aggregated with all other pending claims and unpaid claims for indemnification from such Indemnifying Party (together with, in the case of Seller as the Indemnifying Party, pending claims and unpaid claims for indemnification from each such other Indemnifying Party), the Indemnification Escrow Fund, and (y) if the Indemnified Party is a Seller Indemnitee, otherwise may not, in the good faith judgment of the Indemnified Party, be capable of being satisfied in full by such Indemnifying Party; (B) the claim for indemnification relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation that could reasonably be expected to adversely affect the business of Buyer; or (C) the Indemnified Party has been advised in writing by counsel that a conflict of interest exists between the Indemnifying Party and the Indemnified Party with respect to such claim (including the defense thereof). No Indemnifying Party, in the defense of any Third-Party Claim, shall consent to entry of any judgment or enter into any settlement without the consent of the Indemnified Party, which consent may be withheld in the Indemnified Party's sole discretion (unless the terms of such judgment or settlement include an unconditional full release of the Indemnified Party from all liability with respect to such Third-Party Claim and solely the payment of money and all such moneys shall be paid by the Indemnifying Party, in which case such consent shall not be unreasonably withheld). In the event that the Indemnifying Party does not accept the defense of any matter as above provided, the Indemnified Party shall have the right to defend against any such claim or demand, and shall be entitled to settle or agree to pay in full such claim or demand. In any event, the parties to this Agreement shall cooperate in the defense of any Third-Party Claim subject to this ARTICLE 14 and the records of each shall be made reasonably available to the other with respect to such defense. 14.7 SURVIVAL OF INDEMNITY. Any matter as to which a claim has been asserted in good faith by an Indemnified Parry, by formal notice satisfying the requirements of SECTION 14.7, and prior to the Expiration Date, that is pending or unresolved as of the Expiration Date, by law or otherwise shall continue to be covered by this ARTICLE 14 notwithstanding such limitation (which the parties hereby waive solely with respect to such circumstances), until such matter is finally terminated or otherwise resolved by the parties under this Agreement, by an arbitration or by a court of competent jurisdiction and any amounts payable hereunder are finally determined and paid. 23 14.8 NO CONSEQUENTIAL DAMAGES. Notwithstanding anything to the contrary contained in this Agreement, no person shall be liable to or otherwise responsible for consequential, incidental or punitive damages. 14.9 NO DOUBLE RECOVERY. Notwithstanding anything herein to the contrary, no Indemnified Party shall be entitled to indemnification under any provision of this Agreement for any amount to the extent such Indemnified Party has been indemnified or reimbursed for such amount under any other provision of this Agreement or any other agreement or action at law or equity or otherwise. 15. MISCELLANEOUS PROVISIONS. 15.1 GOVERNING LAW. This Agreement and the legal relations between the parties hereto shall be governed by and construed and enforced in accordance with the laws of the State of Nevada, without regard to its principles of conflicts of law. Each of the parties hereto irrevocably consents to the jurisdiction and venue of any state or federal district court within Clark County, Nevada, in connection with any matter based upon or arising out of this Agreement or the transactions under this Agreement, agrees that process may be served upon them in any manner authorized by the laws of the or State of Nevada and waives and covenants not to assert or plead any objection that they might otherwise have to such jurisdiction, venue and process. 15.2 ENTIRE AGREEMENT. This Agreement, including the exhibits attached hereto, constitutes the entire agreement between Buyer and Seller pertaining to the subject matter hereof and supersedes all prior agreements, understandings, letters of intent, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other agreements, express or implied, made to either party by the other party in connection with the subject matter hereof except as specifically set forth herein or in the documents delivered pursuant hereto or in connection herewith. 15.3 AMENDMENT; WAIVER. This Agreement may not be amended except by an instrument in writing signed by the party against whom enforcement of any such amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by any other party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. 15.4 NOTICES. All notices and other communications hereunder ("NOTICES") shall be in writing and shall be deemed given (i) upon actual receipt by the recipient, if delivered personally, (ii) one Business Day after deposit with an overnight courier, as shown on the records of such overnight courier, if delivered by overnight courier or (iii) on the day of transmission if prior to 5:00p.m. on a Business Day (or if such day is not a Business Day or if the transmission occurs after 5:00p.m. on a Business Day, then on the next succeeding Business Day) if by facsimile and the sender receives electronic confirmation of receipt by the recipient, in each case to the parties at the 24 following addresses or facsimile numbers (or at such other address for a party as shall be specified by like notice): To Buyer: Morgans Group LLC c/o Morgans Hotel Group Co. 475 Tenth Avenue, 11th Floor New York, New York 10018 Attention: W. Edward Scheetz Telephone: _________________ Facsimile: (212) 277-4260 With A Copy To: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Stephen G. Gellman, Esq. Adam O. Emmerich, Esq. Telephone: _________________ Facsimile: (212) 403-2000 To Seller: PM Realty, LLC 510 North Robertson Boulevard Los Angeles, California 90048-1738 Attention: Brian Ogaz Telephone: (310) 358-1710 Facsimile: (310) 652-8787 With A Copy To: Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Attention: Allan G. Mutchnik Telephone: (213) 687-5391 Facsimile: (213) 621-5391 And to: Gordon & Silver, Ltd 3960 Howard Hughes Parkway Ninth Floor Las Vegas, Nevada 89109 Attention: Kathryn G. Noall Telephone: (702) 796-5555 Facsimile: (702) 369-2666 25 To Escrow Agent: Chicago Title Agency of Nevada, Inc. 3980 Howard Hughes Parkway, Suite 100 Las Vegas, Nevada 89109 Attention: Kathryn Wonders, Esq. Telephone: (702) 836-8195 Facsimile: (702) 836-8027 All Notices given by facsimile shall be followed by the delivery of a hard copy of such Notice, provided that such Notice shall be deemed to have been given when received by facsimile. 15.5 EXPENSES. Subject to the provision for payment of the Closing Costs in accordance with the terms of Section 7.6 hereof and any other provision of this Agreement, whether or not the transaction contemplated by this Agreement shall be consummated, all fees and expenses incurred by any party hereto in connection with this Agreement shall be borne by such party. 15.6 ASSIGNMENT. Neither all nor any portion of either party's interest under this Agreement may be sold, assigned, encumbered, conveyed, or otherwise transferred, whether directly or indirectly, voluntarily or involuntarily, or by operation of law or otherwise (including, without limitation, by a transfer of interests in such party) (collectively, a "TRANSFER"), without the prior written consent of the other party hereto, which consent may be granted or denied in its sole and absolute discretion. Any attempted Transfer without such consent shall be null and void. No Transfer, whether with or without consent, shall operate to release the party requesting a Transfer or alter such party's primary liability to perform its obligations under this Agreement. Notwithstanding the foregoing, subject to Buyer's continuing primary liability to perform its obligations under this Agreement, Buyer may, upon prior written notice to Seller but without the necessity of obtaining Seller's consent, assign this Agreement to an Affiliate of Buyer. 15.7 SEVERABILITY. If any provision of this Agreement or the application of any such provision shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. In lieu of any such invalid, illegal or unenforceable provision, the parties hereto agree to negotiate in good faith to add to this Agreement a provision as similar in terms to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable. 15.8 SUCCESSORS AND ASSIGNS; THIRD PARTIES. Subject to and without waiver of the provisions of Section 15.6 hereof, all of the rights, duties, benefits, liabilities and obligations of the parties shall inure to the benefit of, and be binding upon, their respective successors and assigns. Except as specifically set forth or referred to herein, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or entity, other than the parties hereto and their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. 26 15.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 15.10 INTERPRETATION. For all purposes of this Agreement, except as otherwise expressly provided, (a) defined terms have the meanings assigned to them in this Agreement and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned under GAAP, as in effect on the date hereof, unless otherwise stated, (c) all references in this Agreement to designated Articles, Sections or Exhibits are to the designated Article, Section or Exhibit to this Agreement, unless otherwise indicated, and all Exhibits to this Agreement are incorporated herein by reference, (d) the headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement, (e) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (f) the words "TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT," "TRANSACTIONS UNDER THIS AGREEMENT," "TRANSACTIONS CONTEMPLATED HEREBY" and words of similar import mean the sale of the Property by Seller to Buyer pursuant to this Agreement and shall not be deemed or construed to include any of the transactions contemplated by the Other Transaction Documents; (g) the words "HEREIN," "HEREOF," "HEREWITH," "HEREUNDER" and "HERETO" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, and (h) the words "INCLUDE," "INCLUDING" and other words of similar import mean "INCLUDE, WITHOUT LIMITATION" or "INCLUDING, WITHOUT LIMITATION," regardless of whether any reference to "without limitation" or words of similar import is made. 15.11 [INTENTIONALLY OMITTED]. 15.12 FURTHER ASSURANCES. In addition to the actions recited herein and contemplated to be performed, executed, and/or delivered by Seller and Buyer, Seller and Buyer agree to perform, execute and/or deliver or cause to be performed, executed and/or delivered at the Closing or after the Closing any and all such further acts, instruments, deeds and assurances as may be reasonably required to consummate the transaction 27 contemplated hereby. 15.13 NUMBER AND GENDER. Whenever the singular number is used, and when required by the context, the same includes the plural, and the masculine gender includes the feminine and neuter genders. 15.14 MUTUAL DRAFTING. Each party hereto has participated in the drafting of this Agreement, which each party acknowledges is the result of extensive negotiations between the parties. In the event any ambiguity or question of intent arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 15.15 EXHIBITS AND SCHEDULES. All exhibits and schedules attached hereto are hereby incorporated by reference as though set out in full herein. 15.16 ATTORNEYS' FEES. In the event that either party hereto brings an action or proceeding against the other party to enforce or interpret any of the covenants, conditions, agreements or provisions of this Agreement, the prevailing party in such action or proceeding shall be entitled to recover all costs and expenses of such action or proceeding, including, without limitation, attorneys' fees, charges, disbursements and the fees and costs of expert witnesses. 15.17 BUSINESS DAYS. As used herein, the term "BUSINESS DAY" shall mean a day that is not a Saturday, Sunday, federal holiday or legal holiday in Clark County, Nevada. In the event that the date for the performance of any covenant or obligation under this Agreement shall fall on a Saturday, Sunday or legal holiday, the date for performance thereof shall be extended to the next Business Day. 15.18 EARLY TERMINATION. In the event that this Agreement is terminated pursuant to the terms hereof, this Agreement and all of the provisions hereof shall be of no further force or effect and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. 15.19 CONFIDENTIALITY. Each of Buyer and Seller acknowledges that the information being provided to Buyer and its representatives by the Seller is subject to the terms of a confidentiality agreement, dated April 20, 2006, among HRH, Peter A. Morton, HR Condominium Investors (Vegas), L.L.C., a Delaware limited liability company, Seller and Merger Parent. In the event that the Closing hereunder shall not occur, Buyer shall promptly return to Seller all due diligence materials delivered by Seller to Buyer and shall destroy all copies and abstracts thereof. 15.20 [INTENTIONALLY OMITTED]. . 15.21 SECTION 1031 EXCHANGE. Seller or Buyer may consummate the sale of the Property as part of a like-kind exchange intended to qualify under Section 1031 of the Internal Revenue Code of 1986, as amended (an "EXCHANGE"), at such party's sole 28 cost and expense, provided in no event shall the Closing be affected or delayed by reason thereby; provided further neither party shall be obligated to take title to a contract to the purchase of any other property, to expend any funds or to incur any direct or contingent liability in connection with the other party's Exchange. 15.22 ARBITRATION. Any dispute that may arise between the Indemnified Parties and the Indemnifying Parties (collectively, the "PARTIES" and each, a "PARTY") with respect to the performance, interpretation or enforcement of this Agreement (other than a dispute in which specific performance is sought under the terms of Section 12.2) shall be submitted to arbitration conducted in Los Angeles, California pursuant to the rules and procedures of the American Arbitration Association, and, to the maximum extent applicable, the Federal Arbitration Act (Title 9 of the United States Code). The arbitrator shall be a retired judge of the Federal District Court, or some similarly qualified, mutually agreeable individual. The arbitration of such issues shall be final and binding upon the Parties. The arbitrator shall be entitled to impose sanctions and to take such other actions as the arbitrator deems necessary to the same extent as a judge could under the Federal Rules of Civil Procedure and applicable law. Notwithstanding the foregoing, the arbitrator shall not be authorized to award punitive damages with respect to any dispute(s) arising under this Agreement, nor shall any Party seek punitive damages relating to any such dispute(s) in any other forum. The cost of any arbitration hereunder, including the cost, if any, of the record or transcripts thereof, administrative fees, and all other fees involved, including reasonable attorneys' fees incurred by the party determined by the arbitrator to be the prevailing party, shall be paid by the party determined by the arbitrator not to be the prevailing party. The parties to the arbitration shall instruct the arbitrator to render its decision no later than sixty (60) days after the submission of the dispute(s). [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY] 29 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BUYER: MORGANS GROUP LLC, a Delaware limited liability company By: Morgans Hotel Group Co., a Delaware corporation, its Managing Member By: /s/ W. Edward Scheetz -------------------------------- Name: W. Edward Scheetz Title: Chief Executive Officer SELLER: PM REALTY, LLC, a Nevada limited-liability company By: /s/ Peter A. Morton -------------------------------- Name: Peter A. Morton Title: Manager ESCROW AGENT: The undersigned Escrow Agent hereby accepts the foregoing Purchase and Sale Agreement and Joint Escrow Instructions and agrees to act as Escrow Agent under this Agreement in strict accordance with its terms. CHICAGO TITLE AGENCY OF NEVADA, INC., a Nevada corporation By: /s/ Kathryn S. Wonders -------------------------------- Name: Kathryn S. Wonders Title: Assistant Vice President and Legal Counsel EX-10.2 4 rwbpurchasesaleagreement1.txt EXHIBIT 10.2 PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS DATED MAY 11, 2006, BY AND BETWEEN MORGANS GROUP LLC AS BUYER, AND RED, WHITE AND BLUE PICTURES, INC. AS SELLER TABLE OF CONTENTS PAGE 1. PURCHASE AND SALE.......................................................1 2. PURCHASE PRICE..........................................................1 2.1 Deposit........................................................1 2.2 Balance........................................................2 2.3 Adjustment for Prorations......................................2 3. OPENING OF ESCROW.......................................................2 4. PRE-EXECUTION ACTIONS...................................................2 4.1 Due Diligence..................................................2 4.2 Title..........................................................3 5. DESCRIPTION OF PROPERTY.................................................3 5.1 The Improvements...............................................3 5.2 The Real Property..............................................4 5.3 The Intangible Property........................................4 6. CONDITIONS TO CLOSING...................................................4 6.1 Buyer's Closing Conditions.....................................4 6.2 Failure of Buyer's Closing Conditions..........................6 6.3 Seller's Closing Conditions....................................6 6.4 Failure of Seller's Closing Conditions.........................7 7. CLOSING.................................................................7 7.1 Closing Date...................................................7 7.2 Deliveries by Seller...........................................7 7.3 Deliveries by Buyer............................................9 7.4 Actions by Escrow Agent........................................9 7.5 Prorations....................................................10 7.6 Closing Costs.................................................11 7.7 Deliveries Outside of Escrow..................................11 8. SELLER'S REPRESENTATIONS AND WARRANTIES................................12 8.1 Due Organization..............................................12 8.2 Seller's Authority; Validity of Agreements; Noncontravention............................................12 8.3 Lease.........................................................12 8.4 Service Contracts.............................................12 8.5 Violations....................................................12 8.6 Litigation....................................................12 8.7 Condemnation..................................................13 8.8 Foreign Person................................................13 8.9 Environmental.................................................13 8.10 Seller's Knowledge............................................13 i 8.11 No Other Representations or Warranties; Survival..............13 9. BUYER'S REPRESENTATIONS AND WARRANTIES.................................13 9.1 Due Organization..............................................13 9.2 Buyer's Authority; Validity of Agreements.....................13 9.3 Financing.....................................................14 9.4 Survival......................................................14 10. ADDITIONAL COVENANTS AND AGREEMENTS....................................15 10.1 As-Is.........................................................15 10.2 [Intentionally Omitted].......................................17 10.3 Cross Termination.............................................17 10.4 Interim Covenants.............................................17 11. RISK OF LOSS...........................................................17 11.1 Condemnation..................................................17 11.2 Casualty......................................................18 12. REMEDIES...............................................................18 12.1 Seller's Liquidated Damages...................................18 12.2 Buyer's Remedies..............................................19 13. BROKERS................................................................20 14. INDEMNIFICATION........................................................20 14.1 Indemnification by Seller.....................................20 14.2 Indemnification by Buyer......................................21 14.3 Minimum Losses................................................21 14.4 Maximum Indemnification.......................................21 14.5 [Intentionally Omitted].......................................21 14.6 Notice; Procedure for Third-Party Claims......................21 14.7 Survival of Indemnity.........................................22 14.8 No Consequential Damages......................................23 14.9 No Double Recovery............................................23 15. MISCELLANEOUS PROVISIONS...............................................23 15.1 Governing Law.................................................23 15.2 Entire Agreement..............................................23 15.3 Amendment; Waiver.............................................23 15.4 Notices.......................................................23 15.5 Expenses......................................................25 15.6 Assignment....................................................25 15.7 Severability..................................................25 15.8 Successors and Assigns; Third Parties.........................25 15.9 Counterparts..................................................26 15.10 Interpretation................................................26 15.11 [Intentionally Omitted].......................................26 ii 15.12 Further Assurances............................................26 15.13 Number and Gender.............................................27 15.14 Mutual Drafting...............................................27 15.15 Exhibits......................................................27 15.16 Attorneys' Fees...............................................27 15.17 Business Days.................................................27 15.18 Early Termination.............................................27 15.19 Confidentiality...............................................27 15.20 [Intentionally Omitted].......................................27 15.21 Section 1031 Exchange.........................................27 15.22 Arbitration...................................................28 ESCROW AGENT:...............................................................31 LIST OF EXHIBITS............................................................32 iii PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS THIS PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS (this "AGREEMENT") is made and entered into as of May 11, 2006 (the "EXECUTION DATE"), by and between MORGANS GROUP LLC, a Delaware limited liability company ("BUYER"), and RED, WHITE AND BLUE PICTURES, INC., a California corporation ("SELLER"), for the purpose of setting forth the agreement of the parties and of instructing CHICAGO TITLE AGENCY OF NEVADA, INC., a Nevada corporation ("ESCROW AGENT"), with respect to the transaction contemplated by this Agreement. R E C I T A L S A. Seller is the owner of an undivided fee simple interest in that certain parcel of real property located at 4475 Paradise Road, in Paradise Township, County of Clark, State of Nevada, as more particularly described on EXHIBIT A attached hereto (the "LAND PARCEL"). The Land Parcel, together with the "Improvements," the balance of the "Real Property" and the "Intangible Property" (each as hereinafter defined), are sometimes collectively referred to herein as the "PROPERTY." B. Seller desires to sell, transfer and convey the Property to Buyer, and Buyer desires to purchase and acquire the Property from Seller, upon and subject to the terms and conditions set forth in this Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree, and instruct Escrow Agent, as follows: 1. PURCHASE AND SALE. Subject to all of the terms and conditions of this Agreement, Seller agrees to sell, transfer and convey to Buyer, and Buyer agrees to purchase and acquire from Seller, Seller's right, title and interest in and to the Property, upon and subject to the terms and conditions set forth herein. 2. PURCHASE PRICE. The purchase price of the Property (the "PURCHASE PRICE") shall equal Twenty Million Dollars ($20,000,000.00), subject to adjustment as hereinafter provided. The Purchase Price shall be payable as follows: 2.1 DEPOSIT. Concurrently with the "Opening of Escrow" (as hereinafter defined), Buyer shall deposit into "Escrow" (as hereinafter defined) the sum of One Million Five Hundred Thousand Dollars ($1,500,000.00) (which amount, together with any and all interest and dividends earned thereon, shall hereinafter be referred to as the "DEPOSIT"), by wire transfer of immediately available federal funds, pursuant to that certain Escrow Agreement, dated as of the date hereof, by and among Seller, Merger Parent, Red, White and Blue Pictures, Inc., a California corporation, and the Escrow Agent (as amended from time to time, the "ESCROW AGREEMENT"). At the "Closing" (as hereinafter defined), the Deposit shall be credited against the Purchase Price and shall be paid to Seller. In the event that the sale of the Property is not consummated for any reason, then the Deposit shall be held and disbursed in accordance with the terms hereof and the Escrow Agreement. The Deposit shall be held in an interest bearing account and/or invested by the Escrow Agent in accordance with the Escrow Agreement and written instructions delivered pursuant thereto. Seller shall not be responsible for, nor shall Seller bear the risk of loss of, the Deposit and Seller shall not be responsible for the return thereof or the rate of return thereon. 2.2 BALANCE. At the Closing, Buyer shall pay to Seller the balance of the Purchase Price over and above the Deposit, by wire transfer of immediately available federal funds, net of all prorations and adjustments as provided in Sections 2.3, 7.5 and 7.6. 2.3 ADJUSTMENT FOR PRORATIONS. On the "Closing Date" (as hereinafter defined), Buyer shall receive as a credit against the Purchase Price an amount equal to the sum of all: (a) rentals already received by Seller attributable to the period from and after the Closing Date; and (b) the amount, if any, by which prorated amounts and "Closing Costs" (as hereinafter defined) allocated to Seller pursuant to Sections 7.5.1 and 7.6 hereof exceed prorated amounts and Closing Costs allocated to Buyer pursuant to Sections 7.5.1 and 7.6 hereof. 3. OPENING OF ESCROW. On or before the second (2nd) "Business Day" (as hereinafter defined) after the Execution Date, Buyer and Seller shall cause an escrow ("ESCROW") to be opened with Escrow Agent (the "OPENING OF ESCROW") by delivery to Escrow Agent of a fully executed copy of this Agreement. Escrow Agent shall promptly deliver to Buyer and Seller written notice of the date of the Opening of Escrow. This Agreement shall constitute escrow instructions to Escrow Agent as well as the agreement of the parties. Escrow Agent is hereby appointed and designated to act as Escrow Agent and instructed to deliver, pursuant to the terms of this Agreement, the documents and funds to be deposited into Escrow as herein provided. The parties hereto shall execute such additional escrow instructions (not inconsistent with this Agreement as determined by counsel for Buyer and Seller) as Escrow Agent shall deem reasonably necessary for its protection, including Escrow Agent's general provisions (as may be modified by Buyer, Seller and Escrow Agent). In the event of any inconsistency between the provisions of this Agreement and such additional escrow instructions, the provisions of this Agreement shall govern. 4. PRE-EXECUTION ACTIONS. 4.1 DUE DILIGENCE. On or prior to the Execution Date, Buyer has (i) reviewed all contracts, documents, books, records and other materials relating to the Property that have been made available to Buyer by Seller or Seller's agents or representatives (collectively, the "PROPERTY DOCUMENTS") that it deems appropriate or 2 necessary, and (ii) performed any inspections, investigations, studies and tests of the Property that it deems appropriate or necessary, and Buyer is satisfied with all of the foregoing. By its execution hereof, Buyer hereby accepts the Property in its present "AS IS, WHERE IS" condition "WITH ALL FAULTS," and acknowledges that it has been afforded the opportunity to make any and all inspections of the Property and such related matters as Buyer has desired and, accordingly, except as expressly set forth in Section 8 hereof, Buyer will rely solely on its own due diligence and investigations in purchasing the Property. Notwithstanding anything to the contrary contained herein, in the event that this Agreement terminates for any reason other than a default by Seller, as a condition to the release of the Deposit to Buyer if Buyer is otherwise entitled to such release under the terms of this Agreement, Buyer shall deliver to Seller copies of all third party reports, plans, studies, surveys and test results developed by or for Buyer relating to the Property. 4.2 TITLE. 4.2.1 TITLE DOCUMENTS. (a) Prior to the Execution Date, Seller has caused to be delivered to Buyer from Chicago Title Agency of Nevada, Inc., a Nevada corporation (in such capacity, "TITLE COMPANY") (i) a current preliminary title report for a standard coverage owner's policy of title insurance for the Real Property (the "PTR") and (ii) copies of all documents referenced as exceptions therein (collectively, the "UNDERLYING DOCUMENTS"). Seller shall deliver a current ALTA survey of the Real Property certified to Seller, Buyer, Buyer's lender and Title Company as promptly as practicable after the execution and delivery hereof (the "SURVEY"). In the event the Closing occurs, Buyer shall reimburse Seller for the cost of the Survey in lieu of the payment therefor as set forth in Section 7.6.4 below. The PTR and the Underlying Documents shall be collectively referred to herein as the "TITLE DOCUMENTS." (b) Buyer and Seller agree that in addition to that certain Lease Agreement, dated as of November 30, 1989, by and between Red White & Blue Pictures, Inc., a California corporation, and Hard Rock Cafe Investors Ltd. IX, a Nevada limited partnership (as amended, modified and assigned from time to time, the "LEASE"), all matters set forth on EXHIBIT B attached hereto shall be hereinafter referred to as "PERMITTED EXCEPTIONS"; PROVIDED, HOWEVER, in no event shall a deed of trust, mortgage or other voluntary monetary lien incurred by Seller be a Permitted Exception, and Seller (at Seller's cost) shall cause all such deeds of trust, mortgages and voluntary monetary liens incurred by Seller to be paid off and discharged of record at Closing. 4.2.2 CONDITION OF TITLE AT CLOSING. Upon the Closing, Seller shall sell, transfer and convey to Buyer fee simple title to the Real Property by a duly executed and acknowledged grant bargain and sale deed in the form of EXHIBIT C attached hereto (the "DEED"), subject only to the Permitted Exceptions. 5. DESCRIPTION OF PROPERTY. 5.1 THE IMPROVEMENTS. As used herein, the term "IMPROVEMENTS" shall mean, subject to and in accordance with the terms of the Lease, all of Seller's right, title and interest in and to all buildings, improvements, structures and fixtures now or 3 hereafter located on or in the Land Parcel. 5.2 THE REAL PROPERTY. As used herein, the term "REAL PROPERTY" shall mean, collectively, subject to and in accordance with the terms of the Lease, all of Seller's right, title and interest in and to: (a) the Land Parcel; (b) the Improvements; (c) all apparatus, equipment and appliances affixed to and used in connection with the operation or occupancy of the Land Parcel and/or any of the Improvements (such as heating, air conditioning or mechanical systems and facilities used to provide any utility services, refrigeration, ventilation, waste disposal or other services) and now or hereafter located on or in the Land Parcel and/or any of the Improvements; and (d) all of Seller's rights, benefits, entitlements, privileges and easements appurtenant to or used in connection with the Land Parcel and/or any of the Improvements, including, without limitation, all minerals, oil, gas and other hydrocarbon substances, all development rights, air rights, water, water rights and water stock relating to the Land Parcel, all strips and gores, streets, alleys, easements, rights-of-way, public ways, or other rights of Seller appurtenant, adjacent or connected to the Land Parcel. 5.3 THE INTANGIBLE PROPERTY. As used herein, the term "INTANGIBLE PROPERTY" shall mean all of Seller's right, title and interest in and to that certain intangible property owned by Seller and used by Seller exclusively in connection with all or any portion of the Real Property, including, without limitation, all of Seller's right, title and interest, if any, in and to: (a) the Lease, all books, records, reports, test results, environmental assessments, if any, as-built plans, specifications and other similar documents and materials relating to the use, operation, maintenance, repair, construction or fabrication of all or any portion of the Real Property; (b) all transferable business licenses, architectural, site, landscaping or other permits, applications, approvals, authorizations and other entitlements of Seller affecting any portion of the Real Property; and (c) all transferable guarantees, warranties and utility contracts of Seller relating to all or any portion of the Real Property. 6. CONDITIONS TO CLOSING. 6.1 BUYER'S CLOSING CONDITIONS. The obligation of Buyer to complete the transaction contemplated by this Agreement is subject to the following conditions precedent (and conditions concurrent, with respect to deliveries to be made by the parties at the Closing) (the "BUYER'S CLOSING CONDITIONS"), which conditions may be waived, or the time for satisfaction thereof extended, by Buyer only in a writing executed by Buyer (provided, however, that Buyer's acceptance of the Deed shall be deemed to be a waiver of any unsatisfied conditions regardless of whether Buyer executes a separate written instrument to that effect at the Closing): 6.1.1 TITLE. Title Company shall be prepared and irrevocably committed to issue to Buyer (with an effective date not earlier than the Closing Date), a standard coverage owner's policy of title insurance in favor of Buyer for the Real Property (a) showing fee title to the Real Property vested in Buyer, (b) with liability coverage in an amount equal to the Purchase Price, (c) with those endorsements reasonably requested by Buyer (provided that such endorsements are available in the 4 State of Nevada and are paid for by Buyer in accordance with the terms hereof) and (d) containing no exceptions other than the Permitted Exceptions (the "Owner's Title Policy"). 6.1.2 SELLER'S DUE PERFORMANCE. All of the representations and warranties of Seller set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date (except for representations and warranties made as of a specified date set forth in the applicable representation or warranty, which shall be true and complete in all material respects as of such date), except where the failure of such representations and warranties to be so true and correct in all material respects (without giving effect to any limitation as to "materiality" or material adverse effect) would not reasonably be expected to have a material adverse effect on the value of Property. Seller, on or prior to the Closing Date, shall have complied with and/or performed in all material respects all of the obligations, covenants and agreements required on the part of Seller to be complied with or performed pursuant to the terms of this Agreement.. 6.1.3 PHYSICAL CONDITION OF PROPERTY. Subject to the terms of Section 11 hereof, the physical condition of the Property shall be substantially the same on the Closing Date as on the Execution Date, except for reasonable wear and tear and any damages due to any act of Buyer or Buyer's representatives. 6.1.4 BANKRUPTCY. No action or proceeding shall have been commenced by or against Seller under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors, and no attachment, execution, lien or levy shall have attached to or been issued with respect to Seller's interest in the Property or any portion thereof. 6.1.5 DELIVERIES. Seller shall have delivered to Escrow Agent or Buyer, as the case may be, such documents or instruments as are required to be delivered by Seller pursuant to the terms of this Agreement. 6.1.6 OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. For purposes hereof, "OTHER TRANSACTION CLOSINGS" shall mean (i) the "Closing," as such term is defined in Section 1.3 of the Agreement and Plan of Merger, dated as of the date hereof (the "MERGER AGREEMENT"), by and among Hard Rock Hotel, Inc., a Nevada corporation ("HRH"), Morgans Hotel Group Co., a Delaware corporation ("MERGER PARENT"), and MHG HR Acquisition Corp., a Nevada corporation, (ii) the "Closing," as such term is defined in Section 7.1 of the Purchase and Sale Agreement and Joint Escrow Instructions, dated as of the date hereof (the "PMR ASSET PURCHASE AGREEMENT"), by and between PM Realty, LLC, a Nevada limited-liability company, and Buyer, (iii), the execution of the Trademark Agreement, to be dated as of the Closing, by and between Peter A. Morton and HRH (the "TRADEMARK AGREEMENT"), (iv) the execution of the License Agreement, to be dated as of the Closing, by and between Peter A. Morton and Merger Parent (the "LICENSE AGREEMENT"), and (v) 5 the execution of the "Morton Trademark Assignment" (as defined in the Merger Agreement) (the "MORTON TRADEMARK ASSIGNMENT" and, together with the Merger Agreement, the PMR Asset Purchase Agreement and the License Agreement, the "OTHER TRANSACTION AGREEMENTS"). 6.2 FAILURE OF BUYER'S CLOSING CONDITIONS. If any of Buyer's Closing Conditions have not been fulfilled on or prior to the "Outside Closing Date" (as defined herein), Buyer may: 6.2.1 waive any such unfulfilled Buyer's Closing Condition and close Escrow in accordance with this Agreement, without adjustment or abatement of the Purchase Price; or 6.2.2 terminate this Agreement by written notice to Seller and Escrow Agent, in which event (1)(a) Escrow Agent shall return the Deposit to Buyer, (b) Escrow Agent shall return all other documents, instruments and funds delivered into Escrow to the party that delivered the same into Escrow, (c) to the extent that the failure of any applicable Buyer's Closing Condition is not caused by a Seller default, Seller and Buyer shall each pay fifty percent (50%) of the cancellation charges of Title Company and Escrow Agent, if any, and (d) to the extent that the failure of any applicable Buyer's Closing Condition is caused by a Seller default, the Deposit shall be liquidated damages, and Buyer's sole and exclusive remedy hereunder in accordance with the terms of Section 12.2 hereof. 6.3 SELLER'S CLOSING CONDITIONS. The obligation of Seller to complete the transaction contemplated by this Agreement is subject to the following conditions precedent (and conditions concurrent, with respect to deliveries to be made by the parties at the Closing) (the "SELLER'S CLOSING CONDITIONS"), which conditions may be waived, or the time for satisfaction thereof extended, by Seller only in a writing executed by Seller: 6.3.1 BUYER'S DUE PERFORMANCE. All of the representations and warranties of Buyer set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date, and Buyer, on or prior to the Closing Date, shall have complied with and/or performed in all material respects all of the obligations, covenants and agreements required on the part of Buyer to be complied with or performed pursuant to the terms of this Agreement. 6.3.2 BANKRUPTCY. No action or proceeding shall have been commenced by or against Buyer under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors. 6.3.3 DELIVERIES. Buyer shall have delivered to Escrow Agent or Seller, as the case may be, such documents or instruments as are required to be delivered by Buyer pursuant to the terms of this Agreement. 6.3.4 OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the 6 party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. 6.4 FAILURE OF SELLER'S CLOSING CONDITIONS. If any of the Seller's Closing Conditions have not been fulfilled on or prior to the Outside Closing Date, Seller may: 6.4.1 waive any such unfulfilled Seller's Closing Condition and close Escrow in accordance with this Agreement, without adjustment or abatement of the Purchase Price; or 6.4.2 terminate this Agreement by written notice to Buyer and Escrow Agent, in which event (a) Escrow Agent shall deliver the Deposit to Seller (which Seller shall retain as liquidated damages, as its sole and exclusive remedy hereunder, in accordance with the terms of Section 12.1 hereof); provided, however, that if Seller or any of the other parties to the Other Transaction Agreements (other than Buyer, Merger Parent or the Escrow Agent) has breached or failed to perform in any material respect its obligations or satisfy the conditions under any of the Other Transaction Agreements, then Seller shall not be entitled to retain the Deposit and, in such case, Escrow Agent shall return the Deposit to Buyer (which shall be liquidated damages, and Buyer's sole and exclusive remedy hereunder, in accordance with the terms of Section 12.2 hereof), (b) Escrow Agent shall return all other documents, instruments and funds delivered into Escrow to the party that delivered the same into Escrow and (c) to the extent that the failure of any applicable Seller's Closing Condition is not caused by a Buyer default, Seller and Buyer shall each pay fifty percent (50%) of the cancellation charges of Title Company and Escrow Agent, if any. 7. CLOSING. 7.1 CLOSING DATE. Subject to the provisions of this Agreement, the Closing shall take place at a time and on a date specified by the parties, which shall be no later than the fifth Business Day after satisfaction or waiver of the conditions set forth in Sections 6.1 and 6.3 (other than those conditions, including the occurrence of the Other Transaction Closings, that by their nature are to be satisfied at the Closing, but subject to fulfillment or waiver of those conditions, it being the intention of Buyer and Seller that the Closing and Other Transaction Closings occur concurrently) at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019-6150, or at such other time, date, or place as agreed to in writing by the parties hereto. As used herein, the following terms shall have the following meanings: (a) the "CLOSING" shall mean the recordation of the Deed in the official records of Clark County, Nevada (the "OFFICIAL RECORDS"); (b) the "CLOSING DATE" shall mean the date upon which the Closing actually occurs; and (c) the "OUTSIDE CLOSING DATE" shall mean (i) the earlier of (x) seven (7) Business Days following Merger Parent's receipt of Gaming Approvals (as such term is defined in the Merger Agreement) and (y) February 11, 2007 or (ii) such later date as is agreed to by Seller. 7.2 DELIVERIES BY SELLER. On or before the Closing Date, Seller, at its sole cost and expense, shall deliver or cause to be delivered into Escrow the following 7 documents and instruments, each dated as of the Closing Date, in addition to all other items and payments required by this Agreement to be delivered by Seller at the Closing: 7.2.1 DEED. The original executed and acknowledged Deed conveying the Real Property to Buyer; 7.2.2 NON-FOREIGN AFFIDAVIT. The original executed non-foreign affidavit in the form of EXHIBIT D attached hereto (the "NON-FOREIGN AFFIDAVIT"); 7.2.3 ASSIGNMENT OF LEASES. Four (4) original executed counterparts of an assignment and assumption of lease in the form of EXHIBIT E attached hereto (the "ASSIGNMENT OF LEASE"), pursuant to which Seller shall assign all of its rights and remedies under the Lease (including, without limitation, its right to any prepaid rent) to Buyer, and Buyer shall assume the obligations of Seller with respect thereto arising from and after the Closing Date; 7.2.4 BILL OF SALE. Four (4) original executed counterparts of a bill of sale, assignment and assumption in the form of EXHIBIT F attached hereto (the "BILL OF SALE"), pursuant to which Seller shall transfer to Buyer (and Buyer shall assume Seller's obligations arising from and after the Closing Date, if any, with respect to) all of the Intangible Property (other than the Lease), in each case free of all liens and encumbrances (other than the Permitted Exceptions); 7.2.5 PROOF OF AUTHORITY. Such proof of Seller's authority and authorization to enter into this Agreement and the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing or delivering any instruments, documents or certificates on behalf of Seller to act for and bind Seller as may be reasonably required by Title Company or Buyer; and 7.2.6 LEASE. An original or, if the original is unavailable, a copy, of the Lease then in effect, to the extent same are in Seller's possession; 7.2.7 PLANS. Originals or, if originals are unavailable, copies of plans and specifications, technical manuals and similar materials for the Improvements, to the extent same are in Seller's possession; 7.2.8 BOOKS AND RECORDS; PERMITS. Originals or, if originals are unavailable, copies, of all books, records, permits and licenses relating to the operation, maintenance and repair of the Property during Seller's ownership thereof to the extent same are in Seller's possession; 7.2.9 TITLE AFFIDAVITS. Any other affidavit, document or instrument expressly required to be delivered by Seller pursuant to the terms of this Agreement, or that is reasonable and customary to be required by the Title Company in connection with the issuance of the Owner's Title Policy; and 7.2.10 OTHER. Such other documents and instruments, signed and properly acknowledged by Seller, if appropriate, as may be reasonably required by 8 Buyer, Title Company, Escrow Agent or otherwise in order to effectuate the provisions of this Agreement and the Closing of the transaction contemplated herein, including without limitation, a declaration of value form prepared by the Escrow Agent with respect to the Real Property. 7.3 DELIVERIES BY BUYER. On or before the Closing Date, Buyer, at its sole cost and expense, shall deliver or cause to be delivered into Escrow the following funds, documents and instruments, each dated as of the Closing Date, in addition to all other items and payments required by this Agreement to be delivered by Buyer at the Closing: 7.3.1 PURCHASE PRICE. Cash in an amount equal to the sum of the Purchase Price and all of the Buyer's Closing Costs (and otherwise sufficient to close the transaction contemplated herein); 7.3.2 ASSIGNMENT OF LEASE. Four (4) original executed counterparts of the Assignment of Lease; 7.3.3 BILL OF SALE. Four (4) original executed counterparts of the Bill of Sale; 7.3.4 PROOF OF AUTHORITY. Such proof of Buyer's authority and authorization to enter into this Agreement and the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing or delivering any instruments, documents or certificates on behalf of Buyer to act for and bind Buyer as may be reasonably required by Title Company or Seller; and 7.3.5 OTHER. Such other documents and instruments, signed and properly acknowledged by Buyer, if appropriate, as may reasonably be required by Seller, Title Company, Escrow Agent or otherwise in order to effectuate the provisions of this Agreement and the Closing of the transaction contemplated herein, including without limitation, a declaration of value form prepared by the Escrow Agent with respect to the Real Property. 7.4 ACTIONS BY ESCROW AGENT. Provided that Escrow Agent shall not have received written notice from Buyer or Seller of (a) the failure of any condition to the Closing or of the termination of the Escrow and this Agreement or (b) the termination of any Other Transaction Agreement, when Buyer and Seller have deposited into Escrow the documents and funds required by this Agreement and Title Company is irrevocably and unconditionally committed to issue the Owner's Title Policy in accordance with the terms hereof, and the Escrow Agent has been informed that the conditions to the "Closings" under the Other Transaction Agreements are being satisfied concurrently with the Closing, Escrow Agent shall, in the order and manner herein below indicated, take the following actions: 7.4.1 RECORDING. Cause the Deed and any other documents which the parties hereto may mutually direct to be recorded in the Official Records and obtain conformed copies thereof for distribution to Buyer and Seller; 9 7.4.2 FUNDS. Disburse all funds as follows: 7.4.2.1 pursuant to the "Closing Statement" (as hereinafter defined), retain for Escrow Agent's own account all escrow fees and costs, disburse to Title Company the fees and expenses incurred in connection with the issuance of the Owner's Title Policy and disburse to any other persons or entities entitled thereto the amount of any other Closing Costs; 7.4.2.2 disburse to Seller an amount equal to the Purchase Price, less or plus the net debit or credit to Seller by reason of the prorations and allocations of Closing Costs provided for herein; and 7.4.2.3 disburse to the party who deposited the same any remaining funds in the possession of Escrow Agent after payments pursuant to Sections 7.4.1.1 and 7.4.1.2 above have been completed; and 7.4.3 DELIVERY OF DOCUMENTS. Deliver: (a) to Seller (i) two originals of all documents deposited into Escrow (other than the Deed and the Non-Foreign Affidavit), (ii) one copy of the Non-Foreign Affidavit and (iii) one conformed copy of each document recorded pursuant to the terms hereof; and (b) to Buyer, (i) two originals of all documents deposited into Escrow (other than the Deed and the Non-Foreign Affidavit), (ii) the original Deed, (iii) the original Non-Foreign Affidavit and (iv) one conformed copy of each document recorded pursuant to the terms hereof. 7.4.4 OWNER'S TITLE POLICY. Cause Title Company to issue to Buyer the Owner's Title Policy. 7.5 PRORATIONS. 7.5.2 Rentals, revenues, and other income, if any, from the Property, taxes, assessments, improvement bonds, service contract fees, utility costs, and other expenses affecting the Property shall be prorated between Buyer and Seller as of the Closing Date based on a 365 day year. For purposes of calculating prorations, Buyer shall be deemed to be title holder of the Property, and therefore entitled to the income and responsible for the expenses, after 12:01 a.m. Pacific Standard Time on the Closing Date. Delinquent rentals as of the Closing Date shall not be prorated, but when paid to Buyer shall be delivered by Buyer to Seller, net of Buyer's reasonable collection costs. After the Closing, Buyer shall use commercially reasonable efforts to collect delinquent rentals on behalf of Seller, provided that Buyer shall have no obligation to commence any action or proceeding to collect any delinquent rent. All non-delinquent real estate taxes or assessments on the Property shall be prorated based on the actual current tax bill, but if such tax bill has not yet been received by Seller by the Closing Date or if supplemental taxes are assessed after the Closing for the period prior to the Closing, the parties shall make any necessary adjustment after the Closing by cash payment to the party entitled thereto so that Seller shall have borne all real property taxes, including all supplemental taxes, allocable to the period prior to the Closing and Buyer shall bear all real property taxes, including all supplemental taxes, allocable to the period from and after the Closing. 10 If any expenses attributable to the Property and allocable to the period prior to the Closing are discovered or billed after the Closing, the parties shall make any necessary adjustment after the Closing by cash payment to the party entitled thereto so that Seller shall have borne all expenses allocable to the period prior to the Closing and Buyer shall bear all expenses allocable to the period from and after the Closing. Upon the Closing, Buyer assumes all expenses and real property taxes, including all supplemental taxes, allocable to the period from and after the Closing. The provisions of this Section 7.5.1 shall survive the Closing. 7.5.3 Five (5) Business Days prior to the Closing Date, Escrow Agent shall deliver to each of the parties for their review and approval a preliminary closing statement (the "PRELIMINARY CLOSING STATEMENT") setting forth: (a) the proration amounts allocable to each of the parties pursuant to Section 7.5 hereof; and (b) the Closing Costs allocable to each of the parties pursuant to Section 7.6 hereof. Based on each of the party's comments, if any, regarding the Preliminary Closing Statement, Escrow Agent shall revise the Preliminary Closing Statement and deliver the final version of a closing statement to each of the parties. Each of the parties shall execute and deliver counterparts of the final version of a closing statement at the Closing (the "CLOSING STATEMENT"), and Escrow Agent shall deliver a fully executed counterpart thereof to each party. 7.6 CLOSING COSTS. Each party shall pay its own costs and expenses arising in connection with the Closing (including, without limitation, its own attorneys' and advisors' fees, charges and disbursements), except the following costs (the "CLOSING COSTS"), which shall be allocated between the parties as follows: 7.6.1 all documentary transfer, stamp, sales and other taxes related to the transfer of the Property, which shall be paid by Buyer; 7.6.2 Escrow Agent's escrow fees and costs, which shall be paid one-half (1/2) by Seller and one-half (1/2) by Buyer; 7.6.3 the cost of the premium for a CLTA Owner's Title Policy, which shall be paid by Seller; 7.6.4 the cost of the Survey, the difference of the cost of the premium between a CLTA owner's title policy and ALTA owner's title policy, and the cost of any endorsements to the Owner's Title Policy, which shall be paid by Buyer; and 7.6.5 all recording fees, which shall be paid by Buyer. 7.7 DELIVERIES OUTSIDE OF ESCROW. Seller shall deliver possession of the Property, subject only to the Lease and the other Permitted Exceptions, to Buyer upon the Closing. Further, Seller hereby covenants and agrees to deliver to Buyer, on or prior to the Closing, the following items: 7.7.1 INTANGIBLE PROPERTY. The Intangible Property, including, without limitation, the original Property Documents. 11 7.7.2 NOTICE TO TENANT. A letter dated as of the Closing Date and addressed to the tenant under the Lease, informing such tenant of the transfer of the Property and the assignment of the Lease to Buyer, together with an instruction to pay all amounts due or to become due under the Lease to Buyer. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to and agrees with Buyer, as of the Execution Date and as of the Closing Date, as follows: 8.1 DUE ORGANIZATION. Seller is a corporation duly incorporated and existing in good standing under the laws of the State of California. 8.2 SELLER'S AUTHORITY; VALIDITY OF AGREEMENTS; NONCONTRAVENTION. Seller has full right, power and authority to sell the Property to Buyer as provided in this Agreement and to carry out its obligations hereunder. The individual(s) executing this Agreement and the instruments referenced herein on behalf of Seller have the legal power, right and actual authority to bind Seller to the terms hereof and thereof. This Agreement is, and all other instruments, documents and agreements to be executed and delivered by Seller in connection with this Agreement shall be, duly authorized, executed and delivered by Seller and shall be valid, binding and enforceable obligations of Seller (except as enforcement may be limited by bankruptcy, insolvency or similar laws). Neither the execution and delivery of this Agreement nor its performance by Seller will (i) result in the breach of any material contract or agreement to which Seller is a party or by which the Property is bound or (ii) violate any law applicable to the Seller. No approvals, consents, authorizations, declarations, registrations or notices of or to any governmental authority that have not been received or made on or prior to the Closing Date are required by or with respect to Seller in connection with the consummation by Seller of the transactions contemplated hereby. 8.3 LEASE. Other than the Lease (together with all amendments, modifications and guarantees thereof), Seller has not directly entered into any leases or subleases of the Property. Seller has not delivered or received any written notice of, and to Seller's Knowledge, there are no, material defaults under, the Lease. 8.4 SERVICE CONTRACTS. Neither Seller nor any of its agents has executed any service, maintenance, repair, management, supply or other contracts (including, without limitation, any service contracts) affecting the Property which would be binding on Buyer subsequent to the Closing. 8.5 VIOLATIONS. Seller has not received any written notice of, and to Seller's Knowledge, there are no, material violations of any laws, ordinances, orders or requirements of any governmental authority, agency or officer having jurisdiction over or affecting the Property, which have not previously been complied with. 8.6 LITIGATION. There are (a) no actions, investigations, suits or proceedings (other than tax appeals or protests) pending or to Seller's Knowledge threatened in writing against Seller that if adversely decided would have, or are reasonably likely to have, a material adverse effect on the value of Property, or the ownership or operation thereof, and (b) no judgments, orders, awards or decrees currently 12 in effect against Seller with respect to the ownership or operation of the Property which have not been fully discharged prior to the Execution Date; PROVIDED, HOWEVER, in no event shall this representation be deemed to be untrue, incorrect or incomplete in any respect if the subject of any of the foregoing matters would be an "Indemnified Claim" (as such term is defined in that certain Indemnification Agreement, dated as of that date hereof, by and among Morgan Hotel Group Co., a Delaware corporation, and Peter A. Morton, an individual). 8.7 CONDEMNATION. As of the date hereof, there are no pending proceedings or, to Seller's Knowledge, proceedings threatened in writing by applicable governmental authority, to condemn all or any portion of the Property by eminent domain proceedings or otherwise. 8.8 FOREIGN PERSON. Seller is not a "foreign person" as defined in Section 1445 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. 8.9 ENVIRONMENTAL. To Seller's Knowledge, except as would not result in a material adverse effect, Seller has not received any written notice or claim from any governmental authority or third party alleging that Seller is not in compliance with any applicable federal, state and local laws governing pollution or the protection of the environment. 8.10 SELLER'S KNOWLEDGE. As used herein, the term "SELLER'S KNOWLEDGE" shall mean the actual knowledge of Peter A. Morton or Brian Ogaz; and the knowledge of no other person shall be imputed to any such individual. 8.11 NO OTHER REPRESENTATIONS OR WARRANTIES; SURVIVAL. Other than the representations and warranties expressly set forth in this Section 8, Seller shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby and no other person (including any officer, director, employee, stockholder, or Affiliate of Seller) shall be deemed to have made any representation or warranty in connection with this Agreement or the transactions contemplated hereby. The representations and warranties of Seller set forth in this Agreement shall survive until the first anniversary of Closing Date (the "EXPIRATION DATE"). 9. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants to Seller, as of the Execution Date and as of the Closing Date, as follows: 9.1 DUE ORGANIZATION. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. 9.2 BUYER'S AUTHORITY; VALIDITY OF AGREEMENTS. Buyer has full right, power and authority to purchase and acquire the Property from Seller as provided in this Agreement and to carry out its obligations hereunder. The individual(s) executing this 13 Agreement and the instruments referenced herein on behalf of Buyer have the legal power, right and actual authority to bind Buyer to the terms hereof and thereof. This Agreement is, and all instruments, documents and agreements to be executed and delivered by Buyer in connection with this Agreement shall be, duly authorized, executed and delivered by Buyer and shall be valid, binding and enforceable obligations of Buyer (except as enforcement may be limited by bankruptcy, insolvency or similar laws) and do not, and as of the Closing Date will not, violate any provision of any agreement or judicial order to which Buyer is a party or to which Buyer is subject. 9.3 FINANCING. Buyer has obtained written commitments (the "FINANCING COMMITMENTS") for any and all financing (whether equity financing, debt financing or otherwise) necessary to pay the Purchase Price and all fees, costs and expenses relating to the transactions contemplated by this Agreement (the "FINANCING"). Buyer has provided true, accurate and complete copies of the Financing Commitments to Seller, and Buyer has paid all commitment fees and any other fees and amounts due under the Financing Commitments at or prior to the date hereof. None of the Financing Commitments has been amended, modified or terminated, and the respective commitments contained in the Financing Commitments have not been withdrawn or rescinded in any respect in any way materially adverse to Seller. The Financing Commitments are in full force and effect and no event has occurred which, with or without notice, lapse of time (other than the expiration of the term thereof) or both, would constitute a default on the part of Buyer under any of the Financing Commitments. There are no conditions precedent or other contingencies related to the funding of the full amount of the Financing, other than as set forth in or contemplated by the Financing Commitments. The aggregate proceeds to be disbursed pursuant to the agreements contemplated by the Financing Commitments, together with Buyer's cash and cash equivalents, will be sufficient for Buyer to pay the Purchase Price and all fees, costs and expenses related to the transactions contemplated by this Agreement. Buyer has no reason to believe that any of the conditions to the Financing contemplated by the Financing Commitments will not be satisfied or that Buyer will not receive the proceeds of the Financing on or prior the Closing Date. 9.4 SURVIVAL Other than the representations and warranties expressly set forth in this Section 9, Buyer shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby and no other person (including any officer, director, employee, stockholder, or Affiliate of Buyer) shall be deemed to have made any representation or warranty in connection with this Agreement or the transactions contemplated hereby. The representations and warranties of Buyer set forth in this Section 9 shall survive the delivery of the Deed and the Closing for twelve (12) months following the Closing Date. Each such representation and warranty shall automatically be null and void and of no further force and effect on the date that is twelve (12) months after the Closing Date, and Seller shall not be entitled to commence an action or proceeding claiming breach of any such representation or warranty by Buyer at any time subsequent to such date that is twelve (12) months after the Closing Date. 14 10. ADDITIONAL COVENANTS AND AGREEMENTS. 10.1 AS-IS. THE PARTIES HEREBY ACKNOWLEDGE AND AGREE AS FOLLOWS: (A) BUYER IS A SOPHISTICATED PURCHASER WHO IS FAMILIAR WITH THIS TYPE OF PROPERTY; AND (B) EXCEPT AS MAY BE SPECIFICALLY SET FORTH IN THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, IN SECTION 8 HEREOF, NEITHER SELLER NOR ANY OF ITS AGENTS, REPRESENTATIVES, BROKERS, OFFICERS, DIRECTORS, SHAREHOLDERS, OR EMPLOYEES HAS MADE OR WILL MAKE ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY. THE PROPERTY IS BEING SOLD TO BUYER IN ITS PRESENT "AS IS, WHERE IS" CONDITION "WITH ALL FAULTS." SUBJECT TO SECTION 8 HEREOF, BUYER ACKNOWLEDGES THAT IT HAS BEEN AFFORDED THE OPPORTUNITY TO MAKE ANY AND ALL INSPECTIONS OF THE PROPERTY AND SUCH RELATED MATTERS AS BUYER HAS DESIRED AND, ACCORDINGLY, EXCEPT AS MAY BE SPECIFICALLY SET FORTH TO THE CONTRARY HEREIN, BUYER WILL RELY SOLELY ON ITS OWN DUE DILIGENCE AND INVESTIGATIONS IN PURCHASING THE PROPERTY. 15 SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 10.1, AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. /s/ P.M. /s/ W.E.S - ---------- ---------- Seller's Buyer's Initials Initials 16 10.2 [INTENTIONALLY OMITTED]. 10.3 CROSS TERMINATION. If the Merger Agreement is terminated in accordance with the terms thereof, then unless Buyer and Seller shall otherwise expressly agree in writing, this Agreement shall automatically terminate, and this Agreement and all of the provisions hereof shall be void and of no further force or effect (except that Section 13 shall survive the termination of this Agreement), and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. If this Agreement is terminated as a result of the termination of the Merger Agreement pursuant to Section 6.1 thereof, then upon such termination, (i) if HRH is entitled to and elects to receive the "Deposit" (as defined in the Merger Agreement) under the Merger Agreement (the "MERGER DEPOSIT") then upon termination of this Agreement the Deposit shall be paid to Seller, and (ii) if Merger Parent is entitled to and elects to receive the Merger Deposit under the Merger Agreement, then upon termination of this Agreement the Deposit shall be delivered to Buyer. 10.4 INTERIM COVENANTS. During the period from the date hereof until the Closing Date, Seller: (a) shall not enter into any agreements with respect to all or any portion of the Property, unless such agreements expire by their terms on or prior to the Closing Date or may be terminated by the owner of the Property without penalty upon not more than thirty (30) days' prior notice; (b) shall maintain in full force and effect any insurance policies that Seller currently maintains in effect with respect to the Property (or if Seller maintains any such insurance policies in effect, replacement policies providing for substantially similar coverage if available on commercially reasonable terms); and (c) shall operate, maintain, manage and repair the Property in a manner consistent in all material respects with Seller's past practice. 11. RISK OF LOSS. 11.1 CONDEMNATION. If, prior to the Closing, all or any "Material Portion" (as hereinafter defined) of the Property is taken by condemnation or eminent domain (or is the subject of a pending or contemplated taking which has not been consummated), Seller shall within five (5) Business Days notify Buyer of such fact. In such event, Buyer shall have the option to terminate this Agreement upon written notice to Seller given not later than fifteen (15) days after receipt of such notice from Seller. Upon such termination, Escrow Agent shall return the Deposit to Buyer, the parties shall equally share the cancellation charges of Escrow Agent and Title Company, if any, and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. Buyer shall have no right to terminate this Agreement as a result of any taking of any portion of 17 the Property that is not a Material Portion. If Buyer does not elect or has no right to terminate this Agreement, Seller shall assign and turn over to Buyer, and Buyer shall be entitled to receive and keep, all awards for the taking by condemnation and Buyer shall be deemed to have accepted the Property subject to the taking without reduction in the Purchase Price. As used herein, the term "MATERIAL PORTION" shall mean any portion having a value in excess of ten percent (10%) of the Purchase Price. 11.2 CASUALTY. Prior to the Closing and notwithstanding the pendency of this Agreement, the entire risk of loss or damage by earthquake, hurricane, tornado, flood, landslide, fire or other casualty shall be borne and assumed by Seller. If, prior to the Closing, any material damage occurs to any portion of the Property as a result of any earthquake, hurricane, tornado, flood, landslide, fire or other casualty, Seller shall within five (5) Business Days notify Buyer of such fact. Buyer shall have no right to terminate this Agreement as a result of any damage or destruction of any portion of the Property; however, Seller shall assign and turn over, and Buyer shall be entitled to receive and keep, all insurance proceeds payable with respect to such damage or destruction (which shall then be repaired or not at Buyer's option and cost) and the parties shall proceed to the Closing pursuant to the terms hereof without modification of the terms of this Agreement. Buyer shall have the right to participate in any adjustment of the insurance claim. 12. REMEDIES. 12.1 SELLER'S LIQUIDATED DAMAGES. IN THE EVENT THAT THE ESCROW AND THIS TRANSACTION FAIL TO CLOSE AS A RESULT OF (x) THE DEFAULT OF BUYER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR (y) THE TERMINATION OF THIS AGREEMENT DESCRIBED IN THE SECOND SENTENCE OF SECTION 10.3 ABOVE AND CLAUSE (i) OF THE SECOND SENTENCE OF SECTION 10.3 APPLIES, BUYER AND SELLER AGREE THAT (1) SELLER'S ACTUAL DAMAGES WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, (2) EXCEPT AS SET FORTH IN SECTION 6.4.2(a), IN THE CASE OF THE TERMINATION OF THIS AGREEMENT PURSUANT TO SECTION 6.4.2, , SELLER, AS SELLER'S SOLE AND EXCLUSIVE REMEDY, IS ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF THE DEPOSIT AND (3) (A) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF BUYER AND SELLER HEREUNDER AND THE ESCROW CREATED HEREBY SHALL TERMINATE, (B) ESCROW AGENT SHALL, AND IS HEREBY AUTHORIZED AND INSTRUCTED TO, RETURN PROMPTLY TO BUYER AND SELLER ALL DOCUMENTS AND INSTRUMENTS TO THE PARTIES WHO DEPOSITED THE SAME, (C) EXCEPT AS SET FORTH IN SECTION 6.4.2(a), IN THE CASE OF THE TERMINATION OF THIS AGREEMENT PURSUANT TO SECTION 6.4.2, ESCROW AGENT SHALL DELIVER THE DEPOSIT TO SELLER PURSUANT TO SELLER'S INSTRUCTIONS, AND THE SAME SHALL BE THE FULL, AGREED AND LIQUIDATED DAMAGES, AND (D) ALL TITLE AND ESCROW CANCELLATION CHARGES, IF ANY, SHALL BE CHARGED TO BUYER; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT LIMIT SELLER'S RIGHTS OR REMEDIES WITH RESPECT TO (1) THE 18 OBLIGATIONS OF BUYER UNDER SECTIONS 4, 13 AND 15.16 HEREOF AND (2) THOSE RIGHTS AND OBLIGATIONS THAT, BY THEIR TERMS, SURVIVE THE TERMINATION OF THIS AGREEMENT. 12.2 BUYER'S REMEDIES. IN THE EVENT THAT THE ESCROW AND THIS TRANSACTION FAIL TO CLOSE AS A RESULT OF (x) THE DEFAULT OF SELLER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR (y) THE TERMINATION OF THIS AGREEMENT PURSUANT TO SECTION 10.3 ABOVE AND CLAUSE (ii) OF THE SECOND SENTENCE OF SECTION 10.3 ABOVE APPLIES, (1) BUYER AND SELLER AGREE THAT BUYER'S ACTUAL DAMAGES WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, (2) BUYER, AS BUYER'S SOLE AND EXCLUSIVE REMEDY, IS ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF THE DEPOSIT, AND (3) (A) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF BUYER AND SELLER HEREUNDER AND THE ESCROW CREATED HEREBY SHALL TERMINATE, (B) ESCROW AGENT SHALL, AND IS HEREBY AUTHORIZED AND INSTRUCTED TO, RETURN PROMPTLY TO BUYER AND SELLER ALL DOCUMENTS AND INSTRUMENTS TO THE PARTIES WHO DEPOSITED THE SAME, (C) ESCROW AGENT SHALL DELIVER THE DEPOSIT TO BUYER PURSUANT TO BUYER'S INSTRUCTIONS, AND THE SAME SHALL BE THE FULL, AGREED AND LIQUIDATED DAMAGES, AND (d) ALL TITLE AND ESCROW CANCELLATION CHARGES, IF ANY, SHALL BE CHARGED TO SELLER; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT LIMIT BUYER'S RIGHTS OR REMEDIES WITH RESPECT TO (1) THE OBLIGATIONS OF SELLER UNDER SECTIONS 13 AND 15.16 HEREOF AND (2) THOSE RIGHTS AND OBLIGATIONS THAT, BY THEIR TERMS, SURVIVE THE TERMINATION OF THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, IN THE EVENT THAT THE OTHER TRANSACTION CLOSINGS HAVE OCCURRED AND THE ESCROW AND THIS TRANSACTION FAIL TO CLOSE AS A RESULT OF THE DEFAULT OF SELLER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, IN LIEU OF BUYER'S REMEDIES SET FORTH ABOVE IN THIS PARAGRAPH, BUYER MAY ELECT TO PURSUE THE REMEDY OF SPECIFIC PERFORMANCE AGAINST SELLER. Notwithstanding anything to the contrary contained herein, Seller shall not be in default with respect to any of its obligations hereunder unless and until (y) it receives written notice from Buyer specifying such default and (z) it fails to cure such default within twenty (20) Business Days after receipt of such notice. SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS ARTICLE 12, AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. /s/ P.M. /s/ W.E.S. - ---------- ---------- Seller's Buyer's Initials Initials 19 13. BROKERS. Buyer and Seller each hereby represent, warrant to and agree with each other that it has not had, and shall not have, any dealings with any third party to whom the payment of any broker's fee, finder's fee, commission or other similar compensation ("COMMISSION") shall or may become due or payable in connection with the transaction contemplated hereby, other than Leeds Equity Partners (the "BROKER"). Seller hereby agrees to pay any Commission due and payable to the Broker in connection with the transaction contemplated hereby pursuant to its separate agreement with the Broker. Seller shall indemnify, defend, protect and hold Buyer harmless from and against any and all claims, causes of action, demands, obligations, losses, damages, liabilities, judgments, costs and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) (collectively, "CLAIMS") incurred by Buyer by reason of any breach or inaccuracy of the representation, warranty and agreement of Seller contained in this Section 13. Buyer shall indemnify, defend, protect and hold Seller harmless from and against any and all Claims incurred by Seller by reason of any breach or inaccuracy of the representation, warranty and agreement of Buyer contained in this Section 13. The provisions of this Section 13 shall survive the Closing or earlier termination of this Agreement. 14. INDEMNIFICATION. 14.1 INDEMNIFICATION BY SELLER. Seller shall indemnify, defend and hold harmless Buyer and each of its predecessors and successors, members, managers, stockholders, employees, officers, directors, agents and representatives (collectively, the "BUYER INDEMNITEES") from and against, and pay or reimburse the Buyer Indemnitees for, any and all damages, liabilities, losses, claims, obligations, Liens, assessments, judgments, fines and penalties (collectively, "LOSSES") that any of them may suffer, incur or sustain, directly or indirectly, arising out of, attributable to, relating to or resulting from: (a) any inaccuracy in or breach of any representation and warranty made by the Seller in this Agreement; (b) any inaccuracy in or breach of any representation and warranty (without giving effect to any qualifiers or exceptions relating to knowledge, Seller's knowledge or materiality) made by Seller in this Agreement if such inaccuracy or breach, individually or together with all such inaccuracies or breaches, would reasonably be expected to have a material adverse effect on the value of Property, in each case by virtue of the failure of such representation or warranty to be true and correct (i) on and as of the Closing Date with the same effect as thought made on and as of the Closing Date (other than any such representation or warranty that speaks as of a specific date or time other than the Closing Date), or (ii) on and as of the date or time when made, in the case of any representation or warranty that speaks as of a specific date of time other than the Closing Date; and (c) any breach or nonperformance of any of the covenants or 20 other agreements made and to be performed by the Seller pursuant to this Agreement. 14.2 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold harmless Seller and each of its predecessors and successors, members, managers, stockholders, employees, officers, directors, agents and representatives (collectively, the "SELLER INDEMNITEES") from and against, and pay or reimburse the Seller Indemnitees for, any and all Losses that any of them may suffer, incur or sustain, directly or indirectly, arising out of, attributable to, relating to or resulting from: (a) any inaccuracy in or breach of any representation and warranty made by Buyer in this Agreement; and (b) any breach or nonperformance of any of the agreements made and to be performed by the Buyer pursuant to this Agreement. 14.3 MINIMUM LOSSES. No Buyer Indemnitee shall have any right to indemnification under Section 14.1 until aggregate Losses incurred by all Buyer Indemnitees would exceed $250,000 (the "INDEMNITY THRESHOLD"), after which there may only be recovered those Losses in excess of the Indemnity Threshold, subject to the conditions of this ARTICLE 14, including the limitations set forth in SECTION 14.4. 14.4 MAXIMUM INDEMNIFICATION. Seller shall not be obligated to provide indemnification pursuant to SECTION 14.2 exceeding, in the aggregate, the Indemnification Escrow Amount . Notwithstanding anything in this Agreement, any indemnification obligation of Seller under SECTION 14.1 shall be satisfied solely from the Indemnification Escrow Fund. 14.5 [INTENTIONALLY OMITTED]. 14.6 NOTICE; PROCEDURE FOR THIRD-PARTY CLAIMS. (a) Any Person entitled to indemnification under ARTICLE 14 (an "INDEMNIFIED PARTY") may seek indemnification for any Loss or potential Loss by giving written notice to the applicable party or parties from whom indemnification is sought (the "INDEMNIFYING PARTY") before, if applicable, the Expiration Date. Written notice to such Indemnifying Party of the existence of a claim shall be given by the Indemnified Party as soon as practicable after the Indemnified Party first receives notice of the potential claim, PROVIDED that any failure to provide such prompt notice of the existence of a claim to the applicable Indemnifying Party shall not affect the Indemnified Party's right to seek indemnification pursuant to this ARTICLE 14 except and only to the extent that such failure results in such Indemnifying Party actually incurring an expense or otherwise being prejudiced as a result of such delay. In the case of a claim involving a Third-Party Claim (as hereinafter defined), (i) the notice of claim shall describe in reasonable detail the facts known to the Indemnified Party giving rise to such indemnification claim and the amount, or good faith estimate of the amount, of Losses arising therefrom, and (ii) the Indemnified Party shall deliver to the Seller (if the Indemnified Party is a Buyer Indemnitee) or to Buyer (if the Indemnified Party is a Seller Indemnitee), as applicable, promptly after the Indemnified Party's receipt thereof, copies of all notices and 21 documents (including court papers) received by the Indemnified Party relating to such Third-Party Claim. (b) In the case of any claim asserted by a Person that is not a party to this Agreement against an Indemnified Party (a "THIRD-PARTY CLAIM"), the Indemnified Party shall permit the Indemnifying Party (at the expense of such Indemnifying Party) to assume the defense of such Third-Party Claim and any litigation or proceeding resulting therefrom; provided that (i) counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be reasonably satisfactory to the Indemnified Party and (ii) the Indemnified Party may participate in such defense at such Indemnified Party's expense. Notwithstanding the election of the Indemnifying Party to assume control of such defense, the Indemnified Party shall be entitled to retain or assume the defense of such Third-Party Claims (at such Indemnified Party's expense) if (A) the amount of Losses from such claim (x) if the Indemnified Party is a Buyer Indemnitee, could reasonably be expected to exceed, when aggregated with all other pending claims and unpaid claims for indemnification from such Indemnifying Party (together with, in the case of Seller as the Indemnifying Party, pending claims and unpaid claims for indemnification from each such other Indemnifying Party), the Indemnification Escrow Fund, and (y) if the Indemnified Party is a Seller Indemnitee, otherwise may not, in the good faith judgment of the Indemnified Party, be capable of being satisfied in full by such Indemnifying Party; (B) the claim for indemnification relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation that could reasonably be expected to adversely affect the business of Buyer; or (C) the Indemnified Party has been advised in writing by counsel that a conflict of interest exists between the Indemnifying Party and the Indemnified Party with respect to such claim (including the defense thereof). No Indemnifying Party, in the defense of any Third-Party Claim, shall consent to entry of any judgment or enter into any settlement without the consent of the Indemnified Party, which consent may be withheld in the Indemnified Party's sole discretion (unless the terms of such judgment or settlement include an unconditional full release of the Indemnified Party from all liability with respect to such Third-Party Claim and solely the payment of money and all such moneys shall be paid by the Indemnifying Party, in which case such consent shall not be unreasonably withheld). In the event that the Indemnifying Party does not accept the defense of any matter as above provided, the Indemnified Party shall have the right to defend against any such claim or demand, and shall be entitled to settle or agree to pay in full such claim or demand. In any event, the parties to this Agreement shall cooperate in the defense of any Third-Party Claim subject to this ARTICLE 14 and the records of each shall be made reasonably available to the other with respect to such defense. 14.7 SURVIVAL OF INDEMNITY. Any matter as to which a claim has been asserted in good faith by an Indemnified Parry, by formal notice satisfying the requirements of SECTION 14.7, and prior to the Expiration Date, that is pending or unresolved as of the Expiration Date, by law or otherwise shall continue to be covered by this ARTICLE 14 notwithstanding such limitation (which the parties hereby waive solely with respect to such circumstances), until such matter is finally terminated or otherwise resolved by the parties under this Agreement, by an arbitration or by a court of competent jurisdiction and any amounts payable hereunder are finally determined and paid. 22 14.8 NO CONSEQUENTIAL DAMAGES. Notwithstanding anything to the contrary contained in this Agreement, no person shall be liable to or otherwise responsible for consequential, incidental or punitive damages. 14.9 NO DOUBLE RECOVERY. Notwithstanding anything herein to the contrary, no Indemnified Party shall be entitled to indemnification under any provision of this Agreement for any amount to the extent such Indemnified Party has been indemnified or reimbursed for such amount under any other provision of this Agreement or any other agreement or action at law or equity or otherwise. 15. MISCELLANEOUS PROVISIONS 15.1 GOVERNING LAW. This Agreement and the legal relations between the parties hereto shall be governed by and construed and enforced in accordance with the laws of the State of Nevada, without regard to its principles of conflicts of law. Each of the parties hereto irrevocably consents to the jurisdiction and venue of any state or federal district court within Clark County, Nevada, in connection with any matter based upon or arising out of this Agreement or the transactions under this Agreement, agrees that process may be served upon them in any manner authorized by the laws of the or State of Nevada and waives and covenants not to assert or plead any objection that they might otherwise have to such jurisdiction, venue and process. 15.2 ENTIRE AGREEMENT. This Agreement, including the exhibits attached hereto, constitutes the entire agreement between Buyer and Seller pertaining to the subject matter hereof and supersedes all prior agreements, understandings, letters of intent, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other agreements, express or implied, made to either party by the other party in connection with the subject matter hereof except as specifically set forth herein or in the documents delivered pursuant hereto or in connection herewith. 15.3 AMENDMENT; WAIVER. This Agreement may not be amended except by an instrument in writing signed by the party against whom enforcement of any such amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by any other party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. 15.4 NOTICES. All notices and other communications hereunder ("NOTICES") shall be in writing and shall be deemed given (i) upon actual receipt by the recipient, if delivered personally, (ii) one Business Day after deposit with an overnight courier, as shown on the records of such overnight courier, if delivered by overnight courier or (iii) on the day of transmission if prior to 5:00 p.m. on a Business Day (or if such day is not a Business Day or if the transmission occurs after 5:00 p.m. on a Business Day, then on the next succeeding Business Day) if by facsimile and the sender receives electronic confirmation of receipt by the recipient, in each case to the parties at the 23 following addresses or facsimile numbers (or at such other address for a party as shall be specified by like notice): To Buyer: Morgans Group LLC Morgans Hotel Group Co. 475 Tenth Avenue, 11th Floor New York, New York 10018 Attention: W. Edward Scheetz Telephone: _________________ Facsimile: (212) 277-4260 With A Copy To: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Stephen G. Gellman, Esq. Adam O. Emmerich, Esq. Telephone: _________________ Facsimile: (212) 403-2000 To Seller: Red, White and Blue Pictures, Inc. 150 North Robertson Boulevard Los Angeles, California 90048-1738 Attention: Brian Ogaz Telephone: (310) 358-1710 Facsimile: (310) 652-8787 With A Copy To: Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Attention: Allan G. Mutchnik Telephone: (213) 687-5391 Facsimile: (213) 621-5391 And to: Gordon & Silver, Ltd 3960 Howard Hughes Parkway Ninth Floor Las Vegas, Nevada 89109 Attention: Kathryn G. Noall Telephone: (702) 796-5555 Facsimile: (702) 369-2666 24 To Escrow Agent: Chicago Title Agency of Nevada, Inc. 3980 Howard Hughes Parkway, Suite 100 Las Vegas, Nevada 89109 Attention: Kathryn Wonders, Esq. Telephone: (702) 836-8195 Facsimile: (702) 836-8027 All Notices given by facsimile shall be followed by the delivery of a hard copy of such Notice, provided that such Notice shall be deemed to have been given when received by facsimile. 15.5 EXPENSES. Subject to the provision for payment of the Closing Costs in accordance with the terms of Section 7.6 hereof and any other provision of this Agreement, whether or not the transaction contemplated by this Agreement shall be consummated, all fees and expenses incurred by any party hereto in connection with this Agreement shall be borne by such party. 15.6 ASSIGNMENT. Neither all nor any portion of either party's interest under this Agreement may be sold, assigned, encumbered, conveyed, or otherwise transferred, whether directly or indirectly, voluntarily or involuntarily, or by operation of law or otherwise (including, without limitation, by a transfer of interests in such party) (collectively, a "TRANSFER"), without the prior written consent of the other party hereto, which consent may be granted or denied in its sole and absolute discretion. Any attempted Transfer without such consent shall be null and void. No Transfer, whether with or without consent, shall operate to release the party requesting a Transfer or alter such party's primary liability to perform its obligations under this Agreement. Notwithstanding the foregoing, subject to Buyer's continuing primary liability to perform its obligations under this Agreement, Buyer may, upon prior written notice to Seller but without the necessity of obtaining Seller's consent, assign this Agreement to an Affiliate of Buyer. 15.7 SEVERABILITY. If any provision of this Agreement or the application of any such provision shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. In lieu of any such invalid, illegal or unenforceable provision, the parties hereto agree to negotiate in good faith to add to this Agreement a provision as similar in terms to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable. 15.8 SUCCESSORS AND ASSIGNS; THIRD PARTIES. Subject to and without waiver of the provisions of Section 15.6 hereof, all of the rights, duties, benefits, liabilities and obligations of the parties shall inure to the benefit of, and be binding upon, their respective successors and assigns. Except as specifically set forth or referred to herein, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or entity, other than the parties hereto and their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. 25 15.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 15.10 INTERPRETATION. For all purposes of this Agreement, except as otherwise expressly provided, (a) defined terms have the meanings assigned to them in this Agreement and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned under GAAP, as in effect on the date hereof, unless otherwise stated, (c) all references in this Agreement to designated Articles, Sections or Exhibits are to the designated Article, Section or Exhibit to this Agreement, unless otherwise indicated, and all Exhibits to this Agreement are incorporated herein by reference, (d) the headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement, (e) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (f) the words "TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT," "TRANSACTIONS UNDER THIS AGREEMENT," "TRANSACTIONS CONTEMPLATED HEREBY" and words of similar import mean the sale of the Property by Seller to Buyer pursuant to this Agreement and shall not be deemed or construed to include any of the transactions contemplated by the Other Transaction Documents; (g) the words "HEREIN," "HEREOF," "HEREWITH," "HEREUNDER" and "HERETO" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, and (h) the words "INCLUDE," "INCLUDING" and other words of similar import mean "INCLUDE, WITHOUT LIMITATION" or "INCLUDING, WITHOUT LIMITATION," regardless of whether any reference to "without limitation" or words of similar import is made. 15.11 [INTENTIONALLY OMITTED] 15.12 FURTHER ASSURANCES. In addition to the actions recited herein and contemplated to be performed, executed, and/or delivered by Seller and Buyer, Seller and Buyer agree to perform, execute and/or deliver or cause to be performed, executed and/or delivered at the Closing or after the Closing any and all such further acts, instruments, deeds and assurances as may be reasonably required to consummate the transaction 26 contemplated hereby. 15.13 NUMBER AND GENDER. Whenever the singular number is used, and when required by the context, the same includes the plural, and the masculine gender includes the feminine and neuter genders. 15.14 MUTUAL DRAFTING. Each party hereto has participated in the drafting of this Agreement, which each party acknowledges is the result of extensive negotiations between the parties. In the event any ambiguity or question of intent arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 15.15 EXHIBITS. All exhibits attached hereto are hereby incorporated by reference as though set out in full herein. 15.16 ATTORNEYS' FEES. In the event that either party hereto brings an action or proceeding against the other party to enforce or interpret any of the covenants, conditions, agreements or provisions of this Agreement, the prevailing party in such action or proceeding shall be entitled to recover all costs and expenses of such action or proceeding, including, without limitation, attorneys' fees, charges, disbursements and the fees and costs of expert witnesses. 15.17 BUSINESS DAYS. As used herein, the term "BUSINESS DAY" shall mean a day that is not a Saturday, Sunday, federal holiday or legal holiday in Clark County, Nevada. In the event that the date for the performance of any covenant or obligation under this Agreement shall fall on a Saturday, Sunday or legal holiday, the date for performance thereof shall be extended to the next Business Day. 15.18 EARLY TERMINATION. In the event that this Agreement is terminated pursuant to the terms hereof, this Agreement and all of the provisions hereof shall be of no further force or effect and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. 15.19 CONFIDENTIALITY. Each of Buyer and Seller acknowledges that the information being provided to Buyer and its representatives by the Seller is subject to the terms of a confidentiality agreement, dated April 20, 2006, among HRH, Peter A. Morton, HR Condominium Investors (Vegas), L.L.C., a Delaware limited liability company, PMR and Merger Parent. In the event that the Closing hereunder shall not occur, Buyer shall promptly return to Seller all due diligence materials delivered by Seller to Buyer and shall destroy all copies and abstracts thereof. 15.20 [Intentionally Omitted] 15.21 SECTION 1031 EXCHANGE. Seller or Buyer may consummate the sale of the Property as part of a like-kind exchange intended to qualify under Section 1031 of the Internal Revenue Code of 1986, as amended (an "EXCHANGE"), at such party's sole 27 cost and expense, provided in no event shall the Closing be affected or delayed by reason thereby; provided further neither party shall be obligated to take title to a contract to the purchase of any other property, to expend any funds or to incur any direct or contingent liability in connection with the other party's Exchange. 15.22 ARBITRATION Any dispute that may arise between the Indemnified Parties and the Indemnifying Parties (collectively, the "PARTIES" and each, a "PARTY") with respect to the performance, interpretation or enforcement of this Agreement (other than a dispute in which specific performance is sought under the terms of Section 12.2) shall be submitted to arbitration conducted in Los Angeles, California pursuant to the rules and procedures of the American Arbitration Association, and, to the maximum extent applicable, the Federal Arbitration Act (Title 9 of the United States Code). The arbitrator shall be a retired judge of the Federal District Court, or some similarly qualified, mutually agreeable individual. The arbitration of such issues shall be final and binding upon the Parties. The arbitrator shall be entitled to impose sanctions and to take such other actions as the arbitrator deems necessary to the same extent as a judge could under the Federal Rules of Civil Procedure and applicable law. Notwithstanding the foregoing, the arbitrator shall not be authorized to award punitive damages with respect to any dispute(s) arising under this Agreement, nor shall any Party seek punitive damages relating to any such dispute(s) in any other forum. The cost of any arbitration hereunder, including the cost, if any, of the record or transcripts thereof, administrative fees, and all other fees involved, including reasonable attorneys' fees incurred by the party determined by the arbitrator to be the prevailing party, shall be paid by the party determined by the arbitrator not to be the prevailing party. The parties to the arbitration shall instruct the arbitrator to render its decision no later than sixty (60) days after the submission of the dispute(s). 28 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BUYER: MORGANS GROUP LLC, a Delaware limited liability company By: Morgans Hotel Group Co., a Delaware corporation, its Managing Member By: /s/ W. Edward Scheetz -------------------------------- Name: W. Edward Scheetz Title: Chief Executive Officer SELLER: RED, WHITE AND BLUE PICTURES, INC. a California corporation By: /s/ Peter A. Morton -------------------------------- Name: Peter A. Morton Title: ESCROW AGENT: The undersigned Escrow Agent hereby accepts the foregoing Purchase and Sale Agreement and Joint Escrow Instructions and agrees to act as Escrow Agent under this Agreement in strict accordance with its terms. CHICAGO TITLE AGENCY OF NEVADA, INC., a Nevada corporation By: /s/ Kathryn S. Wonders -------------------------------- Name: Kathryn S. Wonders Title: Assistant Vice President and Legal Counsel EX-10.3 5 hrcondopurchasesale1.txt EXHIBIT 10.3 PURCHASE AND SALE AGREEMENT DATED MAY 11, 2006, BY AND BETWEEN MORGANS GROUP LLC AS BUYER, AND HR CONDOMINIUM INVESTORS (VEGAS), L.L.C. AS SELLER TABLE OF CONTENTS PAGE 1. PURCHASE AND SALE.............................................1 2. PURCHASE PRICE................................................1 3. PRE-EXECUTION ACTIONS.........................................1 3.1 As Is, Where Is.........................................1 4. CONDITIONS TO CLOSING.........................................2 4.1 Buyer's Closing Conditions..............................2 4.2 Failure of Buyer's Closing Conditions...................3 4.3 Seller's Closing Conditions.............................3 4.4 Failure of Seller's Closing Conditions..................3 5. CLOSING.......................................................4 5.1 Closing Date............................................4 5.2 Deliveries by Seller....................................4 5.3 Deliveries by Buyer.....................................4 5.4 Closing Costs...........................................5 6. SELLER'S REPRESENTATIONS AND WARRANTIES.......................5 6.1 Due Organization........................................5 6.2 Seller's Authority; Validity of Agreements..............5 6.3 No Other Representations or Warranties; Survival........5 7. BUYER'S REPRESENTATIONS AND WARRANTIES........................5 7.1 Due Organization........................................6 7.2 Buyer's Authority; Validity of Agreements...............6 7.3 Survival................................................6 8. ADDITIONAL COVENANTS AND AGREEMENTS...........................6 8.1 As-Is...................................................6 8.2 [Intentionally Omitted].................................8 8.3 Cross Termination.......................................8 9. BROKERS.......................................................8 10. REMEDIES......................................................9 11. NO ASSUMPTION OF LIABILITIES BY BUYER.........................9 12. MISCELLANEOUS PROVISIONS......................................9 12.1 Governing Law...........................................9 12.2 Entire Agreement........................................9 12.3 Amendment; Waiver......................................10 12.4 Notices................................................10 i 12.5 Expenses...............................................11 12.6 Assignment.............................................11 12.7 Severability...........................................11 12.8 Successors and Assigns; Third Parties..................11 12.9 Counterparts...........................................12 12.10 Interpretation.........................................12 12.11 Further Assurances.....................................12 12.12 Number and Gender......................................13 12.13 Mutual Drafting........................................13 12.14 Exhibits...............................................13 12.15 Attorneys' Fees........................................13 12.16 Business Days..........................................13 12.17 Early Termination......................................13 12.18 Confidentiality........................................13 12.19 Arbitration............................................13 LIST OF EXHIBITS...................................................17 ii PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "AGREEMENT") is made and entered into as of May 11, 2006 (the "EXECUTION DATE"), by and between MORGANS GROUP LLC, a Delaware limited liability company ("BUYER"), and HR CONDOMINIUM INVESTORS (VEGAS), L.L.C., a Delaware limited liability company ("SELLER"). R E C I T A L S A. Seller has pursued the potential development of a project on certain real property located at 4185 Paradise Road, in Paradise Township, County of Clark, State of Nevada and owned by PM Realty, LLC, a Nevada limited-liability company ("PMR"), and as a result of pursuing such potential development, Seller may be the owner of certain assets relating to the proposed development, as more particularly described on EXHIBIT A attached hereto (the "ASSETS"). B. Seller desires to sell, transfer and convey all of its right, title and interest, if any, in and to the Transferable Assets (hereinafter defined) to Buyer, and Buyer desires to purchase and acquire the Transferable Assets from Seller, upon and subject to the terms and conditions set forth in this Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree as follows: 1. PURCHASE AND SALE. Subject to all of the terms and conditions of this Agreement, Seller agrees to sell, transfer and convey to Buyer, and Buyer agrees to purchase and acquire from Seller, Seller's right, title and interest, if any, in and to such of the Assets as Seller is permitted to transfer to Buyer or to any third party without breaching any restrictions on the sale, assignment or transfer of such Assets (the "TRANSFERABLE ASSETS"), upon and subject to the terms and conditions set forth herein. 2. PURCHASE PRICE. The purchase price of the Assets (the "PURCHASE PRICE") shall equal One Million Dollars ($1,000,000.00). At the Closing, Buyer shall pay to Seller the Purchase Price by wire transfer of immediately available federal funds. 3. PRE-EXECUTION ACTIONS. 3.1 AS IS, WHERE IS. On or prior to the Execution Date, Buyer has reviewed all documents and materials relating to the Assets that it deems appropriate or necessary, and has performed any investigations and studies of the Assets that it deemed appropriate or necessary, and Buyer is satisfied with all of the foregoing. By its execution hereof, Buyer hereby accepts the Transferable Assets in their present "AS IS, WHERE IS" condition "WITH ALL FAULTS," and acknowledges that it has been afforded the opportunity to make any and all inspections of the Assets and such related matters as Buyer has desired and, accordingly, except as expressly set forth in Section 6 hereof, Buyer will rely solely on its own due diligence and investigations in purchasing the Transferable Assets. 4. CONDITIONS TO CLOSING. 4.1 BUYER'S CLOSING CONDITIONS. The obligation of Buyer to complete the transaction contemplated by this Agreement is subject to the following conditions precedent (and conditions concurrent, with respect to deliveries to be made by the parties at the Closing) (the "BUYER'S CLOSING CONDITIONS"), which conditions may be waived, or the time for satisfaction thereof extended, by Buyer only in a writing executed by Buyer: 4.1.1 SELLER'S DUE PERFORMANCE. All of the representations and warranties of Seller set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date, and Seller, on or prior to the Closing Date, shall have complied with and/or performed in all material respects all of the obligations, covenants and agreements required on the part of Seller to be complied with or performed pursuant to the terms of this Agreement. 4.1.2 BANKRUPTCY. No action or proceeding shall have been commenced by or against Seller under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors, and no attachment, execution, lien or levy shall have attached to or been issued with respect to Seller's interest in the Assets or any portion thereof. 4.1.3 DELIVERIES. Seller shall have delivered to Buyer such documents or instruments as are required to be delivered by Seller pursuant to the terms of this Agreement. 4.1.4 OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. For purposes hereof, "OTHER TRANSACTION CLOSINGS" shall mean (i) the "Closing," as such term is defined in Section 1.3 of the Agreement and Plan of Merger, dated as of the date hereof (the "MERGER AGREEMENT"), by and among Hard Rock Hotel, Inc., a Nevada corporation ("HRH") , Morgans Hotel Group Co., a Delaware corporation ("MERGER PARENT"), and MHG HR Acquisition Corp., a Nevada corporation, (ii) the "Closing," as such term is defined in Section 7.1 of the Purchase and Sale Agreement and Joint Escrow Instructions, dated as of the date hereof (the "PMR ASSET PURCHASE AGREEMENT"), by and between PM Realty, LLC, a Nevada limited-liability company, and Buyer, (iii) the execution of the Trademark Agreement, to be dated as of the Closing, by and between Peter A. Morton and HRH (the "TRADEMARK AGREEMENT"), (iv) the execution of the License Agreement, to be dated as of the Closing, by and between Peter A. Morton and Merger Parent (the "LICENSE AGREEMENT"), and (v) the execution of the "Morton Trademark Assignment" (as defined in the Merger 2 Agreement) (the "MORTON TRADEMARK ASSIGNMENT" and, together with the Merger Agreement, the PMR Asset Purchase Agreement and the License Agreement, the "OTHER TRANSACTION AGREEMENTS"). 4.2 FAILURE OF BUYER'S CLOSING CONDITIONS. If any of Buyer's Closing Conditions have not been fulfilled on or prior to the "Outside Closing Date" (as defined herein), Buyer may: 4.2.1 waive any such unfulfilled Buyer's Closing Condition and proceed in accordance with this Agreement, without adjustment or abatement of the Purchase Price; or 4.2.2 terminate this Agreement by written notice to Seller. 4.3 SELLER'S CLOSING CONDITIONS. The obligation of Seller to complete the transaction contemplated by this Agreement is subject to the following conditions precedent (and conditions concurrent, with respect to deliveries to be made by the parties at the Closing) (the "SELLER'S CLOSING CONDITIONS"), which conditions may be waived, or the time for satisfaction thereof extended, by Seller only in a writing executed by Seller: 4.3.1 BUYER'S DUE PERFORMANCE. All of the representations and warranties of Buyer set forth in this Agreement shall be true, correct and complete in all material respects as of the Closing Date, and Buyer, on or prior to the Closing Date, shall have complied with and/or performed in all material respects all of the obligations, covenants and agreements required on the part of Buyer to be complied with or performed pursuant to the terms of this Agreement. 4.3.2 BANKRUPTCY. No action or proceeding shall have been commenced by or against Buyer under the federal bankruptcy code or any state law for the relief of debtors or for the enforcement of the rights of creditors. 4.3.3 DELIVERIES. Buyer shall have delivered to Seller such documents or instruments as are required to be delivered by Buyer pursuant to the terms of this Agreement. 4.3.4 OTHER TRANSACTION CLOSINGS. All conditions to each of the Other Transaction Closings shall have been satisfied or, if permissible, waived by the party entitled to make such a waiver, and each of the Other Transaction Closings shall occur simultaneously with the Closing. 4.4 FAILURE OF SELLER'S CLOSING CONDITIONS. If any of the Seller's Closing Conditions have not been fulfilled on or prior to the Outside Closing Date, Seller may: 4.4.1 waive any such unfulfilled Seller's Closing Condition and proceed in accordance with this Agreement, without adjustment or abatement of the Purchase Price; or 3 4.4.2 terminate this Agreement by written notice to Buyer. 5. CLOSING. 5.1 CLOSING DATE. Subject to the provisions of this Agreement, the Closing shall take place at a time and on a date specified by the parties, which shall be no later than the fifth Business Day (hereinafter defined) after satisfaction or waiver of the conditions set forth in Sections 4.1 and 4.3 (other than those conditions, including the occurrence of the Other Transaction Closings, that by their nature are to be satisfied at the Closing, but subject to fulfillment or waiver of those conditions, it being the intention of Buyer and Seller that the Closing and the Other Transaction Closings occur concurrently) at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019-6150, or at such other time, date, or place as agreed to in writing by the parties hereto. As used herein, the following terms shall have the following meanings: (a) the "CLOSING" shall mean the transfer of the Transferable Assets pursuant to this Agreement; (b) the "CLOSING DATE" shall mean the date upon which the Closing actually occurs; and (c) the "OUTSIDE CLOSING DATE" shall mean the earlier of (x) seven (7) Business Days following Merger Parent's receipt of Gaming Approvals (as defined in the Merger Agreement) and (y) February 11, 2007 (or such later date as is agreed to by Seller). 5.2 DELIVERIES BY SELLER. On or before the Closing Date, Seller, at its sole cost and expense, shall deliver or cause to be delivered to the Buyer the Transferable Assets, pursuant to the following instruments to be executed and delivered by Seller at the Closing: 5.2.1 BILL OF SALE. Four (4) original executed counterparts of a bill of sale and assignment in the form of EXHIBIT "B" attached hereto (the "BILL OF SALE"), pursuant to which Seller shall transfer to Buyer all of the Transferable Assets; 5.2.2 PROOF OF AUTHORITY. Such proof of Seller's authority and authorization to enter into this Agreement and the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing or delivering any instruments, documents or certificates on behalf of Seller to act for and bind Seller as may be reasonably required by Buyer; and 5.2.3 OTHER. Such other documents and instruments, signed and properly acknowledged by Seller, if appropriate, as may be reasonably required by Buyer in order to effectuate the provisions of this Agreement and the Closing of the transaction contemplated herein. 5.3 DELIVERIES BY BUYER. On or before the Closing Date, Buyer, at its sole cost and expense, shall deliver or cause to be delivered to Seller the following funds, documents and instruments, each dated as of the Closing Date, in addition to all other items and payments required by this Agreement to be delivered by Buyer at the Closing: 5.3.1 PURCHASE PRICE. Cash in an amount equal to the sum of the Purchase Price; 4 5.3.2 [INTENTIONALLY OMITTED] 5.3.3 PROOF OF AUTHORITY. Such proof of Buyer's authority and authorization to enter into this Agreement and the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing or delivering any instruments, documents or certificates on behalf of Buyer to act for and bind Buyer as may be reasonably required by Seller; and 5.3.4 OTHER. Such other documents and instruments, signed and properly acknowledged by Buyer, if appropriate, as may reasonably be required by Seller in order to effectuate the provisions of this Agreement and the Closing of the transaction contemplated herein. 5.4 CLOSING COSTS. Each party shall pay its own costs and expenses arising in connection with the Closing (including, without limitation, its own attorneys' and advisors' fees, charges and disbursements), except that all documentary transfer, stamp, sales and other taxes related to the transfer of the Transferable Assets, which shall be paid by Buyer. 6. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to and agrees with Buyer, as of the Execution Date and as of the Closing Date, as follows: 6.1 DUE ORGANIZATION. Seller is a limited-liability company duly organized and existing in good standing under the laws of the State of Delaware. 6.2 SELLER'S AUTHORITY; VALIDITY OF AGREEMENTS. Seller has full right, power and authority to sell all of its right, title and interest, if any, in and to the Transferable Assets, to Buyer as provided in this Agreement and to carry out its obligations hereunder. The individual(s) executing this Agreement and the instruments referenced herein on behalf of Seller have the legal power, right and actual authority to bind Seller to the terms hereof and thereof. This Agreement is, and all other instruments, documents and agreements to be executed and delivered by Seller in connection with this Agreement shall be, duly authorized, executed and delivered by Seller and shall be valid, binding and enforceable obligations of Seller (except as enforcement may be limited by bankruptcy, insolvency or similar laws). 6.3 NO OTHER REPRESENTATIONS OR WARRANTIES; SURVIVAL. Other than the representations and warranties expressly set forth in this Section 6, Seller shall not be deemed to have made any other representation or warranty in connection with this Agreement or the transactions contemplated hereby and no other person (including any officer, director, employee, stockholder, or Affiliate of Seller) shall be deemed to have made any representation or warranty in connection with this Agreement or the transactions contemplated hereby. The representations and warranties of Seller set forth in this Agreement shall not survive the delivery of the Transferred Assets and the Closing. 7. BUYER'S REPRESENTATIONS AND WARRANTIES.Buyer represents and 5 warrants to Seller, as of the Execution Date and as of the Closing Date, as follows: 7.1 DUE ORGANIZATION. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. 7.2 BUYER'S AUTHORITY; VALIDITY OF AGREEMENTS. Buyer has full right, power and authority to purchase and acquire all of Seller's right, title and interest, if any, in the Transferred Assets from Seller as provided in this Agreement and to carry out its obligations hereunder. The individual(s) executing this Agreement and the instruments referenced herein on behalf of Buyer have the legal power, right and actual authority to bind Buyer to the terms hereof and thereof. This Agreement is, and all instruments, documents and agreements to be executed and delivered by Buyer in connection with this Agreement shall be, duly authorized, executed and delivered by Buyer and shall be valid, binding and enforceable obligations of Buyer (except as enforcement may be limited by bankruptcy, insolvency or similar laws) and do not, and as of the Closing Date will not, violate any provision of any agreement or judicial order to which Buyer is a party or to which Buyer is subject. 7.3 SURVIVAL. The representations and warranties of Buyer set forth in this Agreement shall not survive the delivery of the Transferred Assets and the Closing. 8. ADDITIONAL COVENANTS AND AGREEMENTS. 8.1 AS-IS. THE PARTIES HEREBY ACKNOWLEDGE AND AGREE AS FOLLOWS: (A) BUYER IS A SOPHISTICATED PURCHASER WHO IS FAMILIAR WITH THE TRANSFERRED ASSETS BEING TRANSFERRED HEREUNDER; AND (B) EXCEPT AS MAY BE SPECIFICALLY SET FORTH IN THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, IN SECTION 6 HEREOF, NEITHER SELLER NOR ANY OF ITS AGENTS, REPRESENTATIVES, BROKERS, OFFICERS, DIRECTORS, SHAREHOLDERS, OR EMPLOYEES HAS MADE OR WILL MAKE ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE ASSETS. THE TRANSFERRED ASSETS ARE BEING SOLD TO BUYER IN ITS PRESENT "AS IS, WHERE IS" CONDITION "WITH ALL FAULTS." BUYER ACKNOWLEDGES THAT IT HAS BEEN AFFORDED THE OPPORTUNITY TO MAKE ANY AND ALL INSPECTIONS OF THE ASSETS AND SUCH RELATED MATTERS AS BUYER HAS DESIRED AND, ACCORDINGLY, EXCEPT AS MAY BE SPECIFICALLY SET FORTH TO THE CONTRARY HEREIN, BUYER WILL RELY SOLELY ON ITS OWN DUE DILIGENCE AND INVESTIGATIONS IN PURCHASING THE TRANSFERABLE ASSETS. 6 SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 8.1, AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. /s/ P.M. /s/ W.E.S. - ---------- ---------- Seller's Buyer's Initials Initials 7 8.2 [INTENTIONALLY OMITTED]. 8.3 CROSS TERMINATION. If the Merger Agreement and/or the PMR Asset Purchase Agreement is terminated in accordance with the terms thereof, then unless Buyer and Seller shall otherwise expressly agree in writing, this Agreement shall automatically terminate, and this Agreement and all of the provisions hereof shall be void and of no further force or effect (except that Section 9 shall survive the termination of this Agreement), and neither party shall have any further rights or obligations hereunder. 9. BROKERS. Buyer and Seller each hereby represent, warrant to and agree with each other that it has not had, and shall not have, any dealings with any third party to whom the payment of any broker's fee, finder's fee, commission or other similar compensation ("COMMISSION") shall or may become due or payable in connection with the transaction contemplated hereby, other than Leeds Equity Partners (the "BROKER"). Seller hereby agrees to pay any Commission due and payable to the Broker in connection with the transaction contemplated hereby pursuant to its separate agreement with the Broker. Seller shall indemnify, defend, protect and hold Buyer harmless from and against any and all claims, causes of action, demands, obligations, losses, damages, liabilities, judgments, costs and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) (collectively, "CLAIMS") incurred by Buyer by reason of any breach or inaccuracy of the representation, warranty and agreement of Seller contained in this Section 9. Buyer shall indemnify, defend, protect and hold Seller harmless from and against any and all Claims incurred by Seller by reason of any breach or inaccuracy of the representation, warranty and agreement of Buyer contained in this Section 9. The provisions of this Section 9 shall survive the Closing or earlier termination of this Agreement. 8 10. REMEDIES. In the event that the Other Transaction Closings have occurred and the transaction contemplated by this Agreement fails to close as a result of the default of the Seller in the performance of its obligations under this Agreement, Buyer as its sole and exclusive remedies hereunder may (i) terminate this Agreement and the rights and obligations of Buyer and Seller hereunder, or (ii) pursue the remedy of specific performance against Seller. In the event that the transaction contemplated by this Agreement fails to close as a result of the default of Buyer in the performance of its obligations under this Agreement, Seller as its sole and exclusive remedy hereunder may terminate this Agreement, and the rights and obligations of Buyer and Seller hereunder. Nothing contained in this Section 10 shall affect the obligations of the parties under Sections 9 and 12.15 hereof, and those rights and obligations that, by their terms, survive the termination of this Agreement. 11. NO ASSUMPTION OF LIABILITIES BY BUYER. Notwithstanding anything to the contrary in this Agreement, in no event shall Seller transfer or be deemed to transfer to Buyer under this Agreement, and in no event shall Buyer assume or be deemed to assume hereunder, any costs, expenses, fees, charges, payments, damages, obligations or other liabilities whatsoever (collectively, "Liabilities") with respect to, arising under or in connection with any Asset, and all such Liabilities are retained by, and are and subsequent to the Closing shall remain the sole and exclusive responsibility and obligation of Seller. Seller and Buyer further confirm agree that Buyer is the purchaser solely of the Transferred Assets, and in no event shall Buyer be or be deemed to be an assignee of or successor to any operation, business, venture or project of Seller, including without limitation, the proposed or contemplated design, development, financing, marketing and/or sale of condominium units at the Property pursuant to action previously undertaken by Seller. 12. MISCELLANEOUS PROVISIONS. 12.1 GOVERNING LAW. This Agreement and the legal relations between the parties hereto shall be governed by and construed and enforced in accordance with the laws of the State of Nevada, without regard to its principles of conflicts of law. Each of the parties hereto irrevocably consents to the jurisdiction and venue of any state or federal district court within Clark County, Nevada, in connection with any matter based upon or arising out of this Agreement or the transactions under this Agreement, agrees that process may be served upon them in any manner authorized by the laws of the or State of Nevada and waives and covenants not to assert or plead any objection that they might otherwise have to such jurisdiction, venue and process. 12.2 ENTIRE AGREEMENT. This Agreement, including the exhibits attached hereto, constitutes the entire agreement between Buyer and Seller pertaining to the subject matter hereof and supersedes all prior agreements, understandings, letters of intent, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other agreements, express or implied, made to either party by the other party in connection with the subject matter hereof except as specifically set forth herein or in the documents delivered pursuant hereto or in connection herewith. 9 12.3 AMENDMENT; WAIVER. This Agreement may not be amended except by an instrument in writing signed by the party against whom enforcement of any such amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by any other party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. 12.4 NOTICES. All notices and other communications hereunder ("NOTICES") shall be in writing and shall be deemed given (i) upon actual receipt by the recipient, if delivered personally, (ii) one Business Day after deposit with an overnight courier, as shown on the records of such overnight courier, if delivered by overnight courier or (iii) on the day of transmission if prior to 5:00p.m. on a Business Day (or if such day is not a Business Day or if the transmission occurs after 5:00p.m. on a Business Day, then on the next succeeding Business Day) if by facsimile and the sender receives electronic confirmation of receipt by the recipient, in each case to the parties at the following addresses or facsimile numbers (or at such other address for a party as shall be specified by like notice): To Buyer: Morgans Group LLC c/o Morgans Hotel Group Co. 475 Tenth Avenue, 11th Floor New York, New York 10018 Attention: W. Edward Scheetz Telephone: ------------------- Facsimile: (212) 277-4260 With A Copy To: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Stephen G. Gellman, Esq. Adam O. Emmerich, Esq. Telephone: ------------------- Facsimile: (212) 403-2000 To Seller: HR Condominium Investors (Vegas), L.L.C. 510 North Robertson Boulevard Los Angeles, California 90048-1738 Attention: Brian Ogaz Telephone: (310) 358-1710 Facsimile: (310) 652-8787 With A Copy To: Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Attention: Allan G. Mutchnik Telephone: (213) 687-5391 10 Facsimile: (213) 621-5391 And to: Gordon & Silver, Ltd 3960 Howard Hughes Parkway Ninth Floor Las Vegas, Nevada 89109 Attention: Kathryn G. Noall Telephone: (702) 796-5555 Facsimile: (702) 369-2666 All Notices given by facsimile shall be followed by the delivery of a hard copy of such Notice, provided that such Notice shall be deemed to have been given when received by facsimile. 12.5 EXPENSES. Subject to the provision for payment of the closing costs in accordance with the terms of Section 5.4 hereof and any other provision of this Agreement, whether or not the transaction contemplated by this Agreement shall be consummated, all fees and expenses incurred by any party hereto in connection with this Agreement shall be borne by such party. 12.6 ASSIGNMENT. Neither all nor any portion of either party's interest under this Agreement may be sold, assigned, encumbered, conveyed, or otherwise transferred, whether directly or indirectly, voluntarily or involuntarily, or by operation of law or otherwise (including, without limitation, by a transfer of interests in such party) (collectively, a "TRANSFER"), without the prior written consent of the other party hereto, which consent may be granted or denied in its sole and absolute discretion. Any attempted Transfer without such consent shall be null and void. No Transfer, whether with or without consent, shall operate to release the party requesting a Transfer or alter such party's primary liability to perform its obligations under this Agreement. Notwithstanding the foregoing, subject to Buyer's continuing primary liability to perform its obligations under this Agreement, Buyer may, upon prior written notice to Seller but without the necessity of obtaining Seller's consent, assign this Agreement to an Affiliate of Buyer. 12.7 SEVERABILITY. If any provision of this Agreement or the application of any such provision shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. In lieu of any such invalid, illegal or unenforceable provision, the parties hereto agree to negotiate in good faith to add to this Agreement a provision as similar in terms to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable. 12.8 SUCCESSORS AND ASSIGNS; THIRD PARTIES. Subject to and without waiver of the provisions of Section 12.6 hereof, all of the rights, duties, benefits, liabilities and obligations of the parties shall inure to the benefit of, and be binding upon, their respective successors and assigns. Except as specifically set forth or referred to herein, nothing herein expressed or implied is intended or shall be construed to confer 11 upon or give to any person or entity, other than the parties hereto and their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. 12.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 12.10 INTERPRETATION. For all purposes of this Agreement, except as otherwise expressly provided, (a) defined terms have the meanings assigned to them in this Agreement and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned under GAAP, as in effect on the date hereof, unless otherwise stated, (c) all references in this Agreement to designated Articles, Sections or Exhibits are to the designated Article, Section or Exhibit to this Agreement, unless otherwise indicated, and all Exhibits to this Agreement are incorporated herein by reference, (d) the headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement, (e) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (f) the words "TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT," "TRANSACTIONS UNDER THIS AGREEMENT," "TRANSACTIONS CONTEMPLATED HEREBY" and words of similar import mean the sale of the Property by Seller to Buyer pursuant to this Agreement and shall not be deemed or construed to include any of the transactions contemplated by the Other Transaction Documents; (g) the words "HEREIN," "HEREOF," "HEREWITH," "HEREUNDER" and "HERETO" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, and (h) the words "INCLUDE," "INCLUDING" and other words of similar import mean "INCLUDE, WITHOUT LIMITATION" or "INCLUDING, WITHOUT LIMITATION," regardless of whether any reference to "without limitation" or words of similar import is made. 12.11 FURTHER ASSURANCES. In addition to the actions recited herein and contemplated to be performed, executed, and/or delivered by Seller and Buyer, Seller and Buyer agree to perform, execute and/or deliver or cause to be performed, executed and/or delivered at the Closing or after the Closing any and all such further acts, instruments, 12 deeds and assurances as may be reasonably required to consummate the transaction contemplated hereby. 12.12 NUMBER AND GENDER. Whenever the singular number is used, and when required by the context, the same includes the plural, and the masculine gender includes the feminine and neuter genders. 12.13 MUTUAL DRAFTING. Each party hereto has participated in the drafting of this Agreement, which each party acknowledges is the result of extensive negotiations between the parties. In the event any ambiguity or question of intent arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 12.14 EXHIBITS. All exhibits attached hereto are hereby incorporated by reference as though set out in full herein. 12.15 ATTORNEYS' FEES. In the event that either party hereto brings an action or proceeding against the other party to enforce or interpret any of the covenants, conditions, agreements or provisions of this Agreement, the prevailing party in such action or proceeding shall be entitled to recover all costs and expenses of such action or proceeding, including, without limitation, attorneys' fees, charges, disbursements and the fees and costs of expert witnesses. 12.16 BUSINESS DAYS. As used herein, the term "BUSINESS DAY" shall mean a day that is not a Saturday, Sunday, federal holiday or legal holiday in Clark County, Nevada. In the event that the date for the performance of any covenant or obligation under this Agreement shall fall on a Saturday, Sunday or legal holiday, the date for performance thereof shall be extended to the next Business Day. 12.17 EARLY TERMINATION. In the event that this Agreement is terminated pursuant to the terms hereof, this Agreement and all of the provisions hereof shall be of no further force or effect and neither party shall have any further rights or obligations hereunder, other than pursuant to any provision hereof which expressly survives the termination of this Agreement. 12.18 CONFIDENTIALITY. Each of Buyer and Seller acknowledges that the information being provided to Buyer and its representatives by the Seller is subject to the terms of a confidentiality agreement, dated April 20, 2006, among HRH, Peter A. Morton, PMR, Seller and Merger Parent. In the event that the Closing hereunder shall not occur, Buyer shall promptly return to Seller all due diligence materials delivered by Seller to Buyer and shall destroy all copies and abstracts thereof. 12.19 ARBITRATION. Any dispute that may arise between the parties with respect to the performance, interpretation or enforcement of this Agreement shall be submitted to arbitration conducted in Los Angeles, California pursuant to the rules and procedures of the American Arbitration Association, and, to the maximum extent applicable, the Federal Arbitration Act (Title 9 of the United States Code). The arbitrator 13 shall be a retired judge of the Federal District Court, or some similarly qualified, mutually agreeable individual. The arbitration of such issues shall be final and binding upon the parties. The arbitrator shall be entitled to impose sanctions and to take such other actions as the arbitrator deems necessary to the same extent as a judge could under the Federal Rules of Civil Procedure and applicable law. Notwithstanding the foregoing, the arbitrator shall not be authorized to award punitive damages with respect to any dispute(s) arising under this Agreement, nor shall any party seek punitive damages relating to any such dispute(s) in any other forum. The cost of any arbitration hereunder, including the cost, if any, of the record or transcripts thereof, administrative fees, and all other fees involved, including reasonable attorneys' fees incurred by the party determined by the arbitrator to be the prevailing party, shall be paid by the party determined by the arbitrator not to be the prevailing party. The parties to the arbitration shall instruct the arbitrator to render its decision no later than sixty (60) days after the submission of the dispute(s). [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY] 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BUYER: MORGANS GROUP LLC, a Delaware limited liability company By: Morgans Hotel Group Co., a Delaware corporation, its Managing Member By: /s/ W. Edward Scheetz ------------------------------- Name: W. Edward Scheetz Title: Chief Executive Officer SELLER: HR CONDOMINIUM INVESTORS (VEGAS), L.L.C., a Delaware limited liability company By: PM Realty, LLC, a Nevada limited-liability company By: /s/ Peter A. Morton ------------------------------------ Name: Peter A. Morton Title: Manager EX-10.4 6 firstamendment.txt EXHIBIT 10.4 FIRST AMENDMENT TO MORGANS LAS VEGAS, LLC LIMITED LIABILITY COMPANY AGREEMENT THIS FIRST AMENDMENT ("Amendment") made effective as of the 15th day of May, 2006 ("Effective Date"), by and between MORGANS/LV INVESTMENT LLC, a Delaware limited liability company ("Morgans"), and ECHELON RESORTS CORPORATION, a Nevada corporation ("Boyd"). Morgans and Boyd may hereinafter be referred to singularly as a "Party" or "Member" or collectively as the "Parties" and the "Members". W I T N E S S E T H: WHEREAS, Morgans and Boyd entered into a certain Limited Liability Company Agreement, dated January 3, 2006, for the formation of the Company (the "Operating Agreement"). WHEREAS, each of the Members desire to enter into this Amendment to amend the Operating Agreement upon the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the mutual promises of the Members and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members agree as follows: A. INCORPORATION OF RECITALS/DEFINITIONS. The foregoing recitals are hereby incorporated herein and made a part hereof as if fully set forth herein. Unless specifically defined herein, all defined terms used in this Amendment shall have the same meanings as those set forth in the Operating Agreement. B. OPERATIVE AMENDMENTS. 1. DEFINITIONS. The following definitions are hereby added to the Operating Agreement: "HARD ROCK PROPERTY" shall mean, collectively, (a) that certain hotel casino property currently known as the "Hard Rock Hotel and Casino" and located at 4455 Paradise Road, Las Vegas, Nevada 89109, comprised of, but not necessarily limited to, Clark County Assessor's Parcel Numbers 162-22-202-001, 002, and 003, 162-22- 103-004, 162-21-504-005, 162-21-602-002, 003, (b) any expansions of such hotel casino property and improvements, and (c) other adjacent or otherwise related properties and assets to be acquired by Morgans or a Morgans Affiliate. "NON-RECOURSE FINANCING" shall mean, in this instance, loan financing pursuant to which neither Morgans Parent nor any of its Affiliates, shall have any financial or credit obligations or any related liability to any lender or other third party, related to any capital contributions or payment or credit support arising from or related to such financing of the Hard Rock Property (other than carve-outs and exceptions that may be reasonably customary for non-recourse financings). 2. COLLATERAL FOR FUNDING OBLIGATIONS AND COMMITMENTS. The following new Section 5.09 is hereby added to the Operating Agreement: Section 5.09. MORGANS COLLATERAL AND FAILURE TO PROCEED. (a) Upon the closing of the acquisition by Morgans or a Morgans Affiliate of the Hard Rock Property, Morgans agrees to wire transfer to Boyd, into a segregated account designated by Boyd, a cash deposit in the amount of Thirty Million Dollars ($30,000,000) (the "Deposit"), and such Deposit shall be maintained in such account by Boyd and shall be retained or applied by Boyd, or refunded to Morgans, in accordance with this Section 5.09. As consideration for Boyd's agreement with respect to the acquisition of the Hard Rock Property (as permitted by Section 8.05(b) of the Operating Agreement, as amended pursuant to this Amendment), Boyd shall have the right to retain and shall have no obligation to return or otherwise reimburse to Morgans the amount of the Deposit upon the occurrence of any of the following: (i) Morgans fails to satisfy any of its financial commitments contained in this Operating Agreement following written notice from Boyd and the expiration of any applicable cure period set forth in the Operating Agreement and the Hotel Management Agreement, including, without limitation, any obligation to fund a Capital Contribution or Cost Overruns, and/or (ii) the Contribution Date does not occur prior to the Outside Start Date ("Contribution Date Passage") due to a breach by Morgans of its obligations under the Operating Agreement and/or the Hotel Management Agreement following written notice from Boyd and expiration of all applicable cure periods set forth in the Operating Agreement (the occurrence of either (i) or (ii) above shall hereinafter be referred to as a "Morgans Default"). In the event that the Contribution Date shall occur in accordance with this Operating Agreement, then the amount of the Deposit shall be applied by Boyd against the Morgans Capital Commitment required to be contributed by Morgans on such date. The parties agree that the Contribution Date Passage date shall be extended day for day as a result of any decision by Boyd, made prior to the Outside Start Date, to delay the commencement of construction and/or pre-construction activities of a material portion of Echelon Place (excluding the Hotels, to the extent caused by a breach of Morgans as set forth above) beyond June 30, 2008. Morgans and Boyd each agree to proceed at all times in good faith in connection with the pre-development of the Hotels pursuant to the Operating Agreement. (b) Notwithstanding Section 4.03 or any other provision of the Operating Agreement to the contrary, in the event of a Morgans Default, Boyd shall have the exclusive right to use at Echelon Place (and Morgans shall not use within the greater Las Vegas metropolitan area, including, but not limited to, Clark County, Nevada), without payment of any fee or any other compensation to the Company or to Morgans or any of its Affiliates, (i) the plans, specifications, reports, test results or other work product prepared in connection with the Project for Boyd to use in its construction of the Hotels on the Land or anywhere else within Echelon Place, and (ii) for the period of time commencing on the date of the Contribution Date Passage or the dissolution of the Company as set forth above through December 31, 2055, the names "Delano Las Vegas" and "Mondrian Las Vegas", and other marks and names that are derivative from such names, pursuant to the brand standards for the Delano and Mondrian brands in effect -2- from time to time and pursuant to other customary non-monetary terms and conditions for licensing arrangements of this type. (c) Notwithstanding anything to the contrary contained in the Operating Agreement or the Hotel Management Agreement, the Members agree that in the event of a Morgans Default, Boyd may, in its sole discretion, terminate the Hotel Management Agreement, and neither the Company nor any Member or Affiliate of such Member, shall have any other rights or obligations thereunder. (d) Morgans agrees that to the extent a dispute arises between the Members under the Operating Agreement or Hotel Management Agreement relating to or arising from the use of the Morgans brand names by Boyd, as set forth above in Section 5.09(b) above, Boyd shall continue to have the right to (i) use the Morgans Brand Names for the Hotels, during the pendency of such dispute in accordance with such Section 5.09(b), and (ii) use the plans and specifications and other materials referenced in Section 5.09(b)(i) above, regardless of the outcome of such dispute; provided, however, that to the extent that it is determined by a court of law, with proper jurisdiction over the dispute, that Boyd does not have a right to use the Brand Names, the use of such Brand Names shall be discontinued by Boyd in accordance with such ruling or finding, as of that date, in connection with Boyd's development, construction, and/or operation of the Hotels. (e) Boyd agrees that its rights under Section 5.09(a) and (b) shall be deemed terminated and void upon the occurrence of any of the following on or prior to the date of the Contribution Date Passage: (w) any sale or other disposition or conveyance by Boyd or a Boyd Affiliate of (i) the Land or a material portion thereof, or its direct or indirect interests therein or (ii) its ownership interest in substantially all of the land on which Echelon Place is to be built, if such sale or other disposition, as contemplated under sections (i) and (ii) above, is made to a third party, but which shall not include an entity that is a Boyd Affiliate or a Boyd Controlled Affiliate, provided that nothing in this clause (w) is intended to, or shall have the effect of, granting to Boyd any rights with respect to the direct or indirect transfer of the Land or Boyd's interests therein beyond Boyd's rights as currently set forth in the Operating Agreement (without giving effect to this Amendment), (x) the occurrence of the Contribution Date Passage for any reason other than a Morgans Default, (y) a merger, sale, consolidation or other transaction (or series of transactions) shall occur resulting in the change of the direct or indirect ownership of 50% or more of the outstanding common stock of Boyd Parent, other than (i) through the trading of publicly held securities in the ordinary course or (ii) as a result of transfers between and among family members of William S. Boyd, including estate planning related transfers, or (z) the acquisition by Boyd of the Morgans Interest pursuant to Section 12.05 of the Operating Agreement. Upon the occurrence of any such event described in this Section 5.09(e), Boyd shall not have the right to retain, and shall promptly return or otherwise reimburse to Morgans, the amount of the Deposit and Boyd shall have no rights under Section 5.09(b) above. (f) The obligations of Boyd under this Section 5.09 shall be guaranteed by the Boyd Parent. -3- (g) The obligations of Morgans under this Section 5.09 shall be guaranteed by the Morgans Parent. 3. DUTIES AND CONFLICTS. The following sentence shall be added at the end of Section 8.05(b) of the Operating Agreement: "Notwithstanding anything in this Section 8.05(b), the provisions of this subsection shall not apply to any acquisition, investment, management, development or other activity described in the preceding sentence by Morgans or any Morgans Affiliate in, at (or of) the Hard Rock Property. In addition, the provisions of Section 3.5 of the Hotel Management Agreement shall not be applicable to the Hard Rock Property, and the Hotel Management Agreement shall be deemed to be amended by this sentence in accordance with Section 22.13 of the Hotel Management Agreement." 4. ADDITIONAL REPRESENTATION AND COVENANT. As a material inducement to Boyd to enter into this Amendment, Morgans represents, warrants and covenants with Boyd that any financing obtained in connection with the acquisition of the Hard Rock Property shall be Non-Recourse Financing with respect to Morgans Parent and any of its Affiliates. C. EFFECTIVE UPON HARD ROCK CLOSING. Notwithstanding anything in this Amendment to the contrary, this Amendment shall only be effective upon, and shall have no force or effect prior to, the closing by a Morgans Affiliate of the acquisition of the Hard Rock Property. If, prior to the date of the Contribution Date Passage, the agreement of a Morgans Affiliate to acquire the Hard Rock Property shall terminate and if Morgans shall notify Boyd in writing of such termination, then this Amendment shall thereafter be null, void and of no force or effect. D. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be the same document. The provisions of this Amendment shall survive any termination or dissolution of the Company. E. NO OTHER AMENDMENTS. Except as specifically amended hereby, all of the other terms and conditions of the Operating Agreement remain in full force and effect in accordance with its terms. F. GOVERNING LAW. All questions concerning the construction, validity, and interpretation of this Amendment will be governed by and construed in accordance with the internal law (and not the law of conflicts) of Delaware. [SIGNATURE PAGE FOLLOWS] -4- IN WITNESS WHEREOF, the Parties have executed this Amendment as of the day and year first above set forth. MORGANS/LV INVESTMENT LLC By: Morgans Group LLC By: /s/ W.Edward Scheetz --------------------------- Name: W.Edward Scheetz Title: Chief Executive Officer AS TO SECTIONS 5.06(a) and 5.09 OF THE OPERAGREEMENT AS AMENDED HEREBY ONLY: MORGANS HOTEL GROUP CO. By: /s/ W.Edward Scheetz --------------------------- Name: W.Edward Scheetz Title: Chief Executive Officer [SIGNATURES CONTINUE ON NEXT PAGE] -5- [SIGNATURES CONTINUED] ECHELON RESORTS CORPORATION By: /s/ Paul J. Chakmak --------------------------- Name: Paul J. Chakmak Title: Senior Vice President and Treasurer AS TO SECTIONS 4.02(c), 5.06(b), 5.09, 8.05(c) AND 11.02(b) ONLY OF THE OPERATING AGREEMENT AS AMENDED HEREBY: BOYD GAMING CORPORATION By: /s/ Paul J. Chakmak --------------------------- Name: Paul J. Chakmak Title: Senior Vice President Finance and Treasurer [SIGNATURES CONTINUE ON NEXT PAGE] -6- [SIGNATURES CONTINUED] The Parties to the Hotel Management Agreement have executed this Amendment below for purposes of amending the Hotel Management Agreement pursuant to the last sentence of Section (B)(3) of this Amendment: OWNER MORGANS LAS VEGAS, LLC By: Echelon Resorts Corporation By: /s/ Paul J. Chakmak --------------------------- Name: Paul J. Chakmak Title: Senior Vice President and Treasurer OPERATOR MORGANS/LV MANAGEMENT LLC By: Morgans Hotel Group Management LLC By: Morgans Group LLC By: Morgans Hotel Group Co. By: /s/ W.Edward Scheetz --------------------------- Name: W.Edward Scheetz Title: -7- EX-10.5 7 side_letter.txt EXHIBIT 10.5 May 15, 2006 Echelon Resorts Corporation c/o Boyd Gaming Corporation 2950 Industrial Road Las Vegas, Nevada 89109-1150 Attention: Robert Boughner Re: ECHELON PLACE PROJECT Dear Bob: In connection with the proposed acquisition of the Hard Rock Property (as that term is defined in the Amendment (as defined below)) by an Affiliate of Morgans, Boyd has agreed that Morgans may proceed with such acquisition notwithstanding Boyd's rights under the January 3, 2006 Limited Liability Company Agreement (the "Operating Agreement"), based upon the terms and conditions set forth in the First Amendment to the Operating Agreement, of even date herewith (the "Amendment"), and based upon the representations made by Morgans set forth below in Section 1, which represent a material inducement to Boyd's execution of the Amendment. All capitalized terms not otherwise defined herein shall have the meaning set forth in the Operating Agreement (as amended). 1. CERTAIN OBLIGATIONS. Morgans agrees with Boyd as follows: a. Prior to the Opening Date of the second Hotel to be developed by the Company, neither Morgans nor any Affiliate of Morgans will invest equity capital, cash, guaranties or other credit support in connection with the acquisition, operation or management of the Hard Rock Property, in an aggregate amount in excess of or with a value in excess of 175% of the Morgans Capital Commitment to the LLC, excluding cash flow from the Hard Rock Property and proceeds of sales, refinancings and other capital events relating to that property. b. Neither Morgans nor any of its Affiliates will negotiate with, hire or retain a manager, operator, lessee or licensee of any material gaming facilities or operations, including internet related operations, at or originating from the Hard Rock Property that is or (during the three (3) years prior to the date hereof) was a public gaming company without first providing Boyd with a right of first refusal and right of last offer on terms reasonably satisfactory to Boyd, and in no event less favorable than those offered to such third party. Boyd shall have sufficient time, as determined by Boyd in its reasonable discretion, to evaluate such proposals, and if accepted by Boyd, to negotiate and enter into written agreements with Morgans or a Morgans Affiliate memorializing such terms. 2. Morgans agrees that in the event of any breach of the covenants set forth above following written notice from Boyd and beyond any applicable cure periods set forth in the Operating Agreement, such breach, in each case, shall constitute a Morgans Default, and shall entitle Boyd to all of its remedies under the Operating Agreement (as amended). 3. Morgans agrees that this letter shall constitute a written amendment to the Operating Agreement for purposes of satisfying Section 14.02 of the Operating Agreement (as amended), and this letter is fully binding upon the parties and is deemed to be incorporated in the Operating Agreement (as amended) and made a part thereof. This letter may be executed in counterparts. Very truly yours, /s/ W. Edward Scheetz W. Edward Scheetz Morgans LV Investment LLC ACKNOWLEDGED AND AGREED TO BY: /s/ Paul J. Chakmak - ---------------------------------------- Paul J. Chakmak Senior Vice President & Treasurer ON BEHALF OF ECHELON RESORTS CORPORATION EX-10.6 8 commitletter.txt EXHIBIT 10.6 COLUMN FINANCIAL, INC. Eleven Madison Avenue New York, New York 10010 May 11, 2006 Morgans Hotel Group Co. 475 10th Ave. New York, NY 10018 Attention: Ed Scheetz Re: US$700,000,000.00 Credit Facility - ------------------------------------- Gentlemen: On behalf of MHG HR Acquisition Corp, a Delaware corporation (the "PURCHASER") that is owned in whole or in part by, and controlled by Morgans Hotel Group Co. ("MHG" or "YOU"), you have requested Column Financial, Inc. ("COLUMN" and, together with its affiliates, the "LENDER," "WE" or "US") to, and we are prepared to, make available to the Purchaser and certain of its affiliates, pursuant to a transaction structure to be mutually agreed upon by the parties hereto, acting reasonably, the credit facility described in the term sheet annexed hereto as EXHIBIT A (the "TERM SHEET") in an aggregate principal amount not to exceed US$700,000,000.00, subject to adjustment as provided in the Term Sheet (the "AGGREGATE COMMITMENT"), consisting of (a) one or more CMBS Loans (as hereinafter defined) or (b) to the extent that the conditions to the availability of CMBS Loans have not been satisfied or waived as to any portion of the Aggregate Commitment, a bridge loan (the "BRIDGE LOAN") in an amount equal to such portion of the Aggregate Commitment (up to the entire amount of the Aggregate Commitment, subject to the terms and conditions hereof), to finance (i) the acquisition (the "ACQUISITION") by the Purchaser, directly or indirectly, pursuant to a certain Agreement and Plan of Merger to be entered into by and among Purchaser and/or a wholly-owned subsidiary of Purchaser ("MERGERCO"), Hard Rock Hotel, Inc., a corporation organized under the laws of the State of Nevada ("TARGET"), and the stockholders of Target (the "MERGER AGREEMENT"), the Other Transaction Documents (as defined in the Merger Agreement) and the other agreements, documents and instruments required to be delivered in connection with the Acquisition pursuant to the Merger Agreement and/or the Other Transaction Documents (the Merger Agreement, the Other Transaction Documents, the PMR/RWB Escrow Agreement (as defined in the Merger Agreement), the Morton Indemnification Agreement (as defined in the Term Sheet) and such other agreements, documents and instruments, collectively, the "TRANSACTION DOCUMENTS"), of (A) 100% of the issued and outstanding capital stock of Target, which owns and operates the Hard Rock Hotel and Casino (the "RESORT"), (B) 100% of the tangible and intangible assets of PM Realty, LLC, a Nevada limited liability company ("PMR") and HR Condominium Investors (Vegas), L.L.C., a Delaware limited liability company ("HRCI"), including, without limitation, certain land and any improvements thereon adjacent to the Resort (the "ADJACENT PROPERTY"), (C) certain trademarks and other intellectual property rights related to the operation of the Resort that are currently owned by Peter A. Morton and/or his affiliates, as described on EXHIBIT C hereto (the "INTELLECTUAL PROPERTY"), and (D) additional land adjacent to the Resort owned by Red White & Blue Pictures, Inc. ("PICTURES") and Picture's rights in the improvements thereon commonly known as the Hard Rock Cafe (the "CAFE PROPERTY"), (ii) the repayment, restructuring or redemption of certain existing indebtedness of Target, and (iii) all transaction costs of the Acquisition and the foregoing refinancings (the transactions described in the foregoing CLAUSES (i) through (iii), collectively, the "TRANSACTIONS"). As a result of the Acquisition, the Purchaser will gain control of all of Target's assets, including the Resort, the Adjacent Property, the Cafe Property and the other properties set forth in EXHIBIT B (collectively, the "PROPERTIES") and the Intellectual Property. In connection with the Transactions, the Purchaser is requesting the credit facility described in the Term Sheet (the "CREDIT FACILITY") in an aggregate principal amount to be disbursed in full upon the closing of the Acquisition, equal to the Aggregate Commitment, subject to adjustment as provided in the Term Sheet, comprised of (x) one or more mortgage and/or mezzanine loans (the "CMBS LOANS") to be borrowed by one or more newly formed, single purpose, bankruptcy remote direct or indirect subsidiaries of Purchaser or the Holdco Mezzanine Borrower (the "CMBS BORROWERS") and/or (y) to the extent that the conditions to the availability of the CMBS Loans have not been satisfied or waived as to any portion of the Aggregate Commitment, a Bridge Loan (together with the CMBS Loans, the "LOANS" and each a "LOAN") to be borrowed by Purchaser or one or more newly formed single purpose, bankruptcy remote subsidiaries of Purchaser (collectively, "HOLDCO"; Purchaser or Holdco, in its capacity as borrower under the Bridge Loan, the "BRIDGE BORROWER" and, together with the CMBS Borrowers, the "BORROWERS"). To facilitate the foregoing, and as a condition to the Acquisition and any financing under the Term Sheet, the Purchaser will cause the reorganization of certain businesses, operations and assets of Target, in each case as required in order to effectuate the foregoing consistent with the material terms of the Term Sheet. 1. COMMITMENT. In connection with the foregoing, Lender is pleased to advise you of its commitment to provide the entire principal amount of the Aggregate Commitment upon the terms and subject to the conditions set forth in this commitment letter (including the Term Sheet and other attachments hereto, collectively, this "COMMITMENT LETTER"). 2. REPRESENTATIONS AND WARRANTIES. You hereby represent and covenant that (a) all information (the "INFORMATION"), other than the financial information and projections ("PROJECTIONS"), that have been or will be made available to Lender by or on behalf of you or any of your representatives in connection with the Transactions, when taken as a whole, is or will be, when furnished, correct in all material respects and does not or will not, when furnished, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements are made and -2- (b) the Projections that have been or will be made available to Lender by or on behalf of you or any of your representatives have been or will be prepared in good faith based upon customary and reasonable accounting principles and based upon assumptions that are reasonable at the time they are made available to Lender (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond your control and no assurance can be given that any particular Projection will be realized). You agree that if at any time prior to the closing of the Credit Facility or any Loan you become aware that any of the representations in the preceding sentence are incorrect, in any material respect, you will promptly supplement the Information and the Projections so that such representations will be correct under those circumstances. In connection with our arranging and syndicating of the Credit Facility, and the origination, syndication or securitization of any Loan, we will be entitled to use and rely primarily on the Information and the Projections without responsibility for independent verification thereof. 3. FEES; DEPOSITS; CERTAIN RIGHTS. As consideration for Lender's commitment hereunder, and the agreement of Lender to perform the services and make available the Credit Facility described herein, you agree to pay (or to cause the Borrowers to pay) to Lender the fees set forth in this Commitment Letter and in the fee letter dated the date hereof and delivered herewith with respect to the Credit Facility (the "FEE LETTER"). In order to commence our underwriting review, the Purchaser shall pay to Lender, in addition to the Commitment Fee payable under the Fee Letter, a total of US$1,000,000.00 (the "GOOD FAITH DEPOSIT"), of which $250,000.00 shall be payable upon the execution of this Commitment Letter by you and the remaining $750,000.00 shall be payable upon execution and delivery of the Merger Agreement. The Good Faith Deposit shall be used for actual reasonable documented expenses incurred by Lender in connection with third party reports and other out-of-pocket expenses, including, without limitation, the fees and disbursements of Lender's external legal counsel and auditors, travel expenses, credit review costs, underwriting and due diligence fees and expenses and the fees of all third parties relating to any such underwriting and due diligence review; if the Good Faith Deposit is insufficient to cover the cost of any reports or professional fees incurred by Lender, then you shall remit to Lender, immediately upon demand, any such additional amounts necessary to pay for such expenses. 4. CONDITIONS. In addition to those conditions set forth in the Term Sheet, the commitment of Lender hereunder is subject to (i) Transaction Documents, substantially in the form submitted to Lender for approval, having been executed and delivered by the Purchaser and each of the other parties thereto, and being and remaining in effect and there being no material amendment, supplement or other modification to any of the terms or conditions thereof or any of the schedules or attachments thereto or any material waiver by any party thereto or extension of any term or condition thereof, in each case to the extent adverse to Lender, unless consented to by Lender in Lender's sole discretion, exercised in good faith, and, in all other cases, in Lender's reasonable discretion, (ii) the Purchaser having received cash equity contributions from you and any non-controlling third party investors selected by you and otherwise reasonably acceptable to Lender -3- (the "THIRD PARTY EQUITY") in such amounts that, when added to the Aggregate Commitment and the cash held by Target and its consolidated subsidiaries, if any, (collectively, the "AGGREGATE CONSIDERATION") are sufficient to, without duplication, (A) consummate the Transactions, (B) defease, repay, discharge or otherwise satisfy in full the Company Bonds (as defined in the Merger Agreement) other than any Company Junior Notes (as defined in the Merger Agreement) that are not tendered in the tender offer relating thereto (with repayment of such Company Junior Notes to be and remain subordinate in all respects to all Loans under the Credit Facility and with all covenants thereunder that would be violated by the consummation of the Transactions or any closings under the Credit Facility, as well as certain other covenants required by Lender in its sole but reasonable discretion, having been eliminated), (C) satisfy all other existing indebtedness of Target and its consolidated subsidiaries, if any, other than (1) customary trade payables not overdue, (2) amounts payable under capital and equipment leases in the ordinary course of business, and (3) any Company Bonds that shall have been defeased and for which funds shall have been deposited in escrow on or prior to the Closing Date for repayment on the day after Closing, (D) pay all liabilities and obligations of Target and its consolidated subsidiaries, if any, arising as a result of the Acquisition, (E) pay all fees and expenses in connection with the Transactions (as defined below), and (F) fund reserves as required by the Term Sheet or otherwise, and such Aggregate Consideration shall be applied as provided in the foregoing CLAUSES (A) through (F) on the Closing Date, (iii) Lender having received true, correct and complete copies of all written information and materials supplied to you, the Purchaser or your affiliates prior to the Closing Date pursuant to the terms and conditions of the Merger Agreement, (iv) the execution and delivery of definitive documentation with respect to the Credit Facility consistent with the terms of this Commitment Letter and otherwise reasonably satisfactory to Lender, acting in good faith, (v) there not having occurred and be continuing a Parent Condition Failure or Company Condition Failure (as such terms are defined in the Merger Agreement), (vi) there not having occurred (A) except for the Transactions, since December 31, 2005, any event that has had or would reasonably be expected to have a "Material Adverse Effect" (as defined in the Merger Agreement) or (B) any material adverse change in the business, assets, results of operations or financial condition of MHG and its consolidated subsidiaries, taken as a whole, since the date of the audited financial statements included in MHG's 2005 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (any of the events described in this clause (vi) being referred to herein as a "COLLATERAL ADVERSE EFFECT"), (vii) each of the conditions precedent to the Acquisition set forth in the Transaction Documents having been satisfied and the Acquisition being consummated simultaneously with the closing of the Credit Facility and any Loan being funded at such time, (viii) Lender having received all fees and reimbursements of all out-of-pocket expenses payable by the Borrowers in connection with the Credit Facility and any Loan being funded simultaneously with the Acquisition pursuant to this Commitment Letter and the Fee Letter, (ix) Purchaser and/or MergerCo having entered into an agreement, in form and substance acceptable to Lender in its reasonable discretion, with a minimum term of one year from the Closing Date, with any of the persons specified on SCHEDULE 1 hereto or another person or entity acceptable to Lender in its sole, but reasonable, discretion, exercised in good faith and giving due regard to factors such as prior gaming and licensing experience, industry reputation, creditworthiness and other factors customarily considered in recruiting, selecting and hiring persons or entities for gaming operations and licensing in the State of Nevada (any such person or entity, the "GAMING LICENSEE") that shall seek to obtain all Gaming Approvals (as defined in the Merger Agreement), and (x) your compliance with the terms and conditions of this Commitment Letter and the Fee Letter, if any failure to so comply -4- (except with respect to the other conditions set forth in this paragraph (the "OTHER CONDITIONS"), which such Other Conditions shall be satisfied without qualification) could reasonably be expected to have a Material Adverse Effect or a Collateral Adverse Effect, it being understood that Lender shall make the Credit Facility available and shall advance Loans thereunder as provided herein, subject, however to the satisfaction of each of the Other Conditions, notwithstanding your breach of a representation, warranty or covenant contained in Sections 2, 5, 6, 7 (other than the first sentence of Section 7), 9 or 13 of this Commitment Letter or any provision of the Fee Letter (other than the obligations referred to in clause (viii) above), so long as neither a Collateral Adverse Effect nor a Material Adverse Effect shall occur as a result thereof; PROVIDED that the funding of any Loan under such circumstances shall not be deemed to constitute a waiver by or on behalf of Lender of any of Lender's rights or remedies under this Commitment Letter, the Fee Letter, the Loan Documents or otherwise in respect of such breach. Notwithstanding anything to the contrary contained in the Loan Documents (as defined in the Term Sheet) or Section 2 of this Commitment Letter, it shall not be a condition to the availability of the Bridge Loan on the Closing Date that any representation or warranty relating to Target, its affiliates and their businesses and assets be true and correct as of the Closing Date other than (a) the representations and warranties made by Target and its affiliates in the Merger Agreement and the Other Transaction Documents (as defined in the Merger Agreement) (the accuracy of which will be certified by Target and its affiliates on the Closing Date) in each case, to the extent any breach of such representations and warranties by Target and/or its affiliates would give you the right to terminate the Merger Agreement, and (b) the representations and warranties of Borrowers to be included in the Loan Documents, as described in the Term Sheet, relating to corporate power and authority, due authorization, execution and delivery, legality, validity, binding effect and enforceability of the Credit Facility, the validity, perfection and first priority of the security interests in the Properties, the Bridge Collateral, the Holdco Mezzanine Collateral, the IP Collateral and the other collateral for the CMBS Loans, and no conflicts with, among other things, agreements binding upon you or your affiliates (the representations and warranties described in clauses (a) and (b), collectively, the "CLOSING REPRESENTATIONS"), it being understood and agreed that the accuracy of each of the Closing Representations shall be a condition to the availability of the Credit Facility and the funding of any Loans thereunder. Notwithstanding the foregoing, Lender's funding of any Loan on the Closing Date despite the existence of any breach of a representation or warranty contained in the Loan Documents shall not be deemed to constitute a waiver of any of Lender's rights or remedies under the Loan Documents or otherwise in respect of such breach, and Lender shall not be required to fund any Loan under the Credit Facility if any breach by any party of any representation or warranty contained in the Loan Documents, the Merger Agreement, the Other Transaction Documents, this Commitment Letter or elsewhere could reasonably be expected to have a Collateral Adverse Effect. No term, condition, right, remedy or other provision of the Merger Agreement or any of the Other Transaction Documents shall be deemed to limit or otherwise modify, in any manner, any of the terms, conditions, qualifications, limitations, rights or remedies of Lender set forth in this Commitment Letter and no approval or deemed approval or waiver or deemed waiver thereunder shall be deemed to represent Lender's approval or waiver under this Commitment Letter, unless Lender shall have expressly granted such approval or waiver in writing. -5- 5. INDEMNIFICATION. You agree (a) to indemnify and hold harmless Lender, any Syndicated Lender (as defined in SECTION 13 below) and their respective affiliates and each of their respective officers, directors, employees, agents, controlling persons, members and successors and assigns (each, an "INDEMNIFIED PERSON") from and against any and all losses, claims, damages, liabilities and expenses, joint or several, to which any such Indemnified Person may become subject arising out of or in connection with this Commitment Letter, the Transactions, the Credit Facility or any related transaction, or any claim, litigation, investigation or proceeding relating to any of the foregoing, regardless of whether any such Indemnified Person is a party thereto (and regardless of whether such matter is initiated by a third party or by the Borrowers, the Purchaser, Target or any of their respective affiliates), and to reimburse each such Indemnified Person upon demand for any reasonable legal or other expenses incurred in connection with investigating or defending any of the foregoing, PROVIDED that the foregoing indemnity will not, as to any Indemnified Person, apply to losses, claims, damages, liabilities or related expenses to the extent they are found in a final, non-appealable judgment of a court of competent jurisdiction to have resulted from the willful misconduct or gross negligence of such Indemnified Person, and (b to reimburse Lender, from time to time, upon presentation of a summary statement, for all reasonable out-of-pocket expenses (including but not limited to expenses of Lender's due diligence investigation, consultants' fees, syndication expenses, travel expenses and fees, disbursements and other charges of counsel), in each case, incurred in connection with the Credit Facility, and the preparation, negotiation and enforcement of this Commitment Letter, the Fee Letter, the definitive documentation for the Credit Facility and any ancillary documents or security arrangements in connection therewith. Notwithstanding any other provision of this Commitment Letter, no Indemnified Person shall be liable for any indirect, special, punitive or consequential damages in connection with its activities related to the Credit Facility. 6. SHARING INFORMATION; ABSENCE OF FIDUCIARY RELATIONSHIP; AFFILIATE ACTIVITIES. You acknowledge that Lender and any Syndicated Lenders and their respective affiliates may be providing debt financing, equity capital or other services (including financial advisory services) to other companies in respect of which you may have conflicting interests regarding the transactions described herein or otherwise. Neither we nor any of our affiliates will disclose confidential information obtained solely from you by virtue of the transactions contemplated by this Commitment Letter or our other relationships with you to other companies or in any manner in connection with the performance by us of services for other companies. You also acknowledge that neither we nor any of our affiliates has any obligation to use in connection with the transactions contemplated by this Commitment Letter or to furnish to you, confidential information obtained by us from other companies. You further acknowledge and agree that (a) no fiduciary relationship between you and Lender is intended to be or has been created in respect of any of the transactions contemplated by this Commitment Letter, irrespective of whether Lender has advised or is advising you on other matters, (b) Lender, on the one hand, and you, on the other hand, have an arms-length business relationship that does not directly or indirectly give rise to, nor do you rely on, any fiduciary duty on the part of Lender, (c) you are capable of evaluating and understanding, and you understand and accept, the terms, risks and conditions of the transactions contemplated by this Commitment -6- Letter, (d) you have been advised that we are engaged in a broad range of transactions that may involve interests that differ from your interests, including the foregoing, and that we have no obligation to disclose such interests and transactions to you by virtue of any fiduciary, advisory or agency relationship, and (e) you waive, to the fullest extent permitted by law, any claims you may have against Lender for breach of fiduciary duty or alleged breach of fiduciary duty and agree that Lender shall have no liability (whether direct or indirect) to you in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of you, including your stockholders, employees or creditors. You further acknowledge that Column and its affiliates are full service securities firms engaged in securities trading and brokerage activities as well as providing investment banking and other financial services. In the ordinary course of business, Column or its affiliates may provide investment banking and other financial services to, and/or acquire, hold or sell, for their own accounts and the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) of, you or your respective affiliates, the Borrowers, the Purchaser, Target and other companies with which you or your affiliates, the Borrowers, the Purchaser or Target may have commercial or other relationships and/or conflicts of interest. 7. ASSIGNMENTS, AMENDMENTS, GOVERNING LAW, ETC. This Commitment Letter (i) shall not be assignable by you without our prior written consent, which such consent may be granted or withheld in our sole discretion, and any attempted assignment without such consent shall be null and void, (ii) is intended to be solely for the benefit of the parties hereto (and Indemnified Persons), and (iii) is not intended to confer any benefits upon, or create any rights in favor of, any person other than the parties hereto (and Indemnified Persons). Lender may assign and delegate its obligations hereunder to any of its affiliates or any prospective Syndicated Lender (as defined below) whereupon Lender will be released from the portion of its obligations so assigned; PROVIDED that any such assignment by Lender shall not relieve Lender of its obligation to fund any Loan upon satisfaction of the terms and conditions therefore set forth in the Term Sheet. Any and all obligations of, and services to be provided by, Lender hereunder (including, without limitation, Lender's commitment) may be performed and any and all rights of Lender (or any Syndicated Lender pursuant to SECTION 13 below) may be exercised by or through any of their respective affiliates or branches. This Commitment Letter may not be amended or any provision hereof waived or modified except by an instrument in writing signed by Lender and you. This Commitment Letter may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. Delivery of an executed counterpart of a signature page of this Commitment Letter by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. Section headings used herein are for convenience of reference only, are not part of this Commitment Letter and are not to affect the construction of, or to be taken into consideration in interpreting, this Commitment Letter. You acknowledge that information and documents relating to the Credit Facility may be transmitted through Syndtrak, Intralinks, the internet, e-mail, or similar electronic transmission systems, and that Lender shall not be liable for any damages arising from the unauthorized use by others of information or documents transmitted in such manner. Lender may place advertisements in financial and other newspapers and periodicals or on a home page or similar place for dissemination of information -7- on the Internet or worldwide web as it may choose, and circulate similar promotional materials in the form of a "tombstone" or otherwise describing the names of the Borrowers and their affiliates (or any of them), and the amount, type and closing date of such Transactions, all at Lender's expense. This Commitment Letter supersedes all prior understandings, whether written or oral, between us with respect to the Credit Facility. THIS COMMITMENT LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 8. JURISDICTION. Each of the parties hereto hereby irrevocably and unconditionally (a) submits, for itself and its property, to the non-exclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Commitment Letter, the Fee Letter or the transactions contemplated hereby, or for recognition or enforcement of any judgment, and agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court, (b) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Commitment Letter or the transactions contemplated hereby in any New York State court or in any such Federal court, (c) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court and (d) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. 9. CONFIDENTIALITY. (a) This Commitment Letter is delivered to you on the understanding that neither this Commitment Letter nor any of its terms or substance, nor the involvement of Lender or any Syndicated Lender pursuant hereto, shall be disclosed by you, directly or indirectly, to any other person except (i) to your officers, directors, employees, attorneys, accountants and advisors on a confidential and need-to-know basis or (ii) as required by applicable law or compulsory legal process (in which case you agree to inform us promptly thereof); PROVIDED that you may disclose this Commitment Letter, but not the Fee Letter, and the contents hereof (A) to Target and its officers, directors, employees, attorneys, accountants and advisors on a confidential and need-to-know basis, (B) to any Third Party Equity, (C) to other lenders providing any portion of the financing for the Transactions as permitted hereby, (D) in any prospectus or other offering memorandum relating to any financing contemplated by the Credit Facility, (E) to any rating agencies that shall be engaged to rate any portion of the Loans in connection with any Syndication (hereinafter defined), or (F) in any press release reasonably approved by Lender. (b) Notwithstanding anything herein to the contrary, any party to this Commitment Letter (and any employee, representative or other agent of such party) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this Commitment Letter and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure, except -8- that (i) tax treatment and tax structure shall not include the identity of any existing or future party (or any affiliate of such party) to this Commitment Letter, and (ii) no party shall disclose any information relating to such tax treatment and tax structure to the extent nondisclosure is reasonably necessary in order to comply with applicable securities laws. For this purpose, the tax treatment of the transactions contemplated by this Commitment Letter is the purported or claimed U.S. federal income tax treatment of such transactions and the tax structure of such transactions is any fact that may be relevant to understanding the purported or claimed U.S. federal income tax treatment of such transactions. 10. SURVIVING PROVISIONS. The compensation, reimbursement, indemnification, confidentiality, syndication, jurisdiction, governing law, and waiver of jury trial provisions contained herein and in the Fee Letter and the Term Sheet shall remain in full force and effect regardless of whether definitive financing documentation shall be executed and delivered and notwithstanding the termination of this Commitment Letter or Lender's commitment hereunder; PROVIDED that none of the indemnification provisions set forth herein shall apply to MHG from and after the funding of any Loans under the Credit Facility and MHG is expressly released from its indemnification obligations hereunder; PROVIDED, FURTHER, that nothing in the foregoing proviso shall apply to, or in any way limit or modify, any separate guaranty or indemnity that may be provided by MHG under the Loan Documents, or any obligation of Target after the Acquisition as a result of the merger contemplated by the Merger Agreement. 11. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM BROUGHT BY OR ON BEHALF OF ANY PARTY RELATED TO OR ARISING OUT OF THIS COMMITMENT LETTER OR THE PERFORMANCE OF SERVICES HEREUNDER. 12. PATRIOT ACT NOTIFICATION. Lender and any Syndicated Lenders hereby notify you that pursuant to the requirements of the USA PATRIOT Act, Title III of Pub. L. 107-56 (signed into law October 26, 2001) (as the same may be extended and in effect from time to time, the "PATRIOT ACT"), Lender and each Syndicated Lender is required to obtain, verify and record information that identifies the Borrowers, which information includes the name, address, tax identification number and other information regarding the Borrowers that will allow Lender or such Syndicated Lender to identify the Borrowers in accordance with the PATRIOT Act. This notice is given in accordance with the requirements of the PATRIOT Act and is effective as to Lender. 13. SYNDICATION, ASSIGNMENT, PARTICIPATION. (a) Lender reserves the right, as the case may be, prior to or after the closing of the Credit Facility or any loan thereunder to syndicate, assign, participate, sell, securitize or otherwise transfer (collectively, a "SYNDICATION") all or any portion of the Credit Facility and any remaining commitment hereunder to one or more banks, financial institutions or other -9- institutional or conduit lenders (the "SYNDICATED LENDERS"). We may commence Syndication efforts promptly upon the execution of this Commitment Letter and you agree actively to assist us in completing a Syndication satisfactory to Lender, in its reasonable judgment, provided that the success of any Syndication shall not be a condition to Lender's commitment hereunder. Lender acknowledges and agrees that no assignment and assumption by any assignee of any obligations of Lender in respect of any portion of its commitment hereunder shall relieve Lender of its obligations hereunder with respect to such portion of the Commitments prior to the Closing Date. Such assistance shall include (i) your using commercially reasonable efforts to ensure that any Syndication efforts benefit materially from your and the Target's existing lending and investment banking relationships, (ii) direct contact between your senior management, representatives and advisors and the proposed Syndicated Lenders (and your using commercially reasonable efforts to cause direct contact between senior management, representatives and advisors of Target), (iii) your assistance in the preparation of a Confidential Information Memorandum (and your using commercially reasonable efforts to cause the assistance by Target) for any facility hereunder and other marketing materials to be used in connection with the Syndication, (iv) using your commercially reasonable efforts, both before and after the launch of the Syndication, to assist the Syndicated Lenders to obtain ratings for any Loans from each of Standard & Poor's Ratings Service and Moody's Investors Service, Inc., (v) your providing or causing to be provided a detailed business plan or projections of Target and its subsidiaries for the years 2006 through 2010 and for the eight quarters beginning with the first quarter of 2006, and (vi) the hosting, with Lender, of one or more meetings of prospective Syndicated Lenders (and your using commercially reasonable efforts to cause direct contact between senior management, representatives and advisors of Target at such meetings). To assist us in our Syndication efforts, you agree promptly to prepare and provide to us all information with respect to the Borrowers and their respective subsidiaries, the Acquisition and the other transactions contemplated hereby, including all Information and Projections as we may reasonably request. You agree, at our request, to assist in the preparation of a version of the Confidential Information Memorandum and other marketing materials and presentations to be used in connection with the Syndication of the Credit Facility, including information and documentation that are either (i) publicly available or (ii) not material with respect to the Purchaser, Target or their respective subsidiaries or any of their respective securities for purposes of foreign, United States Federal and state securities laws or (iii) not subject to any confidentiality obligation set forth herein or any other agreement regarding confidentiality between the undersigned and Target (all such information and documentation being "PUBLIC INFORMATION"). Any information and documentation that is not Public Information is referred to herein as "PRIVATE INFORMATION". You further agree that each document provided by you to us or to any Syndicated Lender in connection with the facilities or indebtedness hereunder or any Syndication thereof will be identified by you as either (i) containing Private Information or (ii) containing solely Public Information. (b) Lender will manage all aspects of any Syndication, including decisions as to the selection of institutions to be approached and when they will be approached, when their commitments will be accepted, which institutions will participate, the allocation of the commitments among Syndicated Lenders, any naming rights and the amount and distribution of fees among Syndicated Lenders. To assist us in our Syndication efforts, you agree promptly to prepare and provide (and to use commercially reasonable efforts to cause Target to provide) to us all information with respect to the Purchaser, Target, the Borrowers and their respective -10- subsidiaries, the Acquisition and the other transactions contemplated hereby, including all financial information and projections, as we may reasonably request. 14. ACCEPTANCE, EFFECTIVENESS AND TERMINATION. (a) If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms of this Commitment Letter (including the Term Sheet) and the Fee Letter by returning to us executed counterparts hereof and thereof, together with the Good Faith Deposit, not later than 5:00 p.m., Eastern Standard Time, on May 12, 2006 (the "EXPIRATION DATE"). Notwithstanding anything herein to the contrary, Lender shall not be obligated to provide any portion of the Aggregate Commitment, and the Aggregate Commitment shall not be available to you, unless and until Target and/or its affiliates shall have accepted your Acquisition proposal in writing and executed and delivered the Merger Agreement and you shall have paid the Commitment Fee in accordance with the Fee Letter. (b) Lender's obligations hereunder will expire, and this Commitment Letter shall be null and void, in the event that we have not received executed counterparts of this Commitment Letter and the Fee Letter, together with the portion of the Good Faith Deposit payable upon your execution hereof, on or prior to the Expiration Date. In addition, (i) if the Target and/or its affiliates have not accepted your Acquisition proposal in writing, and executed the Merger Agreement, on or prior to May 15, 2006 (the "BID ACCEPTANCE EXPIRATION DATE"), (ii) if the Merger Agreement shall have been terminated at any time, or (iii) if your Acquisition proposal shall have been accepted and the Merger Agreement shall have been executed on or prior to the Bid Acceptance Expiration Date, but the conditions to the financing contemplated by this Commitment Letter shall not have been satisfied or such financing shall otherwise not have been consummated on or prior to February 11, 2007 or such later date to which the Outside Date under the Merger Agreement shall have been extended with our prior consent (the "OUTSIDE CLOSING DATE"), then this Commitment Letter and our commitment to provide the Aggregate Commitment as provided herein shall, in each such case, automatically terminate and be of no further force or effect. [signature page follows] -11- We are pleased to have been given the opportunity to assist you in connection with the financing for the Transactions. Very truly yours, COLUMN FINANCIAL, INC. By: /s/ Anthony Orso ----------------------- Name: Anthony Orso Title: Vice President Accepted and agreed to as of the date first above written: MHG HR ACQUISITION CORP By: /s/ W. Edward Scheetz -------------------------- Name: W. Edward Scheetz Title: President MORGANS HOTEL GROUP CO. By: /s/ W. Edward Scheetz -------------------------- Name: W. Edward Scheetz Title: Chief Executive Officer -12- EXHIBIT A CREDIT FACILITY TERM SHEET MAXIMUM $700,000,000.00 CREDIT FACILITY SUMMARY OF PRINCIPAL TERMS AND CONDITIONs Capitalized terms used but not defined herein shall have the meanings given to such terms in the Commitment Letter (the "COMMITMENT") to which this Term Sheet is attached as EXHIBIT A. All monetary amounts set forth in this Term Sheet are denominated in United States Dollars. LENDER: Column Financial, Inc. or one or more of its affiliates CREDIT FACILITY: A credit facility (the "CREDIT FACILITY"), in an aggregate amount up to the Aggregate Commitment, comprised of (a) (i) one or more mortgage loans to the owner of one or more of the Properties (collectively, the "MORTGAGE LOANS") and/or one or more levels of mezzanine financing relating thereto (collectively, the "MEZZANINE LOANS") and/or (ii) a mezzanine loan (the "HOLDCO MEZZANINE LOAN"; and, together with the Mortgage Loans and the Mezzanine Loans, the "LONG-TERM LOANS") to Purchaser or one or more newly formed, single purpose, bankruptcy remote wholly-owned subsidiaries of Purchaser that will, upon the effectiveness of the Acquisition, directly or indirectly own all of the Properties and the Intellectual Property (collectively, "HOLDCO") and/or (b) to the extent that the conditions to the availability of CMBS Loans set forth below have not been satisfied, or waived by Lender, as to any portion of the Aggregate Commitment, a bridge loan (the "BRIDGE LOAN" and, together with the Long-Term Loans, the "LOANS") in a principal amount equal to the Bridge Funding Amount, to Purchaser or Holdco, in each case, as required by Lender. Each of the Loans may be severed, at Lender's discretion, into two or more tranches of notes, including but not limited to, senior and junior notes or participations; PROVIDED that, except as the result of amortization of the Loans arising from any prepayments thereof following any Property release, casualty or condemnation or event of default, the weighted average interest rate of all tranches of notes shall, at all times during the term of the Credit Facility, in the aggregate, equal the weighted average interest rate of the Loans as of the Closing Date. AVAILABILITY; NET REFINANCING OF BRIDGE LOAN: The Bridge Loan must be fully drawn in a single drawing at or immediately prior to the Effective Time under the Merger Agreement (the "CLOSING DATE"). Amounts borrowed under the Credit Facility that are repaid or prepaid may not be reborrowed, except that the Bridge Loan may be refinanced as one or more Long-Term Loans by Lender in its sole discretion as described in the immediately following paragraph. Any amounts to be advanced as Long-Term Loans in repayment of the Bridge Loan may, in the sole discretion of Lender be advanced on a net financing basis by increasing the amount outstanding under any outstanding Long-Term Loan by such amount and decreasing the amount outstanding under the Bridge Loan by a corresponding amount. Exhibit A-1 CONVERSION TO CMBS FINANCING: To the extent that any portion of the Aggregate Commitment is funded as a Bridge Loan, such Bridge Loan will be refinanced as Long-Term Loans under the Credit Facility, so long as the conditions to Long-Term Loans described herein have been satisfied or waived, or the Bridge Loan may be refinanced, at the election of Lender and Purchaser, with other CMBS financing arranged with Lender on terms no less favorable to Bridge Borrower than the terms applicable to Long-Term Loans hereunder, subject, however, to Lender's then-effective underwriting criteria and terms for loans of such type, but any failure to convert the Bridge Loan to CMBS financing as contemplated hereby shall not relieve the Borrowers from any of their obligations hereunder with respect to any Loans. PROPERTIES: The Hard Rock Hotel and Casino (the "RESORT"), certain land and any improvements thereon adjacent to the Resort (the "ADJACENT PROPERTY"), additional land adjacent to the Resort owned by Red White & Blue Pictures, Inc. ("PICTURES") and Picture's rights in the improvements thereon commonly known as the Hard Rock Cafe (the "CAFE PROPERTY") and other properties, all as more particularly identified on EXHIBIT B to the Commitment (collectively, the "Properties"). INTELLECTUAL PROPERTY: The trademarks and other intellectual property identified on EXHIBIT C to the Commitment, together with all rights therein or arising thereunder (collectively, the "INTELLECTUAL PROPERTY"). AGGREGATE COMMITMENT: The lesser of (a) $700,000,000.00 or (b) 82.5% of Capitalized Cost, MINUS, in either case, the amount of any Company Bonds (as defined in the Merger Agreement) that are not defeased, repaid, discharged or otherwise satisfied as of the Closing Date. For purposes of the foregoing, "CAPITALIZED COST" means the sum of (i) the aggregate consideration paid by the Purchaser and its affiliates in connection with the Acquisition, (ii) the aggregate closing costs incurred by the Purchaser in connection with the Acquisition, including, without limitation, such costs as title search and policy fees and premiums, survey fees, brokerage commissions, attorneys fees and expenses and the costs incurred for the preparation of engineering, environmental, marketing and other due diligence reports in anticipation of the Acquisition, but excluding fees or expenses of any nature paid to any affiliate of the Purchaser (except for such sums as are disclosed in writing to Lender and, in any event, are not in excess of sums which would otherwise be payable to an unrelated third party for similar services), (iii) all costs and fees incurred by Lender in connection with the preparation, negotiation, consummation, execution, administration, repayment, collection and enforcement of the Credit Facility and any approval, consent, amendment, modification or waiver related thereto, and (iv) amounts necessary to fund the reserves required pursuant to this Term Sheet. The costs and fees referred to in the foregoing clause (iii) and the reserve amounts referred to in the foregoing clause (iv) may be funded, in Lender's sole discretion, on a net basis from the proceeds of any Loans funded on the Closing Date. BRIDGE FUNDING AMOUNT: The Aggregate Commitment less any amount funded as Long-Term Loans on the Closing Date. Exhibit A-2 BORROWERS: In the case of the Bridge Loan, Purchaser or Holdco (in such capacity, the "BRIDGE BORROWER"). Lender shall be reasonably satisfied with the capitalization, structure, single purpose nature and equity ownership of the Bridge Borrower, both before and after giving effect to the Acquisition. In the case of Mortgage Loans or Mezzanine Loans, one or more newly formed, single purpose, bankruptcy remote direct or indirect subsidiaries of Purchaser or Holdco with each such borrower having two independent directors and owning one of the Properties (each, a "CMBS BORROWER" and collectively the "CMBS BORROWERS"). Lender shall be reasonably satisfied with the capitalization, structure, single purpose nature and equity ownership of each CMBS Borrower under the Mortgage Loans and Mezzanine Loans, after giving effect to the Acquisition. The obligations of CMBS Borrowers shall be joint and several. In the case of the Holdco Mezzanine Loan, Purchaser or Holdco (in such capacity, the "HOLDCO MEZZANINE BORROWER" and, together with the CMBS Borrowers, the "LONG-TERM BORROWERS" and, together with the CMBS Borrowers and the Bridge Borrower, the "BORROWERS"). Lender shall be reasonably satisfied with the capitalization, structure, single purpose nature and equity ownership of the Holdco Mezzanine Borrower, both before and after giving effect to the Acquisition. Each Borrower shall deliver a customary non-consolidation opinion with respect to its parent and any other guarantors that is reasonably acceptable to Lender. USE OF PROCEEDS: The proceeds of the Loans shall be used by the Borrowers solely to (a) finance the aggregate consideration payable to consummate the Acquisition under the Acquisition Agreement, (b) satisfy all existing indebtedness of Target and its subsidiaries, if any, other than trade payables and capital and equipment leases in the ordinary course of business and (c) pay fees and expenses required to be paid by Purchaser or any of its subsidiaries in connection with the Transactions. The proceeds of the Long-Term Loans shall be loaned, directly or indirectly, by the Borrowers to the Purchaser on the Closing Date as an inter-company loan, on customary terms reasonably acceptable to Lender, solely for purposes of consummating the Acquisition. INTEREST RATE: The Interest Rate will be 30-day LIBOR plus the applicable Interest Rate Spread. The Interest Rate shall be adjusted on the first day of each calendar month or such other day of each calendar month as determined by Lender (rounded up to the nearest 1/100th of 1%), based upon the LIBOR rate in effect on the date that is two London business days prior to the adjustment date. Interest will be payable monthly in arrears on an actual/360 basis. Payments on the Loans shall be made on the 9th day of each calendar month (the "PAYMENT DATE"). INTEREST RATE SPREAD: BRIDGE LOAN: 385 basis points; provided that the Interest Rate Spread applicable to the Bridge Loan will increase by 25 basis points every 90 days after the Closing Date until the Bridge Loan is either refinanced or repaid in full. In connection with each such increase in the Interest Rate Spread, Bridge Exhibit A-3 Borrower shall obtain an adjusted Interest Rate Cap that gives effect to such increase. LONG-TERM LOANS: 385 basis points INTEREST RATE CAP: Each Borrower will be required to purchase an interest rate cap (the "INTEREST RATE CAP") (i) for the initial term of its applicable Loan, at a 30-day LIBOR strike price which shall be no greater than 5.5%, and (ii) for any extension term of such Loan, at such strike price and on such terms and conditions as shall be acceptable to Lender in its sole discretion at such time. The Interest Rate Cap provider must be rated at least "AA" by Standard & Poor's Rating Services and Moody's Investors Service, Inc. and otherwise be reasonably acceptable to Lender. Each Interest Rate Cap shall be in a notional amount equal to the aggregate amount of the applicable Loan. AMORTIZATION: Interest only, subject to any prepayments permitted or required hereunder (see "PROPERTY RELEASES" and "MANDATORY PREPAYMENTS" below). LOAN ORIGINATION FEE: BRIDGE LOAN: 0.50% of the Bridge Funding Amount LONG-TERM LOANS: 0.50% of the principal amount of such Long-Term Loan; provided that no Loan Origination Fee shall be payable on any Long-Term Loan that is funded in connection with the refinancing of any portion of the Bridge Loan within 90 days after the Closing Date. A Loan Origination Fee shall be payable with respect to all Long-Term Loans funded on the Closing Date and all Long-Term Loans funded later than 90 days after the Closing Date. In each case, the Loan Origination Fee shall be earned and payable on the date of funding of the Loans. EXIT FEE: On repayment or prepayment of any portion of any Loan, an exit fee of 0.50% of the paid amount (including, at maturity, the entire outstanding principal amount of the Loans) shall be due and payable to Lender, unless any such Loan is refinanced by Lender or any of its affiliates including, in the case of the Bridge Loan, refinancing as a Long-Term Loan under the Credit Facility. TERM: BRIDGE LOAN: The Bridge Loan shall have a term of one year from the Closing Date. LONG-TERM LOANS: The Long-Term Loans shall have an initial term of two years from the Closing Date. EXTENSION: BRIDGE LOAN: One six month extension. Such extension will be granted upon the request of Bridge Borrower, upon written notice to Lender not less than one (1) month nor more than two (2) months prior to the end of the initial term, PROVIDED that, INTER ALIA, the following conditions are satisfied by Bridge Borrower: (i) there exists no event of default (or any event that, with the giving of notice or the passage of time or both would constitute an event of default) at the time the option is exercised or when the option commences, (ii) payment of an extension fee in the amount of 0.25% of the outstanding principal balance of the Bridge Loans, (iii) the purchase of an Interest Rate Exhibit A-4 Cap for the extension period at the strike rate as set forth above, and (iv) a continued increase in the Interest Rate Spread by 25 basis points per quarter during the extended term. LONG-TERM LOANS: Two one-year extension options. Each such extension will be granted upon the request of Long-Term Borrowers, upon written notice to Lender not less than one (1) month nor more than six (6) months prior to the end of the current term, provided that, INTER ALIA, the following conditions are satisfied by Long-Term Borrowers: (i) there exists no event of default (or any event that, with the giving of notice or the passage of time or both would constitute an event of default) at the time the option is exercised or when the option commences, (ii) payment of an extension fee, with respect to the second extension option only, in an amount of 0.25% of the outstanding principal balance of the Loans, (iii) the purchase of an Interest Rate Cap for the extension period at a strike rate as set forth above, (iv) upon exercise of the second extension option, the Interest Rate Spread shall increase to 410 basis points and (v) immediately prior to the second extension, Debt Yield (hereinafter defined) for the Credit Facility shall be not less than 11%, including as the result of any permitted voluntary prepayment at such time in accordance herewith. The entire outstanding principal balance of each Loan, together with any accrued and unpaid interest thereon, shall be due and payable at the expiration of the term of such Loan and any extensions thereto. COLLATERAL: The Bridge Loan shall be secured by (i) a perfected first priority pledge of 100% of the equity ownership interests of each of the Long-Term Borrowers, (ii) a perfected security interest in the Interest Rate Cap referred to above, (iii) an assignment of and security interest in all leases, rents, room revenues, deposits, letters of credit, income and profits, reserve accounts, contracts, agreements, and personal property relating to the Properties and any and all assets of any kind or nature whatsoever of the Purchaser and its subsidiaries, including, without limitation, the IP Collateral (as defined below), and (iv) at Lender's option, a perfected first mortgage on the fee simple interest in the land and improvements as to each Property (collectively, the "BRIDGE COLLATERAL"). The Mortgage Loans shall be secured by, among other things, (i) a perfected first mortgage on the fee simple interest in the land and improvements as to each Property (each, a "MORTGAGE LIEN"), (ii) an assignment of all related leases, rents, deposits, letters of credit, income and profits, (iii) a perfected security interest in the Interest Rate Cap referred to above and (iv) an assignment and/or a perfected security interest in all other construction and other contracts, agreements and personal property relating to the Properties, including sales contracts and related deposits (collectively, the "MORTGAGE LOAN COLLATERAL") Any Mezzanine Loans shall be secured by, among other things, (i) a perfected first priority pledge of 100% of the equity ownership interests in the applicable CMBS Borrower (or, with respect to multiple levels of Mezzanine Loans, such holder of indirect interests in the applicable CMBS Borrower as determined by Lender), (ii) a perfected security interest in any reserve accounts established on behalf of Lender, subject to the Mortgage Loans and Exhibit A-5 any senior Mezzanine Loans, (iii) a perfected security interest in the applicable Interest Rate Cap, and (iv) an assignment and/or a perfected security interest in all other contracts, agreements and personal property, subject to the Mortgage Loans and any senior Mezzanine Loans (the "MEZZANINE COLLATERAL"). The Holdco Mezzanine Loan shall be secured by (i) a perfected first priority pledge of 100% of the equity ownership interests of each of the CMBS Borrowers, (ii) a perfected security interest in the Interest Rate Cap referred to above, (iii) a perfected security interest in any reserve accounts established on behalf of Lender, subject to the Mortgage Loans and any senior Mezzanine Loans, and (iv) to the extent obtainable, an assignment of and security interest in all leases, rents, room revenues, deposits, letters of credit, income and profits, reserve accounts, contracts, agreements, and personal property relating to the Properties and any and all assets of any kind or nature whatsoever of the Holdco Mezzanine Borrower, including, at Lender's option as described below, the IP Collateral, subject, in all events, to the Mortgage Loans and the Mezzanine Loans(collectively, the "HOLDCO MEZZANINE COLLATERAL"). The Bridge Loan and/or one or more of the Long Term Loans, as determined by Lender in its sole discretion, shall be secured by (i) a perfected first priority security interest in the Intellectual Property, (ii) an assignment and/or a perfected first priority security interest in all contracts, agreements and tangible and intangible personal property relating in any manner to the Intellectual Property (the Intellectual Property and the other property described in this clause (ii), collectively, the "IP COLLATERAL"), and (iii) a collateral assignment of Borrowers' rights under that certain Indemnification Agreement to be executed on the Closing Date by Peter A. Morton in favor of Borrowers (the "MORTON INDEMNIFICATION AGREEMENT"), as well as the PWR/RWB Escrow Agreement (as defined in the Merger Agreement) (such additional collateral, together with the IP Collateral, the Holdco Mezzanine Collateral, the Mezzanine Collateral, the Mortgage Loan Collateral and the Bridge Collateral, the "COLLATERAL"). HOLDCO MEZZANINE GUARANTEE: As consideration for the intercompany loans between Borrowers and Purchaser described under "Use of Proceeds" above, Purchaser will execute a guaranty and indemnity with respect to the recourse obligations of the Holdco Mezzanine Borrower and MergerCo described under "Recourse" below. Such guaranty and indemnity shall be secured by a pledge of, and recourse under the guaranty shall be limited to, Purchaser's equity interest in the Holdco Mezzanine Borrower and MergerCo. Purchaser shall covenant that, except for the payment of employee salaries and benefits, not to voluntarily dispose of its assets other than on an arms-length basis in exchange for fair consideration or declare any dividends or other distributions. RECOURSE: Except as set forth below, the Bridge Loan and/or the Holdco Mezzanine Loan, as determined by Lender in its sole discretion, shall be recourse only to the Bridge Collateral, the Holdco Mezzanine Collateral and/or the IP Collateral (whether such IP Collateral is held directly or indirectly by Bridge Borrower or Holdco Mezzanine Borrower, as the case may be, or collaterally assigned to Bridge Borrower or Holdco Mezzanine Borrower by any of their direct or indirect subsidiaries having rights therein), as applicable. Exhibit A-6 Except as set forth below, the Mortgage Loans and the Mezzanine Loans will be recourse only to the Properties, the Mortgage Loan Collateral and/or the Mezzanine Collateral, as the case may be. Notwithstanding the foregoing, certain principals of the Purchaser and the Borrowers, as determined by Lender in its sole discretion, including, without limitation, Morgans Hotel Group Co., (collectively, the "GUARANTORS") shall be jointly and severally liable for any actual losses, damages, liabilities and reasonable expenses incurred by Lender pursuant to standard non-recourse carve-outs, including, but not limited to: (i) misappropriation of insurance proceeds, condemnation/expropriation proceeds, and/or any tenant security deposits by Borrowers or a party controlled by Borrowers, including any property manager, in violation of the Loan Documents, (ii) the misapplication, by Borrower, any affiliated managing agent or other agent of Borrower or any other party with whom Borrower shall collude or cooperate, of rents collected more than one month in advance, (iii) revenues and rents collected by Borrower or any manager or agent of Borrower after an event of default under the Loan Documents (as hereinafter defined) and not delivered to Lender, (iv) physical damage to the Properties arising from intentional misconduct or gross negligence of any Borrower or any Guarantor, or any of their authorized principals, officers, agents or employees, and any removal of assets forming part of the Properties in violation of the Loan Documents, (v) failure to pay (or deposit into reserves held by Lender funds sufficient to pay) taxes or other liens with priority over or equal to Lender's Loan Documents, (vi) damages arising from any fraud or misrepresentation of any Borrower or any Guarantor, or any of their authorized principals, officers, agents or employees, (vii) failure to pay charges for labor or materials or other charges that have become liens on any portion of the Properties, (viii) all of the obligations and indemnities in the Loan Documents with respect to hazardous substances or toxic substances or the failure of any of the Properties to comply with environmental laws (Borrowers and each Guarantor will jointly and severally execute a separate environmental indemnity agreement at closing), (ix) the failure of any Borrower to maintain its status as a single purpose entity in accordance with the Loan Documents, (x) the failure of any Borrower to obtain Lender's consent to any subordinate financing or other voluntary lien encumbering any Property, (xi) the interference by Borrower or any Guarantor (or any of their respective affiliates that control any of the foregoing) with Lender's pursuit of its rights or remedies under the Loan Documents following an Event of Default, except if Borrower or Guarantor shall succeed in such action after Lender has exhausted all appeals and judicial remedies with respect thereto, (xii) failure to maintain insurance under blanket insurance policies to the extent permitted hereunder, (xiii) any breach by any Borrower of any Closing Representation, and (xiv) any breach by Borrowers of the negative covenants in the Loan Documents concerning the exercise of any rights or remedies under the Morton Indemnification Agreement or the PWR/RWB Escrow Agreement without the prior written consent of Lender or satisfaction of any indemnification claims from the PWR/RWB Escrow Fund (as defined in the Merger Agreement) other than pursuant to the Morton Indemnification Agreement. Each Borrower and each Guarantor shall be jointly and severally personally liable for the full amount of the Credit Facility in the event that (a) any Borrower fails to obtain Lender's consent to any assignment, transfer or conveyance of any Property or any of the IP Collateral not permitted by the Loan Documents; (b) (1) any Borrower or any Guarantor files a voluntary Exhibit A-7 petition under the United States Bankruptcy Code or any other federal or state bankruptcy or insolvency law, (2) any Borrower or any Guarantor files an answer consenting to, or any Borrower or any Guarantor (or any of their respective affiliates that control any Borrower or Guarantor) consents or acquiesces to or joins in, any involuntary petition filed against any Borrower or Guarantor, as the case may be, under the United States Bankruptcy Code or any other federal or state bankruptcy or insolvency law, (3) any Borrower or any Guarantor (or any of their respective affiliates that control any Borrower or Guarantor) consents to, or otherwise acquiesces or joins in an application for the appointment of a custodian, receiver, trustee, or examiner for any Borrower or any portion of any Property or any portion of the IP Collateral (other than any such appointment at the request or petition of Lender or its affiliates), or (4) any Borrower or any Guarantor makes an assignment for the benefit of creditors, or admits, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due; or (c) an involuntary petition is filed against any Borrower or any Guarantor under the United States Bankruptcy Code or any other federal or state bankruptcy or insolvency law by or on behalf of any party other than Lender, and any such petition is not dismissed within 90 days, or any Borrower or any Guarantor (or any of their respective affiliates that control any Borrower or Guarantor) solicits or causes to be solicited petitioning creditors for any involuntary petition against any Borrower or any Guarantor, unless, in the case of any voluntary or involuntary petition, receivership or assignment by or affecting any Guarantor, one or more guarantors acceptable to Lender in its sole discretion remains or becomes a guarantor of the Credit Facility as required by this paragraph and the preceding paragraph. CROSS DEFAULT; CO-BORROWING: Lender shall have the right, without the consent of any Borrower or any other Person, to determine the extent to which any Loans are cross-defaulted with each other and the extent to which two or more Borrowers shall be jointly and severally liable for all or any portion of the Credit Facility. VOLUNTARY PREPAYMENT; SPREAD MAINTENANCE: BRIDGE LOAN: The Bridge Loan may be prepaid, in whole or in part, upon not less 10 days' prior written notice, at the option of the Bridge Borrower at any time; PROVIDED that no such notice shall be required in connection with any refinancing as Long-Term Loans under the Credit Facility. LONG-TERM LOANS: The Long-Term Loans may be prepaid, in whole or in part, upon not less than 10 days' prior written notice, at the option of the applicable Long-Term Borrower at any time; PROVIDED that (a) each prepayment shall be in an amount not less than $5,000,000.00 and (b) if such prepayment is made prior to the first Payment Date occurring after the date that is 18 months from the Closing Date (the "LOCKOUT RELEASE DATE"), Lender shall receive a "SPREAD MAINTENANCE PREMIUM" in an amount equal to the product of (a) the principal amount of such prepayment, (b) the Interest Rate Spread and (c) a fraction, the numerator of which shall equal the actual number of days from the date of such payment through the Lockout Release Date and the denominator of which is 360. If any prepayment is made on a date other than a Payment Date, such prepayment shall be accompanied by interest accrued on such prepayment amount through and including the next succeeding Payment Date. Exhibit A-8 DUE ON SALE; NEGATIVE PLEDGE: As more particularly set forth in the Loan Documents, any sale, transfer, pledge, assignment or conveyance (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) (each, a "TRANSFER") of all or any part of the Properties or the IP Collateral or of any direct or indirect interest in any Borrower or any Guarantor (other than customary transfers of public securities that do not give rise to a change of control of any Borrower) shall give Lender the right to declare the entire balance of the Credit Facility immediately due and payable; PROVIDED that (i) holders of direct or indirect interests in any Borrower may Transfer up to an aggregate of 49% of the direct or indirect interests in such Borrower so long as the control of such Borrower does not change, Borrowers deliver prior written notice of any such Transfer to Lender and if the transferee, as a result of such Transfer, owns, directly or indirectly, more than 49% of the interests in any Borrower, Borrowers deliver a revised non-consolidation opinion acceptable to Lender in connection with such transfer and, if such Transfer occurs after Securitization (as hereinafter defined), a Rating Agency confirmation, (ii) holders of direct or indirect interests in any Borrower may Transfer such interests (A) to any other Borrower or any member or partner of any Borrower (other than members or partners of Purchaser) who is a member or partner of such Borrower as of the Closing Date, so long as the control of any Borrower does not change or (B) by maintenance, devise or bequest or by operation of law upon the death of a natural person that was the holder of such interest to a member of the immediate family of such interest holder or a trust established for the benefit of such immediate family member, provided that (x) no such Transfer shall result in a change of the day-to-day operations of the Properties, (y) Borrowers shall give Lender notice of such Transfer together with copies of all instruments effecting such Transfer not less than ten (10) days after the date of such transfer, (z) the legal and financial structure of Borrowers and their members or partners, as applicable, and the single purpose nature and bankruptcy remoteness of Borrowers and their members or partners, as applicable after such Transfer, shall satisfy Lender's then current applicable underwriting criteria and requirements, so long as Borrowers deliver prior written notice of any such transfer to Lender and if the transferee, as a result of such transfer, owns, directly or indirectly, more than 49% of the interests in any Borrower, Borrowers deliver a revised non-consolidation opinion acceptable to Lender in connection with such Transfer and, if such Transfer occurs after Securitization (as hereinafter defined), a Rating Agency confirmation, and (iii) the Property Releases set forth below shall be permitted. Notwithstanding the foregoing, the Purchaser shall control the Long-Term Borrowers and own, directly or indirectly, at least 51% of each Long-Term Borrower at all times. In addition, for so long as the Holdco Mezzanine Loan is outstanding, neither the Purchaser nor any of its subsidiaries shall Transfer any portion of the equity interests of the Purchaser or Target; PROVIDED that holders of direct or indirect equity interests in the Purchaser may transfer up to an aggregate of 49% of the such interests so long as the control of the Purchaser does not change; and PROVIDED FURTHER that customary transfers of public securities that do not give rise to a change of control of Purchaser or any Borrower shall be permitted. Any Transfer in violation of the foregoing shall give the Lender the right to declare the entire balance of all Loans to be immediately due and payable. Exhibit A-9 PROPERTY RELEASES: In connection with any Long-Term Loan, the applicable Long-Term Borrower shall be permitted to obtain a release (a) of the Mortgage Lien on any Property securing such Long-Term Loan in connection with the sale of such Property to an unaffiliated third party or (b) of Lender's security interest in the IP Collateral in connection with the transfer of all of such IP Collateral to an unaffiliated third party; PROVIDED that, INTER ALIA, the following conditions (the "RELEASE CONDITIONS") are satisfied: (i) the applicable Long-Term Borrower shall pay to Lender the Release Price (hereinafter defined) for the applicable Property or IP Collateral, together with the Spread Maintenance Premium, if any, on the amount so prepaid, all interest accrued through the next payment date, and the applicable Exit Fee (ii) no default exists, (iii) the Debt Yield after giving effect to the release is equal to or greater than the greater of the Debt Yield in effect as of the Closing Date or the Debt Yield in effect immediately prior to the date of such release, (iv) the applicable Long-Term Borrower shall have paid all of the reasonable third party legal fees and out-of pocket third party expenses incurred by Lender, (v) the LTV (as hereinafter defined) after giving effect to the release shall be equal to or less than the lesser of the LTV in effect as of the date hereof or the LTV in effect immediately prior to the Closing Date, (vi) the applicable Long-Term Borrowers shall execute such documents as reasonably necessary by Lender to reflect such release and (viii) if any prepayment is made on a date other than a Payment Date, such prepayment shall be accompanied by interest accrued on such prepayment amount through and including the next succeeding Payment Date. "RELEASE PRICE" shall mean the greater of (A) the net sale proceeds from the applicable sale (expenses shall be approved by Lender but in no event shall they exceed 8% of the sales price) and (B) 125% of the allocated loan amount (x) for the applicable Property, as set forth on EXHIBIT B to the Commitment, or (y) for the IP Collateral, as set forth on EXHIBIT C to the Commitment, in each case as determined by Lender. "DEBT YIELD" shall mean the ratio, expressed as a percentage, of the net cash flow (as determined in accordance with Lender's then current underwriting standards for similar transactions) of the remaining Properties as of the date of computation, divided by the outstanding principal balance of the Loans as of such date. "LTV" shall mean the ratio, expressed as a percentage, of the outstanding principal balance of the Loans on the date of computation, divided by the value of the remaining Properties as determined by Lender in its reasonable discretion. PARTIAL RELEASE OF ADJACENT PROPERTY: In connection with any Long-Term Loan secured by the Adjacent Property, the applicable Long-Term Borrower shall be permitted to obtain a partial release of the Mortgage Lien on a portion of the Adjacent Property in connection with a sale of such portion of the Adjacent Property (each, a "RELEASE PARCEL") to an unaffiliated third party; PROVIDED that each of the Release Conditions set forth above shall have been satisfied (but based upon a Release Price determined as set forth in the definition of that term set forth above, but using an allocated loan amount for the Release Parcel in an amount specified by Lender in its sole but reasonable discretion) and the following additional conditions, inter alia, are satisfied: (i) the sale of the Release Parcel and the remaining portion of the Adjacent Property after giving effect to the release shall comply with all applicable zoning, land use, certificate of occupancy and other applicable laws and regulations, (ii) the use and operation of the Release Parcel by the purchaser thereof shall (A) comply with all applicable zoning, land use, certificate of occupancy and other applicable Exhibit A-10 laws and regulations, (B) not be in violation of the terms of any lease applicable to the Adjacent Property, and (C) be consistent with, in Lender's reasonable discretion, the other then-current uses of the Adjacent Property, and the purchaser of the Release Parcel shall have executed and delivered to the applicable Long-Term Borrower a written agreement acknowledging the foregoing obligations on the part of such purchaser; (ii) if Lender shall deem the same to be necessary, Long-Term Borrower shall cause to be created and properly recorded, a reciprocal easement agreement (or such other agreement or instrument as Lender shall require in its sole discretion) for ingress, egress, parking, utilities and any common areas and common area expenses, for the benefit of the Release Parcel and the remaining portion of the Adjacent Property, that is acceptable in form and substance to Lender in its sole discretion; (iii) the applicable Long-Term Borrower shall deliver to Lender, at such Long-Term Borrower's sole cost and expense, ALTA/ASCM surveys of each of the remaining portion of the Adjacent Property and such Release Parcel, which surveys shall conform to the requirements of Lender; (iv) a title insurance company acceptable to Lender shall issue an endorsement to the applicable title insurance policy regarding the validity of Lender's lien on the remaining portion of the Adjacent Property after such partial release and any other endorsements reasonably requested by Lender in connection therewith; (v) any such partial release shall be at no cost or expense to Lender; and (vi) the applicable Long-Term Borrower shall deliver to Lender such amendments to the Loan Documents as shall be necessary to effectuate such release, as well as all documents and information reasonably requested by Lender in order to verify the satisfaction of the foregoing conditions. PARTIAL RELEASE OF IP COLLATERAL: In connection with any Long-Term Loan secured by the IP Collateral, the applicable Long-Term Borrower shall be permitted to obtain a release of Lender's lien on a portion of the IP Collateral in connection with a sale of such portion of the IP Collateral (the "RELEASE IP") to an unaffiliated third party; PROVIDED that each of the Release Conditions set forth above shall have been satisfied (but based upon a Release Price determined as set forth in the definition of that term set forth above, but using an allocated loan amount for the Release IP in an amount specified by Lender in its sole but reasonable discretion) and the applicable Long-Term Borrower shall have delivered to Lender such amendments to the Loan Documents as shall be necessary to effectuate such release. MANDATORY PREPAYMENT: BRIDGE LOAN: The Bridge Loan shall be prepaid, INTER ALIA, with (a) 100% of the net cash proceeds of any mortgage financing (or refinancing thereof) by the Bridge Borrower or any of its subsidiaries of the Properties or the IP Collateral, including, without limitation, any Long-Term Loan, (b) 100% of the net cash proceeds of all asset sales or other dispositions by the Bridge Borrower or any of its subsidiaries (including insurance and condemnation proceeds and any purchase price refund in respect of any acquisition) of any of the Properties or the IP Collateral, and (c) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations of Purchaser or any of its subsidiaries. LONG-TERM LOANS: The Long-Term Loans shall be prepaid, INTER ALIA, with 100% of the applicable Release Price in connection with any asset sale or other disposition by any Borrower or any of subsidiary of any Borrower and Exhibit A-11 100% of any insurance and condemnation proceeds from any of the Properties. SCHEDULED AMORTIZATION PAYMENT: On or prior to the one year anniversary of the Closing Date, Borrowers shall make a principal prepayment on the then-outstanding Loans (including the Bridge Loan, if the term thereof shall have been extended as provided herein) under the Credit Facility in an amount equal to either (a) if such prepayment is made without any release of any Property, $70,000,000.00 (the "MINIMUM AMORTIZATION PAYMENT") or (b) if such prepayment is made in connection with a release of the Mortgage Lien on the Adjacent Property under the Loan Documents, the greatest of (x) the net proceeds from any sale or refinancing of the Adjacent Property at such time (expenses shall be approved by Lender but in no event shall they exceed 8% of gross proceeds of such sale or refinancing), (y) $250,000,000.00 or (z) such amount as would be sufficient, after giving effect to such prepayment of the Loans, to result in a Debt Yield of not less than 12%. Any prepayment under the preceding sentence shall be accompanied by all interest accrued through the next payment date, the applicable Exit Fee, payment of all of the reasonable third party legal fees and out-of pocket third party expenses incurred by Lender, if any, and payment of any other amounts then due and payable pursuant to the Loan Documents, other than any Spread Maintenance Premium thereon. If, at any time prior to the one year anniversary of the Closing Date, the IP Collateral is sold and released from the lien of the Loan Documents, Borrowers may, at their option, apply up to $20,000,000.00 of the proceeds of such sale toward the satisfaction of the Minimum Amortization Payment. If the Minimum Amortization Payment shall have been paid in full, then the allocated loan amount for the Adjacent Property shall be reduced to either (i) $144,000,000.00, if no proceeds from any sale of the IP Collateral were applied to the satisfaction of the Minimum Amortization Payment or (ii) $160,000,000.00, if the IP Collateral shall have been sold and $20,000,000.00 of the proceeds of such sale shall have been applied toward the satisfaction of the Minimum Amortization Payment as provided in the preceding paragraph. If, at any time prior to the one year anniversary of the Closing Date, Borrowers effect a partial release with respect to the Adjacent Property in the manner described under "Partial Release of Adjacent Property" above that results in repayment of a portion of the outstanding Loans, the Minimum Amortization Payment shall be reduced as a result of such repayment by an amount to be determined by Lender and reasonably acceptable to Borrowers. DEFAULT RATE: Four percent (4.0%) over the non-default rate (no grace period). LATE CHARGES: Five percent (5.0%) for any overdue payment (no grace period). REPRESENTATIONS WARRANTIES; LOAN DOCUMENTS: The definitive documentation relating to the Loans (the "LOAN DOCUMENTS") will contain representations, warranties and covenants that are usual and customary for transactions of this nature or reasonably required by Lender for this transaction in particular, and that are reasonably acceptable to Borrowers, including but not limited to, those specified under the Commitment Letter, Exhibit A-12 with such changes as are appropriate in connection with any Loan, as well as a representation and warranty that the Acquisition and the Other Transaction Closings (as defined in the Merger Agreement) were consummated in accordance with the terms and conditions of the Merger Agreement and the Other Transaction Documents (as defined in the Merger Agreement), with only such amendments, supplements and modifications thereto, and waivers and extensions thereunder, as Lender shall have approved in advance. The terms and provisions of any Loan are not limited to those set forth in this Term Sheet or the Commitment Letter. Those matters that are not covered by or made clear under this Term Sheet or the Commitment Letter shall be set forth in the Loan Documents. AFFIRMATIVE COVENANTS: All affirmative covenants customary for transactions of this type and others to be reasonably specified by Lender (to be applicable to the Guarantors, the Borrowers and their subsidiaries), including, without limitation, delivery of financial statements, reports, accountants' letters, projections, officers' certificates and other information reasonably requested by Lender; payment of other obligations; continuation of business and maintenance of existence; maintenance of material rights and privileges; compliance with applicable laws and all rules and regulations; compliance with material contractual obligations; maintenance of property and insurance; maintenance of books and records; right of Lender to inspect property and books and records; notices of defaults, litigation and other material events; compliance with environmental laws; continued perfection of security interests in existing and subsequently acquired collateral; maintenance of Intellectual Property and separateness and single purpose entities; further assurances. NEGATIVE COVENANTS: All negative covenants customary for transactions of this type and others to be reasonably specified by Lender (to be applicable to the Guarantors, the Borrowers and their subsidiaries), including, without limitation, limitations on (with exceptions to be agreed): indebtedness (including preferred stock of subsidiaries); liens; guarantee obligations; mergers, consolidations, liquidations and dissolutions; sales of assets; dividends and other payments in respect of capital stock; capital and development expenditures; investments, loans and advances; optional payments and modifications of subordinated and other debt instruments; transactions with affiliates; changes in fiscal year; negative pledge clauses; changes in lines of business; and changes in passive holding company status. The Loan Documents shall also include a negative covenant to the effect that Borrowers will not exercise any rights or remedies under the Morton Indemnification Agreement or the PWR/RWB Escrow Agreement without the prior written consent of Lender and that in no event shall the PWR/RWB Escrow Fund (as defined in the Merger Agreement) be used to satisfy any indemnification claims other than pursuant to the Morton Indemnification Agreement until expiration of the term thereof. SUBORDINATE FINANCING (SECURED/ UNSECURED): None permitted, other than (i) Mezzanine Loans contemplated by the Credit Facility, (ii) unsecured trade and operational debt incurred in the ordinary course of business and not outstanding for more than 60 days with trade creditors and in amounts as are normal and reasonable under the circumstances, but not exceeding 2.0% of the applicable Loan, and not evidenced by a note or as otherwise approved by Lender, and (iii) capital lease obligations. Exhibit A-13 INTEREST RESERVE: Borrowers shall deposit on the Closing Date an amount equal to the difference between underwritten projected net cash flow and projected interest expense, as determined by Lender in its reasonable discretion, to cover the payment of interest due on the Loans for a period of 24 months. Any extension of any Loan shall require a replenishment of the Interest Reserve in an amount equal to the difference between underwritten projected net cash flow and projected interest expense, as determined by Lender in its reasonable discretion. Amounts on deposit in the Interest Reserve shall be applied, on a monthly basis, to the payment of debt service on the Loans. The Interest Reserve will be terminated, and amounts on deposit therein will be released to Borrowers, if at any time DSCR meets or exceeds a target DSCR to be agreed between Lender and Borrowers. "DSCR" shall mean the ratio of the net cash flow (as determined in accordance with Lender's then current underwriting standards for similar transactions) of the remaining Properties for the trailing 12 month period, divided by the debt service for such period. At no time during the term of the Loans, prior to satisfaction of the conditions in the preceding sentence, will amounts on deposit in the Interest Reserve be less than an amount equal to six month's debt service on the Loans. Lender's determination of (i) underwritten projected net cash flow for purposes of calculating the Interest Reserve under this Section as of the Closing Date shall be calculated in a manner consistent with Lender's standard underwriting criteria in effect as of the date hereof (as reflected in a preliminary Sources and Uses attached hereto as SCHEDULE A, which is attached solely for purposes of illustrating Lender's current standard underwriting methodology and is not intended to be dispositive or binding upon the parties hereto for any purpose), with such changes to Lender's standard underwriting criteria as Lender may reasonably apply based upon market factors in effect as of the Closing Date, and any new or revised standard underwriting criteria that, in each case, have become applicable to the Properties subsequent to the date hereof as a result of changes in circumstances relating to or affecting the Properties, and (ii) projected interest expense shall be calculated as the actual interest expense on the Loans funded on the Closing Date (based upon the Interest Rate Spread over LIBOR at the strike price referred to herein). TAX & INSURANCE RESERVE: Borrowers shall deposit monthly 1/12 of the annual taxes and insurance premiums as estimated by Lender. At closing, the reserve will be funded in an amount which, when the required monthly payments are added thereto, will be sufficient to pay such charges when due. Borrowers shall not be entitled to any interest on any amounts deposited in such reserve, which interest shall be for the account of Lender. If, after reviewing the blanket insurance policy of Purchaser and its affiliates, Lender determines, in its sole discretion, that no insurance reserve is required, Lender shall waive such requirement prior to the occurrence of any event of default under the Loan Documents or following any cure of any such event of default. FF&E RESERVE: Borrowers shall deposit monthly 3% of the gross revenues of the Properties for FF&E, which, for purposes of the Credit Facility, shall include customary FF&E items, as well as casino gaming equipment and rock and roll memorabilia unique to the Resort. Any interest earned on such amounts shall be accumulated for the benefit of Borrowers to be used in accordance with the purpose of such reserve. Exhibit A-14 REPAIR RESERVE: Borrowers shall deposit on the Closing Date 115% of the estimated cost of (i) any immediately needed maintenance and repairs (as determined by the engineering report) and (ii) any environmental remediation or other work related to environmental matters that Lender determines is necessary with respect to the Properties. Any interest earned on such amounts shall be accumulated for the benefit of Borrowers to be used in accordance with the purpose of such reserve. After completion of all repairs and remediation, all remaining funds in such reserve shall be released to Borrowers. CAPITAL EXPENDITURES RESERVE: Borrowers shall deposit on the Closing Date an amount to be determined by Lender and reasonably acceptable to Borrowers but not less than $10,000,000.00, to fund ongoing capital expenditures at the Properties, as approved by Lender in its sole discretion. Any interest earned on amounts on deposit in the capital expenditures reserve account shall be accumulated for the benefit of Borrowers to be used in accordance with the purpose of such reserve. GENERAL RESERVE: Borrowers shall deposit $12,000,000.00 into a general reserve account on the Closing Date to be used for such uses and purposes as Lender shall determine in its sole discretion, including, without limitation, application to the Interest Reserve or any other reserve established hereunder. Any interest earned on amounts on deposit in the general reserve account shall be accumulated for the benefit of Borrowers to be used in accordance with the purpose of such reserve. MANAGEMENT: Management of the Properties shall be conducted by an entity approved by Lender in its reasonable good faith judgment. Any management agreements shall be submitted to, and be approved by Lender. The management fees payable by Borrowers thereunder shall not exceed the base management fees set forth in the management agreements delivered to and approved by Lender prior to the Closing Date and no incentive fees or other fees shall be payable thereunder until the DSCR as of three (3) consecutive calendar quarters is equal to or greater than a DSCR threshold to be determined by Lender in accordance with its standard underwriting practices in which event an incentive fee not to exceed an amount determined by Lender in accordance with its standard underwriting procedures may be paid to manager. The management agreements and any agreement with the Gaming Licensee and the fees thereunder shall be subordinate to the Loan Documents (including payment of debt service), and shall provide that such agreements may be terminated by Lender, without penalty or fee, during the term upon (i) a change in control of the manager or Gaming Licensee, as the case may be, (iii) a continuing default (beyond any applicable grace or cure period) under the Loan Documents, (iii) the manager or Gaming Licensee, as the case may be, becoming insolvent or a debtor in any bankruptcy or insolvency proceeding, or (iv) the manager or Gaming Licensee, as the case may be, committing any fraud, gross negligence, willful misconduct or misappropriation of funds. Borrowers shall also provide copies of all other contracts relating to the Properties (certified by Borrowers to be complete and correct). If at any time revenue of the Target (or the surviving entity in the merger contemplated by the Merger Agreement) and its subsidiaries that arises from, or is attributable to, gaming operations at the Properties decreases below a revenue threshold amount determined by Lender in its sole but reasonable Exhibit A-15 discretion (expressed as a percentage of the projected revenue for gaming operations as set forth in the Projections supplied to Lender as of the Closing Date), then Lender or Purchaser shall have the right to terminate the Gaming Licensee and appoint a new person or entity to oversee and manage the gaming operations at the Properties that is acceptable to Lender in its sole discretion. REPORTING REQUIREMENTS: Borrowers and Guarantors shall provide unaudited quarterly statements within 45 days of the end of each calendar quarter during the term and audited financial statements certified by an officer of the applicable entity (acceptable to Lender) within 60 days of the end of the calendar year during the term. Borrowers shall provide monthly financial statements within 30 days of month-end for the first 12 months following the Closing Date, and as reasonably requested by Lender thereafter. Borrowers shall provide annual budgets for the Properties which shall be subject to Lender's approval, which approval shall not be unreasonably withheld. CASH MANAGEMENT: Borrowers agree that all credit card receipts and rents from the Properties and all licensing fees or other receipts from the IP Collateral will be deposited directly into an account controlled by Lender at a financial institution reasonably acceptable to Lender (the "LOCKBOX ACCOUNT"). Borrowers will cause the manager of the Properties to deposit all other revenues in the Lockbox Account within one business day after receipt. All funds in the Lockbox Account will be swept on each business day to an account designated and controlled by Lender or Lender's servicer (the "CASH MANAGEMENT ACCOUNT"). On each business day, Lender shall withdraw all funds from the Cash Management Account and allocate them in the following order (i) first, to pay Lender the monthly installment of interest due under the Loans on the next Payment Date and to fund all monthly reserves required pursuant to the Loan Documents on such Payment Date, (ii) second, to pay CMBS Borrowers amounts set forth in the approved annual budget for operating expenses for such month and any other extraordinary expenses approved by Lender for such month, and (iii) amounts remaining in the Cash Management Account after payment of all such amounts shall be disbursed to the CMBS Borrowers. The Lock Box Account and Cash Management Account shall be held as additional security for the Loans. NO FRANCHISE AGREEMENTS: Borrowers shall represent and warrant in the Loan Documents that, other than as approved by Lender, none of the Properties is subject to any franchise agreement. GROUND LEASES: Any ground leases with respect to the Properties shall be reasonably acceptable to Lender. Borrowers shall cause each ground lessor under a ground lease to deliver to Lender an estoppel agreement reasonably satisfactory to Lender prior to the Closing Date. Lender may require a ground lease reserve be established with Lender to pay all amounts due from Borrowers under the ground leases. INSURANCE: Borrowers shall provide insurance coverage for each Property, including foreign and domestic terrorism insurance, business interruption insurance, and such other insurance reasonably required by Lender (including, flood, earthquake and windstorm), in all events in an amount sufficient to satisfy in full the entire principal amount of any Loans secured, directly or indirectly, by Exhibit A-16 the applicable Property, together with all interest accrued thereon and all other amounts due and payable thereunder. The provider of all such insurance must be rated at least "A" by Standard & Poor's Rating Services and Moody's Investor Service, Inc. Lender will permit the Properties to be covered by a blanket insurance policy covering Purchaser's affiliates so long as (i) no event of default under the Loan Documents shall have occurred and be continuing and (ii) such blanket policy's aggregates and deductibles on a per occurrence basis otherwise satisfy the foregoing requirements. SECURITIZATION: Borrowers understand that Lender may securitize and/or syndicate any Loan in a public or private securities offering which is rated by one or more rating agencies (the "SECURITIZATION"). In this connection, the Loan Documents will require the Borrowers to, among other things, provide Lender with all information and materials reasonably required by Lender in the Securitization process (including updated financial and operating statements, as applicable, of the Guarantors), and use commercially reasonable, good faith efforts to help facilitate the consummation of the Securitization. Certain of the nationally recognized rating agencies (the "RATING AGENCIES") will rate some or all of the securities or the Loans. Borrowers agree to cooperate, at Lender's expense, with Lender to effect this Securitization, including providing the Rating Agencies with such additional information as they may reasonably request after the closing, amending the Loan Documents and organizational documents of Borrowers as may be required by the Rating Agencies. Borrowers shall indemnify Lender for any losses that relate to any misleading or incorrect information provided by or on behalf of Borrowers and included in the offering document. Any necessary amendment of the Loan Documents or the organizational documents to facilitate any Securitization will not materially adversely alter the economic and any other terms thereof, including recourse carve-outs. TITLE/SURVEY: CMBS Borrowers shall deliver to Lender at the closing of any Mortgage Loan (and at CMBS Borrower's sole cost and expense) title policies issued by First American Title Insurance Company of New York and/or Fidelity National Title Insurance Company in respect of the Properties in form and substance acceptable to Lender, with such endorsement, co-insurance and reinsurance as is approved by Lender, insuring Lender, in an amount at least equal to the principal amount of the Loans, that Lender's security instrument constitutes a first lien or charge upon the Properties subject only to such items as shall have been approved in writing by Lender and its attorneys. Such title policies shall be obtained through the services of an agent determined by Lender. In addition, Borrowers shall deliver Eagle 9 policies and a mezzanine endorsement to the owner's title policy with respect to the Bridge Loan, any Mezzanine Loans and the Holdco Mezzanine Loan, all in form and substance acceptable to Lender. COST AND YIELD PROTECTION: The definitive Loan Documents shall contain customary provisions (i) protecting Lender, and any of its assignees or participants against increased costs or loss of yield resulting from changes in reserve, tax, capital adequacy and other requirements of law and from the imposition of or changes in withholding or other taxes and (ii) indemnifying Lender for "breakage costs" incurred in connection with, among other things, any prepayment on a LIBOR loan on a day other than the last day of an interest period with respect thereto. Exhibit A-17 EXPENSES: Borrowers shall reimburse Lender for all of its actual out-of-pocket expenses, including, but not limited to, reasonable and documented fees and expenses of counsel incurred in connection with this transaction whether or not it actually closes, third party reports, title policies, surveys, recording and filing fees, mortgage recording taxes and other taxes, costs of environmental reports and any remediation required thereunder, physical condition reports and any structural repairs indicated therein or any property improvement program, and appraisals (collectively, the "LENDER EXPENSES"). Lender Expenses, and, if requested by any Borrower, other third party expenses which shall be paid by such Borrower, including, but not limited to, any prepayment premiums or penalties with respect to other financing to be satisfied by such Borrower or other costs or expenses incurred in connection with granting a mortgage to Lender shall be netted from the Loans at closing. To the extent sufficient funds remain available from the Good Faith Deposit paid to Lender pursuant to the Commitment, Lender shall apply such remaining Good Faith Deposit to actual out-of-pocket expenses incurred in connection with the third party reports and other Lender Expenses. Borrowers shall, within 5 business days, deposit with Lender such additional funds as Lender shall reasonably request to supplement such Good Faith Deposit to the extent the costs of third party reports and other Lender Expenses exceed any such unapplied Good Faith Deposit. The balance of any Good Faith Deposit, including any additional funds deposited pursuant to this section of the Term Sheet, to the extent not used to pay for third party reports and other Lender Expenses, will be applied against the Origination Fee (as defined in the fee letter accompanying the Commitment) due pursuant to the Commitment at the time of any final closing under this Term Sheet, and any excess thereof will be refunded promptly to the Company at such time. BROKERAGE FEES: Purchaser, Borrowers and Guarantors represent and warrant to Lender that they have not dealt with any finder or broker in connection with this Term Sheet. Purchaser, Borrowers and/or Guarantors shall pay any and all commissions and fees of any broker or finder retained by them and hereby agree to jointly and severally indemnify and hold Lender harmless from any claim for such commissions or fees. Lender represents and warrants to Purchaser that Lender has not dealt with any finder or broker in connection with this Term Sheet. Lender shall pay any and all commissions and fees of any broker or finder retained by Lender and hereby agree to indemnify and hold Purchaser harmless from any claim for such commissions or fees. Such indemnity shall survive the expiration or termination of this Term Sheet and/or the Credit Facility. CONDITIONS PRECEDENT: BRIDGE LOAN: In addition to the conditions precedent to the Credit Facility described in the Commitment Letter, the Bridge Loan shall be subject to the following conditions precedent as of the Closing Date: (i) Purchaser's counsel shall obtain, at Bridge Borrower's expense, Uniform Commercial Code/litigation/tax lien searches against such parties as Lender may require, with such searches to be updated as of the Closing Date; (ii) Lender shall Exhibit A-18 have received customary legal opinions (including opinions (A) from counsel to Borrowers and Guarantors and (B) from such special and local counsel as may be required by Lender); (iii) Lender shall have received proof of customary insurance coverage reasonably satisfactory to Lender, and (iv) Lender shall have received, at least five business days prior to the Closing Date, all documentation and other information required by regulatory authorities under applicable "know your customer" and anti-money laundering rules and regulations, including without limitation the PATRIOT Act. LONG-TERM LOANS: In addition to the conditions precedent to the Credit Facility described in the Commitment Letter, Long-Term Loans shall be subject to the following conditions precedent as of the Closing Date: (i) Lender shall have satisfactorily completed its due diligence with respect to the Properties (including the review and approval of third party reports, zoning compliance and building code compliance) and the IP Collateral, the Long-Term Borrowers and the Guarantors; (ii) Long-Term Borrowers shall provide Lender an as-built, ALTA survey of the Properties certified to Lender and the issuer of the title policy by a registered land surveyor, dated not more than sixty (60) days prior to the closing date, and otherwise complying with Lender's survey requirements; (iii) Borrowers' counsel shall obtain, at Borrowers' expense, Uniform Commercial Code/litigation/tax lien searches against such parties as Lender may require showing that all personal property is owned by the CMBS Borrowers and is free from all liens and encumbrances and that none of the CMBS Borrowers, their general partners/managing members and principals or the Properties is subject to any pending litigation (other than litigation in the ordinary course of business and which is not reasonably likely to have a Collateral Adverse Effect with respect to the related Collateral), bankruptcy or tax liens, with such searches to be updated as of the closing date; (iv) Lender shall have received such legal opinions (including opinions (A) from counsel to Borrowers and Guarantors and (B) from such special and local counsel as may be required by Lender), documents, appraisals and other instruments as are customary for transactions of this type or as Lender may reasonably request; (v) Lender shall have received proof of insurance coverage satisfactory to Lender, (vi) Lender shall have received an Engineering Report for each of the Properties showing that all material improvements are in good and workable condition and comply with all applicable material regulations including ADA or, if not, an estimate of the cost and description of any deferred maintenance and repairs; (vii) Lender shall have received an Environmental Report for each of the Properties showing that there is no material violation of law in respect of any toxic substance or hazardous waste contained within the Properties; (viii) Lender shall have received such reports and other information as Lender shall have reasonably requested from the United States Patent and Trademark Office or otherwise relating to the IP Collateral showing that the IP Borrower has good and marketable title to, or licensing rights with respect to, the IP Collateral, free and clear of all liens, security interests or encumbrances; (ix) Lender shall have received, at least five business days prior to the Closing Date, all documentation and other information required by regulatory authorities under applicable "know your customer" and anti-money laundering rules and regulations, including without limitation the PATRIOT Act, and (x) Lender shall have received, to its satisfaction, such other documents and instruments as Lender shall reasonably request. GOVERNING LAW: All Loan Documents will be governed by New York law. COUNSEL TO LENDER: Brown Raysman Millstein Felder & Steiner LLP. Exhibit A-19 -----END PRIVACY-ENHANCED MESSAGE-----